Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Langley Weinstein LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

A couple of quick hits on issues previously addressed:

Arbitration

BofA is one of a number of banks to drop mandatory arbitration provisions in their agreements with credit card holders. It follows JP Morgan Chase which stopped referring credit card disputes to arbitration last month.  The tide seems to be turning against arbitration in the consumer context.  We'll see if that sentiment has any effect in the employment arena.

BofA/SEC Bonus Settlement

Executive compensation at Merrill Lynch was covered at length in the media and this blog during the early part of 2009.  Merrill attempted to settle complaints raised by the SEC but a federal judge in New York put the brakes on the settlement and has yet to rule on whether he will approve the settlement.

Cuomo Sues Schwab over Auction Rate Securities

New York Attorney General Andrew Cuomo, who earlier in the year challenged Merrill bonuses, filed a lawsuit today against Charles Schwab over auction rate securities it sold to its customers. In a statement released today, Mr. Cuomo stated:

Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities. Today we commenced a lawsuit to remedy Schwab’s repeated breach of that duty.

There are numerous auction rate lawsuits pending throughout the country as investors, large and small, are unable to obtain funds invested in these securities.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

                                       

Mark Garmaise, an Associate Professor at UCLA's Anderson School of Management, recently published "Ties that Truly Bind: Non-Competition Agreements, Executive Compensation and Firm Investment." 

Garmaise concludes that enforcement of non-competes promotes executive stability, results in reduced executive compensation, shifts compensation towards a greater use of salary, and reduces research and development spending.  The paper also scores each state in a "Non-competition Enforceability Index" based on 12 components.  Louisiana scored zero during the sample time period, meaning non-competes were almost impossible to enforce. Texas scored a 3 during 1995-2004, while the high scorer was Florida with a score of 9 between 1997-2004.  In light of several rulings from the Texas Supreme Court that are favorable to non-compete enforcement I would imagine Texas' score will rise over the next few years.

The article is a fascinating read on the effects of non-competes and well worth your consideration.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Cuomo investigation.

New York AG Andrew Cuomo's investigation of bonuses paid to Merrill Lynch executives continues.  The latest round centers on the testimony of former Merrill President turned Yale Law School Professor Gregory Flemming.  Flemming testified that BofA threatened to sue him if he disclosed any information regarding the Merrill bonuses.  Today, Cuomo and Congressman Barney Frank sent a letter directly to BofA CEO Ken Lewis requesting bonus information.

BofA lawyers are likely trying to avoid disclosure of any such testimony in light of the numerous class action lawsuits challenging the BofA/Merrill merger.   They have asked the New York Court handling the Cuomo investigation to expand the gag order in place to Flemming's testimony. 

Is there a scenario where the Merrill execs would have to pay their bonuses back?  Yes.

Disgorgement of salaries is difficult, but bonuses are another matter.  Specifically, Section 304 of the Sarbanes Oxley Act permits claw back of excess compensation.  Cuomo has previously used New York's fraudulent conveyance laws to attack improper compensation.  Kevin LaCroix provides an excellent analysis of various claw back/disgorgement theories in The D&O Diary. It would appear that Cuomo's ultimate endgame is to claw back the bonuses.  Time will tell if he is successful, but his efforts will continue to receive media attention as the economy sputters. 

BofA non-compete lawsuit.

Merrill/BofA cannot stay out of the news.  Last week, BofA filed suit in New York State againt Deutsche Bank for taking 12 senior bankers.  The suit also names former Merrill Treasurer Eric Heaton as a Defendant asserting he is violating a non-compete agreement that is in place until 2010.   It would appear that BofA wants Merrill employees to think twice about jumping ship when they have a non-compete in place.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Since my entry two weeks ago, New York Attorney General Andrew Cuomo chimed in again on Merrill Lynch 2008 bonuses in a letter (.pdf) to Congressman Barney Frank, Chairman of the House Committee on Financial Services.  The letter does not name names, but outlines numerous multi-million dollar payments to Merrill executives with the top 149 receiving approximately $858 million.  Stunning to say the least. 

 

 Cuomo attacks the timing and amount of the bonuses:

Rather, in a surprising fit of corporate irresponsibility, it appears that, instead of disclosing their bonus plans in a transparent way as requested by my Office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives. Merrill Lynch had never before awarded bonuses at such an early date and this timetable allowed Merrill to dole out huge bonuses ahead of their awful fourth quarter earnings announcement and before the planned takeover of Merrill by Bank of America.

Merrill Lynch's decision to secretly and prematurely award approximately $3.6 billion in bonuses, and Bank of America's apparent complicity in it, raise serious and disturbing questions.  By December 8, 2008, Merrill and presumably Bank of America must have been aware that the fourth quarter and yearly earnings results were disastrous.

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Executive compensation is under attack. It's an easy target for politicians when $20 billion in bonuses were handed out while the economy was in free fall. New York AG Andrew Cuomo has indicated he may attempt to claw back bonuses paid to Merrill Lynch executives in late 2008 that came to light during John Thain's (pictured above) recent ouster from BofA. Some execs are even foregoing their 2008 bonus. If you're an executive in the US right now there are 2 things you should avoid, bonuses and private jet travel. This is especially true if your company has received federal bailout money.

So what can Cuomo do? Apparently the strategy is to attack the Merrill Lynch payments as untimely (they were paid in December as opposed to the normal January) and explore whether shareholders were misled concerning the payments, i.e. securities fraud. A class action has already been filed in the Southern District of New York regarding the BofA/Merrill merger where the 2008 bonuses will likely be scrutinized.

Obviously, publicly traded companies are under heightened scrutiny and standards, but what about private companies? In Texas, companies can choose from a number of business forms, the typical corporation, a partnership, a limited partnership, or even a limited liability company. Often times a limited partnership will have a corporation as its general partner. There are pros and cons for each choice, usually tax considerations drive the decision of what entity to use.

The officers of those entities will owe fiduciary duties to the entity and in some cases, like a general partnership, to their partners. Thus, unreasonable bonuses or compensation are actionable, like a publicly traded company, through a derivative lawsuit or in some cases through a direct lawsuit against the offender usually based on a breach of fiduciary duty claim. The typical defense is the assertion of the business judgment rule, a topic for another day, but what is sound business judgment in these economic times differs from what was acceptable during upswings in the economy.

Does the payment pass the smell test? Payments should not be out of the ordinary. They should be consistent with historical payments tied to personal and company performance criteria. In many cases payments will be contractually mandated. In the case of a private company it would be wise to make sure other owners are informed of any bonuses paid out and the basis for such payments. In other words, avoid any claims of surprise. No matter what, it smells when a company hemorrhaging cash pays big bonuses.

Disclaimer

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link