Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

A local small and solo law firm networking group here in Minnesota has been discussing Risk Analysis. And then, out of the blue, we read the story that at AIG, the Risk Management Group was denied access to the workings of the the very Group that created the massive losses.

What is the purpose of risk analysis? It is to identify risk and recommend steps to take to avoid or minimize the risk. In other words, keep the risk manageable. But AIG created a Risk Assessment function, and then allow executives to deny or limit access by the very people assigned to assess the risk. Once again I wonder why the company does not go after the executives that prevented the risk assessment group to do its' work. You can't be surprised when the risk management executives are prevented from doing their job, and then massive losses occur.

There is only one real reason to deny access to a team or executive that will assess the risk to the company of any action. It is because the person or group wanting to move forward with the proposed action - the sale - or the business venture - is afraid someone will say, "No!" And why are they afraid of someone shining light on their activities? Because they make a lot of money so long as no one pulls the plug on the activity.

Additionally, and I can speak from experience, when the time for a decision is very short, the group pushing a course of action can mis-represent facts, when they know you will not have access or time to check their answers.

In another life, many years ago, I had some experience in the middle east. I was asked by a client to review a contract with a middle east government agency. I had two questions: Did you price in the taxes? And, how are you going to perform this work since this job requires management of a major foreign project and the company is not in that business?

I was assured that the taxes were priced in and that they were bringing on the people with the necessary experience. Neither of these responses was true, and the red ink started flowing almost immediately.

People who work on commissions based on sales (not profit or revenue - but sales) are very encouraged to get the deal approved, regardless of the risk. The risk is irrelevant. Lawyers and risk assessment functions get in the way.

The key to AIG is not to worry about the bonuses. Instead, the company should sue those responsible for taking on risk beyond their authority, and those that interfered with the normal functioning of the Risk Assessment executives. Those employees and ex-employees responsible should be held accountable for their actions in destroying the company.

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I pointed out in my prior post on this subject, that the employees that ran AIG into the ground must have acted outside of their authority to assume, on behalf of AIG, risks that could (and did) bankrupt the company. Only the Board of Directors could have authorized this activity.

Anyone who has ever worked at the executive level of a large company knows how they work. Managers are charged with meeting their budgets and revenue projections. Management sometimes does not look too deeply into how that is accomplished, but they look carefully at the numbers.

This is not a universal problem, but the pressure from shareholders for short term gains sometimes leads to very poor decisions or lack of oversight. AIG Senior management and the Board of Directors have a serious problem. They failed to supervise a part of the business that was essentially betting the company in the quest for quick profits. So we have the perfect storm – to borrow a phrase. The employees were taking actions to bet the company on risky business transactions (presumably without authority); management either allowed this activity or intentionally looked the other way, or didn’t want to ask too many questions while the profits poured in; and/or the Board of Directors failed to ask the right questions or ignored the answers. When everyone is making money senior managers don’t usually rock the boat.

Years ago when I was a young corporate lawyer, a colleague gave me some good advice. He said, “You might see the train charging down the track, and you know that the bridge is out. But if you stand on the track and try to stop the train, you’ll just get run over and the train will still crash. Best to stand aside, watch the wreck, and help pick up the pieces.”

I can tell you from experience that it is virtually impossible to stop a company about to do something foolish when there is a motivated group pushing the action. The drivers of the action will go right around you and accelerate down the track.

I find it difficult to believe that the Board of Directors of AIG knowingly allowed employees to bet the financial health of the company on these transactions. But why didn’t they ask how these profits were being generated? Or did they, and the answer did not fully disclose the risks to the company. In either case the Board of Directors and the senior management at the time should be liable to the company for negligent supervision, and probably for intentionally taking actions outside of their authority. The management of the business unit needs to be held accountable for either violating corporate policy, or the Board members need to be held liable for allowing the high risk actions.

So, who is entitled to receive bonuses? The senior managers that failed to supervise? The employees that drove the train and crashed the company? The Board of Directors that allowed a business group to risk the company? None of these people deserve a bonus! So, what is the solution? All of these senior managers and Board member likely breached their duties to AIG, and the shareholders, and should be liable to the company for the damages caused.

AIG shouldn’t ask for the bonuses back from the guilty – they should demand the return! Additionally, AIG needs to look carefully at whether those people that were responsible, including the board members, should be held liable for the damage they have caused.

And now the AG is investigating.  It should get interesting very quickly. 

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I don’t have the benefit of reading the employment agreements of the people that bankrupt AIG, but it is hard to understand how they had the authority to bet the company.

Company’s many times make very bad decisions when they write compensation agreements. I’ve seen companies that allow the sales force to negotiate the prices of contracts for goods and services, and then pay the sales team a commission based upon the price negotiated, without regard to whether the company makes any money, or even losses money in the transaction. That is bad long term strategy.

Back to AIG. AIG agrees to pay bonuses. BUT, the employee has obligations also. Surely the employees have limits on their authority; surely AIG does not pay people to take actions beyond their authority; surely AIG did not give this small group the authority to bet the company! Or did it? I doubt it. Betting the company is a policy decision for the board of directors, not any employee.

I think the answer is simple.

First: AIG – you don’t pay people for taking risks with the company's money and assets that was beyond their authority. That is called a breach of contract. The fact that they made money for several years does not make it OK. If they made money by robbing banks would AIG pay the bonuses?

Second – Since they were likely acting beyond their authority and misusing company resources, AIG should also demand the return of all previous bonuses paid for their performance to the extent it was related to sub-prime mortgages, credit default swaps, underwriting toxic assets or misusing their authority as employees.

If the employees sue for their money – they need to show they were acting within company policy and guidelines, and within their authority. They should also receive a counterclaim for the return of all prior years bonuses.

AIG needs to talk to their attorneys! And, the employees that acted outside their authority should be fired.

Finally, if the employees in this part of the business had the authority to do what they did, then the managers, executives and the Board of Directors that allowed this transfer of power must be held accountable. Their compensation and bonuses must be withheld. they should be fired, and the company should look to them to recover there previous bonuses.

This is especially true for the Board of Directors. Ultimately the Board is responsible and they clearly were not meeting their obligations to the shareholders, nor exercising the judgment one would expect.

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I was in court on Wednesday and the Judge was reading a report issued by a panel of the state's Judicial Standard's Board. The judge in my case noted that he was reading about all things not to do when you are a judge. He was right.

Rochelle Olson from the Minneapolis Star Tribune wrote an interesting piece on the panel's recommendation. Timothy Blakey, a judge in Goodhue and Dakota Counties, Minnesota, sent business to his divorce lawyer - to whom he owed something in excess of $108,000 for unpaid fees.

The Lawyer likes the business, gives Blakely a $63,503 discount, and says she hopes he will continue to send her business. A panel of the Minnesota Judicial Standards Board reviewed the facts and recommended that Judge Blakely be suspended without pay for six months. Forever seems like a better recommendation.

What is not clear to me is, why the discount is not considered at least attempted bribery by the attorney, and accepting a bride by the judge. In Minnesota the applicable statute reads:

609.42 Bribery.

Subdivision 1. Acts constituting. Whoever does any of the following is guilty of bribery and may be sentenced to imprisonment for not more than ten years or to payment of a fine of not more than $20,000, or both:

(1) offers, gives, or promises to give, directly or indirectly, to any person who is a public officer or employee any benefit, reward or consideration to which the person is not legally entitled with intent thereby to influence the person's performance of the powers or duties as such officer or employee; or

(2) being a public officer or employee, requests, receives or agrees to receive, directly or indirectly, any such benefit, reward or consideration upon the understanding that it will have such an influence;

***

Subd. 2. Forfeiture of office. Any public officer who is convicted of violating or attempting to violate subdivision 1 shall forfeit the public officer's office and be forever disqualified from holding public office under the state.

Additionally, forgiveness of a debt is taxable income. The judge gained $63,503 in taxable
income because the debt was forgiven. That should be an impressive tax bill.

It is not uncommon in Minnesota, and I assume elsewhere, for judges to recommend certain mediators or a group of mediators to litigants. It is also common for judges to recommend firms to people that ask. This is not improper in itself.

What Blakely and his divorce attorney did is hopefully very rare. The matter now goes to the entire Judicial Standards Board for a final recommendation, and then on to the Minnesota Supreme Court - assuming the Board sustains the recommendation and agrees that discipline in warranted.

As an attorney that practices before many of the courts in the state, I think the recommendation is far too light. Would Judge Blakely recuse himself if the attorney was representing a party before his court?  Should he? 

Hopefully the board will reconsider the recommendation. If the public losses trust in the courts, we have lost the trust of a critical part of our government.  If litigants are worried about judicial corruption, we are in trouble as a society.

Judge Blakely needs to step down, and the Lawyer's Board needs to look at his lawyer.

Someone might also want to take a peek at the judge's tax return to be sure he paid his taxes on the new income.

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There is a very good comment on Max Kennerly’s Blog about the misuse (read “false representation”) of precedence when preparing briefs or arguing a motion or case.  This is a much more common problem than it should be.  I don’t know if it is because attorneys use old brief and don’t check the cites – so they carry forward errors, or they figure no one is going to check their citations, and listing cases to support your position looks good.  

I had a federal case at one time where the opposing party cited a US Supreme Court case to support her position.  The problem was that the case supported my position – and I was glad to have the citation – so the opposing motion completely misrepresented the courts decision.  Sometimes cases are cited that don’t have anything to do with the issues in the case at hand.  The case citation appears to be just filler – and again a false representation to the court. 

I now, when there is time and sometimes here is no time, check the citations on major arguments or issues.  They are often wrong and I will gladly point this out to the court.  I can’t imagine why some attorneys would think that using a false or misleading citation helps their client, but they clearly do or this would not happen.

The other thing I find is that attorneys use the phrase, “ The undisputed facts are…” and then proceed to list allegations or alleged facts that are clearly in dispute.  This is another drafting tactic that I find unprofessional and misleading to the court – and I then need to point out to the court that the opposing counsel is misrepresenting the case.  The practice of overstatement assumes that the opposing counsel and the court are not smart enough to see what the drafter is doing – and that is a very bad assumption.

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The Chicago Business Litigation Lawyer has published a couple articles about avoiding Internet Fraud. The tips come from the FBI, and are very telling. The advise is good, and should make us all more cautious. This list is worth a few minutes to read. It is almost impossible to recover funds stolen through internet fraud. The perpetrators are many times overseas, and you will not even be able to determine which country.

The old saying: If it sounds to good to be true, it isn't! Fraud takes on many forms and the victims range from the sophisticated to the not so sophisticated.

In these days of economic hardship for many people, I think there is a tendency of some people to believe what they perceive as a good deal or a way to make money. The people that invested with Bernard Madoff were very happy that their investments continued to do well while the rest of the market was not doing so well. Here is an interesting article about the lawyers and the litigation started as the investors pick at the bones of the carcass that was Madoff's financial castle. If everything is going well, why look too hard.

Tom Petters' investors believed what was put in front of them. It all sounded good. But it wasn't and in the end the investments were fictions. remember just because it is written down does not make the representations true.

The smartest people can be victims. But we don't have to be.

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