Lawsuits

The judge hearing the Justice Department’s CDO-rating lawsuit against S&P refused to dismiss it yesterday, rejecting S&P’s much-mocked theory that its pre-crisis claims of independence and objectivity and, like, plausible ratings were just “puffery” that no one should have taken seriously. Here is the story, and here is his opinion, and here is a rhetorical question:1

At the hearing on this matter, Defendants repeatedly asserted that no reasonable investor would have relied on S&P’s claims of independence and objectivity. Regarding the question of materiality, S&P argued that, since the issuer banks had access to the same information and models that S&P analysts did, they could not have been fooled by faulty credit ratings. This begs the question: if no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?

Well so I mean do you want an answer? How much value do you think they added?

The S&P case is a pretty weird beast because it’s brought under the FIRREA, a law designed to protect federally insured banks, and so the government has to assert that: Read more »

This lawsuit is mostly about the (alleged!) unapologetic Antisemitism of Knight Capital managing director Brendan Joseph McCarthy, which former employee and plaintiff Robert Morris Milloul claims caused him and others to lose their jobs in the algorithmic trading unit of the firm; we don’t need to summarize the allegations but we did think it was important to highlight the motivational technique he was said to use around the office. Read more »

If you had to pick a current or former Wall Street CEO to be your father-in-law, it stands to reason that Dick Fuld would have to be close to the bottom of your list, yes? Lloyd, obviously, would be a delight. Vikram would probably be fun, too. Something about Jamie just seems very pal-y, father-in-law-ish, once you get past him letting you know he’ll take you out in the middle of the night, no questions asked, no finger prints left behind if you ever do anything to hurt his child. Brian Moynihan would finally loosen up and stop being awkward around you circa your 20th anniversary. Hank would probably be slightly scary but in a good way. Someone who gets into “physical altercation[s]” with fans of the opposing team at a children’s hockey game is probably not a guy you want to sit across from at Thanksgiving or play squash with after he’s figured out you can “earn points by hitting your opponent with the ball when he/she is between you and the front wall.” And looking down the line, it stands to reason that Dick Fuld would definitely be close to the bottom of your list of candidates for ex-father-in-law, yes? Aaron Packles knows what we’re talking about. Read more »

I find the story of Dragon Systems hilarious and horrifying so I’m never going to miss an opportunity to tell you about it and one occurred today. The story, quickly, is (1) Dragon Systems, a closely held speech-recognition company, hired Goldman to advise it on a merger with Lernout & Hauspie, (2) Goldman assigned Dragon an extremely JV team of bankers, (3) Dragon sold itself to L&H in June 2000 in an all-stock deal, (4) L&H soon turned out to be a massive fraud, and (5) L&H filed for bankruptcy in November 2000 and Dragon’s shareholders lost $300 million. Dragon sued, Goldman won a trial in January, and today they won some more, for reasons I’m not clear on. That is, I’m not sure why they had to win again – the judge issued an opinion finding in favor of Goldman, even though a jury did the same thing in January. Also it’s not much of a stirring win: Read more »

There’s an alternative theory of the 2007-2008 financial crisis in which it was just a minor hiccup that would have worked out fine for all concerned if the meddling U.S. government hadn’t been so trigger-happy in bailing out basically sound but momentarily embarrassed financial institutions.1 I mean, you probably won’t actually run into anyone who believes this theory, because it is a pretty loony theory. And yet! It keeps coming up in court, which I guess means the courts are full of loonies, QED.

Obviously Hank Greenberg is the most vocal and delightful proponent of this theory, since he’s been suing the government for ever and ever for taking over AIG when AIG actually would have been just fine with a little eleven-digit low-interest loan from the government. But Fannie Mae and Freddie Mac shareholders have come on strong of late, with weird lobbying for re-privatization of their shares and, now, a lawsuit filed yesterday seeking $41 billion in damages over their bailout.

The theory here should be familiar if you’ve been following along with AIG; it goes something like this: Read more »

So that’s nice. Read more »

Fundamentally if you’re a sell-side M&A banker your job is to find a buyer and get them to overpay for the company you’re selling. I mean, oh, you know, you’re a repeat player and reputational concerns and continued business relationships and all that militate against getting them to overpay too much. But mostly, the more they overpay the better you’ve served your client. Also, though, those reputational things etc., plus lots of fraud laws, militate against getting buyers to overpay by deceiving them about stuff relating to the company you’re selling. You can’t, like, just go forge financial statements. That’s cheating, and not in an admiring hahaha-you-got-me way. In a jail way.

So what’s left? One thing you can do is gently deceive them about the competitive dynamic. This might seem a little silly – if you’re buying a company, shouldn’t you be carefully determining its fundamental value rather than just bidding a penny more than whoever else is in the auction? – but in fact a lot of the M&A function is pretty much exactly that. You set up an auction, you demand confidentiality, you forbid bidders from talking to each other, you don’t tell them each others’ bids, you don’t announce to the world when a bidder has dropped out, all with the goal of creating the appearance of more competition than there is. When the bidders share too much information about their bidding plans with each other, you sue them. If a possibly viable but spivvy bidder comes along, you encourage them to stick around and throw out big numbers, just to keep the other bidders on their toes. “Yes, Carl Icahn, please, tell us more about your plans to buy our company,” is a sentence you might find yourself saying. You don’t outright lie, but you do your best to create the impression that your particular fertilizer-byproducts company is the prettiest girl at the dance or whatever the going metaphor is.

Or just do this: Read more »