03.06.09 6:16 AM ET
How to Shake Down the Banks
Like every fuming American, I want Wall Street bankers to be forced to disgorge the zillions they made while tanking the economy—not to mention the billions more they’ve paid themselves while on the taxpayers’ teat. But how?
My wife, Jody, like me a former White House staffer, had an idea: Get Bill Lerach, the country’s premier shareholder class action lawyer—who with his onetime partners at Milberg Weiss law firm was long known as the scourge of corporate America—on the case. A few years ago, she’d seen him in action at a program Stanford University runs for directors on public-company boards. Lerach did a mock deposition of an audit committee chairman that put the fear of God in everyone in the room. Surely Lerach would know how to get these greedy bastards to cough it up. The problem, of course, is that he’s been in prison since last May, serving a two-year sentence in Arizona for paying kickbacks to plaintiffs in his infamous shareholder suits.
Surely Lerach would know how to get these greedy bastards to cough it up. The problem, of course, is that he’s been in jail since last May.
Still, Jody’s idea was in the creative tradition that led FDR to name crafty Joe Kennedy to guard the henhouse as his first SEC chief in 1934. So I wrote it up on my blog, proposing that we sic Lerach on Wall Street, since all the White House has done is make noises about it being ‘hard’ or ‘impossible’ to claw back these recent bonuses, not to mention the other bogus zillions many bankers made while wrecking the economy.
What just came back was a letter from Lerach, passed on to me by a mutual friend, with a legal roadmap for Team Obama to follow:
Dear Mr. Miller:
I don’t usually respond to blog material about me but wanted to make an exception in your case. Your wife Jody is not wrong.
In fact, there is a way for the federal government to go after the obscenely excessive bonuses paid to the Wall Street pigs. One legal problem to be surmounted is that the federal government itself has no statutory authority to sue to recover excessive compensation paid officers of public companies. Such claims are exclusively the province of state law—here, the corporate haven of Delaware, where all the big banks are incorporated. But, in order to sue under state corporate law for waste of corporate assets or breach of fiduciary duty, you must be a common shareholder at the time of the wrong and at the time of the suit. Unfortunately, the federal government is a preferred shareholder in the banks and thus does not have standing to sue and, either way, many of the worst bonuses (i.e., paid to the ousted CEOs of Merrill Lynch [O’Neal] and Citi [Prince]) were paid before the government became a shareholder.
The solution to this dilemma is this. There are several entities of the federal government that one way or another own common stocks—and likely the common stock of the banks in question. The Pension Benefit Guaranty Corp. comes to mind. There are others. They will have standing to sue. They should join forces with four or five other large, prestigious, activist public pension funds—the City of New York and California Public Employees Retirement System (“CalPERS”) are examples—and bring a shareholders’ derivative suit against the grossly negligent boards of directors that permitted the wasteful bonuses to be paid as well as the defalcating executives who got them. Corporate law recognizes claims for breach of fiduciary duty, gross negligence, waste of corporate assets, or abuse of control to recover excessive compensation. Any recovery would flow back to the corporate entity—but since these are now taxpayer-supported entities, the recovery would benefit the taxpayers, i.e., help banks pay back TARP money sooner! These boards are covered by directors' and officers' liability insurance that could pay or help pay for any recovery. Best of all, the US Justice Department could represent the federal agency involved in the case or appear as amicus curiae if necessary—in any event, lending its considerable weight (and prestige) to the claims.
Because corporate law is designed to screw shareholders and protect corporate insiders and because Delaware is the most protective of havens with a long-demonstrated hostility to shareholders’ rights, any such suit would, of course, be difficult and have to overcome numerous procedural and substantive hurdles. But, just because it is hard doesn’t mean it should not be attempted. The mere bringing of the suit—especially against the directors—would have a beneficial deterrent effect on all directors going forward.
Were I free and still able to practice law, I could propose this strategy to President Obama—who, as a Harvard Law School graduate, would “get it.” And, I would have prosecuted the case on a contingent fee basis, i.e., no cost to the government; the fee, if any, to come out of a recovery—no recovery, no fee. Unfortunately, to do so one would have to find a way to get the proposal past the Wall Street alumni and sycophants who serve our new president and are creating the current “save-the-banks” strategy.
So, I appreciate the sentiments expressed by you and your wife, but, unfortunately, I am disabled from doing what I would like to do and what should be done.
OK, Martin Luther King’s “Letter from Birmingham Jail” it ain’t. But at this moment I think even Dr. King would agree the Lerach solution could strike a blow for justice.
Bill Maher had it right when he said, “There are a million lawyers in the United States—doesn’t one of them know how to put a banker in jail?” Maybe not, but at least I’ve found one jailed lawyer with a promising way to make bad bankers pay. If Eric Holder does his duty and takes it from here, before long we’ll hear a phrase that will be music to the ears of an aggrieved and angry nation: “Mr. Prince, Mr. Lerach will see you for your deposition now.”
Matt Miller is a senior fellow at the Center for American Progress and the author of The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking to Unleash a New Prosperity. He hosts “Left, Right & Center,” public radio’s weekly political roundtable, and blogs at mattmilleronline.com.