Tuesday, December 28, 2010

My 12/28/10 whistleblower comments

Subject: File No. S7-33-10
From: Robert Shattuck
Affiliation: none

December 28, 2010

Comments of Robert Shattuck on File No. S7-33-10
Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934
(submitted electronically on December 28, 2010)

December 17, 2010 deadline for submissions

I was out of the country from December 8 through December 16. I first learned of the proposed rules on December 26. I request that my comments be received and considered by the SEC even though not submitted on or before December 17th.

Background of submitter

I am a retired lawyer with no professional or corporate affiliation.

For many years I have had an acute interest in corporate wrongdoing and what society can do to lessen the same. I have had a special interest in whether the work of plaintiffs lawyers aids in the deterrence of corporate wrongdoing. I have concluded that their work undermines business ethics and deterrence. I have recently devoted much time urging ethics professionals to evaluate the validity of my belief that plaintiffs lawyers undermine the deterrence objective of the civil law, and, if they agreed, in turn for those ethics professionals to raise the matter with management and/or make advocacy to lawmakers and others regarding how to increase the deterrence efficacy of the civil law.

I have a blog How To Combat Plaintiffs' Lawyers (URL http://robertshattuck.blogspot.com) in which I have reported my work during the past several years. I have an article Does the Civil Liability System Undermine Business Ethics? (URL http://robertshattuck.blogspot.com/2007/11/i-thought-this-would-be-effective-email.html) in my blog in which I set forth my argumentation that plaintiffs' lawyers undermine business ethics and deterrence.


A main consideration confronting the SEC regarding the proposed rules is how they will interact with, and whether they will undermine, internal compliance programs.

Based on the experience I have had in my work, I offer the following comments on the foregoing important consideration confronting the SEC:

Corporate wrongdoing is perpetrated by corporate officers and employees who participate in the design, implementation and execution of corporate actions and activities that comprise a wrongdoing.

As regards deterrence, I believe more efficacious deterrence is achieved by punishing the responsible corporate officers and employees individually than is achieved by punishing the corporation.

Based on my experience, I believe corporate management is less than fully supportive of trying to achieve deterrence through the punishment of responsible officers and employees individually. I further believe that corporate compliance and ethics officers, as well as corporate counsel, follow the lead of management in this regard and are less than fully assiduous in advocating for punishment of officers and employees individually to achieve a maximum deterrent effect.

The basis for my foregoing beliefs is that I have engaged in very extensive communications to corporate management (and proxies for corporate management such as the chamber of commerce), to ethics and compliance officers and their organizations (such as the Ethics Compliance Officer Association), and to corporate counsel (including the Association of Corporate Counsel). These parties largely exhibited no interest in the question of whether punishing responisble officers and employees would achieve better deterrence than punishing the corporation. These extensive communications are memorialized in my blog.

It is possible that I have misinterpreted the responses of the foregoing parties to my communications. It is possible that they do have an interest in what better deters corporate wrongdoing and that they have beliefs about whether punishing responsible officers and employees individually achieves or does not achieve better deterrence. To seek clarification of this, I will re-contact the parties and ask them whether I have misinterpreted their responses. I will provide whatever answers I receive to the SEC as a further submission.

If there is less than full support within the corporation for that which maximizes deterrence, that is a factor that the SEC should weigh in the balance concerning how the proposed rules will interact with, and whether they will undermine, internal compliance programs.

Respectfully submitted,

Robert Shattuck
Birmingham, AL 35223

SEC whistleblower rules

The SEC proposed whistleblower rules pursuant to Dodd Frank in November. These have drawn many comments and presented a public forum in which to make argumentation related to plaintiffs' lawyers. I submitted comments on December 28, 2010 and January 3, 2011.

Friday, December 24, 2010

Private Securities Litigation: Important Deterrent or Wasteful Churn?

From: RDShatt@aol.com
To: grundfest@stanford.edu, Cox@law.duke.edu, klacroix@oakbridgeins.com
Sent: 12/24/2010 4:30:08 A.M. Central Standard Time

Subj: Private Securities Litigation: Important Deterrent or Wasteful Churn?

Dear Professors Grundfest and Cox, Mr. LaCroix, and Mr. Coffey (address for Mr. Coffey not yet found),

I have read with interest Mr. LaCroix's above referenced post in his blog. You may glean the extent of my interest from my own blog How To Combat Plaintiffs' Lawyers .

I would like to offer some comments.

First, some rhetorical and/or loaded questions: Who and what are the drivers and determinants of the state of the law? Is it plaintiffs' lawyers and their lobbying and other influence with lawmakers, judges and others? Is it judges who have done an adequate policy evaluation of their judicial actions and decisions, insofar as they have discretion regarding the same? Is it academics who have debated the way the law should be and who make recommendations about the same that are accepted by lawmakers and judges? Is it critics, such as The Wall Street Journal?

Also, insofar as plaintiffs' lawyers are the drivers and determinants. to what extent do they exert their influence to achieve a state of the law that benefits themselves to the detriment of the societal interest in how the law operates? How demanding should academics and citizens be of their lawmakers and judges that those persons exert great skepticism about any input the plaintiffs' lawyers have regarding how the law should be and give the plaintiffs' lawyers no benefit of the doubt, including, for example, not finding it an adequate justification that there is "some deterrent effect" from private securities litigation, or that a "private/public partnership" has performed better than "public" alone when there is a choice to beef up with more funding for the "public" effort?

I took particular note of Mr. LaCroix's statement that "there are a large number of sophisticated, well-informed and profit motivated institutional investors that continue to actively participate in securities litigation, some serving frequently as lead plaintiffs." The reason for my interest is that I was once notified of a class action that caused me to send scores of emails to governmental retirement plans and members of the National Institute of Pension Plan Administrators, asking why they weren't "screaming bloody murder." You may read the text of those emails here http://robertshattuck.blogspot.com/2008/11/why-arent-government-retirement-systems.html and here http://robertshattuck.blogspot.com/2008/11/why-arent-retirement-plan-trustees.html . I did not get a single response.

I did not think, at the time, about "pay to play" type stuff going on in securities class action litigation that could keep parties from screaming bloody murder. Trust The Wall Street Journal to enlighten me in February with this item Trial Lawyers Contribute, Shareholder Suits Follow .

On the question of whether individual contibution is needed in order to achieve a better deterrent effect, I have taken the tack of trying to introduce the subject to academics and other professionals in the business ethics field. I have done this mainly through an article I have written that you can find at this link: Does the Civil Liability System Undermine Business Ethics? I have made scant headway in interesting ethics professionals in the subject matter.

Thank you for reading this email.

Rob Shattuck

ECOA Government Affairs group

From: RDShatt@aol.com
To: nwine@theecoa.org
Sent: 12/21/2010 7:37:10 A.M. Central Standard Time
Subj: If Government Affairs should ever get slow

Dear Ms. Wine,

If Government Affairs should ever get slow for you (or if you are just interested in a challenge), you might take a look at my article Does the Civil Liability System Undermine Business Ethics? and decide whether the contentions I make in the article warrant ECOA's Government Affairs to undertake an initiative to engage with Federal and state lawmakers and judges, and others, regarding the matter.

If you would like to discuss this subject with me, I would be very happy to talk with you.

Rob Shattuck

Wednesday, December 22, 2010

WSJ on trial lawyers contributing to pension officials

  • The Wall Street Journal

Trial Lawyers Contribute, Shareholder Suits Follow

Norfolk County, Mass., has only a small pension fund, but it is a big player in court.

Two weeks ago, the fund joined with two others in a shareholder suit against drugstore chain CVS Caremark Corp., whose stock had fallen. It was the 12th time since 2006 the pension fund has gone to court after a stock it owned declined.Former Ohio Attorney General Marc Dann received campaign contributions from out-of-state plaintiffs' firms.

For 10 of the suits, including the latest, the pension fund hired a New York plaintiffs' law firm called Labaton Sucharow LLP. That firm, in turn, has taken a keen interest in the political fortunes of Norfolk County Treasurer Joseph A. Connolly, who heads the pension fund's board. Attorneys at the New York law firm and their relatives have made 68 separate donations, of the maximum $500 apiece, to Mr. Connolly's campaign war chest since late 2005, public records show.

Asked why its lawyers gave to a county treasurer in a state not its own, Labaton Sucharow said its "members and their families make perfectly legal political contributions to elected officials and candidates who support shareholder rights." Mr. Connolly didn't respond to requests for comment.

It is legal for lawyers, like anyone else, to give campaign money to politicians. But questions arise when the politicians are local officials with influence over the selection of legal counsel for shareholder lawsuits filed by public pension funds, a role that can be lucrative.

A Wall Street Journal analysis documented the extent of campaign giving by plaintiffs' law firms specializing in shareholder litigation. It found that 25 leading firms, their lawyers and family members contributed a total of more than $21 million in the past decade to state-level candidates and party funds, as well as to national-party groups that work to elect state officials. Less than 40% went to candidates within the law firms' home states.

Labaton Sucharow was among the donation leaders. The law firm, its lawyers and their family members made $612,000 in campaign contributions in 24 states outside its New York home base in the decade.

Some lawyers say widespread political giving by plaintiffs' law firms, especially outside their home states and near the time when counsel are chosen, is evidence of a corrosive pay-to-play culture in the securities-litigation industry.


"Plaintiffs' lawyers donate because they think it buys them access to people who make decisions over how pension funds select counsel," says Fred Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP, a plaintiffs' firm in New York. Such giving "creates an appearance of complete impropriety," he says, and "should be outlawed."

The American Bar Association takes a similar position. The ABA, in giving guidance on ethics, says lawyers shouldn't accept a "government assignment" if they made a political contribution "for the purpose of obtaining or being considered for" such a job.

The Journal looked at donations in all 50 states from Jan. 1, 2000, through mid-2009, compiled by the National Institute on Money in State Politics, as well as data from other state and federal sources. About 72% of contributions went to Democrats.

The Journal also examined the 25 largest recent class-action settlements in which public pension funds served as lead plaintiff, as calculated by NERA Economic Consulting. In 15 of the cases, one or more law firms representing a lead pension fund had donated to a politician in the fund's home state.

Most plaintiffs' lawyers say they give simply to support like-minded officials. "We make sizable contributions to candidates we believe support investor causes," said Stanley Bernstein, of the New York firm of Bernstein Liebhard LLP.

The firm and people associated with it made $1.2 million in campaign donations, mostly in 31 states other than New York. Plaintiffs' lawyers also say their contributions help offset cash from pro-business interests opposed to shareholder litigation.

Public officials who favor shareholder suits say these are a needed check on corporate misbehavior and have recovered billions of dollars of losses caused by past abuses at WorldCom, Tyco International and elsewhere. They deny any pay-to-play dynamic, and say lawyers are chosen on merit.

Public pension funds increasingly are the lead plaintiffs in shareholder suits, partly because a federal law encourages judges to pick big institutional investors for this role.

As a result, plaintiffs' law firms focus their marketing efforts on wooing public pension funds and the state and local officials who influence them. Some firms enlist the help of lobbyists and attend pension-fund conferences.


Some lawyers say they aren't sure whether contributing helps them get government business, but are afraid not to. Some track how much rivals donate so they don't fall too far behind.

"There are certain places where, to be in the game, you have to donate," said Steven Toll, a partner at Cohen Milstein Sellers & Toll PLLC in Washington. It has contributed only modestly—$62,000 to out-of-state candidates—and Mr. Toll says he is sure its low level of giving has cost the firm business. But "we want to be chosen on merit, not because we contributed money," he said.

Ohio politicians received the most donations from out-of-state plaintiffs' firms in the past decade—more than $1.65 million, by the Journal's analysis. Ohio pension funds have filed at least 21 shareholder suits since 2002, according to state officials.

Running for Ohio attorney general in 2006, Democratic candidate Marc Dann told plaintiffs' law firms he favored shareholder suits and would file more of them than his rival would, he says. He received at least $59,500 from out-of-state securities litigators.

He won, and in the next 16 months, his office filed at least four securities suits on behalf of state pension funds, mostly using law firms that had given to his campaign or to the state Democratic Party. "I have no doubt I received donations with the expectation of work," Mr. Dann said. But, he said, attorneys were chosen strictly on merit.

Legal Tenders


How donations and decisions converged in Rhode Island. Click to see full chart.

Ohio's legislature tried to crack down on perceived pay-to-play abuses with a 2007 law that prohibited giving a state contract to any firm that had donated more than $2,000 to a politician overseeing such a contract. A court later overturned the law because of defects in the legislative process. While the law was in effect, it appeared simply to redirect the money flow to party committees.

Mr. Dann resigned after 16 months in office. After an interim appointment, the state held an election for a successor, won by another Democrat, Richard Cordray. Out-of-state plaintiffs' law firms gave little cash directly to Mr. Cordray's campaign, but in 2007 and 2008 they contributed $830,000 to the Ohio Democratic Party candidates' fund, which passed about $2 million to support Mr. Cordray.

Mr. Cordray then launched what he called an "aggressive" litigation strategy. Six law firms so far have been retained to represent Ohio pension funds in new lawsuits; five of the firms donated a total of $300,000 to the state Democratic party candidates' fund in 2008.

Mr. Cordray said the shareholder suits "have nothing to do with politics and everything to do with standing up for Ohio's pension systems, retirees and investors who have been harmed by corporate wrongdoing."

Massachusetts Treasurer Tim Cahill received campaign contributions from out-of-state plaintiffs' firms.

State officials, in deflecting pay-to-play allegations, often say they pick law firms on merit by first issuing a public "request for proposals," or RFP; law firms then compete to be on a list that pension funds will use for any future litigation. But some lawyers say the RFP process itself can be a political fund-raising opportunity.

Rhode Island General Treasurer Frank Caprio told the state Investment Commission on March 26, 2008, that he planned to issue an RFP for additional securities-litigation law firms. Five days later, Mr. Caprio received 26 campaign donations, totaling $23,000, from people associated with two New York plaintiffs' firms, Labaton Sucharow and Bernstein Litowitz Berger & Grossmann LLP. Both were among the four selected.

Last summer, after local reporters asked about law-firm contributions, Mr. Caprio returned $54,250 from those firms and five others. His campaign committee said it hadn't solicited the donations, and returned them because Mr. Caprio "wanted to assure taxpayers that he makes decisions based on what is best for the state of Rhode Island."

Neither Bernstein Litowitz nor Labaton Sucharow had any comment on the Rhode Island matter.

Once law firms make it onto a pension fund's list of potential litigators, they typically monitor the client's holdings and suggest lawsuits when they spot a stock drop that may be due to some corporate abuse. There's no cost to the pension fund in suing, because the lawyers work on a contingent-fee basis.

In the case of CVS Caremark, on Jan. 15 a lawyer representing Labaton Sucharow contacted Norfolk County's Mr. Connolly and other Massachusetts pension-fund overseers by email.

In the message, reviewed by the Journal, the lawyer recited an alleged "fact pattern" of belated disclosures by the drugstore chain leading to the "biggest drop in 8 years" in CVS's stock price in November.

Two of the pension funds agreed to be represented by Labaton Sucharow in the suit, which alleges CVS didn't disclose certain problems early enough. CVS said it doesn't comment on pending litigation.

A third pension fund suing CVS, the Brockton (Mass.) Retirement System, also received the Labaton Sucharow solicitation, but had just signed up with another law firm. Harold Hannah, the Brockton fund's executive director, says he gets many duplicate lawsuit suggestions. "I'm tired of it," he said.

"A good portion of these cases are ginned up by the plaintiffs' attorneys who go shopping for clients," said Robert Litan, a former Clinton administration Justice Department official now at the Brookings Institution.

"It shouldn't be the case that plaintiffs' lawyers should make contributions to public officials and turn around and get legal business from them," he said. "You want the best lawyer, not the one with the biggest campaign checkbook."

Tensions over the confluence of politics and lawsuits are on show at the $40 billion Massachusetts state pension fund, which in recent years has sued companies including Bear Stearns, Schering Plough and Fannie Mae.

The pension-fund board's executive director, Michael Travaglini, seems a reluctant litigant. "Nobody has convinced me of the value" of filing such a lawsuit, he said, as opposed to simply claiming a pro-rata share of any eventual settlement in a suit filed by somebody else.

Asked why the Massachusetts board has filed shareholder suits, Mr. Travaglini said the state treasurer and the state's current and past attorneys general have been interested in using such suits to spur corporate-governance reforms. All three officials received donations from securities class-action lawyers, records show.

The state pension board's most recent hiring of securities litigators came in 2005. Mr. Travaglini says the board issued an RFP, mostly at the behest of its chairman, Massachusetts Treasurer Tim Cahill.

While the RFP was pending, Mr. Cahill received $10,000 in $500 donations from people associated with Labaton Sucharow. It was one of four firms later selected. Bernstein Liebhard lawyers and family members contributed $5,500 to Mr. Cahill in the weeks after that firm, too, was selected.

Mr. Travaglini said he didn't know about the donations and they had no effect on the selection process. Mr. Cahill said he would let Mr. Travaglini speak for him.

Massachusetts Attorney General Martha Coakley pushed for a new RFP in 2009 to expand the state's stable of plaintiffs' law firms to as many as 12, according to Mr. Travaglini. "I said, 'This is crazy,' " he said, because his staff was already busy with lawsuit suggestions from the current four firms.

The RFP was put on hold while Ms. Coakley ran, unsuccessfully, for Ted Kennedy's vacant Senate seat. Her staff didn't respond to requests for comment.

In the biggest cases, legal fees can run in the millions. That's what happened in a suit by Calpers, the California pension fund, against UnitedHealth Group Inc., where stock options were backdated. The suit was filed for Calpers by the San Diego law firm of Coughlin Stoia Geller Rudman & Robbins LLP.

That firm is a descendent of the famed plaintiffs' firm once called Milberg Weiss Bershad Hynes & Lerach, which split in two in 2004.

Coughlin Stoia filed the suit for Calpers in July 2006. A month later, Coughlin Stoia and its attorneys contributed $107,000 to the gubernatorial campaign of Phil Angelides, who as California's then-treasurer was a member of Calpers's board.

Asked whether the donations were related to the hiring of the law firm, a spokeswoman for Mr. Angelides declined to say, but said that Mr. Angelides "was one of a number of members of the Calpers board and he had tens of thousands of donations during the eight years he was treasurer." He now leads a national board investigating the causes of the financial crisis.

Coughlin Stoia's spokesman—who previously worked for Mr. Angelides—said some of the firm's lawyers "actively support causes they believe in," including candidates.

Calpers said that its general counsel, not the board on which Mr. Angelides sat, picks outside litigators, adding that Coughlin Stoia was chosen based on its experience and resources.

The UnitedHealth suit was settled in August for $925 million. Calpers's share of that came to $3.2 million. The legal fee was $65 million. Most of it went to Coughlin Stoia.

Write to Mark Maremont at mark.maremont@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Nathan Koppel at nathan.koppel@wsj.com