Stoneridge - A Walk for Corporate Fraudsters?

Will 2007 be the year  known as the year the corporate fraudsters were given a "walk" by the Supreme Court? Right now the fraudsters have been pitched four ball, and it certainly looks like a walk for the fraudsters:

1. Ball One: In Bell Atlantic Corp. v. Twombly,127 S. Ct. 1955 (May 21, 2007), the Supreme Court tossed  the long standing pleading standard in  corporate conspiracy cases, requiring injured parties to plead enough facts " to raise a reasonable expectation that discovery will reveal evidence of illegal agreement,” noting that "discovery can be expensive;"
2. Ball Two: In Credit Suisse Securities v. Billing, 127 S. Ct. 2383 (June 18, 2007), the Court tossed a private antitrust suit alleging anticompetitive activities by underwriters in the issuance of initial public offerings, stating in the most conclusory and broadly speculative terms, that "the threat of antitrust lawsuits, through error and disincentive, could seriously alter underwriter conduct in undesirable ways" and was, in essence, preempted by the securities laws;
3. Ball Three: In Tellabs, Inc. v. Makor Issues & Rights, Ltd , 127 S. Ct. 2499, 2007 WL 1773208 (June 21, 2007), tossed the notion that at the pleading stage, before any discovery had begun, that the injured securities purchaser was entitled to all inferences being drawn in the plaintiffs favor. Instead,  “to curb perceived abuses of the § 10(b) private action—‘nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests and manipulation by class action lawyers’” a "complaint will survive...only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged;” and
4. BALL FOUR....WALK: The U.S. Supreme Court decision today in Stoneridge Investment Partners v. Scientific-Atlanta, where, by a vote of 5-3, the Court tossed wide of home plate, any notion that "scheme liability" exists in the context of private causes of actions under the securities laws because investors cannot be said to rely on fraudulent schemes they do not know exist. This leaves sole enforcement and recovery in the hands of that same under-funded, under-manned, out-gunned, SEC that now has to handle all those antitrust issues( See Ball Three ), at least until a new Congress and a new President, untethered to Corporate Lobbyists, come to the rescue, and rectify this unintelligible and illogical mess. Of course I would not be so critical if this were anything other than a policy decision devoid of fact.

In throwing ball four, and hence a walk to corporate conspirators committing deceptive acts, the Court reasoned that even though the act may be deceptive, and intentionally so, the Court will not allow a presumption that investors rely upon a third party's actions or statements. Justice Kennedy wrote:

Though §10(b) is “not ‘limited to preserving the integrity of the securities markets,’” Bankers Life, 404 U. S., at 12, it does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.

To do so might sweep all conspiring suppliers and customers out of the game of accountability for the huge damage they contribute too. The Court, in outright protectionism of Corporate Fraud, rejected the irrefutable fact and logic that:

in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect. Were the Court to adopt petitioner’s concept of reliance—i.e., that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect—the implied cause of action would reach the whole marketplace in which the issuing company does business.

Whew!!!! I didn't know that deception was such a part of our society that we needed to protect fraud conspirators from their own wrongdoing. Rather, the Court decided, as a matter of unsupported fact and law that these conspiring vendors:

had no duty to disclose; and their deceptive acts were not communicated to the public.  [please ignore the inflated revenues] No member of the investing public had knowledge, either actual or presumed, of [the two companies’] deceptive acts during the relevant times. [as long as the deceptive act is hidden the fraudsters can't be held liable] [Stoneridge], as a result, cannot show reliance upon any of [the companies’] actions except in an indirect chain that we find too remote for liability. [and what is the factual basis of this finding?]

So, even though the vendors knew their deceptive billings would inflate Stoneridge's revenues, and that there was no other purpose for the deception, since the public only relied on the false aggregate revenue numbers and not the vendors bills themselves, the Court finds as a matter of law and fact that there can be no reliance???? What happened to the requirement of evidentiary proof and the jury system?

Ohhh, yes, I remember now what the Court said about that. If we hold corporate conspirators liable:

[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here. 

No, we would not want that. We need foreign corporate conspirators to keep our economy running!!!!

Even more confusing is the Court's implication that state law remedies are sufficient:

“Were the implied cause of action to be extended to the practices described here, however, there would be a risk that the federal power would be used to invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state-law guarantees.”

What state law guarantees is the Court talking about?  Has the Supreme Court forgotten about the Securities Litigation Uniform Standards Act of 1998 that preempts class actions that allege fraud under state law "in connection with the purchase or sale" of securities?

Today's ruling will be followed soon by the Ernon case against the investment banking firms who helped Enron create the fraudulent financial vehicles that dupped investors to buy Enron stock— California Regents v. Merrill Lynch, et al. (06-1341) ("Enron").

Can the Court find a difference where the wrongdoer is not a supplier or a customer? Can it be said that investors do not rely on fraudulent transactions with customers but do rely on fraudulent transactions with those more closely engaged in keeping the issuer involved in the securities market, such as lawyers, auditors, bankers and underwriters?

Letting a customer off the hook, when the customer actually bought the goods is one thing, but letting off the lawyers, auditors, bankers and underwriters off the hook when they actually got paid to help commit the fraud, is another. No one will riot over the first. The second will rally a lot of troops as we sit in the middle of this subprime mortgage meltdown.

There is a hint that the Court is not dull and could pick off one or two of these corporate conspirators who take too big of  a lead-off.

First, the Court notes, in talking about these supplier/customer defendants, that their actions were "beyond the securities markets—the realm of financing business – to purchase and supply contracts – the realm of ordinary business." Clearly a distinction would be drawn against the investment bankers in Enron.

Second, the Court states that:

It was Charter, not respondents, that misled its auditor and filed fraudulent financial statements; nothing respondents did made it necessary or inevitable for Charter to record the transactions as it did.

***

Here respondents were acting in concert with Charter in the ordinary course as suppliers and, as matters then evolved in the not so ordinary course, as customers. Unconventional as the arrangement was, it took place in the marketplace for goods and services, not in the investment sphere. Charter was free to do as it chose in preparing its books, conferring with its auditor, and preparing and then issuing its financial statements. In these circumstances the investors cannot be said to have relied upon any of respondents’ deceptive acts in the decision to purchase or sell securities; and as the requisite reliance cannot be shown, respondents have no liability to petitioner under the implied right of action.

It may be arguable, in Enron, that the investment bankers misled or acted with the auditors, or did take action that that "made it necessary or inevitable for [Enron] to record the transactions the way it did." Or the Court may see what they did in Enron as being in the "investment sphere," which it was.

Finally, in another good omen for investors, the Supreme Court rejected, out right,  the oft repeated contention that one must make a deceptive statement to be liable under §10(b):

The Court of Appeals concluded petitioner had not alleged that respondents engaged in a deceptive act within the reach of the §10(b) private right of action, noting that only misstatements, omissions by one who has a duty to disclose, and manipulative trading practices (where “manipulative” is a term of art, see, e.g., Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 476– 477 (1977)) are deceptive within the meaning of the rule.443 F. 3d, at 992. If this conclusion were read to suggest there must be a specific oral or written statement before there could be liability under §10(b) or Rule 10b–5, it would be erroneous. Conduct itself can be deceptive, as respondents concede. In this case, moreover, respondents’ course of conduct included both oral and written statements, such as the backdated contracts agreed to by Charter and respondents.

So the game is not over. Traditional suppliers and customers of goods are safe on base and off. The bankers, the lawyers, the accountants, and the underwriters better keep tight on base....at least until the next pitch....

For more see Jay Brown's weblog.

Supreme Court Oral Argument Transcript

Should Institutions Jump on the VeriFone Bandwagon?

     Many Public Pension Plans are heavily invested in VeriFone Holdings Inc. (NYSE:PAY) and have, most likely, suffered substantial losses as a result of the December 3, 2007 meltdown of the stock.

      We have been investigating this case and have found the facts to be compelling. On December 3, 2007, VeriFone announced that it would restate its financials at least as far back as the quarter ending January 2007. This restatement wiped out four-fifths (80%) of its pretax profits for the first nine months of 2007.

     Clearly, a restatement alone is not fraud. But, in this case, at least three facts compel us to believe that the restatement is not innocent.  

     First, the insider sales in the month of November were huge. The CEO dumped almost 400,000 shares (about 25% or his family trust holdings)for $18.5 million during the month , with 43,000 shares sold just a week before VeriFone’s stock collapsed $23.20, or 48.3%, to $24.83. Over the course of the year the CEO dumped $76,057,159 shares and purchased none. In November, the CFO exercised options for and sold all of his 18000 shares of Verifone stock. For his sales in the month of November he received $802,814, and for the entire year in question he received $7,246,260 for his sales and made no purchases. Even more compelling is the fact that the insiders have been selling shares almost without exception during the entire period at question.The insiders have been dumping their stock for the past 7 ½ quarters, with no purchases since the beginning of the restated periods. While it is widely reported that these sales were pursuant to a 10b5-1 sales plan, both the plan of the CEO and CFO were reported by them to have been adopted on December 10, 2006 at the inception of the accounting irregularities.

    Second, the purported accounting errors which are being blamed for the restatement involve the valuation of “in-transit inventory”:

On December 2, 2007, following a review by and on the recommendation of management, the Company concluded that its unaudited interim consolidated financial statements for the three months ended January 31, 2007, the three and six months ended April 30, 2007 and the three and nine months ended July 31, 2007 should no longer be relied upon, principally due to errors in accounting related to the valuation of in-transit inventory and allocation of manufacturing and distribution overhead to inventory, each of which affects the Company’s reported costs of net revenues.

     Inventory is one of those items that a company can easily play with, to boost profits for a quarter or two or, in this case, at three. W. Stephen Albrecht, PhD., of Brigham Young University, has written for the AICPA’s Antifraud and Corporate Responsibility Center:

Inventory frauds have been such a significant problem historically that a few years ago the Wall Street Journal featured a front-page article titled "Inventory Chicanery Tempts More Firms, Fools More Auditors."….

See Albrecht, Identifying Fraudulent Financial Transactions, American Institute of Certified Public Accountants, 2005. http://antifraud.aicpa.org/Resources/Auditors/Tools+and+Aids/Fraudulent+Financial+Transactions.htm?PrinterFriendly=true

Dr. Albrecht has identified at least 15 fraud schemes that can be used to overstate Inventory and/or understate Cost of Goods Sold, all of which have the effect of increasing net income in the current period. This in turn leads to a huge problem for management that does not exist with other financial manipulations¬¬¬---it must be repeated more intensely in the next period to cover it up:

With revenue-related frauds, reported revenues are overstated in the current period and accounts receivable are overstated on the balance sheet. However, there is no compounding effect in the subsequent period. With inventory frauds, however, the "overstated ending inventory" of one period becomes the "overstated beginning inventory" of the next period and causes net income to be understated in the second period. Thus, if a dishonest management wanted to continue the fraud into a second period (most frauds are multiple-period frauds), they would have to perpetrate a fraud of an equivalent magnitude just to offset the overstated beginning inventory, and then commit an additional fraud if they again wanted to overstate inventory to increase net income. The result is larger misstatements and a fraud that is much easier to detect.

Fortunately, most financial statement frauds are perpetrated out of desperation, and dishonest management worries only about how income can be overstated in the current period with no thought of the problems they create for themselves in subsequent periods.

    This is the very pattern we see in VeriFone’s restatement. As reported by VeriFone in it’s 8-K filed on December 3, 2007:

[T]he Company’s management currently anticipates that the restatement will result in reductions to previously reported inventories of approximately $7.7 million, $16.5 million and $30.2 million as of January 31, 2007, April 30, 2007 and July 31, 2007, respectively, and reductions to previously reported pre-tax income of approximately $8.9 million, $7.0 million and $13.8 million for the three month periods ended January 31, 2007, April 30, 2007 and July 31, 2007, respectively.

Based on this compounding pattern and Dr. Stephens observations, the inventory overstatements appear intentional.

     Third, the size of the restatement is huge when one considers it has all but wiped out the profits, and conveniently is accountable for 80% or the Company’s profits. Moreover, in the Company’s 8-K of December 3, 2007, it states that it has not finished it’s investigation and has cautioned that more is yet to come.

     In VeriFone’s defense, the SEC has not yet started an investigation, Goldman Sachs is blaming it on “friction” with the Lipman acquisition (but the Company is not) and others are blaming VeriFone’s major customers which may have held tons of VeriFone inventory. The Company, itself, has claimed that the overstatement is the result of double entries in VeriFone’s inventory accounting system. According to one unverified press report which comports with at least one analyst report (we wonder where the 8-K is of this filing or why the conference does not seem to have complied with Reg FD and was made public----do you hear me SEC?):

During a conference call with analysts Monday afternoon, Bergeron explained the company's accounting system was not set up to automatically input the value of inventory moving between VeriFone locations in Singapore; Sacramento, Calif.; and Tel Aviv, Israel, Card Technology’s sister publication CardLine reported. Bergeron told analysts that because the in-transit shipments were not automatically applied to the accounting system, someone had to manually input the numbers. Bergeron said that procedure was correct and required. The error surfaced when someone incorrectly determined that direct shipments also had to be entered manually, he said. The double entry was not found until work began on VeriFone's annual audit. "In short, these errors were characterized by double-booking of overhead in Sacramento," Bergeron said. "We are confident that we have isolated the problems in our systems and in our accounting. We are also confident that this issue did not exist before fiscal year 2007."

Card Technology.com, December 5, 2007. http://www.cardtechnology.com/article.html?id=20071205VUXI34XB.

     Whether there is truly a fraud here will be developed by investigations still in process. But, as the class action lawsuits have been filed and the days are counting down to the last day for an institutional investor to decide whether to take the lead the prosecution of the litigation on behalf of all purchasers of VeriFone stock, is coming up, you do not have the luxury of waiting to see how the facts develop.

Ninth Circuit Finds NASDAQ Listing Material

In a rare case, based solely on a Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2) claim, the Ninth Circuit overturned a District Court Opinion finding that an implied promise to list the stock on NASDAQ, in the Final Draft of the Prospectus, was not material. In HOWARD MILLER v.THANE INTERNATIONAL, INC., the Ninth Circuit recites what this author finds to be almost an amusing flip-flop of experts (both of whom I respect) who normally take completely opposite positions in a 10b case where defendants argue that the "reliance" element of fraud cannot be established through the "fraud on the market presumption" in small cap stocks because the markets on which they trade on are not efficient :

Testifying for Thane International, Bradford Cornell, Professor of Finance at the Anderson Graduate School of Management at the University of California, Los Angeles, minimized the importance investors attach to the market in which a company trades, concluding “value derives from the company itself and not where it trades.” He also testified that liquidity is determined by a company’s inherent characteristics,5 not the market on which it trades. He generally regarded listing on the NASDAQ as a cosmetic benefit of secondary importance to investors who focus on a company’s fundamentals.

On behalf of the plaintiff class, Candace Preston, founding member of Financial Markets Analysis, LLC, emphasized the benefits that accompany NASDAQ listing as compared to listing on the OTCBB. She declared that NASDAQ stocks generally enjoy greater liquidity, and thus reduced spreads,6 leading to greater investor returns.7 NASDAQ-listed shares are also exempt from state-by-state “Blue Sky” laws, which require companies offering securities to undergo burdensome registration processes in certain states in addition to the various federal registration requirements. This translates into lower compliance costs, more favorable terms for raising capital, and thus, all things being equal, higher earnings and share prices. NASDAQ-listed shares can also be purchased on margin, i.e. purchased with money on loan from a stockbroker. This can lead, all things being equal, to a larger investor base and higher returns.Wall Street Journal, which further decreases their exposure to potential investors and decreases price transparency. She also explained that NASDAQ listing confers a degree of prestige on a stock because of that market’s more rigorous listing standards.

Preston testified, and Thane International did not dispute, that institutional investors almost universally shun OTCBB stocks, which significantly cuts into the base of demand for those shares (thus depressing their price). Preston also testified that OTCBB stocks are not regularly quoted in financial publications like the

See Thane_International_Ninth_Circuit.pdf. Also of interest to the Plaintiffs' Bar are affirmations of two long held principles. The first being the principle that even literally true statements can be misleading:

[A]n issuer’s public statements cannot be analyzed in complete isolation. “Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors. For that reason, the disclosure required by the securities laws is measured not by literal truth, but by the ability of the material to accurately inform rather than mislead prospective buyers.” In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991) (quoting McMahan & Co. v. Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990)); see also Kaplan v. Rose, 49 F.3d 1363, 1372 (9th Cir. 1994).

The second is that Section 12(a)(2) claims have no scienter element:

“Section 12(a)(2) is a virtually absolute liability provision that does not require an allegation that defendants possessed scienter.” In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 269 (3d Cir. 2006) (internal quotation marks omitted); see also Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995) (“It is understandable that Congress would provide [securities] buyers with a right to rescind, without proof of fraud . . . .” ). Moreover, the purchaser need not prove reliance on the misrepresentations. See Gustafson, 513 U.S. at 576, 578.

While plaintiffs may have won the war, they may have lost the battle. The Courts holding that the stock drop was immaterial for determining liability is moderated by the fact that the Court sent it back for the District Court to consider loss causation. Contrast Footnote 2:

2 In the context of a “fraud on the market” Rule 10b-5 class action, where reliance is presumed based on the price of a stock, availability to the public of truthful information may be relevant to the extent the stock’s price has not actually been skewed by any misrepresentations. However, in an action that does not involve the fraud on the market presumption, that truthful information is available elsewhere does not relieve a defendant from liability for misrepresentations in a given filing or statement. See Apple Computer, 886 F.2d at 1114-15.

With:

A Section 12 defendant is liable only for depreciation that results directly from the misrepresentation at issue. See 15 U.S.C. § 77l(b). Because the district court found no misrepresentation, however, it did not reach loss causation. Thane International urges that we should affirm the district court’s judgment because the district court’s factual findings necessarily establish that there was no loss resulting from any material misrepresentations. Specifically, Thane International argues that the district court’s finding that Thane International stock did not react during its first nineteen days of OTCBB listing supports a finding that its failure to list on the NASDAQ was not the direct cause of any loss of value.

Without expressing any opinion as to the strength of this argument, we remand to the district court to address the issue of loss causation in the first instance, following the “general rule [that] ‘a federal appellate court does not consider an issue not passed upon below.’ ” Golden Gate Hotel Ass’n v. City & County of San Francisco, 18 F.3d 1482, 1487 (9th Cir. 1994) (quoting Singleton v. Wulff, 428 U.S. 106, 120 (1976)).

What one hand gives, the other takes away. Prediction...early settlement.

Loser CEOs, Raking It In

The Washington Post has published an Op Ed by my former colleague, William Lerach on Sunday November 11, 2007.

While William Lerach's actions are not to be ignored, and he is not one to rightfully complain about inequitable distribution of wealth, his observations concerning the abuse of corporate power should be given consideration. As they say, and I say in half jest, "It takes a crook to know a crook."

Link: Loser CEOs, Raking It In.

No Accounting for It, Loser CEOs, Raking It In By William S. Lerach Sunday, November 11, 2007;

"How come I don't get nothin'?"

In light of the massive payoffs that corporations are handing to failing executives -- most recently the ousted chiefs of Merrill Lynch and Citigroup -- that could be the legitimate lament of millions of U.S. workers whose jobs have been sacrificed of late in the name of corporate competitiveness and free trade.

Cleaned up grammatically, that question would probably express the sentiments of many of the 24,000 Merrill employees fired in recent years and the 17,000 Citi employees who are soon to get the ax. Together, former Merrill chief executive E. Stanley O'Neal and former Citigroup chief executive Charles O. Prince have lost more than $20 billion in company money. Yet they left with $360 million in their own pockets.

The American principles of responsibility, accountability and justice require everyone, even corporate titans, to pay a price when they mess up. I've dedicated my career to holding powerful corporations accountable when they victimized innocent people. CEOs such as Enron's Jeffrey K. Skilling, WorldCom's Bernard J. Ebbers and Tyco's L. Dennis Kozlowski all went to prison for their fraud. Now I'm being held accountable for overzealously pursuing these corporate scam artists.

Two weeks ago, I pleaded guilty to a conspiracy charge involving payments made to plaintiffs in lawsuits against major corporations. Under the terms of the plea, which requires court approval, I agreed to pay the government $8 million in fines and penalties and to serve at least one year in federal prison.

But what about accountability for Wall Street CEOs who line their pockets while making stupid decisions that rob shareholders and pensioners of billions of dollars? Recently, corporate boards have been fundamentally misinterpreting the phrase "the buck stops here" -- and handing the bucks over to their miserably performing bosses.

Let's see if I've got this right. To try to boost profits in the new low-interest-rate era, O'Neal and Prince plunged Merrill and Citi into the high-risk world of subprime collateralized debt. The banks peddled billions of dollars of this stuff to pension funds and institutions, pocketing more than a billion in fees for feeding the pigeons. Apparently, Merrill and Citi got stuck with more than $50 billion of the riskiest debt that they couldn't unload on their customers. O'Neal had assured Merrill shareholders that these high-stakes bets would "not add to Merrill's risk profile." And when the subprime fiasco started to unravel, Prince famously said that Citi was "still dancing."

As Merrill and Citi took on these risky assets, their balance sheets ballooned and short-term profits flowed in. O'Neal, Prince and their executive teams crowed about their successes and their risk-management skills while pocketing bigger performance bonuses based on the "profits" and cashing in stock grants and options as the stock prices temporarily advanced. Several top Merrill executives received more than $30 million each in 2006. O'Neal led the pack with $91 million. For cream in his coffee, O'Neal unloaded about 235,000 shares of Merrill stock, pocketing an additional $20 million. At Citi, top executives were given more than $10 million per year, with Prince raking in $25 million. ( Continued )

Then the roof caved in. A tsunami of losses has swept over many big banks -- but none comes close to matching Merrill and Citi for their folly. At first, O'Neal told investors that the Merrill loss would be about $4.5 billion. Prince initially said that Citi's would be about $6 billion. Horrifying enough. But just a few weeks later, O'Neal admitted that Merrill's real loss would exceed $8 billion -- the largest subprime loss in the world. Then Citi announced that its real subprime loss could reach $11 billion.

The previously reported profits have been wiped out, and rumors of billions more in coming write-offs abound. Who knows what the class-action suits against Merrill and Citi for stock fraud will cost? Merrill's stock has deflated from almost $100 per share to $60. Citi's stock is down from $55 per share to $36. Ironically, the Merrill stock "bounced" only when it was disclosed that O'Neal had secretly talked to another bank about buying Merrill -- a bad move for shareholders at these depressed price levels, but one that would have paid O'Neal $250 million under the company's "change of control" provisions.

Let's not forget that Merrill was one of the key architects -- while O'Neal was a top insider -- of the unsurpassed Enron rip-off of thousands of investors. Merrill managers were indicted and convicted. While Prince was Citi CEO Sandy Weil's consigliere, Citi was also a "tier one" bank for Enron and was forced to pay $2 billion to settle lawsuits by Enron stockholders as part of the largest fraud settlement with stockholders in history.

Prince and O'Neal have admitted to "mistakes" and "flawed risk models." These "mistakes" and "risks" are reminiscent of those of Andrew Fastow, Kenneth L. Lay and the other Enron boys in their "structured" "off balance sheet" deals -- contrivances that were really designed to put shareholders at risk while lining the insiders' pockets. The more things change, the more they stay the same on the "Street."

One would think that having engineered these catastrophes, O'Neal and Prince would be in for some real financial reckoning. Some working stiff on the assembly line who forgot to tighten the lug nuts on the cars going past him or some clerk in the risk department who forgot to file an insurance claim would surely suffer some penalty. Like being fired without a huge going-away gift. But O'Neal got to pocket $160 million in stock-based compensation as his departure present -- on top of the more than $100 million he received during the past couple of years. Prince, it is said, left with $100 million, on top of the $100 million he got as Citi's CEO.

How can this comport with notions of fairness? If some Merrill or Citi lower-level manager lost $2 million -- let alone $100 million -- you can bet that the board would come down on that poor soul like a ton of bricks. And these boards would no doubt sue a defaulting counter-party who cost their corporation $800 million -- let alone these billions in losses -- because of a "mistake."

It would be one thing if this were an isolated incident reflecting just terribly bad judgment by these CEOs' pals on their boards. But it's not. It's a way of life in American executive suites, aided and abetted by lax regulations and politically compromised regulators at the Securities and Exchange Commission. Executive failure is consistently rewarded with giant payments -- or, really, payoffs -- to keep the parting sacrificial lamb quiet so that he or she won't bleat to the stockholders, lawyers and the media that the others at the top of the company (and in the boardroom) knew what was really going on.

Similar examples of excess abound. Take Morgan Stanley, where a few years ago, top executives Philip J. Purcell and Stephen Crawford were ousted after a series of managerial missteps swamped that bank with losses and crushed its stock. Their reward? More than $100 million -- as they were shown the door. Jerry Levin was pushed out as chairman and CEO of AOL Time Warner (oops, now it's just Time Warner; the AOL name is gone but not forgotten) after engineering the worst acquisition of the past century, which cost his shareholders $100 billion and sank the stock from $58 to $9. His going-away payoff -- $600 million. After Carly Fiorina ran Hewlett-Packard into the ditch, she was sent packing with a $100 million gift for her "leadership." Dick Grasso, New York Stock Exchange, $140 million. Michael Ovitz, Walt Disney Co., $135 million. And dozens more.

The real frustration is that there's so little that can be done. Shareholders supposedly have access to the courts for a remedy, but they won't get far. A stockholder suit filed more than two years ago challenging the Morgan Stanley payoffs languishes in court. The CEO-and-director club knows that pro-business judges in the corporate haven of Delaware and elsewhere in the legal system will protect them. Shareholder suits against Time Warner's Levin got nothing back from him.

The government -- forget it. The SEC, and even Congress, appear to be getting ready to cut back shareholder rights and court access even more. And the Justice Department is busy defending waterboarding and targeting Democratic activists. Why do you think corporate bigwigs behave so badly so often?

One great virtue of the American free-market capitalist system is that to date, it has been able to withstand all forms of excess. But "quis custodiet ipsos custodes?" -- "Who will guard the guards?" wrote the Roman poet Juvenal. How corporate boards treat the shareholder owners of the corporations they oversee is simply intolerable. And even the strongest camel's back can ultimately be broken.

Someone told me recently that Lenin was wrong about communism but right about capitalism. Maybe he was. I'm on my way to prison because, in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line. It turns out that the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.

WilliamLerach@gmail.com

William S. Lerach is a longtime shareholder advocate and plaintiffs' lawyer.

WellCare (WCG) Securities Fraud Suits Begin After Raid and SEC Probe

WellCare Healthplans Inc. shares closed Friday ,October 26, 2007, at $31.36, down nearly 73%, since Wednesday when trading was halted on news that state and federal law-enforcement agents (the FBI) armed with a federal search warrant raided WellCare's headquarters in Tampa, Fla. The Wall Street Journal on Friday reported huge insider trading, the hallmark of securities fraud:

Since July, Chief Executive Todd S. Farha has sold $8.8 million of shares, while General Counsel Thaddeus Bereday has sold $4.2 million, according to Thomson Financial. Chief Financial Officer Paul Behrens has sold $2.1 million of stock. Regina Herzlinger, a director of the Tampa, Fla., company, sold $2.3 million worth in August. ....Andrew Agwunobi, who now heads Florida's Medicaid agency, served on WellCare's board from June to December 2006 and sold $1 million of shares in December, according to a Securities and Exchange Commission filing....All told, company employees and directors have sold about $47.6 million of stock this year, up from $34.6 million last year, as the company's shares have outperformed the Standard & Poor's 500-stock index by 428% since WellCare went public in mid-2004....

On Friday the SEC and the Conneticut Attorney General joined the probes. Also on Friday, the  law firm Kahn Gauthier Swick, LLC ("KGS") filed a class action lawsuit against WellCare in the United States District Court for the Middle District of Florida, Tampa Division, Case No. 8:07 CV 1940-T24, on behalf of shareholders who purchased the common stock of the Company between May 8, 2006 and October 24, 2007, inclusive (the "Class Period").

If an investor wishes to serve as the lead plaintiff in this class action lawsuit, the investor must move the Court no later than December 26, 2007.If you have further information concerning these facts or are a shareholder and want to be kept apprised of the investigation or of possible legal action, you can e-mail the me at info@hbsslaw.com or call 206-623-7292 or go to http://www.hbsslaw.com/wcg.htm.