Here are news stories from the week that were easy to miss, but may have some lasting impact.
1. The Truth Behind Settling Merger Suits
Lawyers, like magicians, rarely give away their secrets. So it was interesting when the Silicon Valley legal powerhouse, Wilson Sonsini, published an article detailing some little-known facts about merger litigation. According to the article, last year 96% of larger mergers (over $500 million) wound up triggering shareholder suits. In fact, they averaged 5.4 lawsuits per transaction. Where discernible, it appears that two-thirds of those suits were settled and in most cases the merging companies wound up paying the plaintiff’s legal costs. What’s the secret the lawyers at Wilson Sonsini are exposing? Simple. The plaintiff’s bar has “figured out” that filing suit in the face of a major merger can be the way to easy money. Directors and officers don’t want to get bogged down in litigation just as they are closing an important merger (and possibly concluding their role with the company). This makes the company vulnerable to what Sonsini describes as “opportunistic” suits. Further it calls such suits, “a tax on sound transactions.” No one, including Sonsini, is suggesting that all suits resulting from mergers are unwarranted. What is clear is that certain individuals have recognized that the chance for large settlements has drastically increased following announcement of a merger. There appears to be no magic wand that will make such post-merger announcement litigation disappear.
2. When Hedge Funds Make “Unusual” Offers
Three state retirement funds suing a hedge fund over a dispute about performance and liquidity is not unusual. Even when the fund’s accountant gets drawn into the litigation, it hardly registers as uncommon. However, when the fund has guaranteed a 12% rate return on the $100 million that the funds have invested, it certainly qualifies as, well, exceptional. Three Louisiana retirement funds have filed suit with 13 allegations against Fletcher Asset Management and its top executives. We have no insight to the underlying merits of the case, but guaranteeing rates of return, especially above market rates of return, should raise red flags to all parties of any transaction.
3. Big Brother Warns “Fend For Yourself”
Regulators appear to be encouraging financial institutions to prepare for growing cyber attacks and reminding them that the private sector has primary responsibility for fending off such attacks. Many banks have stressed that they do not have the wherewithal to battle with foreign government-led network attacks like the alleged Chinese- and Iranian-controlled attacks of the last few years. Officials from key regulators have been briefing bank officers about expected future attacks. The Office of the Comptroller of the Currency recently hosted a call with over a 1,000 community bankers. During the call the OCC warned cyber attacks on small banks are on the rise. The OCC’s senior critical infrastructure officer warned, “You have to think of cyber-risk as part of the other overall risks at your bank.”
4. Could LIBOR Have Its First Criminal?
Britain’s Serious Fraud Office (SFO) has filed criminal charges against one of the traders entangled in the LIBOR manipulation mess. Former UBS and Citi trader, Tom Hayes, has been charged with eight counts of conspiracy to defraud. These are the first criminal charges that SFO has brought in connection with LIBOR rigging. (This announcement came within days of the announcement by the British Bankers Association that they would change the way that LIBOR is calculated.) Other authorities in Europe, Asia and the U.S. are also expected to bring criminal charges related to the rigging scandal in the coming weeks and months.
5. The Dangers of Sleeping on the Job
It’s called “fat-fingering” when a trader enters the wrong digits on a trade by mistake. It happens. But when a German bank employee fell asleep on his keyboard it caused bigger problems this month. The narcoleptic bank employee transformed a €62.40 wire into a €222,222,222.22 transfer. The mistake was quickly found and the funds returned without incident. The sleep-deprived employee reinstated. However, the supervisor who mistakenly approved the wire was not so fortunate. He was fired. The new supervisor might want to think about getting less comfortable keyboards.