Securities Law - College Fund Losses In Bright Start Plan

Do not assume that just because you invested in what you consider a conservative college fund for the education of your children that your investment is safe.

Lisa Madigan, the Illinois Attorney General, was a leader in obtaining a 77.2 Million dollar settlement from Oppenheimer Fund due to Oppenheimer’s alleged mismanagement of a fund with Illinois 529 College Savings Program. Lisa Madigan, the Illinois Attorney General, and the State Treasurer, Alexi Giannoulias, reached a settlement with Oppenheimer resolving an investigation into the firm’s mismanagement of the “Core Plus Fixed Income Strategy” fund. Illinois began to investigate Oppenheimer’s investment strategy after Core Plus lost about 38% of its value in the year 2008. The settlement means a recovery of about 50 cents on each dollar lost. Core Plus investors who incurred losses between January 1, 2008 and January 25, 2009 are eligible to participate in the recovery.

On December 22, 2009, Lisa Madigan stated “As a result of this agreement, Illinois families who invested in the funds will be able to recover substantial losses in their college savings account in a timely manner while avoiding the uncertainty of delay that would accompany lengthy and expensive litigation.” Five other states are negotiating settlement agreements with Oppenheimer. Those settlements so far range between 67 million and 20 million.

The Core Plus program was marketed as a conservative investment option for families with children near college age. However, suspicions emerged when Core Plus suffered losses of about 40% compared to the Bond Index used to benchmark the fund. The Bond Index showed gains of more than 5%.

Oppenheimer acknowledged the Illinois settlement but admitted no wrongdoing. It stated “Oppenheimer funds agreed to the settlement to resolve the investigation that commenced after the severe market volatility that impacted all investments in 2008, to enable the company to move ahead with its mission to provide high quality investment management services.” High quality management services! Why did they settle for $164 Million?

Investigators determined that Core Plus actually contained serious and risky investments and was leveraged by Oppenheimer’s management team. The risks were never disclosed to Illinois officials. Not surprising, the Investment Team at Oppenheimer responsible for the Core Plus strategy is no longer with Oppenheimer. Core Plus has been liquidated and replaced with alternate fixed-income investment options.
The lesson - monitor investment results frequently. Don’t wait for Lisa Madigan to bail you out.

Edward X. Clinton, Sr.
Copyright 2009

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Securities Law - Accounting and Legal Malpractice Claims

True Value, as a public company, is required to file its financial statements with the SEC pursuant to the Exchange Act. According to the SEC, there were accounting errors in the financial statements of True Value of about One Hundred Thirty Million Dollars ($130,000,000) and that for the year 1999 such loss was to be recognized. Accordingly, such statements had to be recast. Undoubtedly, the True Value stock which is publicly traded, took a hit when the news became public. That was only the start of True Value’s problems.

Management of True Value decided to pursue a remedy against its former accountants, Ernst & Young and decided that it would interview two law firms to sue Ernst & Young. The Firm of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. made the successful presentation to True Value and was selected. The Goldberg Firm filed an arbitration claim against Ernst & Young. The Ernst & Young Engagement Agreement with True Value required arbitration.

After four years and expenses of approximately twelve million dollars ($12,000,000) an arbitration panel ruled against True Value and ordered that True Value pay the fees and costs incurred by Ernst & Young. The panel found that True Value, through the Goldberg Firm’s actions, had exhibited “bad faith” because it failed to consider the extent of the audit work done by Ernst & Young and pressing its lawsuit on several issues where it had no chance of success. True Value opposed an Eighteen Million Dollars ($18,000,000) fee demand by Ernst & Young and ended up by paying about Eleven Million Dollars ($11,000,000) to Ernst & Young and new counsel. True Value then in December 2009 sued the Goldberg Firm in the Circuit Court of Cook County for legal
malpractice.

According to the Complaint, among other things, the Goldberg Firm advised True Value to sue its former auditors for accounting malpractice and, also, that the Goldberg Firm failed to analyze the merits of the claim and did not obtain at an early point an accounting expert.

Also True Value alleged that the Goldberg Firm failed to advise True Value that if it did not prevail in the case, it could be liable for the costs and fees to defend the accounting malpractice case. It alleged that the Goldberg Firm failed to inform True Value at an early stage that the malpractice claim would have to be arbitrated in accordance with the engagement letter and that the arbitration panel likely would consist of auditors.

The current lawsuit against the Goldberg Law Firm seeks to impose the costs incurred by Ernst & Young on the Goldberg Firm and seeks approximately Twenty Million Dollars ($20,000,000) in damages. Also, Goldberg, according to the Complaint gave negligent Securities Law advice, contributing to the above damages for which Goldberg was charged about One Million Dollars. True Value also seeks a recovery of that expense.
What started as an almost routine need to restate earnings ended up in a protracted arbitration by True Value against its former accountants and, now, in furtherance of the fiasco, True Value sues its former lawyers for legal malpractice.

Edward X. Clinton, Sr.
Copyright 2010

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Business Law - Why Incorporate?

Every now and then someone asks us why they should incorporate their business. After all, they say, why not just continue in business and use Schedule C of the IRS 1040 form to pay taxes on the business. Moreover, to incorporate invariably costs money - fees are paid to the Secretary of State (at least for an Illinois corporation) and annual fees are paid thereafter. There is also a modest legal fee as well.

Incorporation, however, is an absolute must for every business.

First, in most cases incorporation prevents a creditor from seeking to hold the owner of the business personally liable. If you are in business without a corporation, and something goes wrong, the creditor can seek to collect from your personally. This is the primary reason for the use of corporations. It is the oldest (several hundred years in the United Kingdom) and best form of "asset protection."

Second, incorporation separates the business from the owner's personal life. Your personal finances do not get mixed in with the business finances. This is an advantage.

Third, corporations provide additional flexibility and greater control. The owner may decide to reward an employee or business partner with a portion of the stock. With a corporation, provided that these decisions are properly documented, the owner may retain control by keeping the majority of the stock of the business. On the other hand, if the owner is in business without a corporation and then adds a "partner," a court may find that the owner has given away 1/2 of the business to this "partner." Worse still, both of the partners may be held personally liable for a debt of the business.

Recently we have seen advertisements on television for do-it-yourself corporations. Not surprisingly, we recommend against the do-it-yourself approach. The main reason why it is not a good idea for a nonlawyer to establish a corporation is that the nonlawyer may make a small technical mistake - which then voids the corporation. We have reviewed many do-it-yourself attempts that did not successfully form and maintain the corporation and were simply a waste of the owner's money. The Courts rarely give partial credit for a bungled attempt at incorporation.

If you have incorporated on your own, without legal advice, we recommend that you show your papers to a lawyer to obtain a professional opinion.

Edward X. Clinton, Jr.
Copyright 2010

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