Marc Powers is a Partner at BakerHostetler. Powers represented an international investment bank in a securities class action and related civil and criminal international investigations by the Securities and Exchange Commission (SEC), U.S. Attorney’s Office and foreign regulators. The matters arose from the liquidation of an $850 million U.K.-based hedge fund with purported inflated portfolio valuations.
Powers and his team developed a strategy to minimize the legal liability for the investment bank, ultimately settling his client in the class action for the payment of $500,000. This is just one of the topics he’ll be addressing during this Q&A.
Christopher P. Skroupa: What are some of the more interesting corporate executive cases you’ve been a part of this year?
Marc Powers: We represented a public company, specifically its Special Committee, regarding overtures made by an activist hedge fund shareholder seeking to obtain both board seats and sale of some of the company’s assets. The Special Committee was charged with considering that overture and demands by that activist. We developed an approach toward communicating with the activist considering strategic alternatives, which included valuing various parts of the business. The purpose behind our actions was to make recommendations to the full board for the best course of action to take that would also be in the interest of the shareholders.
A number of corporate governance issues needed to be considered for purposes of evaluating the proposals made by the activist. This included the board’s fiduciary duties to the shareholders, which at that time included the activist. The final outcome was positive from the company’s perspective and, I think, that of the shareholders.
That particular case was resolved by a formal tender offer by the company to all the shareholders, which would have allowed the shareholders and activist to sell their shares at a certain price. There was then what we call a “backstop,” which allows for the remaining shares of the activist to be bought. That was backstopped by some of the management of the company so, at the end of the day, the company was allowed to continue with its current management and current board.
The company now continues as a much stronger operation and with a more enhanced business plan than it had when the activist made his approach. It was a very interesting project. We had come in as replacement counsel. There had been a lot of contentiousness in the process prior to our involvement, and, working with a new company counsel and that of the activist, I think we came out with a really good outcome here.
Skroupa: And what about representing investment banks in securities class action lawsuits?
Powers: Since leaving the SEC 30 years ago I’ve had the good fortune in my career to represent any number of different investment banks, broker-dealers, hedge funds, investment management companies, and their officers, directors and employees, in various securities class actions, as well as in SEC investigations.
One of the more interesting assignments was representing an international investment bank with five offices worldwide – Hong Kong, São Paulo, Madrid, Mexico City and Greenwich, CT. There was an $850 million hedge fund in the U.K. that had a portfolio of investments, which included some illiquid assets. As it turned out, one of the traders of the investment bank in Madrid was too close to, and apparently involved with, that portfolio manager in the U.K. in the marking or valuation process of those illiquid assets.
These illiquid assets were continually marked up to higher and higher levels. Ultimately, the hedge fund failed and issues arose as to the appropriateness as to the valuation of some of the portfolio positions, in particular those marks. That sparked international investigations by various regulators in Spain, the U.K. and the U.S., and it also sparked criminal investigations here in the U.S. Even before a class action was brought by various limited parties of the hedge funds, we had to manage various parallel and international proceedings in a way that minimized any exposure of the investment bank.
One of the things that we accomplished early on was, after we had conducted our internal review of what occurred, to handle the matter in such a way that, ultimately, when a case was brought by the Securities and Exchange Commission (SEC), it was one that did not name the investment banking firm. Instead, it named only the rogue trader employee, as well as the people involved with the U.K. hedge fund. That was a great accomplishment. There was then a parallel criminal case that was unsealed at that same time involving the U.K. manager, who was coming back to the U.S. when they arrested him at the airport.
Once the SEC and criminal action became public we represented the investment bank through the securities class action filed thereafter. What was particularly interesting for myself was I ended up settling the class action for our client at a relatively early stage, before the other class action defendants, which were the administrator, the servicing agent and the management of the hedge fund.
We ended up settling that case for $500,000, which is a ridiculously small number. The defendants that remained in that case for the next year or so ended up having to settle for more than $14 million. The client was very pleased with our services.
Skroupa: What have you learned from your higher-profile cases that would be of interest to your clientele?
Powers: Over my 35-year career, I have been fortunate to have worked on some of the more interesting and high profile cases of our time. I have represented Lord Conrad Black in various civil and criminal matters relating to his legal troubles arising from Hollinger International. I have worked on the Bernard Madoff case at my law firm as part of our huge team representing Irving H. Picard, Securities Investor Protection Act Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC. I was actively involved in the Martha Stewart insider trading and perjury cases, among others, as well as the mutual fund industry market timing/late trading investigations and class action litigations, representing both Federated Investors and hedge funds.
One of the things I’ve learned is the importance of having an experienced counsel who has been in the trenches and come out the other side successfully. You don’t want to hire someone for whom it’s their first war. You really want someone who’s done this over the years.
This ties into a second point; how important it is to know how to engage media in a way that places the client in the best possible light. I think that it’s a skill, and something that’s very important to learn because the statements you make, and how you make them, will absolutely impact your client’s image. You also need to consider the various constituencies of the client, its board and its fiduciary duties, its shareholders, its employees, customers and suppliers. The next point is how important it is to be organized and have a proper team in place.
When I get involved in these cases I’ll put together a team that not only includes myself, as a securities litigator and regulatory lawyer, but I also might bring someone from our white collar law practice to kind of backstop me, and obtain the benefit of their criminal law background. I want to make sure we’re going to be addressing all possible issues if parallel proceedings are likely. There may also be some tax issues that we’re going to be addressing with a spectrum of resolutions. There are also going to be issues relating to hiring or firing people that may be involved, and administrative actions that may need to be taken concerning certain actors for that company. I’ll bring in our employment lawyers in terms of how we’re going to address that.
Finally, the key is, in my view, is getting it right early. What you do in the first week or two of an “explosive matter” is critical for five years down the line in how it plays out. If you make missteps during those first two weeks by not having the right counselor team around you – media, accounting, forensics, document production, as well as legal – you’re going to have to live with your mistakes five years hence.
When you bring in the right team, and lead them day in and out for as long as it takes, your client benefits. Even if subsequently charged or the subject of a class action – it may have been doing the same thing as some other bad actors – the penalties your client pays will pale in comparison to the relatively hefty amount others have to pay because they either missed, skipped or made the wrong steps within those first two weeks.
Powers will be a panelist for the discussion Wells Fargo Claw Back: Case Story on the Cost and Long Range Impact of Non Compliance at the New Era for Regulatory Risk conference on November 30 in New York, NY.