A daily look at legal news and the business of law:
Schwab Pays 25 Cents On the Dollar to 'YieldPlus' Investors
Though Goldman Sachs (GS) is grabbing all the headlines for allegedly committing fraud against sophisticated investors, the true awfulness of the financial meltdown has been its impact on Main Street, where it decimated the life savings of millions of ordinary Americans. People who don't make huge salaries yet manage to save enough to retire do so by sacrificing present pleasure for the proverbial rainy day. When those savings disappear because Wall Street self-immolates, those workers are, well, screwed. They can't go back in time and spend the money on the fun they deferred, and they can't extend their lives by the years necessary to recoup their losses. They did the "right" thing and lost.
Charles Schwab (SCHW) is a brokerage that caters to those average people, and its investments in illiquid, ultimately worthless mortgage-backed securities wiped out some $700 million to $800 million in savings that had been carefully salted away in its Schwab YieldPlus Fund by some 250,000 investors. Schwab had told its clients that YieldPlus focused on short-term, "conservative" investments, comparing it to a money market fund, but really had invested their money in high-risk mortgage-backed securities. Instead of getting their full investments back, the investors are receiving $200 million, which after legal fees, will result in them receiving approximately 20 to 25 cents for each dollar lost. Sadly, a quarter on the dollar is apparently a huge victory, because investors who file securities class action lawsuits in such situations typically get more like a nickel on the dollar.
This settlement isn't the end of the story, however: Schwab still faces180 arbitrations with individual investors, actions which could recover the investor's entire principal loss. Such arbitrations have already cost Schwab $48 million. Moreover, a class action is still pending in California that could additionally aid investors. Finally, both the Securities and Exchange Commission and the Financial Regulatory Agency are investigating the fund's collapse.
Massive Wal-Mart Sex Discrimination Suit Goes Forward
In a 6-5 ruling that will be appealed to the Supreme Court, the Ninth Circuit Court of Appeals green-lighted the largest ever employment discrimination case: A gender discrimination suit against Wal-Mart (WMT). Some 1 million women are suing for back pay, alleging they were systematically paid less and promoted less frequently than men, simply because they were women. Monday's ruling also sent the claims of women who'd left Wal-Mart before the suit was filed, and claims for punitive damages, back to the trial judge to determine whether those claims should be folded into the class action. Although the victory for plaintiffs is unprecedented compared to other cases, it's actually the fourth straight win for plaintiffs in this case. Will this victory be final, or will the Supreme Court consider reversing? We won't know for months.
And in the Business of Law...
As The Washington Post detailed Monday, Howrey LLP decided in 2009 to overhaul the way it treated new associates, cutting starting salaries and billable hour requirements, reducing the hourly rate clients were billed for their time, increasing their training at the firm, and lending them to clients. Sounds like a win-win for the new associates and clients, but unfortunately, the program has significantly impacted profits at the firm. As Above the Law notes, if Howrey partners don't make what their peers at other firms do, the program's not likely to last.
Nonetheless, this program seems to be the smartest response so far to the changing dynamics of the legal industry. As I've noted in prior columns, firms and clients have taken law schools to task for producing essentially worthless graduates whom the firms are expected to pay exorbitant salaries (to cover law school tuition), and bill to clients as if the new lawyers actually knew something (to cover the salaries the firms were paying). Howrey's move attempts to fix the problem at the point in the chain where it actually has power to do so. It'll be interesting to see if Howrey can hang tough long enough for other firms' clients to demand similar changes.
Investing Like Warren Buffett
Learn from one of the world's best investors.View Course »