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September 12, 2006


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"Every firm engages in conduct that might technically violate the Sherman Act or someone’s ethical standards of corporate conduct, not all of which are illegal or even undesirable from a shareholder and societal perspective."

I usually don't nitpick like this, but this sentence is crying out for it. Three points:

1. A violation of the Sherman Act, technical or not, is by definition illegal.

2. Violations of the Sherman Act, so long as you don't get caught, can be very beneficial to shareholder value. And, given our messed up antitrust law, sometimes even beneficial to society.

3. The counterargument to your point is that, sure, encouraging pushing the legal and ethical envelope might generate value; it might also destroy value. What makes you think that some reasonable government supervision is more likely to destroy value than to generate value?


You seem to forget that the BMS board agreed to this DPA oversight as a matter of contract to avoid being prosecuted for channel stuffing and revenue recognition fraud.

Further you seem not to be able to recognize the role of government oversight is to protect *consumers* from corporate malfeasance. Management has failed already. The corporate governance was broken well before the DPA saw government intrusion into the firm. BMS *agreed* to the oversight, and has separately settled with the FTC over suspect practices that harm consumers by keeping generic drugs off the market. Despite being under a DPA, and despite having settled with the FTC and entered into a consent decree not to engage in the type of behavior for which teh CEO and GC were ultimately ousted, they still did it again, paying off a generic competitor with a share of monopoly profits in violation of its consent decree.

So when a corporation has broen the law on multiple occasions, has agreed to oversight to avoid proseution, and continues to engage in illegal behavior, how is it then that corporate governance is supposed to happen? After repeated failures and breaking the law whose role is it? The shareholdres don't care. They are benefitted by illegal behavior. Who then?


As to "First," The board still has to approve and adopt Mr. Christie's suggestions. So it isn't by fiat that he is achieving these reforms.

As to "Second," Shareholder value was at serious risk already becasue management had subject the firm to criminal prosecution. BMS certainly could have rejected the DPA and defended itself in court. But risking huge penalties, officers being walked off in handcuffs and even potentially being shut down has a lot more shareholdre risk involved.

AS to "Third" you say:
"There is already a variety of ways of instituting governance changes, ranging from voluntary adoption to shareholder recommendation or takeover to changes in state law, SEC rules, or stock exchange listing standards."

You're missing the point. All those ways failed. Shareholders will not keep management from profiting illegally if it is in their ineterests to allow the illegal behavior to continue. State laws and SEC rules have already been broken! That is the point. These were not enough to deter BMS from engaging in botha ccunting fraud and monopolistic practices that harm consumers. They agreed to avoid criminal prosecution.

As to "Fourth" I just don't see a firm failing to adopt a beneficial reform just to use later as a bargaining chip. That is far fetched. The problem is there is no incentive to adopt reforms that make corporate conduct more legal and less profitable.

As to "Finally" well, corrpution and ethics are just that and are separate issues. Plus I'm not sure that some prosecutor getting a grant for his law school is any worse or more of a problem to shareholder or the public than a board member getting certain reforms passed to benefit his minority shares or a large corporate donation for his pet charity.


To "anon": an agreement between two lawyers to collaborate by forming a "firm" rather than compete is technically a contract "in restraint of trade" but is not illegal. Your point is taken. Mine is simply that what might seem like illegal conduct to one particular judge might not be illegal or socially undesirable. The optimal level of illegal conduct by firms is not zero. We want firms to take risks, even risks that might seem foolish to Judge Lacey.

To "LAK": are you a lawyer? If so, and even if not, you should recognize the problem of coercion. If I hold a gun to your head -- literally hold a pistol with bullets and threaten to shoot -- and ask you to agree to sell me your car for $1, can we really say that you agreed to this transaction?

As for the point about third-party incentives, I'm told by a senior lawyer at a major Chicago firm that represents dozens of Fortune 500 firms that this is exactly what some firms are doing. They are playing the corporate governance reform game because they are unsure about the value of any reforms and want to keep their powder dry in the event of any shareholder or government litigation. (The use of similar tactics by plaintiffs' lawyers is part of this story too.)

As for Mr. Christie's ethics, this is just the tip of the iceberg, but a disturbing tip at that. Extorting private benefits from Bristol-Myers lays bear Mr. Christie's true motives here. And the difference between an executive giving to his pet charity and Mr. Christie holding up a firm (even a bad firm) for a contribution to his pet charity is that in latter case the power of the State to take individual liberty or destroy the firm is being brought to bear. There are many firms that we can use to provide goods and services, and the bad ones tend to get ground under by the forces of competition. There is but one State, and, to paraphrase Max Weber, it has all the big guns.


Why yes, I'm a lawyer. And yes I am familiar with coercison. This isn't it. When BMS is getting something in return for being coerced it is a different story. They got out of being prosecuted. I'm all for the government actually having the resources it needs to regulate and prosecute. Instead of DPAs perhaps actual prosecution for wanton violations of the law is the answer. It's not coercion to recommend governance changes when the company has agreed to allow such input and oversight in exchange for not being prosecuted. Or do you dispute BMS broke the law and could have easily been prosecuted for its channel stuffing and accounting fraud?

The government has no interest in coercing BMS to adopt any reforms for its own interests. It is there to protect consumers and shareholdres in certain instances.

So I reject your charaterization of gun to head bargaining. The only reason there was a gun to BMS's head in this case was becasue they broke the law and willingly avoided punishment by subjecting themselves to the oversight of prosecutors. That the prosecutor was in a position to hold the gun to BMS's head was only becasue BMS gave that gun to the prosecutor in the first place in exchange for deferred prosecution for intentiaonally breaking the law and committing accounting fraud.

when you give the gun to the person holding it to your head in exchange for avoiding jail or criminal penalties, then it is hardly the same thing as what you suggest.

Again, you seem to ignore that they entered into the DPA on their own volition. That was no gun to head coercion, that was a calculated choice to avoid prosecution and punishment.


Or were you sugesting they were coerced into accepting teh DPA in the first place?

If so do you believe every time a criminal plea bargains they are being coerced?

If so would you rather, like I would, regulatory agencies follow through on their prosecutions (and actually have the rsources to do so)? That seems to be the answer to your concerns. No more DPA. Just good old fashioned punishment and accountability.

That way, instead of Dolan being ousted by the prosecutor today, he might have already been in jail and BMS might already have paid hundreds of millions of dollars in criminal and civil penalties as they should.

Bottom line is BMS was the perfect example of an appropriate instance for DPA oversight because they repeatedly broke laws, commited accounting fraud, attempted to monopolize drugs and foreclose on generic competition, even violating the explicit terms of previous consent decrees they entered into with the FTC.


Mr. Henderson, two lawyers forming a law firm does not under ANY definition constitute a "restraint of trade", technical or no.

You refer to a DPA as blackmail. I remind you that prosecution gives a corporation no choice at all. I see the use of DPAs as a constructive approach to the problem that the strict enforcement of the law can unfairly destroy shareholder value. Yes, a corporation operating under a DPA has fewer options than a corporation not operating under a DPA. However, inasmuch as such a corporation has demonstrated a proclivity to violate the law, granting it permission to continue operations is quite a generous offer. In a strict legal environment, there's a reasonable case for dissolving a lawbreaking corporation. I don't recommend such a course, but you seem to be complaining about what is in fact a very generous arrangement.

Your accusations of corruption are completely unjustified. The prosecutor in question gained absolutely nothing from the endowment. Given that endowing a chair in business ethics was a proper compensatory action on the part of the corporation, it would seem appropriate to endow such a chair in the same jurisdiction as the corporation. This narrows the range of options considerably. Do you assert that there was a more worthy recipient of the endowment in the same jurisdiction? Failing in such an assertion, the assignment seems completely reasonable to me.

You go on to assert that this is just the tip of the iceberg. If you have additional information relating to possible corruption, please present it. If you have no such information, then why are you asserting the existence of additional corruption that you cannot substantiate?


"The optimal level of illegal conduct by firms is not zero. We want firms to take risks, even risks that might seem foolish to Judge Lacey."

Yikes. We do? "we" meaning shareholders, maybe. Certainly not the public at large. "If those costs can be externalized, fraud/ monopolize away!" I suppose is the message here.

I guess channel stuffing/ accounting fraud is one of those cases (helps some shareholders, screws others) as well as paying off potential competitors with a share of monopoly profits to stay out of the market at cost to consumers (helps all shareholdres screws the public).

The optimal level of illegal behavior may not be zero for the firm itself, but it is for society. Clearly BMS paying off Apotex to stay out of the Plavix market was good for BMS - it was just very, very bad for consumers, which is why the government has stepped in, repeatedly. See for instance the FTC's complaint and consent decree against BMS with regard to the drug Taxol, which they willfully violated with regard to the Plavix debacle that got Dolan fired.

In the case of Good v. Evil, Evil does always seem to be well represented by Kirkland lawyers.


"LAK": the use of insults is not appropriate for this forum. Please refrain from this in the future or we will not allow you to post comments. We can disagree, constructively or not, without resorting to name calling. And, as a factual matter, Stalin was evil, pedophiles are evil; law professors, no matter how silly or misguided, aren't.


Insults? Goodness. Where? Law professors are not evil. Love 'em to death. Especially Doug Baird. One of the nicest most thoughtful guys you'll ever meet. Bristol Myers on the other hand is still subject to debate. Everyone is entitled to legal representation though, so I'm not sure where the insult was.

So does this mean you agree that actual prosecution is the much better alternative to DPAs? Or does channel stuffing and accounting fraud fall within the "optimal level of illegal conduct." Or is it the monopolization of a drug market and preclusion of generic competition in violation of the Sherman Act that does?


I'm not defending any of Bristol-Myers conduct. You misunderstand the thrust of this post – it is about whether corporate governance reforms are an appropriate response to corporate criminal conduct, not whether Bristol-Myers deserves this or that. It is a difficult question what should be done with firms that behave illegally. I doubt strongly, however, that managers agreeing to bind the firm in this way to avoid their own jeopardy is the most efficient solution or punishment. The board and other managers may have made the decision to enter into the DPA to save their own skin at the expense of shareholders. (Similar issues are raised by the waiver of privilege in these cases.) It might be that this type of oversight is essential in some cases, but I’m skeptical for the reasons I mentioned. I’m also worried about the potential for abuse here, by both sides – that is, managers and prosecutors. What we should care about, as society, is fashioning legal rules and penalties that get the right amount of deterrence and optimal social conduct for the right price of monitoring and enforcement. I’m thinking about this issue in the context of DPAs, and I appreciate the useful comments.

P.S. Implying that Kirkland & Ellis lawyers specialize in representing "Evil" clients is an insult to me and everyone who works or has worked at Kirkland & Ellis. I'm proud of all the work I did while employed there.


Well, the issue is not so easy to separate from BMS's conduct. If corporate governance fails and a corporation has no incentive to change its ways, and continues to break laws, then I see a necessity for government oversight and recommendatons to the board for governance changes, because there is no alternative, except stopping cutting deals and actually prosecuting corporations who commit crimes.

I noted that 1. The board adopts the suggestions of the overseer, so it is not ruling by fiat. 2. Shareholder value was seriously threatened by criminal and civil prosecution by the government, so claiming that the actions of a government overseer as a part of a DPA in lieu of prosecution puts shareholder value at more risk is a suspect claim, to say the least. 3. And most importantly I'd like it if you answered my third point, namely that all the "alternatives" you describe had already failed. No state law or SEC rule or market listing rule stopped BMS from committing major accounting fraud and repeated antitrust violations. The rules were already there and were violated. No amount of change in State law or SEC rules or listing rules will change the fact that outright lies about financial results, channel stuffing and accounting fraud is a crime. Unless you have a novel solution?

So BMS commits this fraud, and settles with regulators in a DPA. Fine. But then they go off and commit the very same illegal acts that they agreed not to do with the FTC in a separtae case, paying off generic competitors to stay out of markets. The overseer identifies two individuals involved in leading BMS down this path again and identifies a control weakness in the fact that the Chairman and CEO are the same person and recommends that this guy get fired and his former position be split in two. Sounds good to me. I'm thankful as a consumer if BMS couldn't get it done themselves.

It is not only completely rational given the circumstances, it was totally necessary, because if anything, BMS showed is was unable to implement the neceessary governance changes to stop it from committing the same illegal behavior over and over again. At some point, when it is the consumer who bears the cost of BMS' illegal monopolization, those who represent the consumer, that is the governement, need to do something about it. And they did.

I ask you, what is the alternative? The alternatives you have listed have already proven inadequate. This leaves you with either supporting actual prosecution instead of these DPAs, or allowing government appointed overseers to wield influence over and make suggestions to the board to stop the illegal conduct (or continue with the status quo, which is unacceptable)

As for your claim that "I'm told by a senior lawyer at a major Chicago firm that represents dozens of Fortune 500 firms that this is exactly what some firms are doing. They are playing the corporate governance reform game because they are unsure about the value of any reforms and want to keep their powder dry in the event of any shareholder or government litigation."
Wouldn't just advising their clients not to commit fraud and antitrust violations be an easier thing to do than not implement reforms so that you can save them for a rainy day when you get sued by the government or shareholders??? At some point ethics should enter the advice counsel gives to their clients, even if it might coast them some profits. But that's just me. I'm not sure such tactics don't subject these lawyers to malpractice claims if those changes would be beneficial to the company if implemented immediately, and subject them to government prosecution if they don't. Lord knows it would have saved BMS a lot of pain.

Well Kirkland is a big place. I know lots of fine people there. Many of them proudly defend the fact that they represent some of the largest and often most evil corporations in the land. I guess one man's badge of honor is another man's badge of shame. Indeed, if a Skadden Arps partner once claimed in public that they pride themselves on being as*holes, admitting Kirkland represents some evil interests should not cause you to much distress. Certainly not enough to sling "insult" and banning around.

And as one of probably 3 U of C graduates to have gone into the plaintiffs' class action bar, you'll forgive me if I take a few good-natured pot shots at Kirkland, and any former lawyers who come off as apologists for corporate malfeasance and haters of government regulation of corporate America. Lord knows I've personally seen Kirkland lawyers defend evil intent on a number of occasions. That certainly does not imply Kirkland lawyers are evil or shouldn't be proud of their work or efforts. The best lawyers money can buy, to be sure.


BMG did the crime, but they're not doing the time. They plea bargained. Whose fault is that? It's the USGs fault for allowing the criminal to get away with breaking our laws. This "corporate governance" is (oh, god, here i go again) unconstitutional. Where does it say that the Judicial branch is allowed to govern a corporation? Is individual governance next? When I break a law, can I have Judge Wapner come live with me to make sure I am behaving?


Bob, think of it as ethical bankruptcy, with a court appointed trustee.


Well, I do not generally agree with LAK, but I do in this thread.

It seems obvious to me that the optimum level of ILLEGAL behavior by firms and individuals is zero. If it is not and if the CRIMINAL law is really stifling desirable risk taking by firms and individuals, then we need to persuade Congress to change the law, not persuade the Justice Department not to enforce the law.

If we are going to enforce the current criminal code, which is, after all, the sworn duty of the Justice Department, the question is how we get there and, perhaps more importantly, what should be done about the criminal conduct, which is indeed a hard question.

In Arthur Andersen, the government tried prosecuting the firm by getting individuals to rat on the firm, and the result was, in my view, one of the greatest tragedies in modern U.S. business history.

The government then decided to prosecute the individuals by getting the firm to rat them out (the Thompson approach) which has not, at least so far and at least in my view, resulted in any miscarriages of justice.

Rather than just fine the firm and imprison the guilty individuals, the government seems to be trying with DPAS to correct the cultural governance problem that led to the criminal misconduct. I really don't see a problem with that.

Will individuals take advantage of the situation, within Justice as well as outside? Sure--they're human too. But some misuse of an otherwise legitimate tool does not make the tool suspect. C.f. the arguments from the far left that the corporation should be abolished because of law-breaking by some corporations.


david, how is this tool legitimate and in what respect?


How is it not legitimate? It is a matter of contract between BMS and regulators who were ready to prosecute BMS for fraud. Instead they agreed to have a retired federal judge oversee corporate conduct and make recommendations to avoid committing more crimes. All the guy does is make suggestions to the board. In this last round of misconduct, he identified those parties responsible for BMS violating its consent decree and antitrust law, and identified a control problem in the fact that the CEO and Chairman were the same person.

I fail to see how that is illegitimate. The Board is free to do what they please, at risk of prosecution. And seeing that the board members aren't the ones doing the wrongdoing there was no chance they were covering their own butts at cost to shareholders.


You narrow the class too much. You and I are two of the three UofC Law members of the Plaintiff's bar. Who is the third?

I practice out east and have not crossed swords with the Kirkland firm. Does "The Color of Law" accurately capture the Kirkland firm? It does capture a dozen or so firms out here.



Surely the government must have some tool to deal with corporate crime between the slap on the wrist that a fine (to be paid by the shareholders and not by the wrong-doing or wrong-ignoring management) would be and the death penalty.

If the Justice Department identifies some problems in a corporation's governance that lends itself to law-breaking, I don't see how entering into an agreement with that corporation's management to attempt to change that governance structure is problematic in any way. The FTC and SEC do this all the time in their arenas under the heading of consent orders.

Again, if the government has enough goods on a corporation to put it out of business entirely, then how is it wrong for Justice to get management to agree to change its behavior to avoid the "death penalty?"

However, it may be that managements are too readily giving into this sort of thing. After all, Andersen folded because of the nature of its business: public trust very very important, its assets entirely composed of professionals with portable practices whose association with a "criminal enterprise" would stain their careers and cause their clients to leave them, clients who cannot take a chance on an audit by a "criminal enterprise," licensing laws that regard an indictment as a conviction, etc. I don't know that there are many other non-accouting businesses in this position.


Personally, I think the law is flawed. The corporate veil should be made illegal. The stockholders are obviously innocent, but yes, they do reap benefits from illegal activity, just as they should lose when the company gets caught. But the real problem is the corporate officers who are breaking the law. It is simple, punish the officers with fines and prison. The company continues on, the shareholders take a hit, but the real culprits are behind bars. No plea bargains. Simply enforce the laws.


Well I don't know about getting rid of the corporate veil. I mean, I am left as you get and I even recognize the importance of the corporate form in creating wealth in our country (so did Marx incidentally - he at least recognized the need to pass through various stages of capitalism to achieve the sort of wealth in which equality becomes possible)

But corporations have gotten a pass for far to long when they commit crimes or engage in illegal behavior. That is one of the reasons I went into private practice. The SEC settles with everyone with no more than a slap on the wrist, a promise to stop engaging in the behavior and a smallish civil penalty. Even the few cases where there is criminal liability and the US attorney gets involved, or the State AGs, they rarely end up going very far.

Part of the problem is the resources our regulatory agencies have. Republicans have done a wonderful job a gutting effective regulation. But part of the problem is in the corporate form itself -it become difficult deciding who should be punished and how much.

I mean in this case it is almost absurd to me you have some law professor arguing that BMS should not be subject to governance input from a court appointed observer, when the fact is Dolan should be led out in handcuffs for violating the terms of the DPA and enaging in behavior again over which it had previously settled with the FTC.

Whether or not it is a good idea for a company to have government appointed overseers making governance changes is not controversial. It isn't. But it is necessary at some point, which seems lost on our conservative commentator here, as he has cited as alternatives in this case only the means of governance reform that have clearly already failed in this instance.


The only way to really govern corporations would be to nationalize them. Then they would be just as effective as government and the employees would be just as honest as government employees and officials. This would be a good thing, IMO, as I totally trust my government - without question.


Bob, I can never tell if you are being facetious or not.

However, I agree with you. or at least have governemnt buy-outs of firms of a certain size. That way the incentive to create businesses that can grow and make one wealthy still exists. Or maybe just industries that have significant influence over public welfare like drug companies or utilities.


We shouls also post a government agent in every home to make sure everyone is on the up-and-up, you know, like paying their taxes, not being strict with their kids, getting to work on time, not playing with guns, etc. The watchers can even ride in their cars with us to make sure we don't speed. Also, they can hang out in our bedrooms to make sure we're not participating in any deviant sex, which would be whatever the current administration decides is best. It would provide millions of jobs, too, for the government watchdogs. It's a win-win for everybody.



Why do you say "just industries that have significant influence over public welfare?" Name a company that doesn't. Even walmart is important to public welfare. Look at the thousands that they employ. They should certainly be nationalized. Companies should not be allowed to be that big. They shouldn't be allowed to grow over, say 20 employees. They should have to spin-off. That way we have lots of competition in the market. Of course, many of these spin-offs will go out of business because they would really have to compete hard and only the best would survive, but that's a good thing. We would only lose 20 jobs at a time instead of these massive 50,000 employee layoffs we have all the time. I would also pass a law requiring the President of a company to make no more then the lowest paid employee. I'm sure that would raise all salaries of all employees. Of course, the drawback is that nobody may want the President job, but thats okay too, because once the company is nationalized, some judge can run the company.

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