Clawbacks: Prospective contract measures in an era of excessive executive compensation and ponzi schemes

Minnesota Law Review

Volumn 94, Issue 2, 2010, Pages 368-427

  Cherryt, Miriam A ^a   Wongtt, Jarrod ^a  

^a UNIVERSITY OF THE PACIFIC   (United States)

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EID: 79551712362     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (330)

1. See William K. Sjostrom, Jr., The AIG Bailout, 66 WASH. & Lee L. Rev. (forthcoming 2009) (manuscript at 14-29), available at ,http://paper.ssrn.com/ sol3/papers.cfm?abstractjd:=1346552 (describing the circumstances surrounding AIG's near-bankruptcy and the subsequent bailout). Various sources have been tracking the recipients of government bailout money. See, e.g., Matthew Ericson et al, Tracking the $700 Billion Bailout, N.Y. TIMES, June 24, 2009, http://projects.nytimes.com/creditcrisis/recipients/table.
2. ProPublica, Eye on the Bailout, (last visited Nov. 8, 2009), http://bailout.propublica.org/main/list/index.
3. See, e.g., Deborah Solomon, Uproar Over Geithner's Role in Bonuses Could Vex Rescue, WALL St. J., Mar. 19, 2009, at A5 (reporting that AIG paid out $165 million in bonuses after the company received bailout funds).
4. See Randall Smith & Liam Pleven, Some Will Pay Back AIG Bonuses, WALL St. J., Mar. 19, 2009, at Al (reporting that certain members of AIG's Financial Products group-responsible for a great deal of the losses-had received bonuses, but that some, under mounting public pressure, had decided to repay them). Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation 15-41 (2004) (suggesting that in the absence of arm's-length bargaining between directors and executives, executive performance and compensation have become unlinked).
5. See, e.g., John Christoffersen, AIG Execs' Lavish Homes Draw Busload of Activists, SEATTLE TIMES, Mar. 22, 2009, at A4 (discussing middle-class protestors who visited executives' homes in hopes of convincing them to share their wealth); Michael M. Phillips, Outrage Overflows on Capitol Hill as Lawmakers Denounce Bonuses, WALL ST. J., Mar. 19, 2009, at A4 ("Members of the House ⋯ mentioned their outrage at ⋯ [AIG] 18 times ⋯. And that was during 45 minutes of opening remarks, even before the immediate target of their outrage, AIG Chief Executive Edward M. Liddy, entered the room.")
6. Liam Pleven et al., AIG Faces Growing Wrath over Payouts, WALL ST. J., Mar. 16, 2009, at Al ("Troubled insurer American International Group Inc., now [eighty percent] owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been ⋯ used to pay employee bonuses at the business unit that almost sank the company.")
7. Jonathan Weisman et al., Treasury Will Make Grab to Recoup Bonus Funds, WALL ST. J., Mar. 18, 2009, at Al (quoting Republican Senator Charles Grassley as saying that AIG's managers should "take that deep bow and say 'I'm sorry' and then either do one of two things: resign or go commit suicide."). See To Impose an Additional Tax on Bonuses Received from Certain TARP Recipients, H.R. 1586, 111th Cong. (2009); see also Greg Hitt & Aaron Lucchetti, House Passes Bonus Tax Bill, WALL ST. J., Mar. 20, 2009, at Al (de-scribing the House bill as an echo of "popular outrage over big payouts to employees of [AIG]"). As of the time of this writing, the bonus tax is still being considered, but no action has been taken in the Senate. See infra Part I.B.2. The legality of such a tax is questionable, not only because of its retroactive nature, but also because targeting specific companies and individuals creates potential constitutional issues, including bill of attainder concerns. Although the constitutional issues are interesting in their own right (and the later portion of the Article attempts some preliminary analysis)-they are not our main focus. See infra note 75 and accompanying text. Instead, we are more con- cerned with writing clawback provisions into contracts prospectively and ex-amining the consequences of their inclusion on contract law. See, e.g., Michael O'Neal, AIG Tumult Eroding Confidence, CHI. TRIE., June 11, 2009, at A15 ("The bill seeks to claw back bonuses ⋯ ."). In the intervening months, other developments, including the appointment of Kenneth Peinberg as Special Master or "Compensation Czar" for TAEP recipients, and the focus on passing a "Say on Pay" shareholder vote have taken more central places in the government's policy toward executive compensation. See Press Release, U.S. Dep't of Treasury, Interim Final Rule on TARP Standards for Compensation and Corporate Governance (June 10, 2009), .gov/press/releases/ tgl65.htm [hereinafter TARP Standards Press Release] (announcing the new Treasury Department rules capping CEO pay for companies receiving TARP funds); Press Release, U.S. Dep't of Treasury, Statement by Treasury Secretary Tim Geithner on Compensation (June 10, 2009), http://www.treas.gov/press/releases/ tgl63.htm [hereinafter Geithner Statement Press Release] (laying out the principles underlying the Treasury Department's compensation restrictions)
8. see also Louise Story & Stephen Labaton, Overseer of Big Pay Is Seasoned Arbitrator, N.Y. TIMES, June 11, 2009, at Bl (describing the "almost unprecedented discretion" of the Compensation Czar to set compensation levels). For a further discussion of current developments, see infra Part I.B.I.
9. See, e.g., Jane J. Kim, As 'Clawback' Suits Loom, Some Investors Seek Cover, WALL ST. J., Mar. 12, 2009, at C3 ("Investors who lost money with financier Bernard Madoff are girding for potential 'clawback' suits that might be brought by the trustee in charge of liquidating Mr. Madoff's firm."). Some estimates place investor losses at nearly $65 billion. See Aaron Lucchetti & Tom Lauricella, Investors Were Told They Had a Total of $64.8 Billion, Wall St. J., Mar. 11, 2009, at A2.
10. See id.
11. See, e.g., Robert Frank et al., Madoff Jailed After Admitting Epic Scam, WALL ST. J., Mar. 13, 2009, at Al ("Mr. Madoff's decline and fall added to a national crisis of confidence and distrust of the financial system.").
12. See, e.g., Amir Efrati & Robert Frank, Madoff Set to Plead Guilty to 11 Felonies, WALL ST. J., Mar. 11, 2009, at Al ("A court-appointed trustee has found that no trading occurred for more than a decade.")
13. See, e.g., Tom Lauricella et al., Madoff Used U.K. Office in Cash Ploy, Filing Says, WALL St. J., Mar. 12, 2009, at CI (describing criminal charges against Madoff).
14. See Kim, supra note 8.
15. See, e.g., supra notes 7-8 and accompanying text; see also infra notes 205, 207-08. The term "clawback" has been used in a somewhat casual way to describe any effort at recoupment of losses. In Part 111 of the Article we discuss a more precise definition of the term in greater detail.
16. See infra Part 111.
17. See infra Part III.B.
18. See infra Part III.C.
19. See infra Appendix, Part C. Much of the case law on everything from fiduciary duty to shareholder voting has arisen out of disputes over executive compensation.
20. See, e.g., Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 552-57 (1949) (affirming the applicability of New Jersey shareholder litigation law over a shareholder dispute regarding managerial compensation);
21. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 47-51, 68-73 (Del. 2006) (holding that a $130 million severance package did not violate the board's or the president's fiduciary duty to shareholders).
22. BEBCHUK & FRIED, supra note 4, at 1 (noting that the gap between executive pay and that of average workers continues to expand despite attention to the issue by the public and regulators).
23. See Richard A. Posner, Are American CEOs Overpaid, and if So, What if Anything Should Be Done About It?, 58 DUKE L.J. 1013, 1020-25 (2009) (stating that American CEOs are paid, on average, about twice as much as their foreign counterparts). This discrepancy may be a result of the comparatively larger role of labor in the foreign corporate governance process. Some figures, circa 2003, seem to put the gap at five hundred times that of the average worker. See Samuel Estreicher & Miriam A. Cherry, Global Issues in Employment Law 202 (2008);
24. CEOs and Their Indian Rope Trick, The ECONOMIST, Dec. 11, 2004, at 61 (arguing that between 1991 and 2003 the pay differential between executives and workers more than tripled, and by 2003 "was over 500 times, and growing").
25. See, e.g., Brett H. McDonnell, Two Goals for Executive Compensation Reform, 52 N.Y.L. SCH. L. Rev. 585, 586 (2007-2008) (describing both corporate governance and social equality concerns).
26. See, e.g., Gregg D. Polsky, Controlling Executive Compensation-Through the Tax Code, 64 WASH. & LEE L. REV. 877, 920-25 (2007) (examining provisions of the tax code enacted in 1993 intended to limit excessive compensation and concluding that these provisions have actually resulted in increased costs to shareholders).
27. See, e.g., Seinfeld v. Bartz, No. C01-2259, 2002 WL 243597, at
28. 3-4 (N.D. Cal. Feb. 8, 2002) (discussing the valuation of stock options).
29. See, e.g., Richard P. Bress, Golden Parachutes: Untangling the Rip-cords, 39 STAN. L. REV. 955, 957-60 (1987) (analyzing the policy reasons for adopting such contractual provisions);
30. Albert Choi, Golden Parachute as a Compensation-Shifting Mechanism, 20 J.L. ECON. & ORG. 170, 170-71 (2004) (discussing the function of golden parachutes and introducing some critiques).
31. See, e.g., Cheff v. Mathes, 199 A.2d 548, 554-55 (Del. 1964) (explaining that struggles for corporate control create potential conflicts of interest between shareholders and executives). Bress, supra note 26, at 960.
32. See LR.C. § 280G (West Supp. 2009) (making golden parachutes nondeductible for the payor corporation); LR.C. § 4999 (2006) (imposing a twenty percent excise tax on golden parachutes);
33. see also Jamie Dietrich Hankinson, Golden Parachute Tax Provisions Fall Flat: Tax Gross-Ups Soften Their Impact to Executives and Square D Overinflates Their Coverage, 34 STETSON L. Rev. 767, 770-71 (2005) (describing the tax penalties on excess parachute payments, and mentioning the possibility that costs for such tax penalties will merely be shifted back onto shareholders).
34. See BEBCHUK & FRIED, supra note 4, at 121-85 (arguing that many incentive-based forms of compensation are susceptible to a decoupling of pay from performance);
35. see also Lucian Bebchuk & Jesse Fried, Equity Compensation for Long-Term Results, WALL St. J., June 16, 2009, http://online.wsj.com/article/ SB124516105628518981.html (advocating tying executive compensation to long-term rather than short-term metrics)
36. See, e.g., Adolf A. Berle & Gakdiner C. Means, The Modern Cor-PORATION AND PRIVATE PROPERTY 64 (Harcourt, Brace & World, Inc. 1968) (1932) (discussing the shift from active to passive agency and the resulting powerlessness of modern shareholders).
37. See BEBCHUK & FRIED, supra note 4, at 23-44 (arguing that social and structural factors weaken the independence of corporate boards)
38. see also Michael B. Dorff, The Group Dynamics Theory of Executive Compensation, 28 CARDOZO L. Rev. 2025, 2035-52 (2007) (explaining how "groupthink" leads to suboptimal outcomes among decision-makers with respect to executive compensation).
39. See BEBCHUK & FRIED, supra note 4, at 45-58 (arguing that market forces alone are insufficient to align ownership and management interests).
40. See, e.g., Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 478-79 (1977) (discussing the differences in approaches between state and federal corporate regulation).
41. See Robert C. Art, Shareholder Rights and Remedies in Close Corporations: Oppression, Fiduciary Duties, and Reasonable Expectations, 28 J. CORP. L. 371, 372-74, 384-90 (2003) (discussing "fiduciary duty" and "reasonable expectation" analyses across jurisdictions, with particular attention to Oregon corporate law). See generally John W. Murrey, III, Excessive Compensation in Publicly Held Corporations: Is the Doctrine of Waste Still Applicable?, 108 W. VA. L. REV. 433, 435-41, 453-57 (2005) (exploring the evolution of the corporate waste doctrine under Delaware law). See Joel Seligman, No One Can Serve Two Masters: Corporate and Securities Law After Enron, 80 WASH. U. L.Q. 449, 450 (2002) ("At its core, the primary policy of the federal securities laws involves the remediation of information asymmetries, that is, equalization of the information available to outside investors and insiders.").
42. Jennifer S. Martin , The house of mouse and beyond: Assessing the SEC's efforts to regulate executive compensation. 32 DEL. J. COEP. L. 481, 490-507, 2007, (describing gaps left by the different approaches taken in federal and state regulation of executive compensation).
43. See, e.g., Jennifer S. Martin, The House of Mouse and Beyond: Assessing the SEC's Efforts to Regulate Executive Compensation, 32 DEL. J. COEP. L. 481, 490-507 (2007) (describing gaps left by the different approaches taken in federal and state regulation of executive compensation); Mary-Hunter Morris, The Price of Advice, 86 U. DET. MERCY L. REV. 153, 154-56 (2009) (arguing that compensation consultants contribute to the problem of excess executive compensation).
44. See, e.g., John D. Ship man, The Future of Backdating Equity Options in the Wake of SEC Executive Compensation Disclosure Rules, 85 N.C. L. Kev. 1194, 1194-95 (2007) (describing how the complex nature of executive pay and disclosure disguises the true value of compensation).
45. For a general description and analysis of the provisions of the Sarbanes-Oxley Act, see Miriam A. Cherry, Whistling in the Dark? Corporate Fraud, Whistleblowers, and the Implications of the Sarbanes-Oxley Act for Employment Law, 79 WASH. L. EEV. 1029, 1055-69 (2004).
46. See SEC v. Gemstar-TV Guide Int'l, Inc., 401 F.3d 1031, 1045-46 (9th Cir. 2004) (en banc) (holding that golden parachutes are "extraordinary" payments and thus fall under the purview of the clawback provision); Stephanie Francis Ward, SEC Can Seize CEO Payouts, 4 ABA J. E-HEPORT 13, Apr. 1, 2005 (explaining the significance of the Gemstar ruling).
47. See Sarbanes-Oxley Act § 402(a), 15 U.S.C. § 78m(k) (2006).
48. See Sarbanes-Oxley Act § 304(a), 15 U.S.C. § 7243(a) (2006);
49. Litigation Release No. 20387, U.S. Sec. and Exch. Comm'n, Former United Health Group CEO/Chairman Settles Stock Options Backdating Case for $468 Million (Dec. 6, 2007), (announcing a settlement with William W. McGuire, former CEO of UnitedHealth Group, following an enforcement action under section 304).
50. See Linda Chatman Thomsen & Donna Norman, Sarbanes-Oxley Turns Six: An Enforcement Perspective, 3 J. BUS. & TECH. L. 393, 408 (2008) (explaining that the SEC has brought only two enforcement actions under this provision);
51. see also Rachael E. Schwartz, The Clawback Provision of Sarbanes-Oxley: An Underutilized Incentive to Keep the Corporate House Clean, 64 BUS. LAW. 1, 2 (2008) (explaining that only the SEC can bring suit under section 304 of the Sarbanes-Oxley Act).
52. See, e.g., Joann S. Lublin & Scott Thurm, Money Rules: Behind Soaring Executive Pay, Decades of Failed Restraints, WALL ST. J., Oct. 12, 2006, at Al (arguing that despite an initial drop in average compensation following Sarbanes-Oxley, golden parachutes and other types of compensation have increased executive pay). For an in-depth discussion of the option backdating scandal
53. see Jesse M. Fried, Option Backdating and Its Implications, 65 WASH. & Lee L. Rev. 853, 857-58 (2008) (listing types of backdating and suggesting that such "secret" compensation arrangements reinforce excessive managerial influence over boards of directors);
54. see also Jesse M. Fried, Hands-Off Options, 61 VAND. L. REV. 453, 468-74 (2008) (suggesting prearranged trading plans as a way to sidestep managerial exploitation of option grants).
55. See David I. Walker, Unpacking Backdating: Economic Analysis and Observations on the Stock Option Scandal, 87 B.U. L. Rev. 561, 564 (2007).
56. Although option valuation is complex, at one level the backdating story is simple. Imagine that on March 15 the stock of Tech Inc. closes at $50/share. An option on Tech granted on that date would normally have an exercise price of $50/share. Granting the option 'at the money' ensures that the recipient profits only if the shares appreciate in value and the shareholders profit. But imagine that the CEO of Tech looks back and notices that on February 15 the company's stock price was only $40/share. By falsifying the paperwork to make it appear that the company granted him an at-the-money option on February 15, when in fact the option was granted on March 15, the CEO has effectively acquired an option that is 'in the money' by $10/share. Id.
57. See Shipman, supra note 38, at 1200-18 (describing option backdating and the reforms adopted in response to the scandal, which the author charac terizes as largely ineffectual).
58. See Walker, supra note 46, at 564.
59. See id. at 562 (examining the extent of the scandal).
60. For a general description of these rules, see Sean M. Donahue, Executive Compensation: The New Executive Compensation Disclosure Rules Do Not Result in Complete Disclosure, 13 FORDHAM J. CORP. & FIN. L. 59, 61 n.3 (2008) (citing to the relevant executive compensation disclosure rules); Leigh Johnson et al., Preparing Proxy Statements Under the SEC's New Rules Regarding Executive and Director Compensation Disclosures, 7 U.C. DAVIS BUS. L.J. 373, 378-98 (2007) (describing proxy disclosure rules in detail);
61. Kenneth M. Rosen, "Who Killed Katie Couric?" and Other Tales from the World of Executive Compensation Reform, 76 FORDHAM L. REV. 2907, 2910-23, 2940 (2008) (providing a detailed discussion of administrative rulemaking around SEC disclosure rules for executive compensation).
62. See, e.g., John E. Core et al., Is U.S. CEO Compensation Inefficient Pay Without Performance?, 103 MICH. L. REV. 1142, 1172-79 (arguing that executive compensation is aligned with performance through equity holdings and stock options);
63. M. Todd Henderson, Paying CEOs in Bankruptcy: Executive Compensation when Agency Costs Are Low, 101 Nw. U. L. Rev. 1543, 1618 (2007) (contending that compensation arrangements in bankruptcy result in similarly large pay packages, which potentially disproves the managerial power thesis).
64. See In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) (noting that corporate waste only arises in the rare, "unconscionable case where directors irrationally squander or give away corporate assets") (citation omitted). Although the standard that a plaintiff shareholder has to meet in alleging corporate waste under Disney is extremely high, there is some hint that the doctrine of waste may be making a comeback in Delaware. Specifically, the shareholder complaint in the Citibank case has moved forward in part on this basis.
65. See In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 138 (Del. Ch. 2009) (allowing waste claim to survive a motion to dismiss when "the Company paid the multi-million dollar compensation package to a departing CEO whose failures were allegedly responsible, in part, for billions of dollars of losses at Citigroup").
66. See, e.g., Stephen M. Bainbridge, Executive Compensation: Who Decides?, 83 TEX. L. Rev. 1615, 1619, 1626-1661 (2005) (noting the market for various services including professional basketball players, and arguing for caution in reforming executive compensation).
67. For example, in Disney, Michael Ovitz was earning "approximately $20 to $25 million a year" as the head of Creative Artists Agency. In re Walt Disney, 906 A.2d at 37. While his compensation package at Disney was enormous, that pay package did not look unreasonable compared to his earnings and holdings at Creative Artists.
68. See id. (describing Ovitz's compensation package negotiations at Disney).
69. See Posner, supra note 22, at 1014, 1045-46 (stating that the executive compensation problem is "more serious than I believed it to be" and listing quick responses to principal-agent problems inherent in the corporate form). These practices continue to date. Although a recent study of proxy statements filed between October 2008 and March 2009 indicates that CEO pay fell "for only the second time in the past two decades," a number of publicly traded companies provided lavish bonuses to their executives-despite deep losses or a lack of return on equity.
70. See Phred Dvorak, Poor Year Doesn't Stop CEO Bonuses, WALL ST. J., Mar. 18, 2009, at Bl.
71. See Geithner Statement Press Release, supra note 7;
72. TARP Standards Press Release, supra note 7;
73. see also Sarah N. Lynch, Treasury Explains Why Only 7 Firms Must Answer to Compensation Czar, DOW JONES NEWSWIRE, June 11, 2009, 200906111227dowjonesdjonline000767 (noting that "seven big financial firms that received bailouts will be subject to heightened oversight of their compensation" by Kenneth Feinberg);
74. Louise Story & Eric Dash, Treasury Plans Wider Oversight of Compensation, N.Y. TIMES, June 8, 2009, at Al (outlining the Obama administration's plans to monitor executive pay compensation for bailout companies);
75. Cari Tuna & Joann S. Lublin, New Pay Guidelines Raise Questions, WALL ST. J. ONLINE, June 10, 2009, SB124467682643104143.html (analyzing the new pay guidelines put forth by the Obama administration).
76. See, e.g., Deborah Solomon & Mark Maremont, Bankers Face Strict New Pay Cap, WALL ST. J., Feb. 14, 2009, at Al. Apparently, several economists within the Obama administration expressed the countervailing concern that too many restrictions on executive pay might prevent banks from accepting bailout funds, even if it meant that the credit crisis would continue.
77. See id.
78. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, div. B, tit. VII, § 7001, 123 Stat. 115, 516-20 (amending the Emergency Economic Stabilization Act of 2008 § 111, 12 U.S.C.A. § 5221 (West Supp. 2009)) (setting forth guidelines that a company must follow to receive bailout funds). For an analysis of the financial crisis, its causes, and the subsequent bailouts
79. see Steven L. Schwarez, Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, 93 MINN. L. REV. 373, 376 (2008) ("Most of the causes ⋯ can be attributed to conflict of interest, investor complacency, and overall complexity, all exacerbated by cupidity.").
80. See also Steven M. Da-vidoff & David T. Zaring, Big Deal: The Government's Response to the Financial Crisis 3 (Nov. 24, 2008) (unpublished manuscript), available at http:// papers.ssrn.com/sol3/papers.cfm?abstractjd= 1306342 (describing the gov-
81. See Geithner Statement Press Release, supra note 7;
82. TARP Standards Press Release, supra note 7;
83. see also Sarah N. Lynch, Treasury Explains Why Only 7 Firms Must Answer to Compensation Czar, DOW JONES NEWSWIRE, June 11, 2009, 200906111227dowjonesdjonline000767 (noting that "seven big financial firms that received bailouts will be subject to heightened oversight of their compensation" by Kenneth Feinberg);
84. Louise Story & Eric Dash, Treasury Plans Wider Oversight of Compensation, N.Y. TIMES, June 8, 2009, at Al (outlining the Obama administration's plans to monitor executive pay compensation for bailout companies);
85. Cari Tuna & Joann S. Lublin, New Pay Guidelines Raise Questions, WALL ST. J. ONLINE, June 10, 2009, SB124467682643104143.html (analyzing the new pay guidelines put forth by the Obama administration).
86. See, e.g., Deborah Solomon & Mark Maremont, Bankers Face Strict New Pay Cap, WALL ST. J., Feb. 14, 2009, at Al. Apparently, several economists within the Obama administration expressed the countervailing concern that too many restrictions on executive pay might prevent banks from accepting bailout funds, even if it meant that the credit crisis would continue.
87. See id.
88. See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, div. B, tit. VII, § 7001, 123 Stat. 115, 516-20 (amending the Emergency Economic Stabilization Act of 2008 § 111, 12 U.S.C.A. § 5221 (West Supp. 2009)) (setting forth guidelines that a company must follow to receive bailout funds). For an analysis of the financial crisis, its causes, and the subsequent bailouts, see Steven L. Schwarez, Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, 93 MINN. L. REV. 373, 376 (2008) ("Most of the causes ⋯
89. can be attributed to conflict of interest, investor complacency, and overall complexity, all exacerbated by cupidity.").
90. See also Steven M. Da-vidoff & David T. Zaring, Big Deal: The Government's Response to the Financial Crisis 3 (Nov. 24, 2008) (unpublished manuscript), available at http:// papers.ssrn.com/sol3/papers.cfm?abstractjd= 1306342 (describing the gov-
91. Id.
92. See To Impose an Additional Tax on Bonuses Keceived from Certain TARP Kecipients, H.R. 1586, 111th Cong. § 1(a)(2) (2009).
93. See American Recovery and Reinvestment Act of 2009 § 7001 (amending the Emergency Economic Stabilization Act of 2008 § lll(b)(3)(D)(iii)). An earlier version of the bill had much more serious restrictions, which gave the company a choice of forfeiting the bonuses or charging the company a high tax rate.
94. See Jonathan Weisman, Dodd's Amendment at Crux of Bonus Issue, Wall St. J., Mar. 19, 2009, at A4. In providing the choice, Congress might have avoided the retroactivity problem. Unfortunately those parts of the bill were eliminated, and now members of Congress are blaming each other for its erasure.
95. See id.
96. See Solomon, supra note 2 ('Administration officials say they didn't have enough time to deal with bonuses before AIG ⋯ [paid them]. They say [Treasury Secretary] Geithner learned of the payments on March 10-just a few days after the Treasury loaned another $30 billion to AIG.").
97. Among the justifications for paying out the bonuses was AIG CEO Liddy's fear that the company would be assessed legal penalties under Connecticut labor laws for withholding employee wages.
98. See Letter from Edward M. Liddy, Chief Executive Officer, Am. Int'l Group, Inc., to Timothy F. Geithner, U.S. Sec'y of the Treasury (Mar. 14, 2009),http://www.ft.com/cms/5a06cc90-118d-llde-87bl-0000779fd2ac.pdf.
99. see also AIGFP EMPLOYEE RE-TENTION PLAN, EXECUTIVE SUMMARY 2-3 (2009) However, the Attorney General of Connecticut expressed doubt about AIG's interpretation. http://www.scribd.com/doc/13291401/AIGFP-Employee-Retention- Plan.
100. See David G. Savage, Doing the Math on AIG Bonuses, L.A. TIMES, Mar. 22, 2009, at A3 (quoting Connecticut Attorney General Richard Blumenthal in saying: AIG was categorically wrong when it claimed that state labor law compelled payments of these outrageous, unconscionable bonuses," and further that the Connecticut law requiring double payment for a failure to pay wages "does not apply to AIG bonuses" and was "a joke of a justification to reward financial failure and fiasco").
101. See Lawrence A. Cunningham, Op-Ed., A.I.G.'s Bonus Blackmail, N.Y. TIMES, Mar. 18, 2009, at A27 (listing a number of potential defenses to AIG's bonus payments, including defenses based on changed circumstances or fraudulent conveyance law) [hereinafter Cunningham, Bonus Blackmail];
102. see also Posting of Lawrence Cunningham to Concurring Opinions, .concurringopinions.com/archives/2009/03/aig-contract-qu.html (Mar. 16, 2009, 14:42 EST). In his analysis, Professor Cunningham was careful to stress that any opinion about the legality of the contracts would need to start with the organic documents themselves.
103. See id. ("It is important to see the contracts."). For the contracts themselves, see AIG Fin. Prods. Corp., 2008 Employee Retention Plan (Dec. 1, 2007), AIG Fin. Prods. Corp., Schedule 1 to 2008 Employee Retention Plan, http://www.house.gov/apps/list/press/financial,svcs-dern/confirmation-and- acknowledgement.pdf (last visited Nov. 8, 2009).
104. See, e.g., Cunningham, Bonus Blackmail, supra note 73 (listing potential legal defenses that would excuse AIG from fulfilling its contractual obligations to pay employee bonuses).
105. See, e.g., Posting of Jonathan Adler to The Volokh Conspiracy, More on AIG Bonus Tax as Bill of Attainder, http://volokh.com/archives/archive-2009-03- 22-2009J)3-28.shtml#1237734930 (Mar. 22, 2009, 11:15 EST) (suggesting that the bonus tax bill was passed as a means of punishing "the ill-gotten gains" of AIG employees, and stating that "[w]hen Congress [confiscates property as punishment], it is a Bill of Attainder."). Before obtaining an eighty percent equity stake, the Department of the Treasury should have insisted that both AIG and its executives abrogate all but a small portion of the bonus contracts as a condition of the investment. Without such a "rescue," the companies would have fallen into bankruptcy, which would have put the executives on equal footing with all of the company's other creditors. Faced with a worthless claim for millions in bonuses (or close to worthless, as they would receive little in the bankruptcy), the executives would likely have agreed to a reduced bonus amount.
106. Cf. Davidoff & Zaring, supra note 59, at 20-41 (describing government policy in the bailout as a series of transactional "deals," wherein the government exhibited classic deal-making behavior by walking away from situations that were unfavorable) Emergency Economic Stabilization Act of 2008 § 111(b)(1), 12 U.S.C.A. § 5221 (West Supp. 2009).
107. See infra notes 80-82 and accompanying text.
108. See Gretchen Morgenson, Gimme Back Your Paycheck, N.Y, TIMES, Feb. 22, 2009, at BUI (stating that the top executives at "troubled" American International Group, Bear Stearns, Citigroup, Countrywide Financial, Lehman Brothers, Merrill Lynch, and Washington Mutual received almost $500 million in performance-based pay since 2005).
109. For a full list of the companies receiving funds in the bailout, see ProPublica, supra note 1. However, the $500 million figure seems suspiciously low compared to other reports. The AIG bonuses alone have been estimated at almost $200 million, and the New York Attorney General's Office has estimated that bonus payouts ranged in the billions. See infra note 81 and accompanying text;
110. see also Cunningham, Bonus Blackmail, supra note 73 (describing the government's recovery efforts regarding the "$165 million in bonus payments the insurance giant A.I.G. recently made to nearly 400 employees").
111. See, e.g., Letter from Andrew M. Cuomo, Attorney General of the State of N.Y. and Barney Frank, Chairman, House Fin. Servs. Comm. to Kenneth D. Lewis, Chief Executive & President, Bank of Am. Corp. (Mar. 9, 2009), available at http://www.oag.state.ny.us/media-center/2009/mar/Letter%20to%20. Kenneth%20Lewis%2003.09.09.pdf (alleging that "late last year [2008], Merrill Lynch moved up its planned date to allocate bonuses and then richly rewarded many of its executives").
112. See Susanne Craig, Merrill's $10 Million Men, Top 10 Earners Made $209 Million in 2008 as Firm Foundered, WALL ST. J., Mar. 4, 2009, at Al ("New York Attorney General Andrew Cuomo has subpoenaed information about Merrill's highest-paid employees in connection with his probe into $3.6 billion in bonuses paid by Merrill in the days before it was taken over by Bank of America Corp.");
113. Susanne Craig & Dan Fitzpatrick, Merrill Men Paid Over $10 Million Subpoenaed, WALL St. J., Mar. 5, 2009, at Cl (noting that subpoenas were issued "to several top Merrill Lynch & Co. executives who were each paid more than $10 million in cash and stock last year"); Dan Fitzpatrick, Merrill Pay Scrutinized, WALL ST. J., Mar. 18, 2009, at A2 (noting that the New York Attorney General is "conducting his own probe" into the Merrill Lynch bonuses).
114. See Letter from Andrew M. Cuomo, Attorney General of the State of N.Y., to the Honorable Barney Frank, Chairman, House Fin. Servs. Comm. (Feb. 10, 2009), available at merrill%201etter.pdf.
115. See Susanne Craig, Heat Turns Up on Merrill Bonuses' Timing, WALL St. J., Mar. 12, 2009, at Cl (providing conflicting accounts regarding Thain's request for a bonus);
116. Louise Story, Bonus Season Afoot, Wall Street Tries for a Little Restraint, N.Y. TIMES, Dec. 9, 2008, at Bl (describing Thain's request for an additional $10 million in bonus compensation).
117. See Story, supra note 83.
118. See id. (reporting that Cuomo wrote a letter in which he severely criticized the idea of additional performance bonuses for those at Merrill Lynch, calling such a request "a thumb in the eye to taxpayers").
119. See Mark Maremont & Joann S. Lublin, Loopholes Sap Potency of Pay Limits, WALL ST. J., Feb. 6, 2009, at Cl.
120. Id.
121. See id.; see also Kate Kelly & David Enrich, Wall Street Pursues Pay Loopholes, WALL St. J., Mar. 17, 2009, at Cl.
122. See Weisman, supra note 70. In one version of the bill, Senators Wy-den and Snowe advocated an amendment that would have capped bonuses at $100,000 retroactive to 2008.
123. Id.
124. Bonuses paid in excess of that amount would have to be returned to the Treasury or taxed at a thirty-five percent rate.
125. Id.
126. While the Wyden-Snowe amendment passed in the Senate, it was dropped during House and Senate negotiations, amidst concerns that, by taxing 2008 income retroactively, it raised "constitutional objections." Id. Nevertheless, "[i]ts authors argued that because companies were given a choice whether to return the bonuses or face a tax, the measure was not actually taxing past income but would 'tax' a company's future decision-made with full knowledge of the consequences." Id.
127. See Pleven et al., supra note 5, at A16 ("A top Democratic lawmaker suggested that earlier, stricter limits should have been placed on AIG. 'Clearly there was a mistake at the beginning,' said Rep. Barney Frank ⋯ .");
128. see also Weisman et al., supra note 5, at A4 (suggesting that public outrage was related to the failure of Congress to specifically tax bonuses).
129. See, e.g., Jake DeSantis, Op-Ed., Dear A.I.G., I Quit!, N.Y. TIMES, Mar. 25, 2009, at A29 (letter from an AIG Financial Products division executive who, while using strong rhetoric about the validity of contracts, is donating the approximately $750,000 bonus he received to charity and quitting his job);
130. see also Brady Dennis, Challenges Remain for AIG, Employees, WASH. POST, Apr. 14, 2009, at All (noting that employees at AIG's Financial Products division have agreed to return more than $50 million in bonus payments).
131. See American Recovery and Reinvestment Act of 2009, Pub. L. No.111-5, div. B, tit. VII, § 7001, 123 Stat. 115, 516-20 (amending the Emergency Economic Stabilization Act of 2008 § lll(b)(3)(D)(iii), 12 U.S.C.A. § 5221 (West Supp. 2009)).
132. See, e.g., In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 73-75 (Del. 2006) (discussing the corporate waste doctrine).
133. Id. at 74 ("A claim of waste will arise only in the rare, 'unconscionable case where directors irrationally squander or give away corporate assets.'") (citation omitted).
134. See Eestatement (Second) of Agency § 469 (1958) (stating that an agent who is disobedient or who breaches his duty of loyalty is not entitled to compensation);
135. see also Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184, 200 (2d Cir. 2003) (stating that under New York law, "[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary") (citation omitted). Although perhaps not as apt in the AIG situation, the faithless servant doctrine might have some application to Merrill Lynch- if allegations that the dates and timing of particular bonuses are accurate, that could implicate conflict of interest and duty of loyalty issues.
136. See To Amend the Executive Compensation Provisions of the Emergency Economic Stabilization Act of 2008 to Prohibit Unreasonable and Excessive Compensation and Compensation Not Based on Performance Standards, H.R. 1664, 111th Cong. (2009) (awaiting Senate approval).
137. See Stephen Labaton, Treasury to Set Executives' Pay at 7 Ailing Firms, N.Y. TIMES, June 11, 2009, at Al (discussing Feinberg's "broad discretion" to set salaries and bonuses at the seven companies).
138. See supra note 57 and accompanying text. With a backward-looking glance, some of the federal programs that helped end the Depression are instructive. Stabilizing the economy is an important goal, but the New Deal is still better
139. See Gretchen Morgenson, Intel Can Recover Bonuses It Shouldn't Have Paid, N.Y. TIMES, Mar. 31, 2007, business/31chip.pay.html?ref=businessspecial.
140. See Executive Compensation Trends, EQUILAB, Nov. 2008, at 6-11 (noting that the prevalence of Fortune 100 companies with disclosed clawback policies increased from 17.6% to 64.2% between 2006 and 2008).
141. Id.
142. Id.
143. See Morgan Stanley Executives Forgo Bonuses, as Program Is Changed, -forego-bonuses-as-program-is-changed/ (Dec. 8, 2008, 15:31 EST).
144. Id.
145. Id.
146. See Story, supra note 83.
147. See infra Appendix (referencing clawback provisions, culled from SEC disclosures, in various corporate compensation policies).
148. See infra Appendix (categorizing clawback provisions according to those triggered by bad faith, fraud or misconduct, and restatement of financial results).
149. See infra Appendix.
150. ill. See infra Appendix, Part B.2 (citing the American Express clawback policy, which triggers only upon the board's finding that an employee's fraud or misconduct has caused (or partially caused) a restatement of financial results).
151. See, e.g., Morgenson, supra note 100 (describing the Intel clawback provision, which allows recovery of any bonuses "generated by an error or a misstatement that affected the company's results").
152. Cf. Joann S. Lublin, More Directors Are Cutting Their Own Pay, WALL St. J., Mar. 16, 2009, at Bl (describing how directors at several companies, including General Motors, Ford, Eddie Bauer, and Herman Miller are reducing their own pay in an effort to show leadership and improve company performance).
153. See supra Parts LA, LB. 1-2.
154. See supra Part I.A.2.
155. Cf. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006) ("[T]he onerous standard for [corporate] waste is a corollary of the proposition that where business judgment presumptions are applicable, the board's decision will be upheld unless it cannot be attributed to any rational business purpose").
156. See, e.g., Phillips, supra note 5. Cf. David Zaring, Best Practices, 81 N.Y.U. L. REV. 294, 307-08 (2006) (describing "best practices" in both administrative agencies and business management as a "curiosity," since the term is oft-used but ill-defined).
157. Press Release, U.S. Dep't of the Treasury, Treasury Announces New Restrictions on Executive Compensation (Feb. 4, 2009),.gov/press/releases/tgl5. htm
158. Id. (emphasis added).
159. See JOHN W. WHITE, DIRECTOR, DlV. OF CORP. FlN., SEC. AND EXCH. Comm'n., Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009 (2008),(urging nonpartici-pating institutions to "carefully" consider integrating risk-reducing TARP reg-ulations into company compensation policies).,http://www.sec.gov/news/speech/2008/ spchl02108jww.htm(urging nonpartici-pating).
160. See Richard R. Floersch, The Right Way to Determine Executive Pay, WALL St. J., Mar. 5, 2009, at A15 ("In this climate, those responsible for setting the parameters in the private sector need to start asking the right questions and taking actions, even if the results aren't popular among executives. If they don't, Congress will likely seek to change the way compensation is provided.").
161. Bernard Madoff confessed the fraud to his two sons, telling them he believed that the losses from the fraud exceeded $50 billion and that he would turn himself in, but not before distributing some $200 to $300 million in the fund's accounts to certain employees. In response, the two sons turned Madoff in to the authorities.
162. See Amir Efrati et al., Top Broker Accused of $50 Billion Fraud, WALL ST. J., Dec. 12, 2008, at Al. Rene-Thierry Magon de la Villehu-chet, a prominent investor who traced his lineage to French aristocracy and had more than $1 billion of his clients' money entrusted with Madoff, committed suicide when the extent of the loss came to light. See Associated Press, Suicide Madoff Investor Was 'Honorable Man,' Dec. 24, 2008,.msnbc.msn.com/id/28368421/ See Diana Henriques, Vast Wall Street Fraud Knew No Boundaries, INT'L HERALD TR1B., Dec. 22, 2008, at 12.
163. See Efrati et al., supra note 123.
164. See Mark Hamblett, Madoff Pleads and Is Led Off to Jail, N.Y. L.J., Mar. 13, 2009, at 1, 7 (summarizing Madoff's guilty plea).
165. See id. at 7.
166. See Keren Blankfeld Sehultz & Duncan Greenberg, Bernie Madoff's Billionaire Victims, FORBES, Mar. 12, 2009,madoff-guilty-plea-business-waU- street-celebrity-victims.html. No doubt Kevin Bacon wishes there were more than six degrees of separation between him and Madoff.
167. See Hamblett, supra note 126, at 7.
168. Id.
169. Id.
170. See Gregory Zuckerman & Kara Scannell, Madoff Misled SEC in '06, Got Off, WALL ST. J., Dec. 18, 2008, at Al.
171. See id.
172. See Amir Ifrati et al, Top Wall Street Broker Accused of Fraud, WALL ST. J., Dec. 12, 2008, 35/.
173. See id.
174. See Tom Lauricella et al., Madoff Ran Vast Options Game, WALL ST. J., Dec. 16, 2008, at A19.
175. See id. (explaining that with the ten percent loss in the stock market in November 2008, Madoff could no longer attract investors).
176. See Efrati & Frank, supra note 12 (reporting that after admitting to an initial fifty billion dollars in losses, Madoff subsequently issued statements indicating he had lost almost sixty-five billion in investments).
177. See Zachery Krouwe, Madoffs Worth $823 Million, a Filing Says, N.Y. TIMES, Mar. 14, 2009, at B8.
178. See Press Eelease, United States Attorney S. Dist. of N.Y., Bernard L. Madoff Pleads Guilty to Eleven-Count Criminal Information and Is Remanded into Custody (Mar. 12, 2009), March09/madoffbernardpleapr.pdf.
179. See Robert Frank & Amir Efrati, 'Evil' Madoff Gets 150 Years in Epic Fraud, WALL St. J., June 30, 2009, at Al. Although in many Ponzi schemes, those who profit are early investors, and those who lose are investors who enter the fray later, this is not necessarily the case. Whether an investor ends up losing or winning depends on the structure of the particular scheme and the choices made by the particular investor.
180. See Mark A. McDermott, Ponzi Schemes and the Law of Fraudulent and Preferential Transfers, 72 AM. BANKE. L.J. 157, 159-81 (1998) (stating that the estates of Ponzi schemes are generally nonliquid and that the greatest assets of such estates are claims against winning investors).
181. See Associated Press, supra note 138 (noting that while investors may have lost up to $17 billion, Madoff's assets are estimated at less than $1 billion).
182. For example, as of May 15, 2009, the trustee had "already sued to recover $10.1 billion from six investors who withdrew substantial amounts from their Madoff accounts in the final years of the Ponzi scheme." Diana B. Henri-ques, Trustee Sends $30 Million to Victims of Madoff Fraud, N.Y. TIMES, May 15, 2009, at B3.
183. See Wyle v. Rider (In re United Energy Corp.), 944 F.2d 589, 596 n.7 (9th Cir. 1991) ("[W]e assume that the investors had no knowledge of the fraud the debtors were perpetrating. If investments were made with culpable knowledge, all subsequent payments made to such investors within one year of the debtors' bankruptcy would be avoidable [as fraudulent transfers], regardless of the amount invested ⋯.").
184. See, e.g., Eduardo J. Glas, Redemption Payments Salvaged Prior to the Collapse of Ponzi Schemes, BANKR, STRATEGIST, July 2007, at 3 (noting that Madoff's hedge fund "turned out to be a massive Ponzi scheme that snared a large number of innocent investors"). Cunningham v. Brown, 265 U.S. 1, 7-9 (1924). Collins v. Fisher (In re Lake States Commodities, Inc.), 253 B.E. 866, 869 n.2 (Bankr. N.D. 111. 2000).
185. See Cunningham, 265 U.S. at 8 (explaining that the operator was able to make payments to previous investors solely by obtaining new loans).
186. See id. at 10-11 (outlining the consequences of a collapsing Ponzi scheme).
187. See supra notes 129-38 and accompanying text.
188. See Nancy C. Dreher, Ninth Circuit Holds that the UFTA Covers an Action to Recover the Profit Made by Innocent Investors in a Ponzi Scheme, 9 BANKR. SERV. CURRENT AWARENESS ALERT No. 7 (2008) ("A common epilogue to a collapsed Ponzi scheme is a bankruptcy proceeding, and federal bankruptcy law expressly permits actions under the UFTA."). The investor may additionally turn to the congressionally created Securities Investor Protection Corporation (SIPC), an institution that insures investor accounts in the event a brokerage firm fails.
189. See Securities Investor Protection Corporation, Our 38- Year Track Record for Investors,(last visited Nov. 8, 2009). Unfortunately, the SIPC only insures up to $500,000 per account and the scale of the Madoff fraud coming after the failure of Lehman has led the CEO of SIPC to question whether "SIPC's resources will be adequate" to cover current losses.
190. See Posting of Mary Pilon to The Wallet, Wall Street Journal Blog, Is the SIPC Si http://blogs.wsj.com/wallet/2009/01/30/is-the-sipc-sick (Jan. 30, 2009, 11:01 EST). As of May 15, 2009, 125 claims have been approved for payment of losses adding up to $368 million.
191. See Henriques, supra note 145. Almost all of the checks that have been mailed were for $500,000.
192. See id.
193. See infra notes 204-04 and accompanying text. 11 U.S.C. §§ 544(b), 548 (2006).
194. See generally McDermott, supra note 143, at 159-81. Additionally, the trustee may be able to recover certain payments to the investors as a preference. See id. at 188. However, because preferential transfer law under the Bankruptcy Code applies only to transfers made within the ninety-day period prior to the filing of the debtor's bankruptcy case
195. see 11 U.S.C. § 547(b) (2006), its reach will generally be more limited than that of fraudulent transfer laws.
196. See 11 U.S.C. § 548 (2006) (allowing the trustee to reach back two years in certain circumstances);
197. cf. McDermott, supra, at 181 (noting the potential advantage of a preference action in allowing the trustee to recover the return of an investor's principal, even though the investor made the investment in good faith).
198. See David F. Kurzawa II, Note, When Fair Consideration Is Not Fair, 11 CORNELL J.L. & PUB. POL'Y 461, 464-65 (2002).
199. See McDermott, supra note 143, at 159-60.
200. See 11 U.S.C. § 548(a)(1).
201. See Lisa A. Dunsky, In re Bayou Group, LLC: The "Hotel California" Effect in Bankruptcies of Fraudulent Hedge Funds, FUTURES & DERIVATIVES L. REP., Feb. 2008, at 15 (noting that although it varies by state, the reach-back period for fraudulent transfer claims is typically four years, and further distinguishing the reachback period from the statute of limitations governed by § 546(a) of the Bankruptcy Code);
202. see also David R. Weinstein & Gil Ho-penstand, Reachbacks, Statutes of Limitation and Deadlines: Demystifying the Avoiding Powers, 26 AM. BANKR. INST. J. 63, 65 n.12 (2007) ("The pertinent provisions of the UFTA, usually § 9 [which describes a period of four years], are most often the source of the 'look back' period ⋯ .").
203. Daly v. Deptula (In re Carrozzella & Richardson), 286 B.R. 480, 483 n.3 (D. Conn. 2002);
204. see also Rieser v. Hayslip (In re Canyon Sys. Corp.), 343 B.R. 615, 634 n.15 (Bankr. S.D. Ohio 2006) ("The fraudulent transfer provisions of the Code and the UFTA are substantially similar.") (citation omitted); Pajaro Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental Agency, Inc.), 174 B.R. 557, 572 (Bankr. N.D. Cal. 1994) (noting that case law regarding bankruptcy proceedings may be cross-referenced even if it discusses an alternative statutory basis).
205. UN1F. FRAUDULENT TRANSFER ACT § 4(a), 7A U.L.A. pt.II, at 58 (2006).
206. See, e.g., Scholes v. Lehmann, 56 P.3d 750, 757-58 (7th Cir. 1995) (requiring a profiting investor to return the amount of the profits to a receiver);
207. Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Group), 916 F.2d 528, 540-41 (9th Cir. 1990).
208. See McDermott, supra note 143, at 159-60.
209. See id. (noting that recovery is limited to profits unless the profiting investor had knowledge of the fraud). 11 U.S.C. §§ 544(b)(1), 548(a)(1) (2006);
210. see also McDermott, supra note 143, at 160.
211. See McDermott, supra note 143, at 161 (explaining that in many cases the property in dispute was either property belonging to the debtor, or property in which he had an interest).
212. See, e.g., Merrill v. Abbott (In re Indep. Clearing House), 77 B.R. 843, 854 (CD. Utah 1987) ("[W]hen a debtor obtains money by fraud and mingles it with other money so as to preclude any tracing and when the defrauded party ⋯ accepts benefits under his contract with the debtor, the money is 'property' of the debtor within the meaning of §§ 547 and 548 of the Code.");
213. Rieser v. Hayslip (In re Canyon Sys. Corp.), 343 B.R. 615, 635 (Bankr. S.D. Ohio 2006) ("Payments made to investors in a Ponzi scheme constitute 'transfers' within the meaning of both § 101(54) of the Code and § 1336.01(L) of the Ohio UFTA. Further, a Ponzi scheme operator possesses a property interest in the transferred funds.") (citations omitted); Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424, 432 (Bankr. S.D. Tex. 1997) ("Funds obtained from investors in a Ponzi scheme are property of debtor, and are thus susceptible to preferential and fraudulent disposition by debtor.");
214. Jobin v. Lalan (In re M & L Bus. Mach. Co.), 160 B.R. 851, 857 (Bankr. D. Colo. 1993) (noting that because the investors gave their money voluntarily, the debtor had a legal right to possession) ("It is elemental property law that one of the 'interests in property' included in the total bundle of property rights is the right of possession. All that § 548 requires is the transfer of an 'interest' by the Debtor.").
215. Id.
216. 11 U.S.C. § 548(a)(1)(A). Barclay v. Mackenzie (In re AFI Holding, Inc.), 525 F.3d 700, 704 (9th Cir. 2008);
217. cf. 5 COLLIER ON BANKRUPTCY II 548.04[2][a] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 2009) (noting that the plaintiff meets the requirement on demonstrating that the transferor "acted under circumstances that preclude any reasonable conclusion other than that the purpose of the transfer was fraudulent as to creditors"). According to § 548(c) of the Bankruptcy Code: [A] transferee or obligee of ⋯ a [fraudulent] transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred ⋯ to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation. 11 U.S.C. § 548(c) (emphasis added);
218. see also Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995) (allowing a winning investor to keep all repaid principal because he invested in good faith).
219. See generally McDermott, supra note 143, at 175-81 (explaining the good faith defense in the context of actual fraud). 171. Section 548(a) of the Bankruptcy Code provides as follows: (a)(l)The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily: (B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) was engaged in business or a transaction, or was about to en gage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business. 11 U.S.C. § 548(a).
220. See generally McDermott, supra note 143, at 164-73 (explaining the elements of constructive fraud in the context of Ponzi schemes). See Scholes, 56 F.3d at 757 (requiring a winning investor to return the profits that constituted a theft from later investors);
221. Dreher, supra note 153, §7- Fisher v. Sellas (In re Lake States Commodities, Inc.), 253 B.R. 866, 872 (Bankr. N.D. 111. 2000) (citations omitted).
222. See McDermott, supra note 143, at 165.
223. See, e.g., Wyle v. Rider (In re United Energy Corp.), 944 F.2d 589, 595 (9th Cir. 1991) (noting that investors have a claim to restitution because they were "duped" into buying solar modules);
224. Rosenberg v. Collins, 624 F.2d 659, 664 (5th Cir. 1980) (holding that the debtor owes a debt to the creditors). The Bankruptcy Code defines a "claim" as: (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unma- tured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
225. 11 U.S.C. § 101(5) (2006). Section 101(12) defines "debt" as a "liability on a claim." Id. § 101(12).
226. See, e.g., Cunningham v. Brown, 265 U.S. 1, 8 (1924) (explaining that a Ponzi scheme debtor was always insolvent and became more so each day the business continued);
227. Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006) (observing that a Ponzi scheme "is, as a matter of law, insolvent from its incep-tion") (citation omitted);
228. Guy v. Abdulla, 57 F.R.D. 14, 17 (N.D. Ohio 1972) (noting that it was possible to establish that a Ponzi scheme was insolvent from its very inception);
229. Cuthill v. Kime (In re Evergreen Sec, Ltd.), 319 B.R. 245, 253 (Bankr. M.D. Fla. 2003) ("Insolvency of the debtor as required by § 548(a)(1)(B) is established, when the Debtor is operating a Ponzi scheme.").
230. See McDermott, supra note 143, at 168-69; id. at 169 n.49 (referring to the rule as the "netting" rule).
231. See id. at 168-69.
232. See id. (pointing out that an investor may be liable for all repayments, including returned principal, if they lacked good faith).
233. See supra Part II.A
234. See McDermott, supra note 143, at 158 ("[T]he bankruptcy trustee must collect whatever assets are available in order to pay both the investors who lost money and any other creditors of the estate."). Scholes v. Lehmann, 56 F.3d 750, 757-58 (7th Cir. 1995).
235. Wyle v. Rider (In re United Energy Corp.), 944 F.2d 589, 596 (9th Cir. 1991.
236. See supra notes 182-82 and accompanying text.
237. See, e.g., Donell v. Kowell, 533 F.3d 762, 776 (9th Cir. 2008) ("According to the Eeceiver, in this case approximately 6,000 investors participated in the ⋯
238. Ponzi scheme, but only about 800 received back more than their initial investment. It is likely that many of the other 5,200 losing investors will see only a portion of their initial investment returned.");
239. cf. id. ("[AJssets recovered after a collapsed Ponzi scheme typically are insufficient to satisfy claims by losing investors" (citing McDermott, supra note 143, at 158-59).).
240. See Warfield v. Alaniz, 453 F. Supp. 2d 1118, 1130-31 (D. Ariz. 2006) (holding that a court-appointed receiver could not base his claims under Arizona's UPTA on fraudulent transfers that took place outside of the relevant time period), aff'd 569 F.3d 1015 (9th Cir. 2009);
241. Neilson v. Union Bank of Cal., 290 F. Supp. 2d 1101, 1145-46 (CD. Cal. 2003) (explaining that a claim of intentional fraudulent transfer under California's UFTA is extinguished if it is not made within the statutory period);
242. see also supra notes 165-66 and accompanying text. Donell, 533 F.3d at 776.
243. See supra notes 178-80 and accompanying text. Bayou Accredited Fund, LLC v. Bedwood Growth Partners, L.P. (In re Bayou Group, LLC), 396 B.E. 810, 822 (Bankr. S.D.N.Y. 2008).
244. See id. at 842-43.
245. See id. at 844.
246. Id. at 848.
247. More specifically, the court held: [A] defendant may establish his [good faith] defense [to a fraudulent conveyance claim] if he can prove by a preponderance of the credible objective evidence that his request for redemption was in fact the result of a good faith reason other than his knowledge of 'red flags,' even if he was on inquiry notice and did not make inquiry before redeeming.
248. Id. at 849.
249. See id. at 850-52; see also id. at 846 ("Once on inquiry notice, a transferee's failure to conduct a 'diligent investigation' is fatal to the 'good faith' defense.").
250. See, e.g., Mark Hosenball, Made Money with Madoff? Don't Count on-Keeping It, NEWSWEEK, Jan. 12, 2009, at 9 (reporting that the KL Gates law firm, which represented the victims in the Bayou case, claimed that Bayou "providefs] instructive guidance to [Madoff] investors and other affected parties")
251. See supra note 172 and accompanying text. The contractual clawback is limited to payments representing any amount of the principal invested since any payments in excess of that amount represent fictitious profits and will be treated as fraudulent transfers for redi-stribution to losing investors and all other creditors.
252. See supra notes 172-73 and accompanying text. 13 Samuel Williston, Williston on Contracts § 37:1 (Richard A. Lord ed., West Group, 2000);
253. cf. Cheney v. Powell, 15 S.E. 750, 751 (Ga. 1892) (holding that privity of contract may exist in the context of fraud if there is conspiracy between parties). 13 Williston, supra note 198, § 37:1. See generally Anthony Jon Waters, The Property in the Promise: A Study of the Third Party Beneficiary Rule, 98 HARV. L. REV. 1109, 1177-1209 (1985) (discussing the evolution of third-party beneficiary contracts since 1964). Under the Restatement approach, for example, a third party may recover if it is an "intended beneficiary" of the contract. See RESTATEMENT (SECOND) OF CONTRACTS § 302 (1981). To satisfy this requirement, the third party must show, among other things, that allowing a contract remedy will "effectuate the intention of the parties.
254. Id.
255. An example of a reciprocal provision is the statutory provision regarding an alien's privilege to sue: Citizens or subjects of any foreign government which accords to citizens of the United States the right to prosecute claims against their government in its courts may sue the United States in the United States Court of Federal Claims if the subject matter of the suit is otherwise within such court's jurisdiction. 28 U.S.C. § 2502(a) (2006). An illustration of this statute's operation can be found in the case of Henriquez & Gornell, Inc. v. United States where the court noted that a Panamanian citizen could sue the United States because the "Re public of Panama accords to citizens of the United States the right to prosecute claims against the Republic in its courts. Therefore, under the reciprocal provision of Title 28 U.S.C. 2502 (Alien's Privilege to Sue) plaintiff is entitled to bring its contract claim against the defendant in this court." 180 Ct. CI. 1040, 1049-50 (1967). It may be the case that the initial investors in a smaller fund will, in fact, be aware of their status as such, and will not have the incentive to agree to contractual clawbacks. Presumably, however, such investors will constitute a small proportion of the investor population.
256. Also, to the extent that such investors are put on notice of fraudulent behavior with regard to the fund, which may be more likely under these circumstances, all payments made to them may be recoverable as fraudulent transfers under an actual fraud recovery theory since they will be unable to assert a good faith defense.
257. See supra notes 146, 168-69 and accompanying text.
258. See, e.g., supra notes 182-83 and accompanying text.
259. Cf. Christine Seib, Madoff Winners Stash Their Profits, The AUSTRAL-IAN, Mar. 16, 2009, http://www.theaustralian.news.com.au/business/story/.025192402- 5017996,00.html?from=marketwatch-rss ("Investors facing the clawback are confused about whether to submit a claim for compensation from the Securities Investor Protection Corporation ⋯. Jason Cowart, a partner with Pomerantz, a New York-based class-action specialist, said that clients were 'deeply concerned' at the prospect of losing more money in a clawback.").
260. Martha Neil, Some Madoff Investors Made Money-and Are Now Ly ing Low, A.B.A. J.L. NEWS NOW, Jan. 23, 2009,http://abajournal.com/news/some-madoff- investors-made-moneyand-are-now-lying-low
261. See supra note 133 and accompanying text.
262. See supra Part II.C.2. See supra note 16 and accompanying text.
263. See, e.g., Robert P. Bartlett, III, Venture Capital, Agency Costs, and the False Dichotomy of the Corporation, 54 UCLA L. Rev. 37, 73-74 (2006) (describing "clawbacks" as a term of art used in venture capital fund contracts to ensure that a venture capitalist "receives no more than her specified percentage of fund profits upon the termination of a fund").
264. See, e.g., Nicole Huberfeld, Clear Notice for Conditions on Spending, Unclear Implications for States in Federal Healthcare Programs, 86 N.C. L. REV. 441, 445 (2008) ("As a result of the new Medicare drug benefit, the Clawback provision ⋯ [requires] states to pay the federal government⋯ .");
265. Elizabeth A. Weeks, Cooperative Federalism and Healthcare Reform: The Medicare Part D "Clawback" Example, 1 St. LOUIS U. J. HEALTH L. & Pol'y 79, 82 (2007) (describing clawbacks in the healthcare context as a federal provision that conditions states' receipt of Medicare funds on payments to the federal government)
266. See, e.g., Austen Parrish, The Effects Test: Extraterritoriality's Fifth Business, 61 Vand. L. Rev. 1455, 1492 n.193 (2008) (describing clawback statutes that enable a defendant who paid multiple damages in a foreign country to recover the multiple portion of those damages from the plaintiff).
267. See, e.g., Shira A. Scheindlin & Jonathan M. Redgrave, Special Masters and E-Discovery: The Intersection of Two Recent Revisions to the Federal Rules of Civil Procedure, 30 CARDOZO L. REV. 347, 357 (2008) (defining a clawback in context of discovery as an "agreement regarding a procedure for retrieving privileged information that has been inadvertently produced in the course of discovery"). Although it is always difficult to find a citation for a negative proposition like this one, the authors did a quick survey of the contracts casebooks in their respective offices, including: RANDY E. BARNETT, CONTRACTS: CASES AND DOCTRINE (3d ed. 2008);
268. BRIAN A. BLUM & AMY C. BUSHAW, CONTRACTS: CASES, DISCUSSIONS, AND PROBLEMS (2d ed. 2008);
269. and E. ALLEN PARNSWORTH ET AL., CONTRACTS: CASES AND MATERIALS (7th ed. 2008) and did not find chapters or significant discussion of anything related to clawbacks in the books. The authors also consulted their textbooks on business associations and corporate law and did not find the term discussed there either.
270. See supra Parts I.B-C, II.B-C.
271. See, e.g., John D. Calamaei & Joseph M. Perillo, The Law of Con-TRACTS 599-605 (4th ed. 1998).
272. John P. Dawson, The Self-Serving Inter meddler, 87 HAW. L. REV. 1409, 1409 (1974).
273. See supra Part II.A
274. See supra notes 69-76 and accompanying text.
275. See EESTATEMENT (THIRD) OF EESTITUTION AND UNJUST ENRICHMENT § 1 cmt. b (Discussion Draft 2000) ("Unjustified enrichment is enrichment that lacks an adequate legal basis: it results from a transfer that the law treats as ineffective to work a conclusive alteration in ownership rights.").
276. See supra Part ILA.
277. See supra notes 69-76 and accompanying text.
278. One might argue, for instance, that unfair enrichment is consistent with unjust enrichment as interpreted by Warren Seavey and Austin Scott, the reporters of the Restatement (first) of Restitution. They cautioned that restitution law responds only imperfectly to the basic premise of unjust enrichment and that situations in which "it is not possible to be just to one without being unjust to the other" prevent the perfect embodiment of "the fundamental conception of restitution" into rule form. Warren A. Seavey & Austin W. Scott, Restitution, 54 L.Q. Eev. 29, 35-37 (1938);
279. see also LORD GOFF OF CHIEVELEY & Gareth Jones, The Law of Eestitution 13 (Gareth Jones ed., 6th ed. 2007) (noting that unjust enrichment is a "principle of justice which the law recognizes and gives effect to in a wide variety of claims"). Alternatively, one might paint broader strokes by postulating, as Peter Linzer does, that the pre-vention of "unjust impoverishment" should serve as a source for applying "rough justice" in individual cases when normally sound rules of promissory estoppel and unjust enrichment produce unsatisfactory results. Peter Linzer, Rough Justice: A Theory of Restitution and Reliance, Contracts and Tort 2001 WIS. L. EEV. 695, 764. Contra HANOCH DAGAN, THE LAW AND ETHICS OF RESTITUTION 13 (2004) (stating that Linzer's position "is indefensible because ⋯ '[tjhere is nothing both unique to restitution and common to all subjects of restitution that justifies a greater disregard of rules than judges would countenance in other areas of law"') (citation omitted).
280. See supra Part III.A.
281. See supra Part I.C. 1.
282. See infra Appendix, Part C.l-3 (providing examples of various clawback provisions in executive compensation contracts triggered by a material restatement of financial results).
283. See supra note 69 and accompanying text.
284. See supra Part 1I.A.
285. See id.
286. See supra Part II.C.
287. See supra note 75 and accompanying text.
288. See supra Part I.C.
289. RESTATEMENT (SECOND) OF CONTRACTS § 224 cmt. c (1979) ("In order for an event to be a condition, it must qualify a duty under an existing contract.").
290. Id. § 224 ("A condition is an event not certain to occur ⋯ before performance under a contract becomes due."). E. ALLEN FARNSWORTH, CONTRACTS 523-25 (3d ed. 1999).
291. Id. at 523.
292. See, e.g., infra Appendix (categorizing various clawback provisions in executive compensation contracts based on triggering events, one of which might be material restatement of financial results).
293. See RESTATEMENT (SECOND) OF CONTRACTS § 356 (1979) ("Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.").
294. FARNSWORTH, supra note 234, at 841.
295. Id. at 843.
296. See, e.g., infra Appendix, Part B.l-2 (describing clawback provisions in executive compensation contracts based on the triggering event of executive fraud or misconduct).
297. Of course, one could argue that the company could turn around and sue its agent for fraud-and if the company was unwilling to do so, a shareholder could bring a derivative action to force the company to act. Bringing a claim of fraud, however, which requires pleading with particularity, is more difficult than a straight contract claim.
298. See FED, R. CIV. P. 9(a) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.").
299. See FARNSWOKTH, supra note 234, at 843.
300. See RESTATEMENT (SECOND) OF CONTRACTS §§ 151-158 (1979).
301. See id. §§ 261-272.
302. See id.
303. See, e.g., Melvin A. Eisenberg, Why There Is No Law of Relational Contracts, 94 Nw. U. L. REV. 805, 805 (2000) (stating that classical contract theory was based on "a paradigm of bargains made between strangers transacting on a perfect market" and "a rational-actor model of psychology").
304. For a thorough treatment of the classical model of contract, as well as other theoretical perspectives on contracts
305. see Kojo Yelpaala, Legal Consciousness and Contractual Obligations, 39 McGEORGE L. Rev. 193, 209-13 (2008).
306. See, e.g., Ian R. Macneil, Relational Contract Theory: Challenges and Queries, 94 Nw. U. L. REV. 877, 881 (2000);
307. Ian R. Macneil, Relational Contract: What We Do and Do Not Know, 1985 WIS. L. Rev. 483, 484.
308. See, e.g., Stewart Macaulay, Relational Contracts Bloating on a Sea of Custom? Thoughts About the Ideas of Ian MacNeil and Lisa Bernstein, 94 Nw. U. L. REV. 775, 792-93 (2000).
309. Cf. Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772, 779-89 (9th Cir. 1981) (finding "course of trade" important in the evaluation of a long-term contractual relationship between parties who acted as functional partners);
310. Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 6-9 (4th Cir. 1971) (finding "course of dealing" important in the evaluation of contract terms where Royster had once been a purchaser and then became a seller).
311. See Joseph Grundfest, Punctuated Equilibria in the Evolution of United States Securities Regulation, 8 STAN. J. L. BUS. & FIN. 1, 1-2 (2002).
312. Id.
313. See id.
314. See id. at 1.
315. Id. at 2.
316. See Kosen, supra note 50, at 2940 ("Corporate scandals may indicate a need for reform, but poor, ill-considered reform can easily lead to further frustration for the scandals' victims.").
317. See, e.g., President-Elect Obama Announces Mary Schapiro as Head of Securities and Exchange Commission, WASH. POST, Dec. 18, 2008, http://www.washingtonpost.com/wpdyn/content/article/2008/12/18/ AE2008121802394-pdf.html (reporting President Obama's statement that "what will be just as important to our long-term economic stability is a 21st-century regulatory framework to ensure that a crisis like this can never happen again").
318. See supra Part III.B.
319. See generally Jeffrey J. Rachlinski, Bottom-Up Versus Top-Down Lawmaking, 73 U. Chi. L. Rev. 933, 933 (2006) ("Democratic legal systems make law in one of two ways: by abstracting general principles from the decisions made in individual cases (from the bottom up); or by declaring general principles through a centralized authority that are to be applied in individual cases (from the top down).");
320. Frederick Schauer, Do Cases Make Bad Law?, 73 U. CHI. L. REV. 883, 891 (2006) (observing the difference between case-based and non-case-based rulemakers).
321. See Kevin E. Davis, The Role of Nonprofits in the Production of Boilerplate, 104 MICH. L. REV. 1075, 1078 (2006) (observing how contract terms "become boilerplate either because they are widely copied or because they are used repeatedly by the drafter or its client").
322. See, e.g., Phillips P.R. Core, Inc. v. Tradax Petroleum Ltd., 782 P.2d 314, 319-20 (2d Cir. 1985) ("[T]he basic purpose offeree majeure clauses ⋯ is ⋯ to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.").
323. See, e.g., FAKNSWORTH, supra note 234, at 642-44.
324. See, e.g., id. at 436.
325. See, e.g., id. at 373.
326. See, e.g., U.C.C. § 2-314 (2000) (addressing the creation of express warranties in the sale of goods as governed under the Uniform Commercial Code).
327. See BEBCHUK & FRIED, supra note 4, at 15-17 (discussing the emergence of the agency problem in the corporate context).
328. See id.
329. THOMPSON ON REAL PROPERTY § 78.08(b)(3) (David A. Thomas ed., 2d ed. 1999) (describing a California law that mandates disclosures in real property as to the condition of the land, the location of adjacent airports, and any provisions for public utilities).
330. See SEC Private Resales of Securities to Institutions Rule, 17 C.F.R. § 230.144A (2009).