Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
Speaker 1: It's a stunning, perhaps unprecedented decision that puts Donald Trump's
Speaker 1: business empire at risk of dissolution and strips control of
Speaker 1: key properties from the former president. Judge Arthur and Goren
Speaker 1: ruled that Trump repeatedly committed fraud by inflating the value
Speaker 1: of his assets by billions of dollars on financial records
Speaker 1: submitted to banks and insurers. He wrote scathingly about Trump's defenses,
Speaker 1: saying they were a fantasy, not reality. The documents do
Speaker 1: not say what they say. There is no such thing
Speaker 1: as objective value. Essentially, the court should not believe its
Speaker 1: own eyes, even quoting a famous line from the Marx
Speaker 1: Brothers Movieyes. The judge concluded by saying that New York
Speaker 1: Attorney General Letitia James is now entitled to a court
Speaker 1: order dissolving any certificates issue to Trump's LLC's, putting his
Speaker 1: ability to continue operating his sprawling Manhattan based company at risk.
Speaker 1: Joining me is former federal prosecutor Robert Mintz, a partner
Speaker 1: Maccarter and English. Would you say this decision is unprecedented, rare, uncommon,
Speaker 1: how would you describe it?
Speaker 2: It certainly is a rare decision. There is not a
Speaker 2: lot of history in the New York State of a
Speaker 2: judge actually dissolving a company under these circumstances. Usually companies
Speaker 2: tivily die in bankruptcy cases. So this is something where
Speaker 2: there is not a lot of precedent, and it has
Speaker 2: spawned a lot of confusion, not only by people who
Speaker 2: are looking at this case from the outside, but even
Speaker 2: by the lawyers who are involved in the case. There
Speaker 2: are a lot of questions as to exactly how the
Speaker 2: court is going to try to implement this decision.
Speaker 1: Let's talk about the substance of the decision. Tell us
Speaker 1: why the judge decided that Trump had committed fraud.
Speaker 2: The essence of the judge's decision is that Donald Trump
Speaker 2: and his two oldest sons and his businesses orchestrated what
Speaker 2: the judge called a persistent and repeated fraud in which
Speaker 2: they vastly exaggerated the extent of the former president's wealth
Speaker 2: to procure favorable loans. And they did that in order
Speaker 2: to try to benefit the financially these companies and get
Speaker 2: these very favorable loans based upon collateral ements that the
Speaker 2: judge found was highly inflated.
Speaker 1: Trump's penthouse in Manhattan that's been used as an example
Speaker 1: of the exaggeration or inflation.
Speaker 2: In that case, the judge found that former President Trump
Speaker 2: had engaged in fraud by repeatedly claiming that his penthouse
Speaker 2: at Trump Power, which according to most records, is slightly
Speaker 2: under eleven thousand square feet. According to the judge, former
Speaker 2: President Trump and his businesses would assert that the apartment
Speaker 2: is nearly three times bigger than it was in reality.
Speaker 2: The judge said that Trump's annual statements of financial condition
Speaker 2: used this false square footage to inflate its network by
Speaker 2: as much as two hundred and seven million dollars in
Speaker 2: twenty twelve, when Trump valued the penous that is staggering
Speaker 2: one hundred and eighty million dollars. According to the judge,
Speaker 2: no apartment sold in New York City had ever approached
Speaker 2: that price, and the judge essentially said that while there
Speaker 2: may be some subjectivity in terms of evaluating the square
Speaker 2: footage and the value of an apartment, this was on
Speaker 2: an order of magnitude that, in his mind, showed a
Speaker 2: clear attempt to simply inflate numbers and a knowing violation
Speaker 2: of the law, and the judge found that former President
Speaker 2: Trump had fraudulently inflated the value of this department to
Speaker 2: a staggering degree.
Speaker 1: The judge's tone was scathing. He wrote, at one point
Speaker 1: in defense tenants world rent, regulated apartments are worth the
Speaker 1: same as unregulated apartments. Restricted land is worth the same
Speaker 1: as unrestricted land. Restrictions can evaporate into thin air. And
Speaker 1: then he said that is a fantasy world, not the
Speaker 1: real world.
Speaker 2: Well, the judge was clearly incensed by the conduct here
Speaker 2: and did go through numerous examples of where he thought
Speaker 2: that the conduct was simply not tethered to reality. He
Speaker 2: even went so far as to sanction the lawyers for
Speaker 2: making some arguments on behalf of former President Trump on
Speaker 2: the Trump organization, arguments that he said had already been
Speaker 2: discredited and were simply frivolous. That the judge clearly was
Speaker 2: not at all accepting of the defenses that were being
Speaker 2: put forward by the Trump organization, and wrote a very
Speaker 2: very aggressive decision here, going through in great detail examples
Speaker 2: of what he felt was conduct that was clearly fraudulent.
Speaker 1: Bob that seventy five hundred dollars sanctioned for Trump's lawyers
Speaker 1: for making arguments he'd previously rejected. I mean, don't lawyers
Speaker 1: repeat arguments that have lost in court all the time?
Speaker 2: Yeah, that is a bit of an unusual ruling. Usually
Speaker 2: judges do give defense lawyers latitude to make arguments, which
Speaker 2: they do repeatedly. Sometimes, if a lawyer finds that they
Speaker 2: make an argument that's unsuccessful, they try to make it
Speaker 2: in a slightly different way to give the judge another
Speaker 2: opportunity to perhaps rule differently, so to thanks to them
Speaker 2: for making an argument simply on the basis that they
Speaker 2: had previously made it to something that you do not
Speaker 2: see very often.
Speaker 1: What was the defense.
Speaker 2: The heart of the defense by the Trump organization and
Speaker 2: by former President Trump's lawyers was that the banks in question,
Speaker 2: including Deutsche Bank in this case, these are the banks
Speaker 2: that made the loans allegedly based upon these inflated valuations
Speaker 2: of the collateral. The defense argued that these banks were
Speaker 2: not defrauded at all, because all of the loans were
Speaker 2: ultimately repaid and the banks in fact made quite a
Speaker 2: bit of money on those loans. The judge did not
Speaker 2: buy that argument, saying that it's not fair to suggest
Speaker 2: that no harm had been done to these banks when
Speaker 2: they loan money to the Trump organization. The judge pointed
Speaker 2: out that the first principle of loan accounting is that
Speaker 2: as the risk rises, so to the interest rates. So essentially,
Speaker 2: what the judge was saying is that while in this
Speaker 2: case the loans were repaid and the banks in fact
Speaker 2: did make money on loaning money to the Trump organization,
Speaker 2: had they known what the real value of the collateral was,
Speaker 2: they would have raised the interest rates and the banks
Speaker 2: would have made even more money. So that's where they
Speaker 2: were victimized here, and the judge's eyes, the banks were
Speaker 2: misled in order to make a loan at a lower
Speaker 2: rate than they should have made it if the true
Speaker 2: value of the collateral were known to them at the
Speaker 2: time that the loan was extended to the Trump organization.
Speaker 1: A lawyer for Trump, Christopher Keyes, said that he would
Speaker 1: likely appeal the decision that's expected, which he called out
Speaker 1: rageous and completely disconnected from the facts and governing law.
Speaker 1: He said the judge ignored an early appeals court ruling
Speaker 1: and also ignored basic legal accounting and business principles. Do
Speaker 1: you think they have a good chance on appeal?
Speaker 2: Well, this is an aggressive decision, so it's going to
Speaker 2: be interesting to see what the appeals court does. One
Speaker 2: thing we can know for sure that once they file
Speaker 2: us appeal, it will likely stay the judges ruling, which
Speaker 2: means that nothing will really be done for quite a while,
Speaker 2: could be even years, while the appeals court takes this
Speaker 2: decision up. In the meantime, the judges' decision does require
Speaker 2: the appointment of a receiver, so we'll see whether that
Speaker 2: proceeds even while the appeal is pending.
Speaker 1: So describe the remedy that the judge has ordered or
Speaker 1: the punishment. I'm not sure what we call it.
Speaker 2: Well, the judges sweeping decision ordered that several of Trump's
Speaker 2: businesses be dissolved, and he ordered that a receiver be
Speaker 2: appointed to help in the dissolution of these entities. A
Speaker 2: lot of the decision is not entirely clear because the
Speaker 2: Trump organization itself is really just a shell organization, and
Speaker 2: it's composed of about five hundred various LLC's, all holding
Speaker 2: different properties and serving different purposes, and so exactly what
Speaker 2: the impact of the judge is ruling on these various
Speaker 2: LLC's is unclear. The Trump organization's lawyers, for example, raised
Speaker 2: the fact that former President Trump's two sons, Donald Junior
Speaker 2: and Eric live in homes which are in fact owned
Speaker 2: by these LLC's, and so the question was do they
Speaker 2: have to be removed from the homes? Do those homes
Speaker 2: have to be liquidated? They also asked whether mister Trump
Speaker 2: would have to sell assets including Trump Tower and forty
Speaker 2: Wall Street, which is a downtown commercial property, or whether
Speaker 2: those properties could be managed by an independent receiver rather
Speaker 2: than being dissolved and have to be sold. So there's
Speaker 2: lots of unanswered questions here as to how this order
Speaker 2: will be implemented, and even the judge acknowledged that he
Speaker 2: was not entirely certain as to how his order would
Speaker 2: be implemented and wanted to take more time in order
Speaker 2: to evaluate the implementation of its own order.
Speaker 1: Doesn't that point to a successful issue on appeal for Trump?
Speaker 1: If the judge himself, if this order is so novel
Speaker 1: that the judge himself doesn't know how it's going to
Speaker 1: be implemented, that the lawyers are confused. There are more
Speaker 1: questions here than answers.
Speaker 2: Yeah, there are a lot of unanswered questions. I mean,
Speaker 2: I think it's clear from the judges ruling that he
Speaker 2: is not intending or ordering that mister Trump's company be
Speaker 2: dissolved completely. But what it does do is it affects
Speaker 2: these LLC's, and by taking away the business certificates, it
Speaker 2: will make it impossible for those various LLC's to operate,
Speaker 2: which ultimately can have a crippling effect on the Trump organization.
Speaker 2: So this is a very significant decision. It's highly controversial.
Speaker 2: It's going up on appeal, and we'll have to see
Speaker 2: what the appeals court does here. I think there is
Speaker 2: certainly a possibility that the appeals court may overturn this decision,
Speaker 2: just because it's so unprecedented and because the effects of
Speaker 2: this decision are so sweeping on a major organization like
Speaker 2: the Trump organization, which employs hundreds of people on holds
Speaker 2: millions and millions of dollars in real estate, not only
Speaker 2: in New York State but also around the world.
Speaker 1: Apparently trial is starting next week. What's left to try.
Speaker 2: The essence of the judge's decision was that no trial
Speaker 2: was needed to determine that the Trump organization had fraudulently
Speaker 2: secured favorable terms on loans and insurance deals. But what
Speaker 2: exactly is left for the trial is not entirely clear.
Speaker 2: Even the state's lawyers had not worked out what was
Speaker 2: needed to go to trial at this point. But what
Speaker 2: we do know is that the judge will have to
Speaker 2: determine the extent of the fine he's going to order.
Speaker 2: The Attorney General has asked for as much as two
Speaker 2: hundred and fifty million dollars. The judge could also decide
Speaker 2: a trial whether to borrow the former president and his
Speaker 2: sons from running a business in the state. Ever again,
Speaker 2: those seem to be the issues that are remaining, but
Speaker 2: that will have to be worth out by the state lawyers,
Speaker 2: the defense, and the judge.
Speaker 1: Putting aside the financial consequences of this decision. For Trump,
Speaker 1: this attacks his persona, his brand, you know, being the
Speaker 1: billionaire real estate magnet. It's what he's all about.
Speaker 2: In pre trial hearings before this ruling, one of former
Speaker 2: president trump lawyers told the judge that former President Trump
Speaker 2: is an investment genius and probably one of the most
Speaker 2: successful real estate developers in the country. Clearly, this judge
Speaker 2: disagreed and actually said that he's a genius only in
Speaker 2: a fantasy world. So one of the things that's really
Speaker 2: an issue here is the Trump brand, is the perception
Speaker 2: of the Trump organization and the question of whether it
Speaker 2: is really one of the great successful real estate empires
Speaker 2: in Manhattan and even in the United States and around
Speaker 2: the world, or whether it was built on a basis
Speaker 2: of fraud and fraudulent statements, and in fact, as the
Speaker 2: judge said, the empire is really simply a fantasy based
Speaker 2: upon false information that was provided to give favorable loans
Speaker 2: to which the Trump organization was ultimately not entitled.
Speaker 1: It's also interesting that everyone's been paying attention to the
Speaker 1: criminal cases against Trump, but significant punishment was meted out
Speaker 1: here in a civil case.
Speaker 2: In the array of criminal and civil charges that former
Speaker 2: President Trump is facing, this is the first actual penalty
Speaker 2: that's been imposed upon him, and now we'll have to
Speaker 2: see whether it actually stands up on appeal, and we'll.
Speaker 1: See what happens at the trial next week. Thanks so much, Bob.
Speaker 1: That's former federal prosecutor Robert Mintz, a partner Maccarter and English.
Speaker 1: Coming up next, elon Musk's many lawsuits. I'm Jrean Grosso
Speaker 1: and you're listening to Bloomberg. Elon Musk's leadership at Twitter
Speaker 1: and Tesla is the subject of three major face offs
Speaker 1: coming up in the Delaware Chancery Court next month. It's
Speaker 1: been a year since Musk, after months of court room
Speaker 1: and social media drama, purchase Twitter now renamed as X
Speaker 1: for forty four billion dollars. That deal allowed him to
Speaker 1: avoid a trial in the country's premiere venue for corporate litigation.
Speaker 1: But October will be a busy month for Musk. In
Speaker 1: that Delaware court. He'll face suits from a stockholder and
Speaker 1: pension funds questioning his lavish Tesla pay package, and further
Speaker 1: legal fallout from his Twitter By joining me to sort
Speaker 1: it all out? Is business law expert Eric Talley, a
Speaker 1: professor Columbia Law School. Let's talk first about his record
Speaker 1: breaking pay package of fifty five billion dollars.
Speaker 3: Yeah, that's good work if you can get it, isn't it.
Speaker 3: I'm going to conjecture June that if either you or
Speaker 3: I had a fifty five billion dollar pay package, this
Speaker 3: call wouldn't be happening right now.
Speaker 1: You are definitely right on that one.
Speaker 3: So, yeah, this is an interesting case. It's a case
Speaker 3: that was brought years and years ago and was you know,
Speaker 3: essentially taken over by Chancellor McCormick. It ended up in
Speaker 3: a hearing some months ago. There definitely is a doctrine
Speaker 3: out there about, you know, fiduciary duties and whether exorbitant
Speaker 3: pay packages have the effect of breaching fiduciary duties, and
Speaker 3: this is sort of within that cluster of cases. The
Speaker 3: hard part about this is that, you know, in many respects,
Speaker 3: Elon Musk's compensation package, as it was fashioned back in
Speaker 3: you know, twenty seventeen or whatever, it was a lottery ticket,
Speaker 3: and who knew whether that lottery ticket was going to
Speaker 3: pay off and by how much it paid off? And
Speaker 3: you know, he essentially did the billionaire's version of hitting
Speaker 3: the powerball on this lottery ticket. It paid off almost
Speaker 3: to its maximal amount. And you know, I think part
Speaker 3: of the issue in the case, and probably what's going
Speaker 3: to feed into the opinion is, you know, to what
Speaker 3: extent should we or should we not use that sort
Speaker 3: of you know, twenty twenty hindsight to try to get
Speaker 3: a sense of whether everyone knew that this was going
Speaker 3: to be a a powerball ticket that paid off, or
Speaker 3: it really just turned out that, you know, the fortunes
Speaker 3: of Tesla outshine just about any conceivable picture that anyone
Speaker 3: would have painted at the time. Musk agreed to a
Speaker 3: lower fixed component of his salary for this lottery ticket
Speaker 3: version and it paid off. That's clearly the argument that
Speaker 3: Musk is going to make that in fact, incentive contracts
Speaker 3: are there for a reason this happened to hit the
Speaker 3: powerball lottery, but at the time there was no reason
Speaker 3: to expect that it would.
Speaker 1: Does it even factor in that they claim he's essentially
Speaker 1: a part time leader with other companies to run, strengthened
Speaker 1: by the fact that he seems to be spending a
Speaker 1: lot of time at X.
Speaker 3: He kind of has to now, right, because that's a
Speaker 3: particularly thorny situation he's in having closed that deal. Here's
Speaker 3: the interesting thing about this compensation litigation or dispute is
Speaker 3: that there have effectively been two defenses that Tesla has
Speaker 3: made to try to justify this package. One is the
Speaker 3: lottery ticket version. Right that we didn't know at the
Speaker 3: time whether this is going to pay off big or
Speaker 3: not pay off at all, and if it went the
Speaker 3: other direction, then Musk ends up walking away with a
Speaker 3: pretty minuscule salary. So that's one part of it. The
Speaker 3: other part of it, though, Tesla's argument is that they
Speaker 3: kind of the board had to give him a high
Speaker 3: powered incentive contract to keep his attention because he's sort
Speaker 3: of as distractable as a six month old labrador puppy,
Speaker 3: and if you don't keep his attention on a really
Speaker 3: shiny bouncing ball, then he's going to run off and
Speaker 3: do other things. Well, they gave him that compensation contract.
Speaker 3: It was a big one. He ended up running off
Speaker 3: and getting distracted by SpaceX and Twitter and the boring
Speaker 3: company and so forth. I guess I'm trying to figure
Speaker 3: out which way that cuts. Does that mean that they
Speaker 3: really should have given a bigger package to keep his
Speaker 3: attention on things or not? So it's hard to tell
Speaker 3: exactly which way that cuts. The fact that he is
Speaker 3: so distractable almost feeds into the argument that it would
Speaker 3: make sense to have a high powered incentive contract to
Speaker 3: keep his eyes focused on the fortunes of Tesla and
Speaker 3: not to get too waylaid by other shiny lights and
Speaker 3: bouncing balls.
Speaker 1: How much does Musk's testimony during that November twenty twenty
Speaker 1: two trial that he played no part in the board's decision,
Speaker 1: So is the independence of the boarding coming to this
Speaker 1: decision important.
Speaker 3: Yeah, it's a big deal. It's it's kind of an
Speaker 3: interesting situation right now with Twitter because just last year,
Speaker 3: a totally different case involved Tesla and its decision to
Speaker 3: purchase a very struggling solar energy company called Solar City.
Speaker 3: That case ended up resulting in an Elon Musk win,
Speaker 3: but it did so in an odd way. The judge
Speaker 3: in that case, you know, everyone sort of expected the
Speaker 3: judge in that case was going to have to decide
Speaker 3: whether he was going to declare that Elon Musk was
Speaker 3: a controlling shareholder of Tesla, and if that was true
Speaker 3: and the only one owns about twenty one twenty two
Speaker 3: percent of the stock or did at the time, if
Speaker 3: that is true, that he's deemed to be a sufficiently
Speaker 3: large stockholder, that he's a controller, that puts a larger
Speaker 3: onus of fiduciary obligation on him. And it also calls
Speaker 3: into question whether he might sort of just dominate and
Speaker 3: control everyone on the board, and therefore you can't just
Speaker 3: trust the board to be making independent judgments. So a
Speaker 3: lot of people thought that in that Solar City case,
Speaker 3: we would learn answers to whether Elon Musk was a
Speaker 3: controller or not. But the judge in that case, Vice
Speaker 3: Chancellor Slights, who has tens left the bench. He crafted
Speaker 3: kind of an interesting opinion that essentially was able to
Speaker 3: dodge that. He said, I'm just going to pretend like
Speaker 3: Elon Musk is a controller, but I'm still now going
Speaker 3: to conclude that the way that they did this solar
Speaker 3: city deal satisfied even the heightened requirements that I would
Speaker 3: otherwise impose on a controller. And by doing that, he
Speaker 3: basically said, look, I'm subjecting Elon Musk, at least for
Speaker 3: argument's sake, to the most rigorous test that we have
Speaker 3: in Delaware, and he passes, and therefore I don't have
Speaker 3: to decide whether he's a controller or not, because he
Speaker 3: would win even if he were a controller. Now that
Speaker 3: left open this question that survives to this case about well,
Speaker 3: what is his status? Does he own enough stock that
Speaker 3: he can pretty much, you know, influence or has a
Speaker 3: good chance of influencing the entirety of the board, And therefore,
Speaker 3: in this case is going to have to be put
Speaker 3: under much more of a microscope, and maybe the board's
Speaker 3: judgment about this compensation package shouldn't be trusted as much,
Speaker 3: and so there will be kind of an interesting question
Speaker 3: about whether Chancellor McCormick in this case, you know, pursues
Speaker 3: the same strategy as Vice Chancellor's light, deciding not to
Speaker 3: decide whether he's a controlling stockholder and saying, assuming that
Speaker 3: he is, this still is okay under Delaware law. Now
Speaker 3: if in her opinion, ah boy, whether he's a controller
Speaker 3: or not really matters for the outcome of this case,
Speaker 3: because if he is a controlling stockholder, then he hasn't
Speaker 3: met his burden to defend this thing. But if he's
Speaker 3: not a controlling stockholder, he gets a lot more different.
Speaker 3: If she decides that that's the case, she's going to
Speaker 3: have to make a call on whether having twenty one
Speaker 3: twenty two percent of the stock of Tesla is enough
Speaker 3: to make him a controlling shareholder. I think a lot
Speaker 3: of us that teach in this area are sort of
Speaker 3: hoping that we'll hear something along those lines, but it's
Speaker 3: not clear to me which way it goes. Because Tesla
Speaker 3: did put up, you know, I think some pretty flashy
Speaker 3: testimony about, you know, the idea that this was the
Speaker 3: type of compensation package that's like a lottery ticket, and
Speaker 3: this lottery ticket just happened to pay off, but there
Speaker 3: are all kinds of scenarios in which it might not.
Speaker 1: If it's just a regular CEO, there's no question about
Speaker 1: controlling stock. Are there parameters that the judges used to
Speaker 1: determine whether a CEO's pay is fair or not?
Speaker 3: Yeah, there are. There are a couple things that are
Speaker 3: an issue here. So one is, even if it's just
Speaker 3: the CEO, the CEO still on a director by director
Speaker 3: basis may have extra pull and extra influence, and that's
Speaker 3: something that you have to be mindful of when setting compensation.
Speaker 3: But to the extent that there are directors who are
Speaker 3: sufficiently independent of mister Musk that they can exercise their
Speaker 3: own judgment, and if he's just an ordinary CEO, then
Speaker 3: they're kind of the presumption goes in that direction, then
Speaker 3: their disinterested assessment of the propriety of this compensation package,
Speaker 3: and then their vote amongst the disinterested directors to permit it.
Speaker 3: Gets a lot of deference under Delaware law that in
Speaker 3: order to challenge that, it basically is protected by something
Speaker 3: known as the business judgment rule. Which isn't quite a
Speaker 3: conclusion that Tesla's going to win this case, but it's
Speaker 3: pretty close to that. It's basically saying, boy, you better
Speaker 3: be able to provide us evidence that these directors, even
Speaker 3: though they weren't influenced or dominated or controlled by mister Musk,
Speaker 3: they basically were just phoning it in and they didn't
Speaker 3: really care about the welfare of Tesla or Tesla's stockholders.
Speaker 3: And you know, that's a hard boundary to get over.
Speaker 3: It was famously tested almost a quarter century ago involving
Speaker 3: the then CEO of Disney, Michael Ovitz, who was let
Speaker 3: go and handed one hundred and sixty million dollars on
Speaker 3: his way out the door, and stockholders challenged it. But
Speaker 3: because the board of directors and the compensation committee was
Speaker 3: deemed to be sufficiently independent of him, the court basically said, yeah,
Speaker 3: this doesn't rise to that level of them just basically
Speaker 3: being indifferent about the value to Disney, and there was
Speaker 3: a rationale for what they did. And so the stockholders
Speaker 3: lost in that case. And so that Disney case almost
Speaker 3: certainly will rear its head if that's the nature of
Speaker 3: the bottom line here, and that Musk is found to
Speaker 3: be by Chancellor McCormick just an ordinary CEO and not
Speaker 3: a controlling stockholder.
Speaker 1: Coming up Next, the legal fallout from must purchase of Twitter.
Speaker 1: This is Bloomberg. I've been talking to Professor Eric Talley
Speaker 1: of Columbia Law School about how Elon Musk's leadership at
Speaker 1: Twitter and Tesla is the subject of three major face
Speaker 1: offs coming up in the Delaware Court of Chancery in October. Now,
Speaker 1: let's talk about there's legal fallout from Musk buying Twitter,
Speaker 1: which he's for some reason renamed x which everyone now
Speaker 1: describes as formerly Twitter. There are numerous lawsuits over whether
Speaker 1: xo's millions to former employees, vendors, and landlords, including whether
Speaker 1: more than one point six million dollars in legal fees
Speaker 1: are owed to Twitter's ex CEO.
Speaker 3: Well, you know, when Musk took over Twitter, but before
Speaker 3: we renamed it acts, there was a big house cleaning
Speaker 3: and then sitting CEO and pretty much most of the
Speaker 3: senior management and a lot of mid level management was
Speaker 3: just shown the door. And there are allegations out there
Speaker 3: that they were shown the door in a way it
Speaker 3: was violative of their contract rights to have you know,
Speaker 3: effectively golden parachute. No, if there's a you know, change
Speaker 3: of ownership, that all there's options would vest and so
Speaker 3: forth and Twitter basically stiffed them on those payments. That
Speaker 3: has given rise to a lot of different lawsuits. Each
Speaker 3: of them is probably going to be a little bit
Speaker 3: different in nature, and typically you actually don't see this
Speaker 3: after an acquisition then, you know, usually that's part of
Speaker 3: the assumption is you know, there are these contract rights
Speaker 3: that I'm not going to be able to avoid paying.
Speaker 3: Twitter seems to have been a little bit more or
Speaker 3: the new Twitter seems to have been a little bit
Speaker 3: more litigious about about this and trying to fight the
Speaker 3: contractual rights, you know, many of which are available on
Speaker 3: the SEC's website. They look pretty typical and at least
Speaker 3: on first blush, just based on the terms of those deals,
Speaker 3: there's nothing like kind of weird or exotic or sketchy
Speaker 3: about them. So, you know, my guess is Twitter is
Speaker 3: going to try to make an argument that for some reason,
Speaker 3: there was conduct by these employees before they were they
Speaker 3: were released, and therefore when Twitter and mister Musk basically
Speaker 3: showed them the door, he did so because he had
Speaker 3: cause to fire them. Unclear whether that is true or not,
Speaker 3: but that the defense that Twitter is going to be
Speaker 3: putting forward, because usually these these contracts say look, I'm
Speaker 3: going to get this payment unless I am terminated for
Speaker 3: cause or something along those lines or some other type
Speaker 3: of misbehavior. So that's almost certainly going to be the
Speaker 3: legal strategy that Twitter takes on. But you know, in
Speaker 3: some ways, that's not a single argument that you can
Speaker 3: make for every one of these folks, every single one
Speaker 3: of them. You kind of have to say, oh, and
Speaker 3: then here's why this person was fired for cause, and
Speaker 3: here's why this other person was fired for cause. So
Speaker 3: it is a big and somewhat of an uphill legal
Speaker 3: battle to do that. You know, It's it's kind of
Speaker 3: an interesting question about whether that uphill battle is in
Speaker 3: part kind of predicated against a ticking clock of trying
Speaker 3: to understand just how much money Twitter or X or
Speaker 3: whatever you want to call it has it in the
Speaker 3: bank to operate right now, given that it is now
Speaker 3: a heavily indebted company and is having to pay significant
Speaker 3: interest rate payments. And so maybe if it's kind of thinking, gosh,
Speaker 3: we may be entering a zone of insolvement sometime soon,
Speaker 3: this possibly could just a strategy to put off having
Speaker 3: to pay these former employees until the whole company is
Speaker 3: in Chapter eleven and they're restructuring every creditors sorts of claim.
Speaker 1: So there's also a settlement over a lawsuit brought by
Speaker 1: a pension fund over executive compensation packages at Tesla. There's
Speaker 1: going to be an October thirteenth hearing on that settlement.
Speaker 3: That one is a little bit different because that one,
Speaker 3: I think has to do with director compensation at Tesla
Speaker 3: and not Musk's compensation, if I am not mistaken, And
Speaker 3: so it's kind of based on different facts. Because it's settled,
Speaker 3: we don't exactly know how things are going to come out.
Speaker 3: Usually with these settlements that both sides sort of say,
Speaker 3: we think we had a strong case, but there are
Speaker 3: of course risks that we might lose, and therefore we
Speaker 3: think this is a reasonable settlement amount. And so my
Speaker 3: guess is those things typically are going to end up
Speaker 3: getting signed off on. But you know, in recent months famously,
Speaker 3: the Delaware chance Re Court has become an entertaining, if
Speaker 3: somewhat frenetic landscape on which people suddenly show up and
Speaker 3: object to settlement, such as in the AMC settlement last
Speaker 3: month in front of Vice Chancellor's earned So my guess
Speaker 3: is this ends up sort of failing through. A successful
Speaker 3: settlement of a case is usually seen by all sides
Speaker 3: as you know, kind of a victory, including the judges
Speaker 3: who now don't have to adjudicate the case. But you know,
Speaker 3: you never know whether an objector is going to have
Speaker 3: some traction. There are always a few people who are
Speaker 3: kind of thinking that this should have been a more
Speaker 3: lucrative settlement or less lucrative settlement, But my guess is
Speaker 3: it ends up being signed off.
Speaker 1: What caught my eye is that attorneys for the pension
Speaker 1: fund are looking for two hundred and thirty million dollars
Speaker 1: in legal fees, which adds up to more than ten
Speaker 1: thousand dollars an hour.
Speaker 2: Yes, seriously, that's another job that we missed out.
Speaker 3: Actually, so this is an often controversial but also a
Speaker 3: little bit complicated thing about how our plaintiff attorneys compensated.
Speaker 3: There definitely is a fairly large cottage industry of plant
Speaker 3: off attorneys who say, okay, let's go after this particular violation.
Speaker 3: We'll find a stockholder who can be our representative stockholder,
Speaker 3: and then we're going to move forward with a class
Speaker 3: action or a derivative action and try to get a settlement.
Speaker 3: But there's kind of a parallel to the venture capital
Speaker 3: industry where I think you know the famous adage that
Speaker 3: nine out of ten VC backed companies basically just go
Speaker 3: sideways or fail, right, you'll make any money off of them.
Speaker 3: You'll only make money off of the one in ten
Speaker 3: that succeeds. And there's something that's kind of similar about
Speaker 3: these lawsuits that when you take on any one of
Speaker 3: these lawsuits, you are effectively bearing risk to take it
Speaker 3: on the overwhelming majority at the time, you're not going
Speaker 3: to get that much out of it. If anything, if
Speaker 3: the case gets dismissed, you have spent however much you
Speaker 3: spent as a plane is firm, getting absolutely nothing. And
Speaker 3: so the theory in a lot of these cases that
Speaker 3: you know there will be some sort of percentage of
Speaker 3: the overall settlement that the plaintiffs attorneys are going to
Speaker 3: get that can't be exorbitant, but the judges generally do
Speaker 3: try to take account of the fact that there are
Speaker 3: significant costs in bringing these cases and there are a
Speaker 3: lot of risks associated with them. And so you know,
Speaker 3: if you just look x post and in hindsight that
Speaker 3: this one settlement, it's like, oh, what attorney makes ten
Speaker 3: thousand dollars an hour. Well, the fact of the matter
Speaker 3: is if there were nine other cases that had just
Speaker 3: as much effort going into them and they all ended
Speaker 3: up with nothing, then that looks more like one thousand
Speaker 3: dollars an hour. Right, that the fence side attorney might
Speaker 3: easily be billing regardless of whether the case wins or loses,
Speaker 3: and therefore doesn't even actually have any risk there. So
Speaker 3: when you sort of look at the numbers in isolation there,
Speaker 3: they're eye popping. They're definitely eye popping when you back
Speaker 3: it out and sort of say, well, you know, on
Speaker 3: some level, while we're on the topic of lottery tickets,
Speaker 3: taking these cases from the plaintiffs side is a little
Speaker 3: bit of a lottery ticket as well. That may give
Speaker 3: a little bit more explanation to it. Do the courts
Speaker 3: and the parties always get it right, It's not clear, right.
Speaker 3: The fact of the matter is that you know the
Speaker 3: attorneys that they are not doing this because they are
Speaker 3: essentially the newest incarnation of Mother Teresa running around, right.
Speaker 3: They are trying to make a living too. You know,
Speaker 3: Plaintiff attorneys are people too, and they've got to make
Speaker 3: a living, and so they're going to try to claim
Speaker 3: as much as they think they can they can feasibly
Speaker 3: claim from the transaction. One of the things that's a
Speaker 3: little bit dangerous about these stockholder litigation cases is that
Speaker 3: you got the defendants that would like to settle, You
Speaker 3: got the plaintiff's attorney that would like to settle. You
Speaker 3: got one plaintiff that's kind of phenomenally being represented by
Speaker 3: the plaintiff, maybe backed by an entire class of plaintiffs,
Speaker 3: but they're usually usually silent in the background. So are
Speaker 3: the defense attorneys and Planet's attorneys basically sort of ushering
Speaker 3: through a settlement that doesn't give a lot of value
Speaker 3: to the real harmed parties in the case. That's a
Speaker 3: big danger and we see how fairly significant attorney compensation
Speaker 3: amount that better be matched by, you know, a significant
Speaker 3: benefit that is given to the company and to the
Speaker 3: stockholders here that there is an agreement that you know,
Speaker 3: some of this conversation is going to be given back.
Speaker 3: I guess there's another question that sits in the background, though,
Speaker 3: is that is that actually going to be paid by
Speaker 3: an insurance company or you know, are there some hidden
Speaker 3: indemnification rights? And I think in some cases that's been
Speaker 3: ruled out, but I'm not sure it's been completely ruled
Speaker 3: out across all corners here, so we'll have.
Speaker 1: To keep our eye on the Delaware Chancery Court next month.
Speaker 1: Thanks so much, Eric. That's Professor Eric Tally of Columbia
Speaker 1: Law School, and that's it for this edition of The
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