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In deciding in favor of the committee, the court found that the district attorney was essentially a local rather than a state actor when it collected on the plea agreement. Distinguishing between a district attorney's prosecutorial powers and administrative powers, the court stated that “neither the integrity of the State, nor financial risk to it, is involved in any way; the State is in every respect a bystander to this controversy.” Noting that the office of District Attorney was entitled to immunity under the Eleventh Amendment of the U.S. Constitution when it wielded its prosecutorial power in fashioning the plea agreement and fine, it was acting like a creditor, and not a prosecutor, when it collected the money. The court found that after the plea agreement was structured, the role of the District Attorney's Office was only to take the money from the debtor. Here, the prosecutor “was acting essentially as a creditor and in a manner that did not involve his judgment as a prosecutor (or even as a lawyer).”

Large Pre-Petition Compensation Agreements Alone Do Not Show Scienter

The District Court for the Southern District of New York has ruled that where senior executives amended their employment agreements to significantly increase their compensation in the months leading up to the company's bankruptcy filing, this alone does not show scienter sufficient to support a securities fraud action. Addad v. Amman, 02-Civ. 4188 (LAP) (Sept. 30).

In dismissing the securities fraud claims of the former stockholders of the bankrupt company, the court ruled that the complaint failed to adequately allege scienter. The court found the entire case to be based on the assertion that after determining the company could not survive, the defendants “decided to conceal that information and formulated a plan to milk as much from the company for themselves as they could before its demise.” The generous employment agreements that the defendants entered into, however, were not enough to support the fraud claim. The court stated that the “bonus compensation was offered to these defendants to induce them to stay with the company and complete a restructuring. Such restructuring or retention bonuses are common in financially troubled companies.”

Creditors May Seek Recovery of Criminal Fine from District Attorney

The Bankruptcy Court for the Southern District of New York has ruled that the creditors of a bankrupt construction company can sue the Manhattan District Attorney's Office to recover $3 million that they claim was fraudulently used to pay a criminal fine. In Re: AJ Contracting Company, Inc., No. 00 B 14842 (Nov. 14).

A principal and his company pleaded guilty to commercial bribery. The principal avoided jail time but agreed to resign from the company within a year and guarantied the company's payment of $3.3 million in fines. Under the plea, $1 million was paid immediately, with the balance to be paid in equal installments over 4 years. But under the principal's direction, the company paid the entire fine early. He later died, and the company filed for bankruptcy. The creditor's committee claimed the principal, knowing he was in poor health, ordered the payments during the time he still controlled the company to limit his exposure on the guarantee. The committee also argued that the fine was paid with money that was to be held in trust for the benefit of subcontractors hired for construction jobs. These actions amounted to fraud and sent the company into bankruptcy.

In deciding in favor of the committee, the court found that the district attorney was essentially a local rather than a state actor when it collected on the plea agreement. Distinguishing between a district attorney's prosecutorial powers and administrative powers, the court stated that “neither the integrity of the State, nor financial risk to it, is involved in any way; the State is in every respect a bystander to this controversy.” Noting that the office of District Attorney was entitled to immunity under the Eleventh Amendment of the U.S. Constitution when it wielded its prosecutorial power in fashioning the plea agreement and fine, it was acting like a creditor, and not a prosecutor, when it collected the money. The court found that after the plea agreement was structured, the role of the District Attorney's Office was only to take the money from the debtor. Here, the prosecutor “was acting essentially as a creditor and in a manner that did not involve his judgment as a prosecutor (or even as a lawyer).”

Large Pre-Petition Compensation Agreements Alone Do Not Show Scienter

The District Court for the Southern District of New York has ruled that where senior executives amended their employment agreements to significantly increase their compensation in the months leading up to the company's bankruptcy filing, this alone does not show scienter sufficient to support a securities fraud action. Addad v. Amman, 02-Civ. 4188 (LAP) (Sept. 30).

In dismissing the securities fraud claims of the former stockholders of the bankrupt company, the court ruled that the complaint failed to adequately allege scienter. The court found the entire case to be based on the assertion that after determining the company could not survive, the defendants “decided to conceal that information and formulated a plan to milk as much from the company for themselves as they could before its demise.” The generous employment agreements that the defendants entered into, however, were not enough to support the fraud claim. The court stated that the “bonus compensation was offered to these defendants to induce them to stay with the company and complete a restructuring. Such restructuring or retention bonuses are common in financially troubled companies.”