Legal News

Junk Bonds for Bankers? Bonus Season? See You in Court . . .

By Dan Slater

Today, the Deal Journal’s Heidi Moore wrote this WSJ story about Credit Suisse’s plan to convert their bankers’ usual cash-and-stock bonuses into a less desirable package that may even — gasp! — leave them envious of their law firm counterparts, “half-Skadden” be damned.

But is CS’s plan legal? Moore checked in with some employment lawyers. Here’s her dispatch:

Credit Suisse’s plan is a simple, if creative, flip to the usual cash-and-stock bonuses that bankers usually get. The cash portion of investment bankers’ bonuses — usually about 50% of the total bonus — will be subject to a “clawback” provision that will allow the bank to take back 2008 compensation if a banker leaves the firm in, say, 2010. The stock portion of bonuses will be mostly replaced by interest in a new “partner asset facility,” or PAF, which will consist of leveraged loans and commercial mortgage-backed securities that the bank cannot currently find buyers for.

“Who the heck knows what this is? It’s a bunch of junk that they can’t move in the market, and they’re handing it to us. To me, it’s worth zero. It’s two lumps of coal and I was looking for the gumdrop,” groused one irate banker at the firm. “How many different ways can they tie you to the firm? At some point, you have to decide you actually want to work here. It’s stick, stick, stick, and where’s the carrot?’

The clawback provision may be the biggest source of legal trouble, according to lawyers. “I think it might change through trial and error,” said John Singer, a co-founder of law firm Singer Deutsch. “I also think there will be challenges in court to the legality of this. It is an onerous form of a restrictive covenant that may ultimately not be deemed legal. I think the policy is going to get shelved.”

Singer reasoned that investment bank employees are required to go through a FINRA arbitration process if they have objections to their bonuses. In his opinion, few arbitration panels would allow a bank to take back a banker’s bonus if no wrongdoing was found.

Still, Credit Suisse — and other banks, including Morgan Stanley and UBS who also have clawback provisions — may have the law on their side if the cases get to an actual court. That is because bonuses are discretionary, Singer said. “A bonus is incentive compensation which can fall outside labor laws and they can do what they like,” Singer pointed out. Another labor lawyer at a prominent firm noted, “They can pay people in old shoes, if they like.”

One labor lawyer at a prominent firm noted that investment banks can change anything they would like — as long as they notify employees before they do it. Some of the clawbacks instituted now may be considered changing the goalposts in the middle of the game, the lawyer said, and perhaps employees could argue that they did not start the year believing they would be paid in junk bonds or have to give their money back.

The lawyer argued that the crux of the argument about the clawback provision will come down to the issue of “earned.” Wall Street firms will argue that their employees only “earn” their money by staying with the firm for at least two years to see their projects through. Employees will argue that they earned their money by working for a full year to bring the bank profits. Ultimately, many feel, the courts will have to decide who is right.

Full post as published by Law Blog - WSJ.com on December 19, 2008 (boomark / email).