AIG gets a $65 billion bailout and throws a $400,000 party for sales people.  GM and the other car manufacturers come to Congress and ask for $25 billion, with no plan and no gurantee the money will be used in any effective manner then fly home in private jets, with Rick Wagoner making use of a $36 million luxury aircraft.  As ABC reported:

• All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone. . . . While Wagoner testified, his G4 private jet was parked at Dulles airport. It is just one of a fleet of luxury jets owned by GM that continues to ferry executives around the world despite the company's dire financial straits.  . . .Wagoner's private jet trip to Washington cost his ailing company an estimated $20,000 roundtrip. In comparison, seats on Northwest Airlines flight 2364 from Detroit to Washington were going online for $288 coach and $837 first class.

Wagoner, who joined GM in 1977, is steeped in a culture that looks in, not out.  How else can one explain such an obvious gaffe?  And, where was the board?  Its true that the board cannot step in at every mistake but surely the board can set the tone. 

Of course, directors who want to discuss this at a special meeting have a problem.  The authority rests with the chairman and, like most large public companies, Wagoner is both the CEO and chairman.  He's unlikely to call a meeting that will have as its purpose a trip to the wood shed.  Of course, this is a mirror image board, one that Jon Macey at Yale would likely argue was captured by the CEO.  There would be no trip to the wood shed even if a meeting were somehow called.

In South Ferry LP v. Killinger, 542 F.3d 776 (9th Cir. 2008) Washington Mutual, Inc. (“WAMU”) shareholders filed a suit against several of the company’s officers alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  The defendants included WAMU’s President and CEO, Vice-President and CFO, and consumer group President.  WAMU was a publicly traded financial services company that offered banking, mortgage lending and other services.  The complaint related to WAMU’s mortgage lending business of buying, selling, originating, and servicing home loans.  Specifically, the complaint concerned two types of risks presented by WAMU’s mortgage business – mortgage servicing rights (MSRs”) and mortgage “pipeline risks.”

Plaintiffs alleged that defendants made materially false or misleading statements regarding WAMU’s ability to manage its MSRs risks and mortgage “pipeline risks.”  Particularly, they alleged that defendants assured shareholders that WAMU’s information systems were updated to handle the market fluctuations in interest rates that created those risks.  Plaintiff, however, argued that the defendants knew otherwise, that WAMU "was unprepared for the interest rate volatility that occurred later because it failed to integrate its information systems to permit it to keep a close watch on the hedges that it maintains."  Plaintiff asserted that these concerns were "core operations" of the company and that the information could be attributed to the defendants because of their position with the company.

The district court denied defendants’ motion to dismiss because it concluded that plaintiffs’ pleadings of knowledge of core operations and defendant’s statements met the PSLRA’s pleading requirement of scienter.  The district court certified the issue for an interlocutory appeal.  As the district court noted: "the complaint does rely on circumstantial evidence and an inference of knowledge arising from the connection between defendants' job roles and the core operations of the business."

The Ninth Circuit analyzed its own precedents and the U.S. Supreme Court’s opinion in Tellabs.  Tellabs permitted the consideration of "a series of less precise allegations to be read together to meet the PSLRA requirement."  Moreover, this included "vague or ambiguous allegations" as part of the "holistic review when considering whether the complaint raises a strong inference of scienter."  The core-operations inference could, therefore, be properly considered.  Indeed, sometimes it would be enough, standing alone, to establish scienter.  

• A question remains, however, about reliance on the core-operations inference when it is the only basis for scienter in the complaint.  Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants' actual exposure to information, it will usually fall short of the PSLRA standard. In such cases the inference that defendants had knowledge of the relevant facts will not be much stronger, if at all, than the inference that defendants remained unaware. As a general matter, "corporate management's general awareness of the day-to-day workings of the company's business does not establish scienter--at least absent some additional allegation of specific information conveyed to management and related to the fraud" or other allegations supporting scienter. However, in some unusual circumstances, the core operations inference, without more, may raise the strong inference required by the PSLRA.  (citation omitted)(emphasis added). 

The court concluded that allegations regarding knowledge of "core operations" would be relevant and assist in satisfying the PSLRA’s scienter requirement in three circumstances: (1) if the allegations used when read together with other allegations, raise an inference of scienter that is cogent and compelling; (2) if the allegations are particular and suggest that defendants had actual access to the disputed information; and (3) allegations where the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without knowledge of the matter.