Letter from the President

I have just reviewed the schedule for the upcoming AIRA Annual Seminar to be held in Orlando in early June. It was truly impressed by the quality and depth of the programs reflected in the subjects to be presented, and the speakers. The dual program track with the Small Business – Middle Market focus provides an excellent alternative to the large business programs; but whichever way you choose to go, the program and speaker combinations are excellent. The small business track includes programs on Accounting and Reporting, Forensics, Reorganization without New Financing, and Ethics. The standard programs include discussions of Wall Street Developments, the Bailout, TARP, the Automotive Industry, Cross-Border Insolvency Issues, Real Estate Restructuring in the New Political Environment, and Substantive Consolidation. The point is that it is not the “same old thing” by any measure.

The hard part for many will be finding the time to attend the AIRA’s Annual Bankruptcy and Restructuring Conference in 2009. The level of activity in the restructuring and insolvency world is unmatched in many ways. In that regard, one of the parallels worth reviewing is the circumstances that existed in the 1930’s. One perspective was brought to my attention while doing some research on Supreme Court Justice William O. Douglas in connection with my review of one of the decisions he wrote in 1941, early in his tenure on the Supreme Court. To focus on the why Justice Douglas would have been selected to write the opinion in the seminal bankruptcy case of Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510 (1941), it is worth studying Justice Douglas’ background as a lawyer and his regulatory career with the Securities and Exchange Commission. To do this, the SEC Historical Organization website is one of the best resources I have found on the internet, and it is worth reviewing.

http://www.sechistorical.org/museum/galleries/douglas/index.php. In addition to the description of events at that time, links to original documents are provided for the reader. The links to actual documents provide the ability to drill down and see the evolution of the reforms pursued by Justice Douglas with the SEC as well as his background in the insolvency and bankruptcy arena. An excerpt is reprinted because, unfortunately, it has obvious parallels to the current economic situation.

The two previous SEC Chairmen, Joseph P. Kennedy and James L. Landis, had constructed the initial design of the administrative agency with an acute understanding of the pitfalls in making and administering regulatory policy.(1) During Kennedy’s tenure, the SEC had consolidated the New Deal legislative victory of the securities act. During Landis’s Chairmanship, the administrative machinery was established which the SEC would use to implement the mandate of the 1934 and 1935 Acts. Yet, despite the agency’s growth from 1934 to 1939, the SEC remained a work in progress. Douglas’s tenure as SEC Chairman would be to use the machinery his predecessors had created to make permanent its institutional authority over the nation’s stock markets.

The SEC continued its business as the national economy began a downturn in early 1937, but it faced an uncertain future. By October 19, 1937, when the bottom once again fell out of the stock market, the national economy was in full-blown recession. Millions of Americans lost their jobs and thousands of businesses went bankrupt. Opponents of the New Deal, especially the Wall Street old-guard led by Richard Whitney, blamed the SEC for the recession, arguing that its policies restricted the free flow of capital into the markets undermining the economy. Douglas became the voice of regulation on the Commission, giving numerous speeches denying that SEC regulation of the markets had hurt the economy. Despite heavy opposition to continued SEC involvement in regulating the national economy, Douglas continued to advise President Roosevelt on action the government should take to reform the economy.

Douglas’s SEC moment came when the rest of the New Deal was in fast retreat. Stock prices had fallen by 30% in the two months preceding his election as Chairman. More than six million Americans lost their jobs. Charles Gay, the president of the NYSE, commented on Douglas’s appointment, stating it "gratifying" and commended Douglas for "his experience and intimate knowledge of the problems that confront the securities markets," but blamed the SEC for amateurish regulation and interference with the process and flow of capital.(2)

Stung by the recession, President Roosevelt suggested a relaxation of margin requirements and the nomination of John W. Hanes, a member of the NYSE, to the SEC. Douglas acceded to Roosevelt’s suggestion to appoint a business insider, but got his friend Jerome Frank nominated to the Commission as a counterweight to Hanes.(3) When study of the stock exchanges which had been ordered during Joseph Kennedy’s tenure as Chairman was finally published in 1937, Douglas used the opportunity to push for major reforms. The receipt of the Kennedy Stock Exchange investigation report prompted Douglas to prepare for a battle to reform the country’s stock exchanges by regulating the activities of the exchanges in the interest of the investing public.

Despite the economic downturn, an October 1937 Gallup Poll reported that 62% of all investors and 69% of all voters thought that "Government regulation of the stock exchanges has helped investors."(4) Aware of the value of public support for the role of the SEC in the national economy, Douglas gave numerous public speeches advocating the position of the SEC. He criticized the NYSE for its clubby atmosphere and lack of control over insider trading. Putting his SEC experience as a staff member, Commissioner and now as Chairman, into action, Douglas advocated that the Exchange regulate itself, but insisted that it must do so by segregating broker/dealer functions and by establishing strong new reforms for its members.

What are the answers to the crisis that faces us at this time? Is it simply a crisis of confidence, or something deeper. Are the New Deal policies re-proposed by the stimulus package going to work, and to what extent, and what else is necessary to restore confidence in our economic system? Will it take a classic maverick with the audacity and intelligence of a William Douglas to accomplish true change, and is that even possible with the atmosphere that has existed for years in Washington that often focuses on a person’s human weaknesses and mistakes and not his potential to effectuate positive change. Of course, is it really any different than it ever has been, or are we all just intimately aware of it as a consequence of nearly instantaneous communication?

I look forward to seeing as many of you as possible in June in Orlando.

Author Bio:

Grant Stein is a partner in Alston & Bird’s Bankruptcy, Reorganization and Workouts Group. His diverse practice includes the representation of debtors, secured and unsecured creditors, creditors’ committees, and fiduciaries in complex and difficult out-of-court workouts, debt restructurings, bankruptcy cases, and financial transactions throughout the United States and internationally. He also regularly represents officers, directors, and other parties in bankruptcy litigation of all kinds. His restructuring experience includes manufacturing, real estate, wholesale, retail, distribution companies, health care, communications, technology and intellectual property issues.

Mr. Stein is a Fellow of the American College of Bankruptcy and is identified as a top practitioner in Chambers USA: America’s Leading Lawyers for Business, The Best Lawyers in America and Super Lawyers magazine. He serves as a director and president-elect of the Association of Insolvency and Restructuring Advisors (AIRA). He also is a director and president-elect for the Southeastern Bankruptcy Law Institute. He recently served as a Member of the executive committee of Emory University’s Board of Visitors. He has written numerous articles on bankruptcy and workout issues and regularly lectures around the country. Mr. Stein served as law clerk to The Honorable W. Homer Drake, the senior judge of the United States Bankruptcy Court for the Northern District of Georgia, following his graduation, with honors, from the University of Georgia School of Law in 1981. He received his B.B.A., with high honors, from Emory University in 1978.