AIG Bonuses and Hedge Funds Changing the Rules

MARCH 23, 2009

A furor was originally raised over announced plans to continue to pay over $165 million in AIG bonuses. Some critics had originally suggested that the terms of employment contracts which outlined these bonuses be changed and the contracts literally torn up. Many legal scholars were quick to point out the illegality of this and the bad precedent this would create.

In this case US contract law does not allow the rules of the game to be changed unless both parties are open to
contract negotiation. While it is unfortunate that the American tax payer is being forced to suffer the burden of these bonuses, one can have little sympathy for the US government for their lack of due diligence in properly vetting AIG before rushing to write a blank TARP bailout check and catching their mistake after the fact. There are now a number of proposals to tax these bonuses into virtual non-existence.

The idea that people should be allowed to change the rules when times get tough reminded me of a similar furor which was raised over hedge fund's suspending redemptions by invoking gates during the credit crisis. One of the most vocal proponents of ganging up on hedge funds to change the rules was Sandra Manzke. She went so far as to create an organization called the Hedge Fund Investor United Forum, whose website has since been taken down in the past few days.

On her first post on this organization's webpage in November 2008 she states, " I am not saying everyone out there is a bad apple, but there are too many bad apples for my taste and it only takes a few to bring the industry to its knees."

Here is a link to Sandra Manzke on CNBC. In this clip, Ms. Manzke chastises hedge funds and echoes a similar sentiment to catch all of these bad apples funds that were, as she put it taking actions "that nobody anticipated." Ms. Manzke went so far as to name three funds with behavior deemed to be reprehensible as RAB Capital, Paul Tudor Jones and Highland Crusaderamong others. Ms. Manzke's Maxam Capital Management was wiped out in the Madoff fraud.

This CNBC clip aired on December 9, 2008. It is reported that the next day Madoff confessed to his sons that the asset management arm of his firm was a giant Ponzi scheme. In an attempt to point the finger for Maxam's lack of ownership of their due diligence process, Maxam has filed suit against their auditors Goldstein Golub Kessler and McGladrey & Pullen, “Maxam intends to pursue its legal rights to ensure that proper restitution is made to its investors,” Jonathan Cogan, a lawyer for Maxam, said in a statement.

Soon after the fraud was announced, Ms. Manzke's son began selling golf balls with Madoff's face. His company is aptly named Sleazeballs LLC.

Mother Sandra apparently has no problem with her son's actions reportedly telling Naked Shorts, "my son came up with this idea and has rented space from my office to pursue. He is working on tennis balls, racquet balls, baseballs etc. I do think it is a good idea to shame a lot of sleazeballs." Perhaps this Madoff devil bobble head is more appropriate.

I doubt that any of Maxam's investors which lost over $280million will see one cent of the profits from Sleazeballs LLC's sales. Is this an attempt to make Lemonade from lemons or just the height of poor taste?

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