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How Successor Liability May Disrupt The Best Laid Plans Of Cyber Ninjas

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A recent news article mentions that Cyber Ninjas, the firm employed by the Arizona Senate to conduct its ill-fated review of the 2020 election, will be formerly shutting down but will then be re-created as a new firm with the same workers doing essentially the same thing. The reason for this is that Cyber Ninjas is currently facing a $50,000 daily fine imposed by an Arizona judge for its contemptuous failure to turn over certain election review records. But will that work for Cyber Ninjas II, or whatever the new firm will be called, to avoid this liability? Probably not.

American law has long recognized the concept of “successor liability”, which means that a successor entity can be liable for the claims and judgments against its predecessor. The idea behind this concept is to prevent a company like Cyber Ninjas from doing exactly what it intends, i.e., to shut down the predecessor company so as to cut off its liabilities and then start up a new liability-free company doing basically the same thing.

Consider a local pizza place called ABC Pizza LLC down on the corner which is very successful in making pizzas. However, the pizza place gets into a dispute with one of its suppliers, and goes to court and suffers a large judgment. Instead of paying the supplier’s judgment, the owners of ABC Pizza LLC reorganize it as DEF Pizza LLC and it continues business down on the same corner, with the same employees and making the same pizzas. In that event, the court would apply successor liability to make DEF Pizza LLC liable for the judgment against ABC Pizza LLC.

Successor liability is a concept which is an adjunct of alter ego liability, which is about as an amorphous a concept as is found in our law. There are a good number of factors that a court can properly look at, and the determination of whether successor liability exists is ultimately one of the particular facts and circumstances of a given case. However, there is a bit of certainty in that to establish successor liability, a creditor would need to prove at least two thing: First, that the same person or persons own or control both the predecessor entity and the successor entity, and, second, that an inequitable result would obtain were the entity separateness of the predecessor and the successor be respected.

As to the first element, it appears from news reports that the founder of Cyber Ninjas, being Doug Logan, will be forming the new company, and thus common ownership or control will be relatively easy to establish. The second element, being that it would be inequitable to recognize Cyber Ninjas as distinct from the new company, is more problematic for the reason that what constitutes an inequitable result is often difficult to figure out.

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Among the circumstances that the court should look at would include whether the employees are common to both companies. That Logan has stated that he intends to re-hire the former Cyber Ninjas employees for his new company would be evidence in favor of successor liability. That the new company will apparently be in the same business as Cyber Ninjas will likely be more evidence that the new company will simply be a successor entity. But most important will be Logan’s own public statements that he will essentially just be re-creating Cyber Ninjas with a different name ⸺ that is as close to a confession of successor liability as one will find.

A court might also take into account the nature of the liability against Cyber Ninjas, which is the $50,000 per day fine for contempt of court for refusing to turn over certain documents. Few things are taken so seriously by the courts as contempt of their orders, and this will likely way very heavily in the court’s analysis of whether to impose this liability on a new entity.

Some might wonder whether bankruptcy of the predecessor company can cut off liability such that the liability doesn’t follow to the new company. Normally, bankruptcy can wash out the claim against the predecessor company, thus allowing the business owner to start a new company without the liabilities of the old. The downside is that the filing of bankruptcy creates a bankruptcy estate, and if the predecessor is being liquidated in a Chapter 7 proceeding (as opposed to reorganized in a Chapter 11 proceeding), then a bankruptcy trustee will be appointed who will liquidate all the assets of the predecessor company and thus make it much more difficult for the successor company to get started.

In a way, that doesn’t get Cyber Ninjas anywhere in its current apparent desire not to turn over documents as ordered by the court. If Cyber Ninjas goes bankruptcy, then a bankruptcy trustee will be appointed to take over Cyber Ninjas. The bankruptcy trustee could both come up with the document to satisfy the court’s order, considering that bankruptcy will not block a contempt order, and also on behalf of Cyber Ninjas waive any attorney-client privilege that it might have regarding the documents, or even just communications with its own attorneys involving the recount. So, bankruptcy really doesn’t get Cyber Ninjas anywhere, and it would frankly be a surprise if they filed for bankruptcy.

But let’s say that Cyber Ninjas doesn’t go bankrupt, but instead simply dissolves. This actually makes things worse for Mr. Logan, because the dissolution of an entity will also dissolve the entity’s liability shield for its owners and make them directly liability for the entity’s liabilities. That would mean that any owners of Cyber Ninjas could become liable for the $50,000 per day contempt order. So that’s not much of an option either.

The more practical course for Cyber Ninjas to take would be to go back into court and attempt the so-called Impossibility Defense, which basically means that a person or entity held in contempt cannot be punished for that contempt if they lack the means to comply with the order, i.e., such compliance is impossible. The problem here for Cyber Ninjas is in making that showing, since they would literally have to show that they can’t come up with any of the documents that they have been ordered to produce, and in this day and age of electronic records that is almost never the case.

All that leaves Cyber Ninjas with trying to do what they are doing now, which is simply ceasing to do business in the name of Cyber Ninjas but then setting up essentially the same company doing the same thing with the same owners, more or less, the some folks in control, and the same employees, and thus ignoring the contempt order. But that will likely result in the contempt liability flowing to the new company as well.

There is also the chance that the judge will apply the contempt order directly to Mr. Logan and any persons others in charge of Cyber Ninjas, which is frankly the most logical next step for the court. But we’ll have to wait and see if that materializes. The bottom line is that if Cyber Ninjas just thinks it can change its name and continue doing business, that is probably a mistaken assumption.

Finance

Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street

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America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.

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But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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Finance

It Is Time To Buy Bonds

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US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle

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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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