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Big Investment Banks Win Big in Congress
The major investment banks secured a big win with the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 (the Act). They quietly convinced Congress to remove the strongest limitation in the Bankruptcy Code (' 101(14)) on a Chapter 11 debtor's employment of an investment banker. That prohibition, in effect since the Depression, had essentially prevented the debtor's retention of a banker for any of the debtor's outstanding securities (Id.). The securities industry called the statutory ban “anti-competitive” (see, eg, Securities Industry Assn. Position Paper at http://www.sia.com (hereinafter, “SIA”)).
The SEC had warned Congress 2 years ago, when the SIA had proposed a legislative change, that a “one-size-fits-all” approach may be insufficient in light of a 1938 study of corporate reorganization practices. (See letter dated May 22, 2003 from SEC Chairman William H. Donaldson to Hon. P. Leahy and Hon. P. Sarbanes). The SEC's study showed that potential or actual conflicts had often existed among underwriters, investment bankers and their attorneys due to … the extent of the financial interest of the underwriter in the enterprise, the underwriter's relationship to the management under whose auspices the company failed, participation in the acts of mismanagement for which legal liability might be imposed or which might make new management desirable or necessary, and fraudulent or negligent activities in connection with the sale of the securities. (Collier on Bankruptcy, ' 327.04[2][a][iii][D] at 3-327 and n. 44 (15th rev. ed. 2005) citing SEC, Report on the Study and Investigation of the Work Activities, Personnel and Functions of Protective and Reorganization Committees, pt. II at 172.)
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