Wednesday, October 06, 2010

The Submission of Cantor Fitzgerald to the Special Master of the September 11th Compensation Fund of 2001, and to The United States Department of Justice,

What follows are highlights from an absolutely remarkable pdf document, which can still be found online, linked to from an archived web page of a now-defunct Cantor Fitzgerald web site, the "Family Information Center," an effort which was active from September 12, 2001 through November 2, 2006.

Dated September 12, 2002, the document was the pro bono effort of Cantor's attorneys Skadden, Arps, Slate, Meagher & Flom, to address a perceived potential for unfairness in administrating the recently passed federal law designed to indemnify the airline industry by buying off the victims of 9/11.
"It is important to recognize that the Act was adopted by Congress and signed by the President as part of a plan to protect the nation's airlines from potentially devastating civil lawsuits while at the same time providing full compensation to the families of those lost on September 11. The establishment of the Victim Compensation Fund was an extraordinary legislative act to protect the airlines and the victims' families. The Fund was created to compensate, fully and fairly, the families of victims and survivors of the September 11 tragedies for the economic loss that they suffered as a result of the attacks.9 Victims who apply to the Fund waive certain important rights, including the right to sue for damages, including punitive damages, and they must deduct from their awards amounts from certain collateral sources of funds. They were not required to give up was the right to collect their full economic losses. That is the careful balance struck by Congress. It is against the factual backdrop that the Act should be interpreted and applied. Pages 29 & 30
At issue was how to properly compensate high-earning victims fully.
"Of the 658 Cantor Fitzgerald employees lost on September 11, 163 were Partners, and thus co-owners of the business. In addition to the compensation earned as employees, Partners also earned Partnership distributions, eSpeed stock and Partnership Grants (additional Partnership Units typically awarded as a form of signing bonus or deferred compensation). Page 28
A central point concerned the standard practice of averaging incomes over a previous three-year period in arriving at a base figure for further calculations. A problem arose though, from a dramatic increase in the aggregate annual income of the Cantor victims between the years 1999 and 2001. Rather than pulling down the figure by which benefits would be derived with the three-year average, Cantor employees stood to gain by using only the 2001 income. The document is explicit
The two year 2000 – 2001 average aggregate pay is 15% greater than the three year average aggregate level, while the 2001 amount is 47% greater than the three year average aggregate level. Pages 68 and 69
On page 78 of the Summary Report and Analysis of Earnings Data for the Cantor Fitzgerald September 11 Victim Compensation Fund Participants, is Exhibit 5, 'Cantor September 11th Victim Aggregate Income, All Cantor Victims with 1999 - 2001 Data (Exclude Options and eSpeed Stock,) which lists the gross collective income for that group as $133,500,111 in 1999, $160,704,717 in year 2000, and $283,724,953 in 2001.

Various explanations are offered for the increase in income.

On page 18, is information attributed to the Federal Reserve Bank of New York, indicating a corollary increase in the average daily trading volume of U.S. Treasury securities from 1999 ($186.5 billion) to 2001 ($297.9 billion) and further rising to ($344.8 billion) in 2002.

A note says the chart illustrates the gross totals for primary dealers with interdealer brokers and primary dealers with others, but it doesn't offer reasons for the expansion in the volume of traded U.S. Treasury securities, or address Cantor's share of the market. A direct comparison only accounts for about half of Cantor's increased income anyway, which came during a bad year for the rest of Wall Street.
"The publicly available New York Stock Exchange and Federal Reserve volume figures show that volumes increased last year, even though there was a general economic downturn in 2001." Page 16

"However, financial services businesses with investment banking and other non-brokerage components had lower earnings in 2001. The reason for the success of wholesale intermediary businesses when other businesses suffered due to the market downturn is marketplace volume." Page 17
But Cantor's business wasn't limited to just government securities.
"Among other things, the wholesale brokerage business brokered transactions involving government securities, mortgage-backed securities, U.S. government agencies, interest rate swaps, interest rate swap options, emerging markets, municipal securities, corporate bonds, collateralized mortgage obligations, credit derivatives, repos, foreign exchange options, and, through our environmental brokerage business,, environmental-related products. Page 22
As we entered into the 2008 recession, those were the growth areas that grew into the Toxic Asset Bail Out Program. Unaddressed however, are questions whether the inflated results of 2001 were due to any possible manipulation---in the way a union worker is faulted for loading up the last year of a contract with overtime to inflate their pensions---it appears to be the start of unsupportable trend that collapsed seven years later.

The growth of Cantor's eSpeed division is cited as a reason for a successful future in the company
"As of September 11, 2001, eSpeed was the leading provider of electronic marketplace and interest-rate related technology solutions and it was in the midst of significant growth. eSpeed's operations had been steadily improving. To illustrate, for the year ended December 2000, eSpeed earned $70.3 million in transaction revenues, a 222% increase over transaction revenues of $21.9 million for the year ended December 31, 1999. The growth in these revenues was attributable to the continued rollout of electronic marketplaces and an increase in the number of clients electronically trading through the eSpeed℠ system. As of December 31, 2000, eSpeed had converted 43 product marketplaces to the eSpeed℠ system. For the quarter ended December 31, 2001, eSpeed recorded operating profits for the first time. For the year ended December 31, 2001, eSpeed earned $98.4 million in transaction revenues – a 40% increase over transaction revenues of $70.3 million from the previous year. eSpeed has met or exceeded its forecasts consistently, a feat very few ecommerce companies have achieved. The steady growth of eSpeed, its ability to meet its projections, and its strong market position, leaves no doubt that the future for its deceased employees would have been extraordinary."Page 15
However much new business eSpeed was generating, a great deal of business was simply being shifted over from Cantor's established telephone-voice bond brokering. An article in Business Week published eight days before 9/11 seems specifically to address what I see as a central financial fraud at the heart of the 9/11 conspiracy. Called, " eSpeed's Trading Secrets : Cannibalizing Cantor's bond trading has paid off, but growth is slowing," it was written by a business writer with a punning name, Spencer E. Ante. His lead paragraph opens with an unmistakable effect:
"On the 105th floor of New York's World Trade Center, a bond broker is sleeping, legs stretched out, head resting softly on the back of a chair. When he's awake, he takes phone orders for U.S. Treasury securities at Cantor Fitzgerald, once the leading wholesale broker of government bonds. Two years back, he would have been surrounded by 220 screaming comrades hard at work matching buyers and sellers. Now, he's one of just 25 brokers whiling away the day and waiting for the phone to ring."
What possible agenda could Mr. Ante serve being the sole source in the record who paints such a contrary view of a private scene---if it were not the truth? He pays eSpeed a back-handed compliment:
"While most e-marketplaces are in a financial tailspin, eSpeed has been gaining altitude. The company has become the de facto exchange for U.S. Treasury securities, with about half of the $300 billion in daily trades taking place on its system."
Does "de facto" mean "butt-boy" in Latin? Ante is prescient enough to speak directly to the causes for any hikes in profits:
"ESpeed faces slowing growth in its bond-brokering business as it takes an increasingly large chunk of sales from Cantor. In the second quarter, Cantor Fitzgerald completed 25% of its transactions by phone, compared with 63% in the first quarter of 2000. That's starting to affect eSpeed: In the first half of 2001, the upstart's trading volumes grew less than the overall Treasury market for the first time--by 11% vs. 33% for the total market. Within 18 months, eSpeed will have taken everything it can from Cantor, says Robertson Stephens Inc. analyst Justin J. Hughes."
Rather than confusing the issue by comparing a financial chart, which has a four-year growth pattern, against one with three years, and thus overstate a market trend, Mr. Ante gives us the facts that offer up an entirely different reality. When federal borrowing rises significantly in a short period (a serious question in itself, which is entirely ignored. We're we going to war even then?) while Cantor's grip on its traditional market share is sliding for unknown reasons, then I'd guess there's no way the timing of the BusinessWeek piece could be a coincidence. Now could it? Truth must takes a stand like this, even to for account.

In my opinion, the Skadden, Arps, Slate submission to the September 11th Compensation Fund, materially misrepresents other facts concerning the prospects for future earning for many of the so-called 678 Cantor victims of 9/11. Even outright misrepresentation is not unknown.
"Before engaging in economic loss calculations for the Cantor Fitzgerald families, it is important for the Special Master to understand Cantor Fitzgerald's business and the fact that the future of Cantor Fitzgerald employees was secure...Further, this submission explains why Cantor Fitzgerald's business is not adversely affected by market downturns and, thus, why Cantor Fitzgerald's revenues, earnings and earnings growth was and remains sustainable." page 10
Perhaps the future is secure for the twenty employees who Cantor fired on Monday, but who were rehired on Wednesday---and who came back!---after the collapse of the towers. When Knight-Ridder's excellent Maureen Fan, writing three days after 9/11, "Financial giant, decimated by tragedy, clings to life," attributes the surviving co-president of equities, Peter DaPuzzo, as telling her that
Though much is made of the family-like nature of Cantor Fitzgerald, it still was, and is, a hard-nosed business. Nearly 500 people had lost their jobs before Sept. 11, and 300 more were about to be axed made obsolete by the success of their electronic bond-trading network, DaPuzzo said.
Whether their were only 25 bond brokers sitting around in the days before 9/11, instead of the former high-energy contingent of 220 traders, figures like 500 who'd been let go, while 300 more awaited, starts to smell like patent disinformation.

Another misrepresentation, which apparently holds a candle to the Cantor wind, concerns a much lauded training program at Cantor for young people entering the bond brokerage business.
"Cantor Fitzgerald and eSpeed, as the largest and leading marketplace intermediary of U.S. Treasuries and a company at the forefront of technology, was a sought-after employer. Cantor Fitzgerald maintained a formal training program for recent college graduates seeking careers as brokers. The program was very selective - approximately 400 people applied each year, 100 were interviewed and 20-50 were accepted for employment, depending on need. Cantor Fitzgerald hired the most promising candidates and kept only the very best. Those who were employed on September 11, 2001 were those who had survived a rigorous training process, and, as a result of their hard work, enjoyed tremendous salary growth and opportunity." Page 47
However, in discussing the issue, Cantor only uses data from a training program from 1993 through 1998. Was it because the training program was abandoned afterwards?
From 1993 through 1998, approximately 237 people were accepted into the Cantor Fitzgerald training program. There were 30-50 trainees during each year of the program. Page 47

As of September 11, 2001, 40 individuals from the 1993-1998 training classes were still with Cantor Fitzgerald. Of those 40, 30 were lost on September 11. Those who died, for the most part, were spread equally among the classes. Note 17,

Note 17: "There were five victims in the 1993 class, nine in the 1994 class, three in the 1995 class, five in the 1996 class, four in the 1997 class and four in the 1998 class." Page 48
A note tells us that 206 of the 678 victims of 9/11, had started their Cantor employment after January 1, 2000.
The charts exclude options and eSpeed stock and include all victims for whom Chicago Partners has complete data for each time period. Chicago Partners has full information for 323 victims for the four-year period, 1998-2001; it has full information for 383 victims for 1998-1999; it has full information for 452 victims across the years 2000-2001. There were 206 victims who have employment start dates after January 1, 2000, and thus, have only partial 2001 information. This partial year data is not included in the tables for comparative purposes." Page 45
The Skadden, Arps, Slate submission takes great pains in describing the security and future in a company culture which had already vanished before tragedy struck on September 11.
At Cantor Fitzgerald, those individuals who had demonstrated their ability to perform in Cantor Fitzgerald's competitive work environment were well-compensated. Cantor Fitzgerald provided generous incentives, including granting opportunities to become partners and to invest in the company to more than 20% of its employees. Once established, many individuals remained at Cantor Fitzgerald due to the cohesiveness of its structure, collaborative environment and compensation packages. Even if an employee decided to leave Cantor Fitzgerald, our research shows that he or she was able to pursue a gainful occupation and earn comparable compensation elsewhere. See, infra, pp. 44-45. The employees lost in the attack had strong economic futures with a successful, expanding company; thus, their prospective earnings would have been significant.
That the victim compensation fund was intended to be a giant slush used to buy off the various participants in the 9/11 drama is becoming clear. The Cantor submission includes a dissenting minority opinion, which addresses the unfairness of income disparity directly, albeit from the opposing viewpoint.
Representative John Spratt (D.-South Carolina) made the following remarks I also believe that the victims of this tragedy, whether in the air or on the ground, deserve compensation, and most citizens will be pleased to know that this bill uses their tax dollars for that purpose. But in this case, where the liability of the airlines is unsettled, I do think there are limits to which victims' compensation by the government should be provided. This bill sets up a Victims' Compensation Fund, but does not specify the size of the fund or the maximum that any beneficiary can recover. Many of the victims in the World Trade Center earned many times the incomes of the firemen and police who died trying to protect them. Under this bill, the heirs of those victims will be eligible for many times more benefits than this bill will allow those brave firemen and police. Quite a few claimants will be able to show substantial incomes. The earning capacity of their decedents will run into millions of dollars. I do not doubt their losses, or the grief their survivors must feel, but I do think the compensation to which they are entitled under this bill should be subject to some fair and reasonable limit. At this point, no one has any idea what the government's liability under the Victims' Compensation Fund may be, though it is likely to be substantial. I wanted to propose that we set a fair but generous cap on the victims' benefits paid by the government, and use some of the money saved to help the thousands of airline workers who are being terminated or laid off, and are in a real sense, victims of the September 11 tragedy also. Resolution 244, the rule allowing this bill to come to the House floor, would not permit me to offer such an amendment, and for that reason, I voted against the rule. I will vote for the bill, but it would be a much better bill if such an amendment had been made.

Representative Spratt's desire for an amendment was precluded by resolution and thus, a cap was rejected. Instead, the Act promises full recovery of economic losses in exchange for waiving rights to sue. Page 56
Very little was written in the main stream media about the efforts in preparing submissions such as Cantor's document, an effort which can be seen more broadly as an attempt at legitimating victims. One article that succeeded in giving a flavor of the times was a July 9, 2002, New York Times piece by David W. Chen, "Career Profiles of 9/11 Dead Arouse Anxiety ," which attributes the emotions aroused

There were three Cantor Fitzgerald employees who were in the World Trade Center on September 11, but who had not yet arrived at the Company's floors at the top of the building. They survived the attack, but were severely burned. No submission to the Department of Justice and Special Master would be complete if it did not mention these three survivors. They have been courageous and inspirational in their struggle to cope with the devastating
injuries they have suffered. We request that the Special Master consider the claims of these three people on an individual basis and that they receive full and just compensation both for their economic loss as well as their incredible non-economic loss. They have been horribly injured and face many years of pain and medical expenses in their struggle to survive.
Page 62

Trainees had starting salaries in the general range of $30,000, depending on class year. However, as demonstrated in the chart below, trainees who successfully completed the program were able to more than quadruple their salaries in as few as three years, earning well into the six figures, whether they stayed at Cantor Fitzgerald or not. For example, for those people in the 1997 training class still working at Cantor Fitzgerald as of September 11, the average salary in 2000 was $219,166, and in 2001 it was $241,222. For those people in the 1997 training class who left Cantor Fitzgerald and for whom salary data is available, the current average salary is $200,300. Page 48

As the trainee class members gained experience, their salaries and bonuses continued to increase rapidly. The salaries of those in the 1993 training class rose exponentially within eight years – on average, forty-eight times their starting salary for those who remained at Cantor Fitzgerald, and twenty times their starting salary for those who left Cantor Fitzgerald. For those 1993 training class members still working at Cantor Fitzgerald as of September 11, the average total compensation in 2000 was $757,522, and in 2001 it was $1,467,631. For those in the 1993 training class who left Cantor Fitzgerald and who provided salary information, the average current salary is $650,000. This information demonstrates that a future income calculation based on set percentage increases is inappropriate compared with Cantor Fitzgerald's actual compensation data. Most of the trainee class members attained a salary at or above the 98th income percentile after just a few years at Cantor Fitzgerald. While the information available for those who left Cantor Fitzgerald shows that those remaining at Cantor Fitzgerald generally earned more, those who left are still doing very well. Page 49

"The absence of a cap," [the Special Master] says, "means that I've got to be aware of what is fair not only from the claimants' point of view, but from the taxpayers' point of view."
Josh Tyrangiel, Holding The Checkbook (Time, Vol. 160, No. 11, September 9, 2002). Page 55

At Cantor Fitzgerald, where the average age of the victim was 38, Page 41

"Finally, with respect to the issue of collateral offsets, Cantor Fitzgerald has voluntarily developed and implemented a number of plans to assist the families of victims, including contributing 25% of its profits to the Cantor Fitzgerald Relief Fund — plans that Cantor Fitzgerald had no legal obligation to create or continue. This submission explains why these plans are not "collateral sources" under the Act or the "Final Rule." Note 2, Page 12

"The vast majority of Cantor Fitzgerald employees killed on September 11 were compensated in the following ways: (i) salary and bonus, (ii) eSpeed stock options, (iii) fringe benefits such as health and life insurance, and (iv) an employer matched contribution in a 401(k) plan. In addition, the 163 Partners who were lost also received (i) Partnership distributions on a quarterly basis, (ii) eSpeed stock in 2001 and 2002; and (iii) awards of Partnership Grants. It is important to recognize that employees and Partners also earned compensation that was not taxable at the time granted and, therefore, not reflected on a W-2 form, but that such Page 24

As described above, as part of its compensation package, Cantor Fitzgerald provided other benefits related to employment, such as paying insurance premiums for medical insurance, disability insurance, life insurance and workers' compensation insurance. These benefits are included in compensation under the Act and state law. Page 31

"More than 250 Cantor Fitzgerald employees who were killed on September 11 had incomes above the 98th percentile (before including eSpeed options and eSpeed stock). These Cantor Fitzgerald families will be seeking calculation of an award based upon their factual record." Page 41

The presumed Age-Specific Earnings Growth Rates published in Table 3 to the Explanation of Process are woefully inadequate as applied to Cantor Fitzgerald victims. Far from the 3-9.7% growth rates presumed by the Special Master in Table 3, the actual growth rates observed for Cantor Fitzgerald decedents during the years 1998 through 2001 actually exceeded 20% for many age groups. When examined at each age group level, the actual average Cantor growth rates exceeded the presumed rates in over 87% of the possible single year comparison points and in over 97% of the three year averages. Page 43

"The Cantor Fitzgerald growth rates were calculated based upon actual data compiled for the lost Cantor Fitzgerald employees, tracking their compensation and age over the 1998 to 2001 period. Chicago Partners compiled the actual compensation data for each lost employee for the years 1998-2001, calculated annual growth rates for each employee, combined the resulting growth rates with all other lost Cantor Fitzgerald employees of a similar age, and determined the average actual percentage increase on an annual basis for each age group. Page 45

A Three-Year Average Of Earnings Would Under Compensate Most Cantor Fitzgerald Families
The Explanation of Process states that, "[g]enerally, the Special Master will consider the past three years of income data," and that "[f]or some cases the most recent year will be the primary basis of the award – other claims may require analyses of trends adjusted to current dollars." Page 46

The Cantor Fitzgerald families should at least be given the choice of selecting whether a two-year average (2000 and 2001) is used or whether 2001 income data alone (on annualized basis) is used. Page 51

Cantor Fitzgerald is adamantly opposed to having its deceased employees' families penalized for voluntary payments that the company has made to them when such payments were not required by law or contract. Both the text of the Act and the Final Rule support the conclusion that voluntary employer contributions, such as those described above, should not be considered a collateral source to be deducted from the Fund award.
Page 58

This Report was prepared by
140 South Dearborn Street
Chicago, Illinois 60603 Page 64

Following the tragic events of September 11, representatives of the Skadden, Arps, Slate, Meagher & Flom L.L.P. law firm contacted Chicago Partners about the firm’s willingness to serve in a pro bono role helping Cantor Fitzgerald in assisting the victims’ families in applying to the September 11th Victim Compensation Fund. This report is the result of those pro bono efforts. Page 66

Chicago Partners compiled a relatively extensive database on the Cantor Fitzgerald September 11th victims. As discussed above, this data was sourced primarily from IRS forms provided by third party payroll service providers to Cantor. Page 67

For the nine Cantor victims within this age group (with data across all three years), the two year average earnings level of $144,764 is 28.6% greater than the $112,594 three year average, while the $204,409 2001 average earnings level is 81.5% greater than the three year average. Page 69

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