Template:GMSLA compensation for mismanagement

Retrospective compensation for corporate mismanagement

An interesting question arises as to whether settlements or judgments reflecting corporate malfeasance by issuers of Loaned Securities or Collateral — and which manifest themselves in compensation payments to shareholders of record as of a certain date (and which falls during the term of a Loan) — qualify as “Income” under the 2010 GMSLA that must be manufactured back to the Lender.

Such disputes can take years — decades even — to iron out, can take any number of different forms and, if viewed as Income, represent a significant tail risk in a Borrower’s trading book.

On one hand, the definition of Income is very wide:

Income means any interest, dividends or other distributions of any kind whatsoever with respect to any Securities or Collateral;

On the other hand — and it pains me somewhat to lay some Latin on you, but I will — the ejusdem generis rule of interpretation says where general words (here, “distribution of any kind whatsoever”) follow specific words (“dividends, interest”), the general words are cover only objects similar in nature to those specific words. So the distribution should be of the same nature as interest or dividends.

So, is a court-mandated compensation for historical corporate malfeasance “of the same nature” as an issuer’s voluntarily declared dividend intended to reflect its good performance? The JC would argue that it is not.