In the Shadow of the Omnipresent Claw : A Response to Professors Cherry & Wong

As the American economy continues to totter against an ever-growing populist momentum, it seems likely that clawback mechanisms of various sorts will be put to increasing use in the coming months and years. Very generally, a clawback attempts to regain previously conferred monies or benefits following a certain triggering event, usually involving some change in circumstances. In a sense, clawbacks offer the opportunity for a “do-over” — a convenient antidote to both the uncertainty that characterizes American financial markets and the calls for accountability that grow louder with each corporate misstep, real or perceived. This Response to Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes by Professors Cherry and Wong challenges the academic community to address a number of questions that remain unsettled, as clawbacks have been subject to neither rigorous analytical scrutiny nor definition and exposition. While it seems intuitive that the retroactive imposition of clawbacks, by legislation or otherwise, is less desirable than more prospective efforts, the complexity of the subject matter demands more than a reflexive call for the organic inclusion of clawback provisions in investment contracts or compensation agreements as a matter of course.This Response proceeds in three parts. Part I introduces the basic framework through which the Article's authors analyzed the uncertain world of clawbacks. This section very briefly recounts the Madoff and AIG affairs and introduces the mechanics of the clawback in the less controversial context of the long-established preference period immediately preceding a firm's bankruptcy filing. Part II examines the lens through which Professors Cherry and Wong suggest that market participants understand, interpret and employ clawbacks. This section also introduces the primary shortcoming of their approach — its latent subjectivity. Part III offers additional critiques, primarily concerned with the practical difficulties in realizing the robust and developed clawback regime the authors envision. Finally, the Response concludes with a warning that the clawback does not represent the magic bullet it might first appear to be. And, we should resist reflexively embracing its application absent careful consideration and deliberation