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dojN002513.xml

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2002-01-18

Friday, January 18, 2002 11:57 AM
InterimFinalComments.doc

Keefe, Bruyette & Woods, Inc.
757 Seventh Avenue
New York, New York
January 18, 2002




Kenneth L. Zwick
Director
Office of Management Programs
Civil Division
U.S. Department of Justice
950 Pennsylvania Avenue
Washington, D.C. 20530

Via e-mail

Dear Mr. Zwick:

I am the General Counsel of Keefe, Bruyette & Woods, Inc., also known as
KBW. Our main offices were located on the 88th and 89th floors of Two World
Trade Center in New York. KBW lost 67 employees in the terrorist attack. I
am providing these comments on the Interim Final Regulations adopted to
implement the September 11 Victims Compensation Fund.

On January 15, 2002, I met with Special Master Kenneth Feinberg and many
representatives of families of KBW employees who were lost in the attack.
It was clear that Mr. Feinberg has heard and understands many of the
concerns that families have in response to the Interim Final Regulations.
While his statements gave us some comfort, families are currently left with
regulations and comments in the adopting release which cause great concern.
If Mr. Feinberg is to get the trust from victims and families that he seemed
to feel was justified, the regulations will need several material changes to
encourage such trust. As currently drafted, the regulations have created
great anguish and spurred a divisive debate in the country by misdirecting
attention from the true purpose of the statute-to provide a no-fault
alternative for fair compensation for economic and non-economic losses in
conformity with state law.

Although there are numerous portions of the Interim Final Regulations that
could be the subject of comment, I would like to confine our comments to
three very critical areas: the inherent limitations and caps on awards
built into the regulations; the negative impact of an expansive reach in
determining collateral source reductions; and the use of artificially low
guidelines for the determination of pain and suffering.


Unfair Imposition of Caps and Limitations


Within days after the September 11, 2001 attacks on the World
Trade Center and Pentagon and the related crash in Shanksville,
Pennsylvania, Congress passed, and the President signed into law, the Air
Transportation Safety and System Stabilization Act. As this name suggests, a
key purpose of this legislation was to provide the United States airline
industry financial grants and guaranteed loans, as financial protection
against the negative impact of the hijackings and terrorist attacks. The
legislation was heavily supported through aggressive lobbying efforts on
behalf of the airline industry. One aspect of the unprecedented financial
protection granted to this industry was to limit the potential impact of
liability lawsuits against the airlines to the liability insurance they
carried covering these incidents.

This liability protection went hand in hand with another purpose
of this legislation. This was the creation of the September 11th Victim
Compensation Fund, an unlimited commitment of our government to use our
Treasury to provide a no-fault alternative to litigation. The Fund would
compensate the victims of these terrorist attacks and their families for
their economic and non-economic losses. At the time the legislation was
adopted and signed into law, estimates of potential victims reached as high
as twelve to fifteen thousand. Fortunately, the ultimate number of victims
and the related cost of the Compensation Fund is much lower than what had
been expected. It is clear that Congress and the President, in providing a
fair no-fault alternative to protracted negligence litigation, anticipated
paying awards similar to those that would be recovered in court proceedings.
While the statute contained a more expansive definition of collateral
sources, the law generally relied on the same state laws that would be used
to determine loss in conventional litigation. There was no limit or cap on
the compensation for loss that may be awarded.

There can be an endless debate about whether the enactment of
this legislation was an appropriate allocation of public resources. After
all, airlines have far greater resources than just the insurance available
per plane. They have paid massive negligence awards in many cases in the
past. Even if the financial impact of these attacks led to airline
bankruptcy, we have seen numerous major airlines suffer this fate without a
catastrophic effect on our economy. Nonetheless, there is no question that
these actions of Congress and the President also reflected the very noble
and true outrage of our Nation and a heartfelt desire to aid the victims of
these attacks, as well as a desire to protect an industry. The drafters and
signer of this legislation clearly understood that the targets of this
attack by foreign hostile forces represented the essence of our system-the
government and the financial industries of our country. In subsequent
airport security legislation, Congress and the President similarly limited
the risks of litigation for other potential defendants. No non-terrorist
defendant would have liability in excess of applicable insurance.

Because of the unprecedented reach of this legislation, the
unknown losses that may be faced and the speed with which it was drafted and
signed into law, the actual law left the establishment of rules for the
operation of the Victims Fund to the Department of Justice. An independent
Special Master was appointed, with broad powers to implement and oversee the
system.

A basic principal of regulation is that the regulations not contradict or
override the purpose of the statute. Unfortunately, in the current case,
the Interim Final Regulations have ignored the clear intention of the
statute to use conventional methods in the calculation of losses in
conformity with current state laws. Instead, the regulations have imposed
inherent caps under Track A and a clear intention to abide with those caps
under Track B, based solely on the assumed resources available to the
claimants. Such a regulatory action is in clear contravention of the
statute designed to compensate for losses in a manner consistent with that
applied in litigation. The Interim Final Regulations undermine the
intention of Congress and the President to provide a full and fair
alternative to litigation for all victims. The Interim Final Regulations
replace this clear statutory purpose with a concept more akin to that
applied under I.R.S. regulations governing the dispensing of charity
benefits-a "need" based standard, as opposed to a loss based standard.

The DOJ in adopting the regulations made very strong statements that the
size of awards would be limited for persons who earned above the 98th
percentile of national income because they were likely to have the resources
to protect themselves and didn't need to be fairly compensated for their
loss. Unfortunately, in addition to ignoring the statute, the imposition of
such a cap ignores both the financial realities of living in many
communities in the New York City area and the fact the Trade Center Victims
were chosen as targets precisely because of their financial success. It is
easy to understand that using a 98th percentile national cap had a far
greater limiting effect in the New York area for the many employees of
companies in the Trade Center. For example, this would imply that only 2%,
or approximately 60, of the victims made over this amount. Our company, as
well as several others, provided compensation histories for many victims in
the Trade Center prior to the adoption of the Interim Final Rules. A roster
of the companies in the World Trade Center reads like a "Who's Who" of the
New York based financial sector of our economy. It was therefore completely
clear to the DOJ and Special Master that many times that number of persons
made over the unrealistic limit used in the regulations.

In addition to ignoring the statute's intention regarding the
meaning of "loss", the purported justification of imposing such limits to
not unnecessarily use public resources also ignores the fact that a
significant portion of the governments cost may be paid by the private
sector. Section 409 of the statute provides that the United States is
subrogated to any claim paid under the statute. Since we can assume the
government would seek to minimize public expenditures, it would seem likely
that the government will negotiate with insurers for significant payments
under these subrogation rights.


Overly Expansive Application of Collateral Sources


As written, the Interim Final Regulations adopted a very broad reach for the
definition of collateral sources. For example, voluntary survivors benefits
that are paid by employers would be included in collateral sources. This
will obviously have the effect of discouraging employers from making such
payments. For example, our commitment to pay for health insurance of
families may similarly reduce their awards from the Fund. This will force
us, and other companies, to reconsider such voluntary This is, simply, cruel
and unnecessary. In addition, the regulations penalize those conservative
and industrious persons who saved in pension funds and purchased insurance
by deducting the full amounts of these benefits from the awards they could
receive under the fund.

The statute clearly would allow a narrower scope in defining collateral
source in the regulations. For example, the definition of collateral source
could have excluded vested pension or retirement benefits (which are
essentially nothing more than a form of savings account which belong to an
employee) or other amounts (such as deferred compensation rights or the cash
value of a life insurance policy) which were, in effect, already owned by
the employee, as distinguished from a death benefit properly deductible from
the award (such as term life insurance or previously unvested interests in a
retirement fund). As adopted, the regulations are capricious and can serve
no public policy purpose. The victims who were spendthrifts who never saved
are rewarded with fewer reductions from the awards, as compared to persons
who made voluntary contributions to pension funds or purchased whole life
insurance as a savings and investment vehicle.


Unfair Pain and Suffering Assumptions


The adopting release for the regulations provides that pain and
suffering awards have been fixed consistent with standards applied to law
enforcement and military personnel. While pain and suffering awards are
always subjective, it is hard to understand how the suffering of a group of
civilians, completely unprepared for the risk of violent deaths and
injuries, could be equated with persons who have voluntarily chosen to put
themselves at risk of such death and injury as part of their daily job.

This type of an assumption is, again, completely inconsistent with the
language of the statute regarding compensation for non-economic loss. It
imposes an unrealistically low and inapplicable standard whose sole purpose
is to limit the size of the award without providing adequate compensation by
any reasonable standard for civilians.


Conclusion


The statutory limitations on litigation designed to protect certain
industries left the Victims Compensation Fund as the only viable alternative
to recover losses. The noble intentions of Congress and the President to
provide a fair alternative were structured to provide restitution without
limit. The Interim Final Regulations have been expressly designed to alter
the intended effect of the statute. This has put the squeeze on many
victims and families.

The victims we knew in the Trade Center were among the most highly motivated
people in our country. Their families shared their motivations and dreams.
Most paid taxes at the highest rates and never asked for, wanted or
anticipated being on the government dole. Quite a few comment letters sent
to the DOJ prior to adopting the Interim Rules took the shocking position
that these people were being unjustly enriched at the public expense.
Unfortunately, this shocking position has found its way into the Interim
Final Rules.

The statute would have provided support to companies likely to be defendants
in lawsuits and just compensation for victims. This reflected national
interest in preserving the airline and other industries and national outrage
on the attack on our American system. Our government, through the
legislative process, made a policy decision that the costs were properly
placed on our Nation's Treasury. What has happened through the Interim
Final Regulations is a trade-off, not envisioned by Congress or the
President, which has turned the legislation on its head-potential commercial
defendants have been protected at a cost to individual victims. A strong
argument can be made that such limitations on awards, which have never
before been found in our American litigation system, only further victimized
the victims.

We urge the Special Master and DOJ to reverse this injustice and
act consistent with the legislation and honor the memories of the many
unfortunate victims.

Very truly yours,


Comment by:
Keefe, Bruyette & Woods, Inc.

2002-01-18