Alumni Short
Professor Whitehead Adjudicates Multibillion Dollar Derivatives Question Ithaca, NEW YORK, Mar 31, 2016


One month before filing for bankruptcy, Caesar's Entertainment Corporation stopped making full payment on its debt. The Las Vegas gamers paid a portion of what was due, anteeing up $18 million.  The question was whether or not the shortfall was a "credit event" under the credit defaults swaps (CDS)-in effect, a kind of default insurance-related to the Caesar's bonds.

To investors, the answer affected as much as $26.9 billion in CDS. To Professor Charles Whitehead, the legal answer was "no."

"There were advocates on both sides of the question-lawyers to argue yes, lawyers to argue no, and three panelists to make a decision," said Whitehead, the Myron C. Taylor Alumni Professor of Business Law and the director of the Law, Technology, and Entrepreneurship Program. "Under the circumstances, we found that a credit event had not occurred. That's the decision Wall Street stood by, affecting the largest amount of CDS ever involved in one case. Our conclusion was not binding in the way a court decision might be, but it was certainly precedential."

For their work on the panel, Whitehead, Andy Brindle, and Jeffrey Golden were named runners up in the Global Arbitration Review's award for the most important judgment of 2015. It was only the second time in the history of CDS that the International Swaps and Derivatives Association convened a panel to adjudicate whether a credit event had occurred. Whitehead was pleased to be chosen unanimously as a panelist for the Caesar's question.

"The panel was asked to interpret the language in the CDS contract," says Whitehead, who worked as a managing director at Citigroup and Salomon Smith Barney before joining the Cornell Law faculty in 2009. "Because this same language appears in thousands of contracts, it's important to understand what it means in order to enhance certainty and not inadvertently create problems for the other derivatives contracts that will be affected. The industry's decision to trust us to decide this multibillion dollar question was a great honor. Our coming in second behind the European Court of Justice demonstrates what a substantial decision it was."