Business Law Prof Blog

Levitt's Call for a Unified SEC/CFTC

Arthur Levitt's editorial in the Wall Street Journal today called for, among other things, a unified SEC/CFTC.  It sounds good but assumes that government agencies work better than they do.  We are better off having two agencies that compete with each other and keep each other honest, just as we are better off with state attorney's general keeping the SEC honest.  One federal agency with control over all securities market regulation and prosecution is a recipe for one agency that is self-righteous and inflexible.  What we have is better than what he wants.

OffShore Trusts

The unexpected benefit of the 370 page report on tax scams by the Senate Permanent Subcommittee on Investigations is a detailed exposition of the use of offshore trusts, not only to avoid taxes, but also to avoid SEC reporting and disclosure obligations.  This has been going on for some time and the tax report has put a Congressional lens on it.  The SEC rules have always contained "look-through" standards of application:  ownership may be direct, "indirect" or "beneficial."  Indirect ownership depends on control and influence.  It is had to assess control or influence over offshore trusts.  Lawyers set these up and have for years, using offshore entity structures to obscure reporting and tax obligations.  Perhaps the Congressional focus and disgust with these entities will tighten up prosecution of offshore trust abuses and the prosecutions should include the lawyers that set them up.

Conflicts, Conflicts

Investment banks are now in the private equity business and the hedge fund business; private equity funds are also starting hedge funds; hedge funds are starting private equity funds.  The reason is more than just financial diversification.  These financial operatives develop valuable information and are attempting to share this information across investment vehicles.  But there is a problem -- conflicts.  Some information can be shared legally, some cannot.  These multi-purpose investment vehicles will push and perhaps occasionally cross the boundaries of what information can be shared internally. 

An investment bank earns fees underwriting and consulting.  So doing, it gathers valuable information about clients.  Can it use the information to invest in clients?  to speculate in client's stock?  to invest in competitors of the client?  to itself compete with the client for other investments?  A private equity fund often takes a role in the management of clients (often a director's position); can it use the information for short term speculation in client stock?  The answers are complex.  Some depend on the nature of the information; others depend on the nature of the client's industry; finally, others depend on the procedures used to invest on the information.  Will financial institutions respect the limits??  They all will profess to do so, but pressures to slide up to and over the line a bit will be very, very strong. 

Senate Report on Tax Cheats: Lawyers and Plausible Denial

A Senate investigation of tax fraud has concluded that tax cheating is rampant and that lawyers and accountants facilitate the fraud.  As with options backdating, lawyers are in an era of "plausible denial."  Here is how it works.  A lawyer is asked for an option on a scam, for draft documents on a scam, or for disclosure documents on a scam.  The lawyer does the work under an "assumption" of facts that give an argument for legality;  the assumptions are provided by a well-educated (and often well-schooled) client.  In a tax scam, for example, the lawyer issues an opinion on legality assuming that offshore transactions had "real economic" substance when in fact the transactions are shams.  The assumptions are carefully articulated and formalized in a written record.  But the assumptions are false and ignores substantial suspicions that they are false (deliberate ignorance).  Offshore transcations between multiple entities in tax havens, for example, are rarely legit, but the lawyer assumes that they are.  When the assumptions prove to be false the lawyer says, very simply, I gave services based on assumptions that I was given.  I did not participate in the scam.  This should no longer be a defense because lawyers have abused it.  Lawyers should have a "red flag" duty to investigate their "assumptions," just as accountants do when a deal smells.  The failure to investigate should be an ethics violation.  A part of the Senate Report's recommendations may make this a legal rule; the Report recommends that aiding and abetting statutes apply to lawyers in tax scams.  The definition of aiding and abetting may, and ought to, include a definition of deliberate ignorance.    

Link below:

Tax Haven Abuses: The Enablers, The Tools, and Secrecy

"Short-Termism"

There is a renewed political campaign for freeing corporate managers from shareholder oversight.  It is called "short-termism" and it is bogus.  It is seductive, as many catch phrases are: Our managers are managing for the short-term and not the long-term, hurting their own companies.  The solution?  Leave managers alone and let them run their companies without shareholder interference, read accountability.  Where does the data come from on short-termism??  Manager surveys.  Managers who know a good thing when they see it: "Oh yes, I would make better decisions if I was not accountable."  Why the new push??  Shareholders are figuring out how to use the voting machinery to attach executive salaries and the SEC is allowing the increased use of Internet proxies.  Main Street is establishing a policy base for re-asserting restrictions on shareholder voting (director elections every five years anyone??).  The seductive power of the claim is evidenced by a testimony of new believer William Donaldson, the old SEC Chair.  He was always an easy mark, however.

Executive Signing Statements

The arguments over the ABA's study on signing statements are proceeding apace.  I suggested in an earlier filing that Bush's transparency in the use of such statements was a positive not a negative.  The ABA condemned Bush's overuse of the technique despite its long history and recent use by President Clinton.  Clinton's legal counsel, Walter Dellinger, now a Duke law professor, has an editorial in the New York Times stating that, yes, I wrote a 1993 memo stating that Clinton has the power to use signing statements, but that overuse is abuse.  He notes a few paragraphs in his 1993 memo on restraint.  He, like other Clinton folks, is attempting to walk a fine line; Clinton's use of signing statements was good, Bush's use is bad.  What is missing, of course, it a clear definition of abuse other than one that depends on who is in the White House. 

I am suspicious over anything signed by the Yale Dean now days. [He was a signer of the report.] When academics get sanctimonious it is usually trouble.  The Yale Dean pulls the self-righteousness trigger very fast as is evidenced by his post-argument press conference in the case on military recruiters in law schools.  The court noted that high school students should know better than to make the arguments the Dean favored and he made them with great self-righteousness.