January 16, 2008
Tough Times Mean More Pressure for Government Preferences and Setasides
Two items of interest are in the news. First women are upset that the Small Business Administration announced rules that require at least 5 percent of all federal government contracts to go to female "controlled" companies. Controlled companies include those managed by women or owned 51% by women. The women wanted more, 8% perhaps. Small business owners are upset that the agency did not increase the present 23 % set aside for small business; they want 30%. Second, state pension funds are participating in the bailouts of banks that employ people in their states. New Jersey's pension fund is investing in both Citigroup and Merrill Lynch (along with governments of China, Korea, Singapore, Kuwait and others) to shore both up the banks' capital. Many states put pressure on state investment funds to invest in "local businesses."
This is all bad. First, the subsidies pile up and hard to eliminate when the reasons for them wane. Why not Latino set asides? to geographic setasides (is the suffering Midwest getting its due in contracts?)? Second, investment returns or quality of contracts is given a back seat to social engineering. Give grants or loans to favored businesses -- they are more transparent and do not affect the healthy competition that maximizes the quality of the product sought (investment returns or product quality). Third, China's investment fund has done this for years. Is this the example we want to follow?
Stoneridge v Scientific Atlanta Decided
The Supreme Court, very predictably to anyone who read the arguments, decided 5-3 in favor of the defendants in Stoneridge. Justice Kennedy, the author of the earlier Central Bank of Denver opinion, wrote the majority opinion affirming the logical extension of the earlier opinion. Pity. The big winners are lawyers and investment bankers. The largest of our financial frauds are now so complex that they must involve lawyers who write and file the paper and investment bankers who fund and underwrite the deals. These professionals, if they participate with intent but do not attach their names to any of the fraudulent statements known to the public markets are free from liability in private suits. The SEC can still sue them and seek substantial civil penalties but the SEC has traditionally focused on the CEOs and CFOs who are the primary violators. There is an unimportant sense in which lawyers are losers however. It is less likely that they will have a BarChris style opinion to hand out to young associates and clients as a defense to the pressures from clients to go along with clients' questionable activities. The pressure to generate billable hours plus the strategy of documented plausible denial ("I only filed X based on assurances and did not know of the fraud") and the full plate of the SEC enforcement office may mean that lawyers will continue to be too willing to not ask questions when a lucrative fee is available. The claim that such an action would generate more "strike suits" has some merit but it is limited given the need to pled specifically and prove scienter, which would be signficantly harder in aiding and abetting cases than it is now in primary violator cases.