Business Law Prof Blog

Some Interesting Links

I'm on vacation.  So, the best I think I can do right now is pass on some links to posts I've come across this past week that struck me as interesting and that you, dear reader (Hi, Mom!), might have missed:

Over at the HLSFOCGAFR, John Ruggie has an interesting post about the linkage between corporate and securities law and human rights.

Prof. Bainbridge has links to couple of interesting reviews: (1) Macey's Corporate Governance: Promises Kept, Promises Broken; and (2) Steven Bank's From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present.

Finally, the Corporate Securities Law Blog has an interesting post about a Delaware Chancery Court decision that "applied a 'unified standard' to controlling stockholder 'freeze-out' transactions that differed from the standard applied in other Chancery Court decisions, urging the Delaware Supreme Court to resolve the conflicting approaches."

SJP

Amazing Statutes of Yore

The Detroit Free Press the other day reported on a number of old laws still on the books in the state of Michigan (article here).  

One city in the state still has a law banning homosexuals from bars. The city manager says there is no rush to remove laws such as this as long as the laws aren't being enforced. I completely disagree.  It's one thing to keep arcane laws that can't really impact everyday life (see, e.g., the city of Birmingham's (Michigan) law that makes it illegal to "[t]hrow rotten soap or animal horns on a street").  It is quite another to have laws on the books that codify a disdain for a specific group of people. 

It appears the state has quite a bit of work to do to modernize the statute books.  A few of my favorite illegal acts:

• To "indulge in pointless, useless wandering from place to place within a public area without any excuse for such roaming other than impulse."
• Send a postcard that annoys someone.
• Paint a bird and sell as a parakeet.
• Loiter in the morgue.

One city even makes it illegal to "[n]eglect your wife."  Not necessarily a good law, but truly outstanding advice.  

--Joshua Fershee

BP's "Research"

Interesting story here about BP's efforts to ["contain"? "capture"? "cap"?] academic research on the oil spill.

SJP

Citizens United Teaching Proposal

Atiba Ellis and Jena Martin-Amerson of the West Virginia University College of Law are seeking collaborators for an interdisciplinary, cross-institutional teaching project focusing on Citizens United.  Here is an excerpt from their proposal for a panel presentation for the upcoming SALT Conference:

At the conference, we will present the results of a semester of teaching the Citizens United case in our respective fields of Corporations, Election Law, and Labor Law.  We will discuss how we first took the opportunity to have a collaborative conversation among ourselves as professors to compare our disciplinary-specific analyses of the Citizens United case as well as elaborate on points of common reference which cross our disciplinary boundaries.  Second, we will discuss how each of us crafted an approach in each of our individual courses.  Third, we will reflect on our discussions of the Citizens United case in a cross-disciplinary forum at our law school and the techniques we used to generate discussion and focus on the power relationships created and reshaped by the decision.

Please contact either Prof. Ellis or Prof. Martin-Amerson if you are interested in finding out more about this project.  Though I will not be teaching Corporations this fall, I plan on participating in at least one "distance learning" event, contributing to the project's proposed faculty blog, and encouraging my students to visit and contribute to the project's proposed student blog.

SJP

Another Oil Spill, Another Slow Response

I'm traveling in Michigan to see family, and I was welcomed to my beautiful birth state by another oil spill (see here).  This one, too, it seems is facing criticism of inadequate resources.  More to follow, I'm sure.

--Joshua Fershee

The SEC expands the comment process...

...perhaps first and foremost to ease the burden of the massive rulemaking that the financial reform foisted upon it.  See today's NY Times ("SEC Expands Process For Public Comments On New Financial Rules" by Edward Wyatt) for details.

Personally, I don't think the timing of the public's comments is determinative - a wary world sounded alarms about credit rating agencies and abusive short sales long before the related reforms were finalized.  The trick would seem to be to crystallize and voice public outcry contemporaneously with polemic Commissioner votes.

In any event, the SEC Chair's comments on the liberalized rulemaking process can be found here:  

http://www.sec.gov/news/speech/2010/spch072710mls.htm.

---JSC, 7/27/10   

Military Contractor's Trial: Stock and Awe

The New York Times today provides an outstanding (and appalling) example (allegedly) of misappropriation of funds, as well as outright fraud and theft. The trial of a former executive for a company that makes body armor for the U.S military provides this: $6 million in items that are claimed the executive billed back to the government  

included . . . university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.

My favorite part: The defendant "has not disputed that many of his personal expenses were paid for by the company, but his lawyers have maintained that the practice was authorized."

Oh, and there was this small additional claim of stock fraud that apparently earned the executive and a cohort $190 million through false claims about the company's success (followed, of course, by a price increase in the stock and a stock sale by the two executives).

This should prove interesting, and regardless of the outcome, probably offensive.

--Joshua Fershee

The SEC reaches for life settlements

In 1996, the DC Circuit halted the SEC's attempts at reaching "viatical settlements" (i.e., fractionalized, third party interests in life insurance proceeds) through the Life Partners decision.  While some Circuits saw stalwart SEC staffers occasionally attempt to bring such agreements within the securities laws, it was primarily State actions that regulated the field for years to come.

Last decade, over a dozen States adopted versions of the Uniform Securities Act defining securities to include viatical settlements.

Last week, the SEC released a staff report concluding that life settlements (i.e., a sale of a policy/pool of policies to a third party for a lump sum of cash) are securities.  Among other things, the Report calls for Congress to amend the definitional sections of the federal securities laws to include such vehicles.  See http://www.sec.gov/news/press/2010/2010-129.htm.  Although the SEC Chair's touting of the agency's desire to "get out in front of" this ancient issue is a bit ironic, the aggressive stance by the Commission would nonetheless appear to be a positive and overdue protection for investors.   

---JSC, 7/26/10   

Financial Crisis Timeline Link

Over at the Akron Law Cafe, law librarian Lynn Lenart has posted a link to a useful financial crisis timeline.

SJP

Conflating Markets and Source Preferences in the Energy Sector

Forbes blog about Business in the Beltway today discusses energy policy, and quotes an energy policy analyst at the Competitive Enterprise Institute, who says the government should get out of energy policy. Although I don't agree fully that such a position is sensible or feasible, the argument starts out reasonably enough. He says the United States should, "Get the government out of the electricity industry." Deregulation is certainly an option, and reasonable people can think that's the best policy.

However, one also needs to keep in mind the issue of stranded costs and who pays them. Utilities have invested money -- often shareholder money -- with an expectation of a return based on the current market structure. Without a process for assessing those already committed costs, it would punish the utilities and their shareholders. Full-scale deregulation might improve the market (and that's a significant "might"), but it's not as simple as just stepping out of the way, as we saw in the 1990s when partial deregulation of the industry took place at both the state and federal levels.

Furthermore, the analyst then goes on to argue that renewable energy incentives should stop. He argues that if people are “so confident that renewable energy can compete on the merit of price of alone, then let’s revoke the mandates.” It's fine to say government should get out of the way, but this implies that oil, gas, and coal companies shouldn't get any incentives, either. It's often forgotten that the incentives in those industries far outweigh renewable industry incentives.

Removing renewable incentives in the name of free markets means we should remove ALL incentives related to energy sources. Only then can we have any idea what "the market" actually wants. Otherwise, this is simply a market-based argument cloaked in a source-based argument (e.g., a preference for coal over wind). And, while perhaps valid, that's a very different argument.

--Joshua Fershee

Do We Need More Bondholder Empowerment?

Prof. Bainbridge offers a nice summary of some of the blogosphere's responses to Dodd-Frank's shareholder empowerment provisions.  The running critical theme is the disconnect between trying to solve a problem of excessive risk-taking in pursuit of short-term shareholder interests by giving more power to shareholders.  Perhaps we should be empowering bondholders instead.

SJP

Prof. Klepper on "The CEO's Boss"

I am posting the following on behalf of Prof. William Klepper.

SJP

Time for a Social Contract and Tough Love in the Boardroom

 It is time to go beyond the employment agreement between a CEO and the Board in Corporate America. Every CEO and his/her board should have a social contract. The first element of that contract is a common commitment to "what they stand for as an organization." In my book, The CEO's Boss: Tough Love in the Boardroom (Columbia University Press, 2010) I provide examples of companies with clear credos, such as the revitalized Tyco which has risen from the ashes as a result of following its social contract.

 But contracts alone are not enough to guarantee satisfactory performance; tough love is needed for a CEO and a Board to be an effective team. The CEO's Boss lays out how tough love in the boardroom may have prevented Lehman's ultimate collapse in the fall of 2008. My Integrated Leadership Model, based on my teachings as a Professor of Management at Columbia Business School, synthesizes the research on an effective CEO's agenda, practices, and style at each phase of the business cycle.

 Finally, the current recession and business failures have brought renewed attention to corporate governance practices. In The CEO’s Boss I tell you how I foresee the relationship between boards and CEO's to be different in the future.

A View from the North on the Housing Market

I'm in Banff for the Rocky Mountain Mineral Law Foundation's Annual Institute (a great program if you're interested in natural resources law and business), and in addition to enjoying stunning views, I have been looking to the local paper and websites to access my news.    

The Globe and Mail's Business website had two story briefs that caught my eye, both of which were U.S.-based stories.  

First, there is a story about U.S. housing construction concerns, which notes that some economists are predicting a "double dip" (that's bad) if the U.S. job market doesn't rebound quickly.  There are some economists who disagree that the situation is that dire, but there's no doubt the market is down following the recent expiration of the federal tax credits for home purchases.

Second, the site reports on the New York Times' coverage of mortgage lenders who are now taking a "conservative view" of potential borrowers who are pregnant.  Lenders are now concerned that the pregnancy indicates that a parent won't go back to work, making the loan too high.  

I'm all for lenders showing some sense and making sure that loan approvals are for realistic amounts, but if some mortgage brokers are using pregnancy as an automatic trigger for disapproval this is a bad idea. It's one thing to be conservative; it's quite another not to do your job of assessing risk.   Beyond the moral and ethical implications, it's bad business.  

Sitting here, looking at the mountains, I can't help but wonder what other ill-founded and illogical fear-driven policies are further slowing the recovery.  

--Joshua Fershee

A new, untested bureaucracy? Oh Lord, I hope so...

The Financial Reform passed despite embarrassingly partisan opposition.  Senator Shelby decried the length of the law (!), the likelihood that American markets would become less competitive, and the creation of "unaccountable" bureacracies."  One would think that a two-year head start at opposition would yield a more meaningful cry of protest.

Clearly, reform was inevitable.  A New York Times piece from last week aptly summed up the era triggering the widespread change as follows:

"Usury laws were set aside. Banks were allowed to expand across state lines, sell insurance, trade securities. The government watched and did nothing as the bulk of financial activity moved into a parallel universe of private investment funds, unregulated lenders and black markets like derivatives trading."

Equally clear is the fact that administrations staffed by both political parties had a hand in the 30-year rush to deregulate.  What has yet to become as manifest is the need for both parties to work together to restore an equilibrium.  Here's a worthy starting point:  Federalizing all mortgage laws (and, in turn, mortgage terms).  The highways of Long Island are littered with billboards STILL proclaiming the availability of "no income check" home loans.  If these precarious practices continue as in the years leading to the Recession of 2008, the electorate won't just be universally accepting Washington, D.C. as a catalyst for change - it shall likely demand a strong government hand in preventing retail lending foolery altogether.

---JSC, 7/20/10   

The SEC and monies for lawyering up...

The year was 1991.  Or 1990.  Anyway, PLI was offering dueling glimpses of the prosecutorial frenzy over insider trading.  The conference's keynote panel featured lawyers for a broker-dealer who argued that a legitimate enterprise had been squeezed into submission by the asset forfeiture provisions of the RICO law; responding prosecutors highlighted wiretaps disclosing boasts such as "Welcome to the world of sleeze."   At the most confrontational moment, a storied SDNY judge took the floor and warned the SEC, "Cool your jets."

It was great theatre, and prescient legal commentary.  For perhaps gone are the days when securities regulators can dance in and out of the dictates of criminal procedure.  Witness a recent SDNY decision, SEC v. FTC Capital Markets Inc, 09 Civ. 4755 (June 29, 2010).  In granting the defendant's motion modifying an SEC injunction to permit an advance of legal fees, the Judge stated as follows:

"This Court concludes that [petitioner's] claim to the frozen funds is governed by the standard set forth in Monsanto and Coates.  [Petitioner] has demonstrated - and the Commission does not dispute - that without advancement of the frozen funds, she will be unable to to pay defense counsel's fees in the criminal action.  Under such circumstances, the Commission is required to demonstrate that the frozen funds are traceable to fraud...Here, there has been no finding that the forzen funds are traceable to fraud..."

In rejecting the Commision's reach for a restrictive standard possibly exceeding precedent (i.e., precluding the release of funds "whether or not the funds are tainted by fraud"), the Judge disregarded the SEC position at oral argument, tersely stated as "As a matter of fact, it doesn't make sense to treat one pile of money different from another pile..."  The decision countered, "In determining whether funds are the proceeds of fraud or are traceable to fraud, however, it may in fact 'make sense to treat one pile of money different[ly] from another pile.'" 

Such judicial brakes do more than "cool the jets" of the SEC:  If the fungible money debate continues and escalates, decisions like FTC Capital Markets (and the aggressive SEC stances therein) may effect 6th Amendment case law in toto.  

---JSC, 7/19/10

   

Studying Dodd-Frank's Haircut

According to an analysis of the Dodd-Frank financial regulation bill (PDF here), the law firm Davis Polk estimates that there will be sixty-seven studies or one-time reports under the legislation. The report also finds that there are twenty-two recurring reports, and at least 243 mandatory rulemakings.  The Davis Polk summary is more than 120 pages in length, giving an idea of just how much there is in the bill.  

I'm fascinate by how many proposed provisions turned in "studies."  Here's a quick look at one study that jumped out at me.  "Sec. 215. Study on secured creditor haircuts." 

(a) STUDY REQUIRED.—The Council shall conduct a study evaluating the importance of maximizing United States taxpayer protections and promoting market discipline with respect to the treatment of fully secured creditors in the utilization of the orderly liquidation authority authorized by this Act. . . . . 

FIrst, have we all become so well-versed in financial jargon that "haircut" doesn't need any explanation? I suppose in context it is fairly clear, and the language has to do with a study, so it's not as though this is a regulation that will be applied to any specific party. Still, would it be so terrible to explain that the study will consider whether the government should retain a certain percentage of secured creditors' claims in times when the government spends funds in a resolution action?

Second, do we really need to study the "importance of maximizing United States taxpayer protections?"  It seems to me that should always be part of the equation. Politicians may disagree about what maximizes protections for taxpayers, but I would hope that would be deemed important all the time.  For example, a "freer-market politician" may argue that providing government funds should be done with limited strings attached because it is more likely to hasten recovery, thus benefiting taxpayers and justifying the expense.  (Note: I say "freer market" instead of "free market" because it seems to me a true free-market politician should oppose a bailout in virtually all circumstances.)  In contrast, a more pro-regulation politician may think significant restrictions on banks and a significant "haircut" (such as treating 25% of secured creditors' claims as though they were unsecured) if the government funds a resolution action would protect taxpayers by promoting market discipline.  Both have legitimate, if not correct, viewpoints, and both hopefully consider what's best for U.S. taxpayers when they choose their positions.  

Ultimately, I suppose more time spent negotiating language on this provision probably wasn't worth it.  I'm just not sure funding sixty-seven studies was either.

--Joshua Fershee

Financial Reform and Other Stuff

Steven Davidoff has read all 2,300 pages of the financial reform bill.  I have not.  So, go here to see what he thinks.

Over at Concurring Opinions, Frank Pasquale has nicely pulled together some other interesting reactions here.

And, the Glom will be hosting a Masters' forum on the legislation next week.

On a perhaps not completely unrelated point, go here for Kenneth Anderson's thoughts on a new edition of Leviathan.

SJP

Goldman Sorry SEC Was Upset

Goldman and the SEC have reached a $550 million settlement (download PDF here) related to the ABACUS 2007-AC1 CDO, a package of mortgage securities. According to the Goldman site:

The firm entered into the settlement without admitting or denying the SEC’s allegations. As part of the settlement, however, we acknowledged “that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”

Of course, and reasonably so, Goldman did not admit or deny any of the SEC's allegations. Upon my first read, I was thinking the above statement was a fairly significant concession from Goldman, but after further review, this is a little closer to, "I'm sorry you were offended" than " I am sorry I offended you." That is, it's not, "We really should have include the Paulson information because it was important."  Instead, it's, "Now that we have to deal with this, I wish we had included the Paulson information."

For example, let's look at the actual changes Goldman agreed to make.  In the consent para. 7, Goldman agrees to

ensure that processes are in place so that written marketing materials (as defined below) for mortgage securities offerings do not include any material misstatement or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 

(b) Role of Internal Legal and Compliance

1. Marketing Materials. All written marketing materials (i.e.,investor presentations or "flip books," term sheets, and offering circulars/prospectuses) used in connection with mortgage securities offerings must be reviewed by representatives of Defendant's Legal Department or Compliance Department. The review process shall also include a review of the relevant memoranda . . .  as part of the approval process for mortgage securities offerings and all other material terms of the proposed transaction. Defendant shall establish and maintain a centralized process to record these reviews through recordation and retention of:

a. The name of each person in the Legal Department or the Compliance Department who reviewed the materials;

b. The date of completion of review; and

c. A list of the materials reviewed.

Notice, then, that there is nothing related specifically to disclosure of other potentially interested parties or of other Goldman clients who may be taking a contrary position. Goldman has not agreed to stop the practices it used before; they have simply apologized for not doing it in the ABACUS case and agreed to add some additional layers of review in the future.  Presumably, because the law requires it, Goldman already was of the view that they worked to make sure they did not "include any material misstatement or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading."  Even more important, I am sure Goldman still believes that the Paulson omission was not a material misstatement or omission, just a "mistake."   As I have noted before, I think they may be right under current law, even if it is shady.

This settlement has value for the parties in that the SEC has been generally looking bad and needed a win. For its part, Goldman looked terrible after the details of the ABACUS/Paulson transaction became public and stood a lot to lose a lot, regardless of the outcome, if the process dragged out too long with the SEC. Now both the SEC and Goldman can move forward.  Beyond that, I'm not sure much will come from this. It certainly didn't provide any answers to the substantive questions raised by the SEC's complaint.  Then again, I suppose that how it is with most settlements.   

--Joshua Fershee

The Loss of Retail Investor Confidence

An article in Monday's Wall Street Journal points out that retail investor confidence in the market has reached a meaningful low.  Here's an example of the sentiment:

"In the military, you learn that you want people you can respect, trust—who have integrity," Mr. Potyk says. "Over the last five years or so, I find that our financial institutions have no shred of the character I describe."

In a forthcoming article, I argue that part of the problem may be how routinely judges characterize the lies of corporate executives as "immaterial."

SJP

The "Problem-Solution" Dance of Corporate Law

Holman Jenkins wrote an interesting piece in the Wall Street Journal yesterday about the inherent tension between the corporate shareholder wealth maximization norm and the systemic risks posed by too-big-to-fail banks.  Here's how I might add this problem to my usual "problem-solution dance" introduction to my Corporations class:

• Problem: Private investors won't finance necessary but risky ventures for fear of incurring personal liability as partners.

• Solution: Separate ownership from control via the corporate form, thus providing the theoretical justification for limiting investor liability to the amount invested in the venture.

• Problem: Investors remain wary of investing because now they are confronted by the agency problem, which arises when there is a high degree of risk that the interests of the managers of assets will conflict with the interests of the owners.

• Solution: Impose fiduciary duties on managers (and regulate securities markets) to support investor confidence.

• Problem: Being successful in business requires taking risk.  Imposing trust-like fiduciary duties on managers will stifle the risk-taking diversified investors desire.

• Solution: Insulate managers from liability for business decisions via doctrines like the business judgment rule and a narrow interpretation of securities laws.

• Problem: Even if the balance struck above is generally satisfactory (and this is what I tell my students we'll spend the majority of Corporations trying to figure out), some corporations, like private banks, may pose systemic risks that make our usual willingness to tolerate some percentage of business failures unacceptable.

• Solution: We're working on it.

SJP