March 20, 2010
More on Shaming Corporate Criminals: It's Complicated
Fines don't cut the mustard ... the people who run corporations aren't the people who have to pay the fine .... The folks who pay are the shareholders .... To the extent it's a good smack, it's the wrong face. The jail time alternative is interesting.... [But] the crime [often] can't be attributed to any particular individual .... It's a problem.
I have to admit that when I suggested fines and jail time in lieu of shaming I was thinking of cases where the crime could be attributed to a particular individual or set of individuals. But as Greenfield points out, that is often not the case because of the often inherent (Convenient?) dispersion of responsibility within the corporation.
This may all lead us to conclude that as we weigh the pros and cons of making it easier or harder to prove scienter or attribute corporate statements to individual defendants, the fact that erring on the side of protecting individuals makes applying effective sanctions more difficult should be part of the analysis.
March 19, 2010
When Just A Little Charity Is Not EnoughThe Illinois Supreme Court yesterday issued an opinion upholding an appellate court decision revoking a hospital’s charitable property-tax-exempt status. This ruling will lead to property tax liability in the seven figures. The decision has already prompted significant criticism (along with some accolades).
I don’t have a major problem with the outcome, although I am inclined to agree with concerns (as noted in Justice Burke’s concurrence and dissent) that the plurality decision improperly imposes a required level of care requirement and dollar threshold (i.e., at least more than “de minimus”) for the charitable exemption. The statute is silent as to a threshold, and as such it seems the court may have overreached here.
Regardless, this case will play a role in my future Business Associations classes. First, the case demonstrates the significant role subsidiaries can have on a parent and the importance of considering how one structures multiple businesses. Second, the case reinforces the separate nature of state and federal laws as they impact corporations (e.g., it dispels the common misunderstanding that a federal tax exemption automatically creates a state tax exemption). Finally, it demonstrates the heavy intersection between nonprofit and for-profit entities and that such interactions are anything but simple.
Afsharipour on the Financial Crisis
Afra Afsharipour has posted Integrating the Financial Crisis in the Business Associations Course: Benefits and Pitfalls on SSRN with the following abstract:In a time of economic turmoil, teaching business law classes can be both inspiring and precarious. The inspiration is easy to come by; in a class that students once took somewhat begrudgingly, they are now participating in impassioned discussions. At the same time, one cannot ignore the difficulties that can arise when discussing such tumultuous activity. The challenges of teaching about economic turmoil are magnified when teaching about a global financial crisis, the likes of which the world has not seen in many decades. It is often difficult to balance conveying the essential substantive material that should be covered in a class with the undertaking to help students comprehend the crisis, especially at a time when its causes and full effects are not yet fully understood. This essay provides a first-hand account of integrating the financial crisis in the Business Associations course and discusses the benefits and pitfalls in doing so.
Gordon on Global Financial Law
Richard K. Gordon has posted On the Use and Abuse of Standard for Law: Global Governance and Offshore Financial Centers on SSRN with the following abstract:Current trends in international legal scholarship have shifted from a paradigm of state actors working within recognized sources of international law to one that includes networks of domestic regulators that develop and implement best practices or standards on a global basis. The new paradigm can be seen in operation in the efforts by onshore jurisdictions (most of which are financial centers themselves) to restrict the activities of offshore financial centers. Onshore jurisdictions enlisted these regulatory networks, as well as key international organizations, such as the Organisation for Economic Co-operation and Development and the International Monetary Fund, to advance new standards for income taxation, prudential regulation, and money laundering in offshore centers. By 2005, offshore centers’ compliance with financial, regulatory, and money laundering standards was largely complete, while there was less success with income tax standards. The current financial crisis, however, has spurred renewed efforts, particularly with respect to the latter. An analysis of this experience suggests that the new paradigm should view regulatory networks in the context of a complex system of states and international organizations that possess the qualities of such regulatory networks. A system of global governance that includes both regulatory networks and these international organizations advances fairness and objectivity and, in particular, may protect weak states from the coercive power of the stronger.
Ben-Shahar and Posner on Contract Law
Omri Ben-Shahar and Eric A. Posner have posted The Right to Withdraw in Contract Law on SSRN with the following abstract:
European law gives consumers the right to withdraw from a range of contracts for goods and services; American law, with narrow exceptions, does not. Yet merchants in the United States frequently provide by contract that consumers have the right to return goods. We analyze the right to withdraw in a model that incorporates a tradeoff between allowing consumers to learn about goods that they purchase and protecting sellers from the depreciation of those goods. The right to withdraw - at least, as a default rule - has a plausible economic basis. We identify a nascent version of it in the well-known, controversial case of ProCD v. Zeidenberg.
March 18, 2010
Another scandal. Your choices are: (1) "Nothing to see here, folks. Move along." (2) "I love that few-bad-actors Kool Aid." (3) "Houston, we have a problem."
Apparently, Lehman cooked the books before its fall. Sigh. It seems like the paint will never get a chance to dry on my "Corporate Scandal Timeline" masterpiece. But should I really be surprised? Let's try the following thought experiment:
Mid-level exec A = maximize profit.
Mid-level exec B = maximize profit to the extent possible without breaking any laws, eroding long-term shareholder value, or creating systemic risk that puts the entire financial system at risk.
Which exec is most likely to get promoted?
Maybe Nick Naylor was on to something when he said in "Thank You for Smoking" [insert adult language warning]: “My job requires a certain... moral flexibility.”
Business Law Lecture: The United States and the Future Development of Global Competition and Consumer Protection Policy
Case Western Reserve School of Law is presenting the above today from 4:30 to 5:30. The lecturer is Prof. William E. Kovacic. The web page (where you can find additional information as well as a link to view the webcast) provides that:
The increasing interdependence between U.S. and foreign regulatory policy has demanded that U.S. competition and consumer protection authorities engage themselves more extensively in international affairs. This has required a significant adjustment in the orientation and perspective of the FTC. This presentation addresses the modern transformation of the FTC’s international programs and emphasizes their importance to the fulfillment of the Commission’s traditional competition and consumer protection responsibilities.
March 17, 2010
Cimino on Contract Law
Chapin Cimino has posted Virtue and Contract Law on SSRN with the following abstract:
For years, legal theory scholars have been obsessed with two dominant normative accounts: law and economics and individual rights. Recently, however, an old normative theory has resurfaced. Virtue theory, grounded in Aristotelian practical philosophy, has begun to receive attention from both historians and legal philosophers. In the past year, a small group of theorists has made a dramatic move: they have attempted to apply virtue theory to problems in contemporary law, in the form of a new “virtue jurisprudence.” Thus far, virtue jurisprudence scholars have limited their work to public law subjects. This article makes a substantial new contribution by extending virtue jurisprudence to a central area of private law: contracts.
Why contract law? This article contends that several difficult challenges in contract jurisprudence remain unresolved because neither law and economics nor rights theorists have been successful in accounting for the actual desires of contracting parties. For example, current theoretical frameworks fail to fully explain contract’s duality as both an economic and social institution. They fail to account for parties’ interest in both wealth maximization and justice. Virtue jurisprudence accounts for these critical dualities better than either law and economics or individual rights. Accordingly, this article suggests that virtue jurisprudence may reframe how both theorists and courts think about “the parties’ intent,” which is a foundational concept in any contract case.
This article takes on several tasks. It explains virtue theory in ways that show its relevance to contract law. It lays out a historical case for the importance of virtue theory to political liberalism and free markets. It explores several sites where current theoretical approaches do not fully capture contracting parties’ intent. Finally, it shows how virtue jurisprudence may offer a superior descriptive, and normative, account of intent-based doctrines in contract law.
Needed: A Study to Determine if Studies Are Effective
The financial reform bills under consideration in both the House and Senate include several studies to determine the likely effectiveness of a variety of proposals. In fact, the New York Times reports, the House bill, includes “a call for a study of how regulations affect small businesses, and another to examine the definition of ‘small.’”
Studies can be helpful, especially in rapidly changing areas; studies can also be used to delay making any changes. Often we are tempted to view such delays as “keeping things the same.” However, this is usually not an accurate way to look at it. As I often tell my students, the status quo is also a choice. Not changing a law or a regulation doesn’t mean the world will stay exactly the same. Instead, it means simply that the law or regulation (or lack thereof) stays the same.
It is hard to say what studies will make it into the final bill (if there is one) and if those studies will become law. However, if lawmakers are putting the studies in place out of fear that the underlying possible changes could be harmful, they need to remember that not making a change runs the same risk.
March 16, 2010
The informal, unscientific results ...
...from the poll of my Securities Regulation class are in: Among the 12 or so broad topics covered by Senator Dodd's regulatory reform Bill, the proposals with the most support concerned regulating OTC derivatives, making credit rating agencies accountable, and strengthening existing regulatory agencies.
Surprisingly, among the least favored reforms were the inter-agency council (to detect systemic risk) and the consumer protection agency.
Overall, it just feels so good to once again be discussing reform...
March 15, 2010
Curtain Call for Groucho...
As Josh Fershee noted yesterday, Senator Corker has expressed doubt that his Republican colleagues will have time to digest Senator Dodd's reform Bill (which, at 1200+ pages, would, by all accounts, teeter the most grand of coffee tables). Since we know how this partisan conflict ends, below is a simple refrain to be chanted by any Senator finding it too time consuming to have staffers read the Bill (but still knowing that it simply must be wrong):
Whatever It Is, I’m Against It, by Harry Ruby (music) and
Bert Kalmar (lyrics), performed by Groucho Marx in Horse Feathers (1932)
I don’t know what they have to say,
It makes no difference anyway --
Whatever it is, I’m against it!
No matter what it is or who commenced it,
I’m against it.
Your proposition may be good
But let’s have one thing understood --
Whatever it is, I’m against it!
And even when you’ve changed it or condensed it,
I’m against it...
Remarkably Capable Robots to Take Over Senate?The New York Times reports that Sen. Chris Dodd, chair of the Senate Banking Committee, is ready to introduce a major financial reform bill designed to address concerns raised by the recent financial meltdown. The bill is expected to be broad, dealing with everything from over-the-counter derivatives to credit cards and mortgages. The bill is also designed to have some cross-aisle appeal and will likely have provisions that should appeal to both liberals and conservatives.
Nonetheless, the article reports that Sen. Bob Corker (R-Tenn.) says everything is moving too fast: “If the senators can pass a bill of this substance out of committee in a week — a 1,200-page bill full of substance, that has a real effect on the financial industry — then the states who elect them might as well send robots to the Senate.”
I am not sure what this means. Is it bad to “pass a bill of substance” that is effective if you get it out of committee quickly? Did robots do the work; they just currently serve as staffers? Are these robots even old enough to serve under Article I, Section 3? (Thirty is pretty old for a robot – this would be from the TRS80/Apple IIe range, if memory serves.)
I appreciate careful deliberation of all legislation, and I certainly hope everyone involved is taking this legislation seriously. I have not seen the bill and am not at all sure how effective the bill would be, but I am, frankly, less concerned with the contents of this legislation than other quickly crafted bills. The bailout bills and the USA Patriot Act, for example, were drafted hastily in response to major unforeseen and unexpected (at least in terms of timing and magnitude) events.
Perhaps I am wrong, but I am inclined to believe much of the current reform bill includes a whole host of provisions that have been considered previously. For what ever reason, the timing was just not right for their adoption. Of course, extra time does not make these provisions an inherently good idea, but it is no reason to delay Senate consideration, either.
March 14, 2010
"Mission Accomplished" - Part Two
Last Friday, The Wall Street Journal exulted in the apparent "reprieve from regulatory reform." The full page editorial rejoiced in the specter of no new regulatory laws in 2010 "("That strikes us as good news"), declared Sarbanes-Oxley to be "destructive reform," and aggressively defended the status quo ("But today, regulators can already see essentially the entire market..."). In case you missed the partisan proclamation, here's a healthy portion:
....A year ago we were told a broad systemic reform had to pass quickly to rescue a teetering financial system, but that urgency has receded. Thanks to the Federal Reserve's extraordinarily low interest rates, banks have been able to make money riding the yield curve as they work off their bad loans.
Most banks have repaid their TARP money, and the Fed has been able to roll back its many new discount-window facilities...Credit markets continue to normalize, save for small business, which depend on small- and medium-sized banks that are still reluctant to lend to customers when they can make easier profits on the interest-rate carry trade. But this is not a problem legislation can solve....
Gee, wasn't the problem of imminent bankruptcy up and down Wall Street avoided through legislation?
Golly, isn't banks still not acting like banks a big problem?
And gosh, I had no idea things were back to normal. Unless "normal" entails 10% unemployment, savings accounts and CDs that pay less than 2%, and a dollar that fails in comparison to currencies around the globe.
Or that we no longer care that the stock market is down 25% from 2008, or that there will be more rounds of adjustable rate mortgage resets in 2010 and 2011 (leading The Washington Post to declare on the same day that 5 - 7 million more homes are heading for foreclosure).
Or that the same exotic instruments presently imperiling nations have yet to be regulated (or even understood).
Or that the Bailout will result in a shortfall exceeding $100 billion (and their chief benefactor lost another $8.8 billion in the fourth quarter of last year).
Apparently, we should take solace in the indisputable fact that the very largest banks are back to behaving like the very largest banks.
In sum, it was the WSJ landing on that aircraft carrier last week, like that misguided chief executive some years ago, equally indifferent to the present dangers and future hardships, but nonetheless relishing in the buoyant cheers of the isolated and protected few.