Business Law Prof Blog

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

Faculty Openings at University of Cincinnati College of Law

In faculty hiring news, the University of Cincinnati College of Law is looking for candidates to join their ranks, which already includes a lot of talented academics.  The school recently contacted me and asked me to post the following:

The University of Cincinnati College of Law invites applications from entry-level and lateral candidates for as many as two tenure-track or tenured faculty positions in a broad number of areas, including agency/partnership/unincorporated business associations,  civil procedure, commercial law, corporations, criminal law, criminal procedure, employment and labor law, evidence, immigration, international law, property, torts, and wills and trusts.  We also seek applications for visiting faculty positions in those areas.  All applicants should have a distinguished academic background and either great promise or a record of excellence in both scholarship and teaching. The University of Cincinnati is committed to a diverse faculty, staff, and student body.  We encourage applications from women, people of color, persons with disabilities, and others whose background, experience, and viewpoints would contribute to the diversity of our faculty. Contact:  Professor Verna L. Williams, Chair, Faculty Appointments Committee; University of Cincinnati College of Law; P.O. Box 210040; Cincinnati, OH 45221-0040.

Good luck to all those who choose to apply!

ECC

Does Federal Court Ruling on Privilege Create a Problem for BP?

As a number of sources reported, on June 29, Magistrate Judge Cott ruled that Gucci America could not assert the attorney-client privilege with regard to communications with Gucci's inside counsel Jonathan Moss in a trademark infringement case against apparel company Guess.  (Remember Guess jeans?) Cott found that, despite Moss's education and role at the company, the privilege was not available because Moss was not an active member of any bar.  (The court has not yet determined if work-product protections might apply.)  

According to the California bar website, Moss went to law school at Fordham and was admitted to the California bar in 1993; he became inactive in 1996.   Judge Cott determined that Gucci could not "reasonably believe" Moss was authorized to practice law when the company had done zero "due diligence to confirm his professional status."   Gucci had claimed that Moss was initially hired in a non-legal position, so it never checked his bar status.  The opinion notes that Gucci did not do so even when Moss was promoted to Director of Legal Services and, later, Vice President, Legal and Real Estate.  

For a valid claim of privilege, Judge Cott said, a company must, at a minimum, confirm their inside counsel is licensed to practice in a "some jurisdiction" where they were not suspended or otherwise facing discipline.  

This a good lesson for both would-be or current in-house attorneys as well as the corporations that hire them:  make sure in-house counsel is licensed somewhere if the company wants to be able to assert the attorney-client privilege. 

Either through custom and practice or through the Rules of Professional Conduct, states often allow in-house attorneys to practice in some capacity as long as they are admitted somewhere. For example, under the Model Rules of Professional Conduct, Rule 5.5 Unauthorized Practice Of Law; Multijurisdictional Practice Of Law: 

 . . . . 

(d). A lawyer admitted in another United States jurisdiction, and not disbarred or suspended from practice in any jurisdiction, may provide legal services in this jurisdiction that:

(1) are provided to the lawyer’s employer or its organizational affiliates and are not services for which the forum requires pro hac vice admission; or

(2) are services that the lawyer is authorized to provide by federal law or other law of this jurisdiction.

One thing of note here:  under this rule, that "other" jurisdiction must be another U.S. jurisdiction.  I raise this because I was thinking that BP (a UK company) is probably looking at a significant number of discovery requests in the near future, and I imagine their in-house attorneys at every level will be asserting privilege on some items.  If it goes to the top, BP's general counsel, Rupert Bondy, presumably has a number of communications he'd like to protect.  

According to BP's website, Bondy "is a member of the English Bar and the California Bar." He is a member of the Middle Temple Inn of Court in England, where he appears to be an active member. (Search here.)   However, according to the California bar website, Bondy was admitted to practice in California in 1991, but he has been inactive since 1994. 

I am not sure of the scope of any discovery requests (or the related viability of any such requests under the various filing courts' jurisdictions) that would actually make this an issue.  Further, under Judge Cott's analysis (where a license to practice in "any" jurisdiction was sufficient to asset privilege) it may not matter.  Finally, I imagine even general rules of comity might extend any available privilege protections. Nonetheless, in light of the extensive litigation pending for BP, it is a rather interesting consideration.  

--Josh Fershee

Missing Portugal

I remember a variety show sketch from the 1970s featuring famed actor Jimmy Stewart.  Stewart was finishing his first shift on the night desk of a police department.  The phone rang, and the iconic celebrity was informed that "Cincinnati is missing."  Stewart then showcased his trademark deliberate vocal style to read the names of everyone in the Cincinnati phone book to a partner completing a very lengthy police report.  As the duo finished the missing persons form days later, another phone call came in to announce that "Cleveland is missing."

I always respected that comedy premise - a whole locale gone missing because of one report.

Then I saw today that Moody's downgraded Portugal (see James Kanter's article in the New York Times).   The whole country's credit effectively slammed.  Blam!  Sovereign bond ratings down two notches.  The move could influence, among other things, IMF funding, the strength of the dollar, and the focus of future stress testing in Europe. 

Golly.  A whole country's economic fate in the hands of a few agencies who not too long ago told us that CDOs were prime investments.  Have we no better means of assessing a nation's economic strength?

Has global finance become so opaque as to cloak what a European economic commissioner today blandly referred to as 'pockets of vulnerability' ?

Does the ratings system know of no less disruptive or cryptic way of signaling national economic hardship than to publish "A1" in lieu of "Aa2"?   

And what about the pundits who said the worst of the lingering crisis was over?

Personally, I can't wait for this night shift to end.  When the phone rings next, we may learn that some other storied European country just went missing...   

---JSC, 7/13/10

BP's New Cap: A Better Solution or Flirting with Disaster?

BP has begun implementing a new process to stop the oil leak more completely. This process involved removing the old cap, which is allowing even more oil to spill into the Gulf, then replacing the old one with a new and better cap in the next five days or so.

I really hope this works, but I can't help but be a little disheartened by the Wall Street Journal's choice of accompanying photo. Let's just say I hope this isn't some inadvertent foreshadowing.

--Josh Fershee 

Today is the day (maybe)...

...that the Senate finally approves financial reform (possibly).  The move would end uncertainty over new regulations as old as the Crisis itself.

Unless political forces work to further delay the President's signature.

Sadly, somehow lost in all the lobbying, jockeying and grandstanding is one simple truth about Wall Street:  It loves certainty.  I have to believe that Wall Street firms will find ways to keep profits up regardless of the degree of new limits imposed.  Moreover, I can think of no industry more equipped with capital, lawyers and expertise to navigate the untested waters of reform.

Here's a thought for any filbusterers out there: The quicker the rules are set, the quicker firms can learn to live with them, and the greatest possible chance for market recovery.  As a reminder, the DJIA stood at 13,254 on December 31, 2007.  It closed Friday at 10,198.  Isn't it better for an incumbent seeking re-election to be able to point to a re-gaining of those losses?  Pass the Bill and move on.

---JSC, 7/12/10   

Hylton and Lin on Comparative Antitrust Law

Keith N. Hylton and Haizhen Lin have posted American and European Monopolization Law: A Doctrinal and Empirical Comparison on SSRN with the following abstract:

This paper focuses on the differences between Article 82 and Section 2, reflecting largely on the American experience. We start with a discussion of the American experience and use that as a background from which to examine the European law on monopolies. American law is more conservative (less interventionist), reflecting the error cost analysis that is increasingly common in American courts. The second half of this paper provides an empirical comparison of the American and European regimes. Although a preliminary empirical examination suggests that the scope of a country’s monopolization law is inversely related to its degree of trade dependence, the actual relationship between trade dependence and the scope of monopolization law appears to be an inverted U.

ECC