Business Law Prof Blog

On Any Given Saturday

If Stephen Bainbridge and Gordon Smith can blog about football . . . well, you know where this is going.

The Akron Zips start their conference schedule tonight against Northern Illinois.  We are currently 0-4, and some people are worried we might not win a game all season.  But as I type this we are undefeated in the conference.  So, what's the point of being a fan if you don't believe in miracles?

SJP

Sloppy Mortgages = Sloppy Foreclosures

The New York Times reports that problems with the housing market will continue, this time as major questions emerge about the process used to forclose on thousands of homes.  According to the Times,

In depositions taken by lawyers for homeowners, executives at GMAC and Chase said they or their teams signed 10,000 or more affidavits and related documents a month. That did not give them time to review the cases.

I'd like to think that in the wake of the initial housing crisis, lenders would be taking a more serious look at all their procedures and trying to get them right.  Unfortunately, it appears they are still using many of the same sloppy tactics that helped get us into this mess in the first place.   

--Joshua Fershee

Does a Corporation Have "Personal" Privacy Rights?

The Supreme Court will try to answer that question when it hears the case of FCC v. AT&T.  Prof. Bainbridge is not optimistic that the Court will do a good job of clearing up many of the lingering questions regarding the constitutional rights of corporations.  If you're planning on betting on the outcome, I'd just like to note that the Citizens United majority equated corporations with "associations of citizens" multiple times.

SJP

Foolishly Representing Yourself Is Also Representing a Client

The North Dakota Supreme Court yesterday in a relatively rare spilt decision ruled that an attorney representing himself (pro se) is representing a client for purposes of North Dakota Rule of Professional Conduct 4.2:  Communications with Person Represented by Counsel. Disciplinary Board v. Lucas, 2010 ND 187 (2010). In the opinion, the court settled a split of authority on the issue. That is, there is at least one case holding that an attorney acting pro se is not representing a client when that client is himself for Rule 4.2. Pinsky v. Statewide Grievance Committee, 578 A.2d 1075 (Conn. 1990). 

In Lucas, the context is an attorney litigating a dispute with his condominium association board. The disciplined attorney made several strong statements directly to board members who were represented by counsels.  For example, here are a couple excerpts from two of his letters, as noted in the opinion:  

If we can't resolve our differences soon I will correspond with our owners to advise them of the actions taken by our Board which are contrary to their best interests and I will start two or three new lawsuits. 

. . . .

If the Board continues to encourage and permit [their attorney] to maliciously, vindictively and cruelly litigate and harass me I will have to shift to the same tactics and practices. There are many lawsuits I could bring, and there are internet sites and books on how to be a 'bad neighbor.' I may have to replace Tom as the 'neighbor from hell.'

Two big takeaways, as far as I am concerned.  First, when you send letters like this, it's rare that something good follows.  Threats and hyperbole may work from time to time, but it's rarely, if ever, the best tactic.   

Second, for lawyers in business, take note.  Representing yourself may serve your purposes from time to time, but you need to know that in many (if not most) jurisdictions you could be subject discipline for representing yourself if you continue to communicate with others after they are represented by counsel.

This rule, it seems to me, is right. Plus, despite a constitutional right to take yourself as a client, it does not mean you aren't a fool for doing so.  See, e.g., People v. Watts, 173 Cal. App. 4th 621 (2009) ("We review the entire record de novo to determine whether a defendant validly exercised the constitutional right to have ‘a fool for a client.’").   

--Joshua Fershee

Corporations and Constitutions

I've been struggling for a few years on an issue - how state corporate law interfaces with state and federal constitutional law, namely the Contracts Clause.  The Contracts Clause on the federal level reads "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

In one of the first major Supreme Court cases, Darmouth College v. Woodward, dealt with the interface of the Contract Clause with state corporate law, invalidating the state's changes to the corporate statutes that were contrary to Darmouth College's original corporate grant by George III.

Florida has reserved the right in their corporate statutes that if you create a corporatation in the state of Florida, the state may change the law and you agree to comply.

 

jmm

Another Review of Wall Street - Money Never Sleeps

I wanted to follow up on the earlier review of the sequel to Wall Street.  For me, the original is a special movie, along with OPM being one of the more influential cinematic reasons why I became a corporate and securities lawyer.  So the sequel I believe is a proper topic for this blog.

As Prof. Colesanti pointed out, in the original movie the regulators where the 800 lb gorilla that wasn't on screen, but there precense was felt.  They make their enterance much like Orson Welles in the Third Man late in the film.  And correctly so, in this film at best the regulators are impotent to stop the coming financial crisis.

But I think this is where Oliver Stone gets it wrong.  Like so many others, Oliver Stone suggests that the 2008 financial crisis on which the movie was loosely based was caused by the lack of regulation.  But Stone fails to bring up any reason why the housing bubble existed in the first place - whether you believe it to be the requirements that banks had to lend to subprime borrowers, that housing was the only viable investment after the internet bubble burst, etc.  And then the linkage between the housing market and what the investment banking houses were doing is missing an adequate explantation in the film.  Lastly, Stone makes the underlying assumption that making money was bad.  So the investment banks are hedged. It's a fact of life that some investors take both sides of the market.  Stone's treatment of the subject was a little juvenille.

For the rest of the movie, the acting is less than stellar.  The plot, predictible and thin for an Oliver Stone film.  Charlie Sheen's cameo was wasted.  Even the use of bubbles as a visual element in the film is hackneyed.  The best aspect of the movie was the incidental music.

jmm

SEC Chiefs Past and Present at Fordham

Last night, the Fordham Corporate Law Center sponsored a panel on the history and direction of the SEC.  For roughly 75 minutes, current Commission Chair Mary Schapiro and former chairs Richard Breeden (1989-1993) and Harvey Pitt (2001-2003) spoke on topics such as SEC staffing, penalties, and challenges.  

While guarded in his suggestions, Pitt was pointed in his critiques, noting that the far-reaching Dodd-Frank Act may have "set up" the Commission for a fall.  Likewise, the famed securities litigator and former SEC General Counsel stated that it was unfortunate that Congress stopped short of allowing the Commission to self-fund.  Near the end of his remarks, he cautioned againt investigations proceeding for too long, perhaps a veiled reference to the Mark Cuban case (which shall now proceed on facts over 6 years old).

For his part, Breeden was outspoken and verbose, sharing anecdotes about penalty negotiations and the insider trading case behind the notorious "naked, homeless and without wheels" quote once attributed to the SEC's penalty program.  Breeden took shots at Treasury (which was described as having the luxury of more staff), the enforcement efforts of the States (which were characterized as meddlesome and self-interested), and the powers behind the Basel banking standards (who were only half-jokingly described as having gravely damaged wordlwide banking).  He also candidly opined that "It's a bad day [at SEC Enforcement] when no one gets sued."                 

For her part, the Chair defended SEC structure and hiring, explaining recent efforts at spending more on staff education and vesting greater discretion with Enforcement attorneys (of particular note is the abolition of the SEC's traditional "Branch Chief" position).  Ms. Schapiro explained that the SEC has expanded its comment process, leading to over 2000 comments on the fiduciary standard harmonization alone.  She also addressed the painful aftermath of Dodd-Frank:  The SEC will be forced to make rules or conduct studies over 100 times.  Thus, Ms. Schapiro explained that priorities will delay consideration of any changes to mandatory arbitration while pointing out that, in general, there will be continued "reliance" on the stock exchanges to handle many matters. 

The Panel agreed that the Commission had made a tremendous recovery since the days of late 2008 (when the press was predicting demise).  Conversely, the speakers differed on the import of monetary penalties on corporations, which may primarily penalize present shareholders but without which violations may go unpunished.    

Overall, one couldn't help but feel that the gaps between the standing room only applause were laden with silent recognition of the same obstacles that have plagued the agency from its inception:  Understaffing, shifting priorities, political interference and inter-governmental turf wars.  On a night that may have served primarily to celebrate the Commission's survival, its chief acclaimers (perhaps predictably) sounded entrenched refrains.  Specifically, why pillory efforts at raising net capital standards - wherever proposed - when a large part of the current mess stemmed from leveraged  speculation?   And why decry the "stepping up" of the Treasury when most agree that the alternative was economic Armageddon?  Too often the Panel's quips - while entertaining - served to highlight the diffused data streams, entrenched warfare and questionable policy choices that left the agency marginalized at the outset of the Crisis. 

Likewise, while staff education is a good thing, there still exist so many layman questions on the Dodd-Frank Act.  There certainly would be value in more money on programs designed to demystify the reform on topics ranging from hedge fund participation to derivatives regulation, to the limits of the new Consumer Protection Agency. 

It's encouraging that practitioners, students and academics crowd a conference hall on a weeknight to glean insight into a long lasting contribution of the New Deal.  Concomitantly, it's a bit depressing that in these precarious and stressful times, this agency  - through both its press and its silence - has not much more to offer than its traditional dual mantras of "Give us time" and "If we catch you, you will pay."  Gramm-Leach-Bliley sounded a competitive death knell for firms reluctant to engage in one-stop shopping.  A decade later, the securities industry's chief regulator similarly faces possible irrelevance as a result of failing to recognize investors' needs for quick, one-stop answers to concerns on banking, securities and corporate health.  

---JSC, 9/28/10       

SEC Charges: True Facts and Misleading Positive Spin

The SEC announced charges on September 21 against a Minnesota attorney (who left his partnership to run the fund) and two Bay Area fund promoters for misleading investors.  (Complaint here.)

The SEC asserts that, initially, the fund's sole business was to make real estate loans to one business partner.  After that business partner defaulted, the SEC alleges that the defendants continued to raise money, even though they "had no meaningful income" and were instead using the new investor funds to pay their original fund investors.  The defendants raised this money by claiming that they were in a position to take advantage of the real estate market collapse, but the SEC asserts there was no such possibility.  In a statement, the SEC's Chicago Regional Director explained:  "Investors were entitled to know true facts rather than the misleading positive spin that [was] provided."

I don't love the phrasing, but it's an interesting way to frame the case.  It's certainly reasonable that the the SEC would want to ensure investors have access to "true facts" (as opposed to any other kind of facts). And I suppose the SEC is trying to send a message that what might be (in the mind of some business people) justified as "positive spin" can, nonetheless be "misleading" under Rule 10b-5.  I see the point; when we discuss disclosures in my course BA courses, I often borrow Dwight Drake's recommendation (see his book here) to lay out all risk factors for the offering and to "stay clear of bold adjectives."  As he puts it, "You are protecting here, not selling."  

Further, it seems to me that a "misleading positive spin" on the investment implies that the SEC will be taking a hard line on those soliciting investors, expanding beyond just those, for example, who "lied" to investors. The only concern I would have is that "misleading positive spin" also seems to imply an argument that the positive spin was not knowing or reckless.  That is -- positive spin implies that there's some truth there, it's just truth with the best possible framing.  I haven't forgotten that Rule 10b-5 also covers material omissions; I'm just saying it's kind of soft language and might elicit sympathy in some corners. 

Personally, I'd go for something stronger in my statement:  "The investors were entitled to all the necessary facts, not a deliberately misleading set of cherry-picked items designed to hide the realities of the investment."  Just a thought. 

--Joshua Fershee

 

The Sequel to the Best Movie Ever About Rule 10b-5...

...opened this weekend.  While Wall Street II may have disappointed its reviewer at The New York Times (see Joe Nocera's "When Did Gekko Get So Toothless?"), I still have to marvel at any mainstream film that combines industry terms like "margin," "short sellers," and "credit default swap" with such aphorisms as "Money is a jealous mistress."

What is alarming, however, about Oliver Stone's reprise of Gordon Gekko is the complete absence of laws and regulators.  Wall Street I juxtaposed the action with slow but persistent bureaucrats who eventually catch up with young Bud Fox and arrest him for conspiring to violate the Insider Trading and Securities Fraud Enforcement Act (a crime which, if technically impossible, nonetheless reeks of force of law).   

In Wall Street II, while the government occasionally arrives with a bailout checkbook, justice is left to market titans and internecine capitalism.  Concurrently, the economic crisis is blamed on causes  ranging from greedy CEOs to greedy hedge funds, and from greedy real estate brokers to greedy owners of plasma TVs (i.e., we're all to blame).  In that regard, Mr. Stone may have sounded the most fatalistic refrain on the Crisis to date:  Nobody's watching, and we're all Gekko.

Obviously, the legendary filmmaker has a dim view of the protections afforded by the Dodd-Frank Act of 2010.  Conversely, the soundtrack - at each tranche - was upbeat and (I dare say) triple A.

---JSC, 9/27/10        

Resource: The ABA Committee on the State Regulation of Securities

I recently joined the ABA's Committee on the State Regulation of Securities, and was immediately impressed with the materials I received.  I think that if you give the most recent edition of their newsletter, The Blue Sky Bugle, a quick once-over you'll be similarly impressed.

SJP