Business Law Prof Blog

"New Governance" or New Levels of Corruption?

In 2001, David Korten released the second edition of his provocative book, "When Corporations Rule the World."  If he decides to update this edition, he may want to include the following NPR items:

1.  Shaping State Laws With Little Scrutiny:

When you walk into the offices of the American Legislative Exchange Council, it's hard to imagine it is the birthplace of a thousand pieces of legislation introduced in statehouses across the county. . . . The real authors are the group's members — a mix of state legislators and some of the biggest corporations in the country.

2.  Prison Economics Help Drive Ariz. Immigration Law:

Last year, two men showed up in Benson, Ariz. … offering a deal … a prison for women and children who were illegal immigrants. . . . [H]ow would they possibly keep a prison full for years — decades even — with illegal immigrants?  [The] prison companies … had a plan — a new business model to lock up illegal immigrants.  And the plan became Arizona's immigration law.

Perhaps relatedly, Korten might also want to include a recent study by Transparency International concluding that the U.S. has dropped out of the top 20 countries in terms of battling corruption.

I have some additional thoughts on these issues in my latest published article: Finding State Action When Corporations Govern.

SJP

 

The Value of Regulators or "I Want My $3"

The FCC announced yesterday (pdf here) a settlement agreement related to "mystery fees" Verizon Wireless charged some pay-as-you-go customers, which included a record $25 million payment to the U.S. Treasury, as well as an immediate refund to 15 million customers to the tune of $52.8 million. Verizon Wireless was apparently improperly charging a $1.99 per MB data usage charge to some customers. The customers were getting charged for a variety of reasons.  Some customers did not know they had programs on their phones that were connecting to the data network. Others were charged even though they failed to connect to the data network other than to register a charge.  Still others accidentally hit a button on their phone that accessed the network. (The FCC consent decree can be found here in pdf.)

This case underscores one of the real potential values of regulators. Ultra-large companies serve so many customers that small charges can lead to large dollars.  With 15 million customers, an extra dollar charged per customer raises a ton of cash. A small charge can be quite lucrative, even though the impact per customer is relatively small. On the one hand, of course, $15 million is not a lot of money to Verizon.  Last year, the company's total wireless revenues were $16.2 billion and service revenues were $14.2 billion.  On the other hand, an extra $15 million here and there still adds up quickly.

Most individuals are not likely to pursue a few dollars in overcharges zealously because they are dealing with an entity with great resources and the potential gain is modest.  That doesn't mean a large company's practices should go unchecked.  Not every customer can be expected to be the newspaper boy from the "classic" film, Better Off Dead.  And perhaps that's part of the real value of regulators.  They can be our Johnny the Paper Boy when it comes to big companies acting improperly.  The FCC already chased Verizon Wireless down the ski hill screaming, "I want my $3!" That means 15 million Verizon Wireless customers didn't have to.  

(With apologies to those without solid roots in 1980s film and/or the John Cusack Collection.)

--Joshua Fershee 

BLPB Selected As One of LexisNexis's Top 25 Business Law Blogs of 2010

The complete list is here (while you're there, feel free to vote for us for Blog of the Year).  Thanks to everyone who has helped make this blog a success.  Hopefully, this means we've managed to provide some form of value and service to our readers in our time here.  Onwards and upwards!

SJP

CFTC Rules on Market Manipulation Incorporate Sympathy Provision

The CFTC yesterday announced its proposed rules on market manipulation, as required by Dodd-Frank (the available factsheet can be found in pdf here). Proposed section 6(c)(1) tracks SEC Rule 10b-5 and is similar to the rule promulgated by the Federal Energy Regulatory Commission (FERC) under authority granted in 2005 (18 C.F.R. § 1c). The FTC also created similar rules in 2007.

The CFTC language adds a new wrinkle, stating that is unlawful to

deliver or cause to be delivered, or attempt to deliver or cause to be delivered, for transmission through the mails or interstate commerce, by any means of communication whatsoever, a false or misleading or inaccurate report concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce, knowing, or acting in reckless disregard of the fact that such report is false, misleading or inaccurate. Notwithstanding the foregoing, no violation of this subsection shall exist where the person mistakenly transmit, in good faith, false or misleading information to a price reporting service.

As someone who formerly practiced before FERC, this new provision reminds me of a mistake made by a natural gas company back in 2004 (see here). The company had generated a correct report, but the clerk charged with sending the information about natural gas withdrawals to the Energy Information Administration accidentally attached the wrong data file.  This was a pretty big mistake, and it was one that cost consumers because it created a spike in futures prices.  

As most of us know, it's pretty easy to attach the wrong file if you aren't paying close attention. As lawyers, we must to be vigilant about such things.  However, it's also reasonable to have regulators include some "there but for the grace of God" provisions from time to time. 

--Joshua Fershee 

Oh, That Tricky 10b-5

As reported in The New York Law Journal last week, an S.D.N.Y. judge recently dismissed a class action complaint against Oppenheimer Co. centering on sales of auction rate securities, a vehicle of infamy in recent years.  The case serves as a barometer of the Second Circuit's tolerance for Rule 10b-5 claims inviting a number of controversial defenses to securities fraud.  See Vining v. Oppenheimer Holdings Inc., 08 Civ. 4435 (Sept. 27, 2010).

As the judge ruled:

Plaintiffs' basic theory is that high-level Oppenheimer officials issued management directives and uniform sales materials to Oppenheimer financial advisors regarding ARS, and that these directives were issued recklessly or with the intention to defraud because the prospect of ARS illiquidity was "either known to [Oppenheimer] or so obvious that [Oppenheimer] must have been aware of it."

On the topic of imputing scienter of unnamed individuals to the corporate defendant, the Court readily concluded that, while such is theoretically permissible in the Circuit, Plaintiffs had failed to offer sufficient grounds in the Complaint.  Specifically, allegations of inadequate training did not create an inference that the trainer possessed a motive to defraud.

As for the Tellabs "competing inference" analysis, the Court concluded that the allegations of fraud failed when juxtaposed with "the more cogent theory that Oppenheimer was caught off-guard by the exceptional turmoil in the financial markets...."

And concerning Plaintiffs' attempts to satisfy the strong inference test via allegations of the entity's insider sales/desire to keep the ARS market afloat, the Court cited a 2001 Second Circuit case (Kalnit v. Eichler) for the continuing truism that allegations of a generalized profit motive will not satisfy the demands of scienter. 

Overall, by dismissing the Complaint, the S.D.N.Y. reiterated that, even in these angry times, lawsuits involving notorious vehicles may be dealt setbacks that have plagued 10b-5 suits for decades.

---JSC, 10/26/10       

From Investopedia....

The Emergency Economic Stabilization Act of 2008 -One of the bailout measures taken by Congress in 2008 to help repair the damage from the subprime mortgage crisis. The act gives the Treasury Secretary the authority to buy up to $700 billion of troubled assets and restore liquidity in financial markets. The Emergency Economic Stabilization Act (EESA) was originally created and proposed by Henry Paulson...The original form of the EESA was rejected by the House of Representatives in September of 2008 and was therefore revised. A revised version was passed the following month. Proponents of the plan felt that it was vital to minimize the damage done to the economy by the mortgage meltdown, while detractors felt that the cost of the plan was way too high.

The American Recovery and Reinvestment Act of 2009 - An act initiated and signed by U.S. President Barack Obama in February, 2009. The act was set into motion as a response to the weak economic state facing the country. The American Recovery and Reinvestment Act was created to stimulate the economy through individual and corporate tax cuts, leniency in unemployment benefits, increased domestic spending, and increased social welfare funding.

[Just two notes to self.  I've read so many times this year that the current administration is to blame for "the bailout" of banks and Wall Street that I sometimes need a reminder of what actually happened].

---JSC, 10/25/10 

LLCs Taking Over?

The North Dakota Secretary of State's office provides a list (pdf here) of business entity statistics -- seven biennial histories -- for the years 1995, 1997, 1999, 2001, 2003, 2005, and 2007.  I was curious how LLCs and for-profit corporation compared over the last two time periods, to see if the LLC explosion was a reality here in North Dakota.  I'd say it is. 

In 2005, there were 12,849 "Domestic (in-state) Chartered Corporations."  In 2007, there were 13,211, which is a net increase of 362 corporations or an increase of 2.7%.  As for in-state limited liability companies (LLCs), in 2005 there were 3362 LLCs; in 2007 there were 4833.  This is a net increase of 1471 North Dakota LLCs, and increase of 43%.  The growth pattern for LLCs is quite recent, and quite remarkable -- in 1995 there were only 366 LLCs (340 of which were new registrations).  

If the rates from the last-reported biennium hold, LLCs will pass corporations as the North Dakota entity of choice by 2013. Not bad for an entity that didn't exist in the state until April 12, 1993.  

--Joshua Fershee

I'll take the Giants.

In case you've been focusing on other things, the World Series starts Wednesday in San Francisco.  The S.F. Giants will be facing the Texas Rangers and you can get a quick overview of the matchup here.  I'm picking the Giants because: (1) the teams look relatively evenly matched and so home field--particularly home field with NL rules--may have a bigger impact than usual, and (2) I've got to root for any city that has a chance to put "World Series Champion" and "Home of the Grateful Dead" together in one place.

PS--The rest of the world called, and they're not at all holding a grudge about not being invited to our "World Championship" playoffs--they're used to that kind of behavior from us.

SJP