Business Law Prof Blog

Is "Trickle Down" a Myth?

Warren Buffett says he wants his taxes raised because "trickle down" economics don't.  Frank Pasquale offers an explanation for why that may well be the case here.  Meanwhile, bonus checks are being cashed while soup kitchens are struggling to meet demand.

Happy Thanksgiving.

SJP

SEC Hearing on Municipal Securities Markets

The SEC recently announced it would be holding its second hearing on the state of municipal securities markets.  According to the press release:

The Securities and Exchange Commission announced today that it will hold its second field hearing to examine the municipal securities markets at its Headquarters in Washington, D.C., on December 7. Topics will include market stability and liquidity, investor impact, and self-regulation.

That's a pretty broad set of topics, warranting the long hearing, which will last from 9 a.m. to 4:50 p.m. 

The SEC is holding the hearings because "[i]nvestors in municipal securities lack many of the protections afforded to investors in public companies and other sectors of our financial markets."  The hearings are in part to determine whether new legislation, regulations, and/or improved industry best practices recommendations are needed. 

I have to imagine something should be done, although the hearings themselves may help raise awareness of the limited oversight. Personally, I'd like to see the SEC focus on the last one first, and see where that leads.

--JPF

Do They Serve "Equal Access" Kool-Aid at the SEC?

If you ask me to give you a quick summary of illegal insider trading, you are going to hear me talk first and foremost about two things: duty and deception.  Did the trade in question involve deception in the form of a violation of a duty to disclose the non-public material information--either to the source of the information or the counterparty to the trade?  Or, was the non-public material information being traded upon acquired deceptively via some form of affirmative misrepresentation?  If the information came via a tip, did the source of the tip violate a duty not to disclose in exchange for some personal benefit, and should the recipient of the tip have known this?

Now, contrast the above summary with the summary given by Harvey L. Pitt, a former chairman of the Securities and Exchange Commission, in the interview provided here.  You will not hear one mention of duty or deception.  Rather, you'll hear that our law says "you're not supposed to cheat by having information that the rest of the market doesn't have."  In fact, Mr. Pitt claims that it would be improper to trade on information you overhear standing in line next to someone who is blabbing away on their cell phone.  This is simply not correct since, at the very least, the necessary personal benefit to the "tipper" is missing.  While I want to give people every benefit of the doubt when critiquing their live interviews, the view being advanced here by Mr. Pitt seems to me to clearly be the "equal access" theory of insider trading that has been repeatedly and sternly rejected by the Supreme Court.

Now, time will tell whether the current insider trading dragnet is targeting individuals who are violating the law of insider trading as it is currently understood, or whether at least some part of this offensive will be aimed at once again trying to re-establish some form of the equal access norm--either via the courts or legislative action following judicial rejections.  But either way, it's sometimes hard not to get the sense that when it comes to the equal access theory of insider trading--the SEC, for better or worse, is like a dog on a bone.

SJP

Giving Thanks and Asking Questions

With Thanksgiving about to come, I have much to be thankful for.  A great family, immediate and extended, a great job, and great colleagues.  Beyond that, I have thoughtful and insightful students, who go on to to become thoughtful and insightful lawyers (for the most part), and I appreciate that I have a small role in their futures.  (Student evaluations are long completed, just so you know). 

Here are a few things I hope to be thankful for: (1) Safe completion of a 4-mile race tomorrow; (2) A safe drive home this weekend; (3) A solid exam for (and from) my BA students; and (4) A Detroit Lions victory tomorrow. 

At least I have a reasonable expectation of the first three. Looking forward, here's one other thing to keep an eye on - of the General Motors executives who bought shares in the IPO, only one, CEO Dan Akerson, bought more than 3000 shares, according to SEC reports. I don't know if that's low, but it kind of seems like it.

 Regardless, a happy and safe Thanksgiving to all.

--JPF

Investing in Baseball Futures

The New York Times ran a haunting piece last week that detailed American investment in the future salaries of baseball prospects from the Dominican Republic.  See Michael S. Schmidt, "New Exotic Investment: Latin American Baseball Futures,"  NY Times (Nov. 17, 2010).  As the article summed up the financial arrangement:

Recognizing that major league teams are offering multimillion-dollar contracts to some teenage prospects, the investors are either financing upstart Dominican trainers, known as buscones, or building their own academies.  In exchange, the investors are guaranteed significant returns - sometimes as much as 50 percent of their players' bonuses - when they sign with major league teams.  Agents in the United States typically receive 5 percent.

The article also details the greatly varying living conditions at these academies while weighing the advantages and disadvantages they provide for the prospects, who range in age from 13-19 and often "forgo formal schooling."  A professor of international law is quoted as saying that the buscones "are in the business of selling children."  The referenced investments are said to range from $15,000 to $400,00; the investors ranged from a relative of a major leaguer to a former U.S. ambassador.  The Mets' new general manager, who previously helped upgrade baseball operations in the Dominican Republic, is quoted as saying that he "hoped the American investors realized their investments were teenagers, many who will never reach the major leagues."

Which highlights one of the many legal questions occasioned by this surprising fact pattern.  Under U.S. law, it's hard to see this arrangement as anything other than a "security", the next inquiry being whether an offshore, de minimis or other exemption somehow negates the need for registration.  After Life Partners, it took over a decade for federal courts to agree upon SEC jurisdiction over viatical settlements.  If children are truly being exploited (and their U.S. investors not appreciating these and other risks), let's hope the Howey test takes root faster this time.

---JSC, 11/23/10  

1% Ownership Does Not an Issuer Make

The North Dakota Supreme Court recently determined in State v. Hager (here) that a seller of LLC "member units" was not exempt from registering as an agent under North Dakota securities law even though the member units were exempt under Rule 506 of SEC Regulation D.  The seller (Hager) in question was selling these  securities while serving a suspended prison sentence through electronic home monitoring.  Hager had previously been convicted of selling unregistered securities and acting as an unregistered agent. 

Hager owned 1% of the member units and claimed that he was an issuer under the National Securities Markets Improvement Act of 1996 (NSMIA), and thus exempt from registration.  He argued that as an owner and employee, he was an issuer.  However, Hager never did anything other than offer services usually "performed by the those in a sales capacity."  The court thus determined he was not an issuer. This seems right -- he did not seem to have any control over the LLC, and appeared to be more of a facilitator than an insider. 

Hager then argued that if he wasn't an issuer, he still was not required to register as an agent. The North Dakota Century Code, however, requires agents to register or be otherwise exempt to act as a sales agent. Hager claimed this law only applied to third-party individuals, but the statute covers as an agent, "an individual . . . who represents a . . . an issuer . . .in effecting or attempting to effect purchases or sales of securities." Thus, the court found, Hager thus failed to register when required.

Hager had a tough case from the start.  The court below stated that

most troubling of all is the simple fact that the new violations are of the exact kind and nature as the original violations. Clearly, the message was not received. . . .The people who entrust their financial well-being to the people who are selling securities and providing financial advice need to know that they will not be misled. They need to know that the appropriate laws will be followed.   

Add to this that "Hager admitted he possessed firearms in violation of the conditions of his probation," it's hard to be surprised that the court was skeptical Hager took his first conviction very seriously. 

--JPF

 

Are these two news items related?

Item 1: Insurers Gave U.S. Chamber $86 Million Used to Oppose Obama's Health Law

Item 2: Americans More Likely to Skip Health Care and Battle Insurers, Survey Says

SJP