Business Law Prof Blog

With States Starting to Move All-In on Online Poker, Can the Fed Be Far Behind?

I've blogged previously about the tax revenue states and the federal government are missing out on by rejecting fully legalized and regulated online poker here.  Now, it appears New Jersey and California are taking the lead on capturing some of this missed opportunity.  Meanwhile, the push continues at the federal level as well, with Senator Reid backing legalized web poker.

SJP

Mixed Messages on the Economy?

The Wall Street Journal, among many sources, today reports that the U.S. economy added fewer new jobs than was expected and saw an increase in the unemployment rate from 9.6% in October to 9.8% in November. (FYI, the November 2009 jobless rate was 10%.)

The Detroit News, among many sources, yesterday reported that November automobile sales were up 17% this year over November sales a year ago.  In that article, a GM economist states that improved sales seemed to be linked to improving employment numbers.  The article explains:

Sales should continue climbing, riding on improved consumer confidence and long-awaited signs that jobs are being created in meaningful numbers.

"It's all about employment," said Yingzi "Sue" Su, senior economist for General Motors Co. "It's only recently that the logjam seems to be broken," which should spur spending.

Does this mean sales are likely to drop in December because of the bad employment numbers? Perhaps, but maybe it isn't all about employment; just mostly.  Auto sales might be a better indicator (generally, as opposed to month to month) of where the economy is headed than one month's employment numbers. For most people, cars are relatively long term commitments often coming with a monthly loan payment of three to five years (or more). Notwithstanding some questions about the practices of some auto lenders, this means that (most) purchasers expect to be able to make such a payment over that time frame and (most) lenders expect that, too.  

If auto sales, and the rest of the economy, are based primarily on employment numbers, then it's likely that December will be a less successful month than the automakers were hoping.  For now, though, it appears that the auto companies are feeling better about the economy this year than they did last year: Auto incentives are down 9.4% as compared to a year ago.  Then again, maybe all that will change with today's employment information. 

--JPF

Questioning the FCPA

Mike Koehler recently testified before the Senate Subcommittee on Crime and Drugs at a hearing entitled "Examining Enforcement of the FCPA"--he has some interesting related links here.  The FCPA Blog also has a nice summary here:

Senator Specter, for example, wants to know why the DOJ is fining corporations hundreds of millions of dollars but not indicting any of their leaders or employees. Michael Volkov wants to know why clients have to call him to ask if they can pay the taxi fare for a nurse from an overseas government-run hospital who's in the U.S. attending a conference. Andrew Weissmann, meanwhile, wonders why corporations that do everything right to stop corruption can still be punished because a single, low-level employee went off the rails.

SJP 

This Way to Unproductive Rhetoric

The U.S. Chamber of Commerce provides as new "game" at http://www.thiswaytojobs.com/. The game puts you on a path as a business person and then demonstrates all sorts of hurdles in the way of the success of your business.  (Not surprisingly, it's nearly impossible to move forward in the game because of all the regulatory and other government hurdles.)

According to the web site:

A dramatic increase in burdensome regulation by the Congress and administration is causing tremendous uncertainty for business owners around the country. The path to recovery lies in bringing certainty to the regulatory environment and putting in place smart policies that allow American businesses and the economy to grow.

Hurdles, they say, run the gamut, and include energy and environmental, labor, financial, and health care hurdles that businesses need to overcome to succeed.  

One of the hurdles noted in the game is the increased cost of hedging in the energy sector.  This claim has been made by others (beyond the Chamber), such as Morgan Stanley (see here). Many companies use hedging to lock in prices for fuel and natural gas to add some predictability to their businesses. Dodd-Frank does have new requirements that may very well add some cost to certain energy hedging practices. Then again, it may be that the new requirements will provide some added stability that will yield a net gain.  That remains to be seen, but I concede it is a fair criticism to question the potential impact of the rules.

It's not as though companies were always smart enough to use hedging for energy purchases when there weren't new rules, though.  Remember when most of the airlines decided to add that $15-$25 bag fee? It was because they failed to hedge their fuel costs.  (Southwest, which still doesn't charge for bags, hedged 70% of their fuel costs during the fuel price spikes in 2008.)  See my July 2008 take on this issue here.   

It's certainly the right of the Chamber to rail against regulations in any circumstances they see fit, but I find it ridiculous when people act as though businesses hate regulations in all circumstances. They don't. Take, for example, the airlines, a major business who will have to deal with the new hedging regulations. Since 2008, the airlines have actually been arguing for more regulation in some parts of the fuel markets.  According to an airline industry group seeking to "Stop Oil Speculation":

Lobbyists and special interests used their influence in Washington, D.C. to weaken regulations on oil trading. For example, in 2000, Enron convinced Congress to overhaul 60-year-old commodities rules that formerly provided checks and balances on oil speculation. This loophole allowed speculators to manipulate and potentially corner the market.

I guess when it comes down to it, I hate the black and white rhetoric on regulation and taxation as though all such actions are anti-business and anti-economy.  Some regulation can be good for the economy, and some regulation can be helpful in facilitating market operations.  And when we over regulate (or over tax), we almost certainly impede both businesses and the economy.  But to imply that every SEC, CFTC, EPA, OSHA or other agency action is inherently anti-economy and anti-business is simply wrong. And it's even less productive. 

--JPF

Investment Shopping on Cyber Monday? As Always, Buyer Beware

The SEC announced last week that a federal court granted a request for an asset freeze related to a suspected Denver-based Ponzi scheme that offered both European bank notes trading and "diamond trading."  The defendants -- Richard Dalton and Universal Consulting Resources LLC -- apparently raised $17 million from investors who received monthly payments that were claimed as profits from the “Trading Program” and the “Diamond Program.” The payments, the SEC claims, were actually funded through monies received from new investors in the programs.  

Here's the promise made to investors, as per the SEC press release:

According to the SEC’s complaint [pdf here] filed in U.S. District Court in Denver, Dalton told investors in UCR’s Trading Program that their money would be held safely in an escrow account at a bank in the United States, and that a European trader would use the value of that account — but not the actual funds — to obtain leveraged funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough that he was able to guarantee returns of 4 to 5 percent per month — or 48 to 60 percent per year — to investors. Dalton claimed that he had successfully run the Trading Program for nine years. 

The Diamond Program promised even better returns (everyone knows actual diamonds are better than trading bank notes, right?). The SEC says that Dalton promised investors "a guaranteed 10 percent monthly return — or 120 percent annual return."  

Of course, the "business" was not nine years old; it apparently began in 2009.  Nice timing, too -- the market's down, people are looking for promising investments outside the stock market, and here comes someone providing monthly payments based on money held "safely" in escrow.  To make the program work, Dalton used prior investors to find friends or family members. These new investors, as you might expect, were wooed by both this connection and the regular monthly payments.  

Obviously, if all of this is true, it's fraud and the defendants should be punished severely.  But I can't help but wonder, does anyone have deals like this that actually work?  I know some people have made 120% annual returns (and more) on investments in a variety of settings, but I'm curious of any situation when that kind of return was promised, virtually risk free, and then delivered.  I cannot imagine any such scenario.  

Then again, maybe it's just that I don't have the kind of money to invest to find out.  But I rather doubt it.

--JPF

"Don't Ask, Don't Tell": The Securitization Version

Mike Konczal posts a nice chart here showing some of the many things that went wrong during the mortgage securitization feeding frenzy.  Money quote:

[I]t appears that during the worst excesses of the mortgage bubble the very basic rules of property transfer and record-keeping were ignored. . . . Key point: . . . Even at this late stage, the actions of the trust, servicers and depositors are opaque to regulators and investors.

Hat tip to Frank Pasquale for this item, and for his analysis here--which includes the following:

Adam Levitin argues that most legal observers are slow to recognize how bad things have gotten, because they believe “there’s no way there were massive screw-ups because thousands of top Wall Street legal minds were working on securitization deals.” Levitin responds: “the best legal minds in the country weren’t doing diligence on endorsements on securitization deals.”

SJP