Business Law Prof Blog

Socrates knew that he did not know, but Todd Henderson knows that Roger Cohen is a moron.

Over at Truth on the Market, Prof. Todd Henderson of Chicago takes on Roger Cohen of the New York Times.  In what Larry Ribstein describes as a "great post", Henderson uses the following terms and phrases to describe Cohen and his idea: "moron"; "drivel"; "faux-intellectual babble"; "absurd"; "sophistry"; "simplistic and downright silly".  The focus of Prof. Henderson's ire?  The statement by Cohen that: "When it comes to health it makes sense to involve government, which is accountable to the people, rather than corporations, which are accountable to shareholders."  Henderson asserts that: "Shareholders are people. Who exactly does Mr. Cohen think owns our corporations? We do. The 'people' who allegedly can hold our government to account are exactly the same people who can hold our corporations to account."  So, does that mean we can go ahead and amend the Constitution to replace "We the People" with "We Shareholders"?

SJP

Nelson on the Financial Crisis

Grant Nelson has posted Confronting the Mortgage Meltdown: A Brief for the Federalization of State Mortgage Foreclosure Law on SSRN with the following abstract:

This Article argues for federal preemption of state procedures governing the foreclosure of mortgages and security interests in rents. While it also suggests that federal action limiting or prohibiting state anti-deficiency legislation may be appropriate, it leaves this issue to future consideration. Thus, its major focus is to advocate the congressional adoption of both Uniform Nonjudicial Foreclosure Act (UNFA) and Uniform Assignment of Rents Act (UARA) to make them available to all lenders nationwide. However, the federal government has a special stake in greater uniformity for its own account. This is especially the case as to mortgages on real estate. The fallout of the economic crisis of the past year and a half has made it the owner or guarantor of millions of mortgages. It will be confronted with an overwhelming number of foreclosures that will survive all attempts at modification. Given the fact that Fannie Mae and Freddie Mac are now wards of the federal government, the federal stake in efficient and fair foreclosure procedures has become compelling. Forcing the federal government to foreclose possibly hundreds of thousands of mortgages judicially in many states seems almost surreal. Given the enormous cost of this crisis to the federal taxpayers, the government should not be held hostage to arcane and outmoded foreclosure procedures. Even in nonjudicial foreclosure states, the federalization of Fannie Mae and Freddie Mac probably necessitates changes in some statutes to comply with constitutional due process mandates. At the very minimum, the federal Single Family and Multifamily Acts with minor modifications should be made available to all federal agencies.

ECC

Mitchell on Law and Economics

Lawrence E. Mitchell has posted Toward a New Law and Economics: The Case of the Stock Market on SSRN with the following abstract:

Do the public equity markets play the macroeconomic role we believe them to play? What is the relationship between the U.S. public equity markets and American economic growth? What do these conclusions teach us about the approaches we take and should take in evaluating and designing the laws of corporate governance and securities regulation?

The law and economics paradigm of the last forty years may be mistaken in assuming that economic efficiency on an individual (or institutional) level is sufficient to ensure economic welfare on a macroeconomic level. While legal scholars have carefully and usefully examined the effects of a wide range of regulations on individual and institutional behavior, they have largely done so without considering the broader economic roles individuals and institutions play in building a growing and sustainable economy that creates wealth and jobs. Asking these broader questions may lead to reexamination of the ways in which we encourage the creation of economic institutions and incentives for economic behavior.

This paper exemplifies this new approach through an examination of the role of the U.S. public equity markets, concluding that their contribution to economic growth is highly limited. Public equity markets do not generally finance the formation of productive capital except in the limited, but important, role they play in providing exit opportunities for entrepreneurs and venture capitalists. But I do not accept this conclusion uncritically, noting that even claims for the importance of public equity markets for business creation may well be overstated, and that there is considerable research yet to be done. Moreover, even if the conclusion holds, an overall appraisal of this contribution in the broader context of the public equity markets raise important questions for corporate governance, financial regulation, and the structure of market institutions.

ECC

Sticking with the Veil-Piercing Theme

Yesterday the United States Court of Appeals for the Eighth Circuit, in an ERISA action, issued an opinion that mirrors my response to at least a few exam questions on veil-piecing each year:  finish your analysis.
 
The court made clear that, contrary to the lower court’s analysis, piercing the veil is, in fact, still a two-part test.  To pierce the corporate veil in this context, a court must determine: “(1) whether a corporation was controlled by another to the extent it had independence in form only, and (2) whether the corporation was used as a subterfuge to defeat public convenience, justify wrong, or perpetrate a fraud.”
 
The defendants in the case, among other things, commingled funds (almost always a no-no) and generally disregarded corporate formalities in a way that justified the determination that the corporation lacked independence.  However, the court reversed and remanded for a trial on the second issue:  “whether the corporation was used as a subterfuge to defeat public convenience, justify wrong, or perpetrate a fraud.” 
 
The Eighth Circuit noted that the district court, as well as the plaintiffs, provided little explanation about why the same facts that established the first prong of the veil-piercing test also satisfied the second prong.  Given a lack of evidence and “the lack of explanation on the second prong of the test,” the court found “trialworthy issues” warranting remand.
 
The lesson: Even when it seems obvious, you need to finish the job. And it’s better sooner rather than later. 
 
--Josh Fershee

Online Poker as "Tax Fairness"

Personally, I don't care what you call it ... just legalize it.  (We are reportedly talking about an extra $40-50 billion in tax revenue over the next 10 years.)

SJP

Are Republicans more likely than Democrats to support "fat bank profits, generous bonuses and stingy lending policies" during an economic recovery?

Apparently, some Wall Street lobbyists think so.

SJP

Symposium Announcement - The Fall of the Economy: How New York Can Rise to the Challenge

On March 5, 2010, The Journal of Civil Rights and Economic Development at St. John's University School of Law will host a symposium entitled: The Fall of the Economy: How New York Can Rise to the Challenge.  The web page for the event describes the event as follows:

This Symposium will foster a discussion about business social responsibility, government bailouts of big business and the mortgage foreclosure crisis. As a backdrop, the panels will also explore the economic inequities in the United States, and in New York City, that predated the recent economic crisis and have been exacerbated by the  biggest economic collapse since the Great Depression. The goal of this Symposium is to learn lessons from what caused the market collapse and to determine how to repair the breaches in our economic system.

Notably, my friend and co-blogger, Scott Colesanti, will be presenting at the symposium.  Based on his presence alone, I'm sure it will be great event.  Of course, the rest of the panels look good also.

ECC

A Veil Piercing Epidemic in the High Plains?

From 1999 until 2007, the North Dakota Supreme Court did not hear single case seeking to “pierce the veil” of a limited liability entity.  This is especially significant because there is not an intermediate court of appeals in the state; litigants in the state appeal directly to the state's Supreme Court. Thus, it’s not as though the Court simply declined to hear any cases on the issue. 
 
Since 2007, however, there has been a (relative) rash of veil piercing cases.  The North Dakota Supreme Court has issued four decisions on the issue, piercing the veil in all four cases.  Coughlin Const. Co., Inc. v. Nu-Tec Industries, Inc., 755 N.W.2d 867 (N.D. 2008) (piercing the veil of a corporation); Red River Wings, Inc. v. Hoot, Inc., 751 N.W.2d 206  N.D. 2008) (piercing the veil of a limited liability partnership); Intercept Corp. v. Calima Financial, LLC, 741 N.W.2d 209 (N.D. 2007) (piercing the veil of a limited liability company); Axtmann v. Chillemi, 740 N.W.2d 838 (N.D. 2007) (piercing the veil of a corporation).
 
I have to wonder if this simply a fluke or is there a discernable trend in these kinds of cases (both in their existence and outcomes)?   One might expect a surge in veil piercing cases when the economy is poor, but the state of North Dakota has managed to escape most of the ill effects of the nation’s financial crisis.  In fact, only North Dakota and Wyoming posted budget surpluses last year.   Then again, I arrived in North Dakota and began teaching Business Associations in 2007, so perhaps I was the catalyst. But that can’t be it, either, as the Axtmann and Intercept Corp. cases (at a minimum) would already have been well underway. 
 

Regardless, this could be interesting.  I plan to take a look at other states to see if this is a trend around the country or simply a blip on the North Dakota radar. In the meantime, I welcome any thoughts or comments.

--Josh Fershee

Long live the painful mosaic...

Securities Regulation is undoubtedly a difficult patchwork of federal and state, civil and criminal, private and public authorities and actions.  So it was conceived in 1933/34, and so it remains today.

As we were all reminded by the written decision of Honorable Judge Rakoff that yesterday approved the settlement between the SEC and Bank of America.  In "reluctantly" granting approval, the court nonetheless reiterated enough concerns about the events attending the BOA-Merrill Lynch merger of the fall 2008 so as to turn eyes to the pending New York State Attorney General's complaint against BOA and two of its former officials.  That civil suit, lodged on February 4th, alleges fraud and manipulation on essentially the same facts underlying the SEC settlement.

The 15-page "Opinion and Order" of Judge Rakoff on the SEC suit is available at http://graphics8.nytimes.com/packages/pdf/business/BofAOpinion.pdf.  While its pointed critique of the Commission's efforts ultimately yielded to judicial deference for negotiated settlements ("In the exercise of...self-restraint, this Court, while shaking its head, grants the S.E.C.'s motion..."), the settlement's worth a read  for the references to Yogi Berra and Harlan Fiske Stone alone.

---JSC, 2/23/10   

Reform sliding backwards?

A recent Bloomberg.com item noted that lobbyists were targeting the proposal to align rules for 'brokers' and 'investment advisers' through the creation of one, fiduciary standard of care.  In addition to emphasizing the danger of stalled regulatory reform, the Bloomberg item focuses attention on a topic that has bypassed surreal on its way to sublime.

As background, the '34 Act spoke to broker-dealers and their agents; six years later, one of the legislative additions of 1940 addressed 'investment advisers,' who would be held to the higher, fiduciary-like duty towards customers.  For decades, the two regimes coexisted based upon distinctions between method of compensation (i.e., trade commissions defined brokers; advisory fees indicated investment advisers).

The famed "Tully Commission" of 1995 concluded, among other things, that "conflicts of interest persist" despite the compensation divide, and that some fee-based programs would serve the interests of broker-dealers.  In 1999, the SEC thus proposed to allow brokers to offer some services for a fee without coming under the adviser regulatory scheme.  In the related 2005 Final Rule, the SEC took the position that brokers could remain outside of the 1940 Act as long as they provided only "incidental" advice to customers and avoided more robust "financial planning services." 

In 2007, a suit by the Financial Planners Association led to the D.C. Court of Appeals striking down the SEC's distinctions. Wall Street lobbied for and received "interim" rulemaking from the SEC so that millions of broker-dealer accounts needn't be re-classified (and thousands of brokers dual-registered).  The interim SEC guidance provided that brokers could escape the demands of the '40 Act by avoiding "special compensation" and distinguishing broker-dealer and investment advisory activities; facing uncertainty and pressure from State regulators, some broker-dealers simply registered their sales force as both brokers and investment advisers.

An ensuing 2008 Rand Corporation study concluded (not surprisingly) that investors were confused as to whether they were dealing with a broker or an adviser.

In 2008 and 2009, successive Treasury reform plans called for the "harmonization" of the broker-dealer and investment adviser standards.          

That harmonization has languished in Congress, thus empowering lobbyists in 2010 to call for a return to the bifurcated world of 1999.  In normal times, this would be the point where Bugs Bunny holds up that sign to the 4th wall reading "SILLY, ISN'T IT?"  But with unprecedented investor losses, class action litigation, and overall low marks for Wall Street blooming since October 2008, the cry to perpetuate the confusion by excepting brokers from a higher standard of care just seems appalling.  The D.C. Court of Appeals, State regulators, a Republican administration, and a Democratic administration have all indicated the need for a solitary standard.  If Wall Street truly seeks to regain the trust of Main Street, a good first step would be in publicly confessing that the time for distinctions without difference has passed. 

---JSC, 2/23/10     

Would Open Trading Trump Rational Apathy?

In a recent New York Times online opinion piece, William D. Cohen discusses the significant stock sales that many high-level Goldman Sachs executives made in their own company during the worst part of the 2008 stock market fall.  Cohen states that if people had had real-time information about the sales made by Goldman’s executives, the market had known would have not looked favorably on the news.  I’m not so sure.
 
Although there are a number of potential downsides, I admit I am intrigued by the concept of making more real-time information available about trades by large shareholders and company employees. I’m not quite ready to agree with Henry Manne, et al., that insider trading should be permitted because it would send the market proper signals leading to more accurate stock price valuations (my apologies to all for the oversimplification), but perhaps more information would lead to better outcomes. 
 

Then again, it seems like Enron should have been discounted significantly, too, given that no one could seem to figure out exactly how they were doing so well. (For a great discussion on this topic, see William D. Henderson & Hon. Richard D. Cudahy, From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons, 26 Energy L. J. 35 (2005)).  In light of that, maybe no one would have noticed. After all, shareholders tend to be rationally apathetic, right? 

--Josh Fershee

Let's hope for sunlight on the Olympics...

...and on the processes of its governing body.  For while attention may presently be directed on its decisions addressing competitor safety, does anybody really understand how the International Olympic Committee determines the roster of "Olympic sports" ?

It was July 2005 when the IOC (via secret vote) decided to drop baseball and softball from the storied global stage, an event I was reminded of last week as I watched youngsters in thermal pajamas glide through the air sans trapeze in something called "half pipe."  The chief theories as to why baseball and softball met their demise centered on lack of worldwide participation and North/South American domination of the event.  While snowboarding is certainly a curious spectacle, is the novel competition any more global in allure or diversified in result?

Statistics reveal that between 1998 and 2006, only two countries (USA and Switzerland) won gold medals in men's half pipe, and that these same two nations, in fact, won 7 of all 18 medals awarded in the sport.  In fact, going into this year's contest (again topped by an American), only two continents had ever won medals in the competition.  By comparison, between 1992 and 2008, 6 nations from 4 continents took home medals in baseball.  Moreover, the figure of 39 contestants in this year's men's half-pipe air pageant is misleading:  All but 10 scored less than 35 out of 50, indicating an ambitious but less than Olympian field.

Which makes the 2005 decision on baseball all the more suspect.  And which magnifies the need for the IOC, a Swiss corporation representing over 200 individual nations, to engage in more openly deliberative processes.  Share some Board minutes.  Issue explanatory written decisions.  Show us more consistency and rule of law.  Earn higher scores from ancient Greece.

--JSC, 2/22/10