Business Law Prof Blog

Insider Trading Liability for Sokol? Not Likely

Sorry for the number of posts today, but there's a news item I couldn't resist.

David Sokol, the chairman of several subsidiaries of Berkshire Hathaway, resigned on March 28. Sokol was one of the potential successors to Warren Buffett, Berkshire Hathaway’s legendary leader, so Sokol’s resignation was surprising to say the least. News stories about the resignation are available here (Wall Street Journal) and here (New York Times).

The reports of the resignation include descriptions of stock trades Sokol made in Lubrizol, a company that Berkshire Hathaway eventually purchased for $9 billion. Some have speculated as to whether Sokol engaged in illegal insider trading. Warren Buffett has an unequivocal answer to that question: “Neither Dave [Sokol] nor I feel his Lubrizol purchases were in any way unlawful.” But, according to the Wall Street Journal, “the SEC is reviewing the Berkshire press release and considering whether to launch an investigation.”

I have no personal knowledge of anything that happened. But, if the public report of the facts are correct, I think it's highly unlikely that Sokol has engaged in insider trading in violation of Rule 10b-5.

Here’s a chronology derived from the Berkshire Hathaway news release  :

1. December 14: Sokol purchased 2,300 shares of Lubrizol.
2. December 21: Sokol sold those 2,300 shares.
3. January 5, 6, and 7: Sokol purchased 96,060 shares of Lubrizol, pursuant to a 100,000-share limit order he had placed.
4. Jan. 14 or 15: Sokol for the first time discussed with Warren Buffett the idea of purchasing Lubrizol. Buffett was skeptical.
5. Jan. 24: Buffett sent Sokol a short note indicating his skepticism about acquiring Lubrizol.
6. Jan. 25: Sokol discussed a possible purchase with James Hambrick, the CEO of Lubrizol.
7. Subsequent to Jan. 25, Sokol reported his discussion with Hambrick to Buffett and the Berkshire Hathaway board approved the purchase.

According to the Wall Street Journal, the profit on Sokol’s 96,060 shares would be $3 million.

Larry Ribstein says whether Sokol is liable for insider trading depends on whether Sokol breached a duty to Berkshire Hathaway when he bought the stock. Larry’s right, of course, that liability for insider trading under Rule 10b-5 requires a breach of fiduciary duty. The Supreme Court’s opinions have made that clear since its Chiarella decision in 1980, and subsequent Supreme Court cases—Dirks v. SEC (1983) and U.S. v. O’Hagan (1997)—reaffirm the breach-of-duty requirement.

But there’s a much stronger reason why Sokol is probably not liable.  One is liable for trading on nonpublic information only if that information is material, and Sokol doesn’t appear to have had any material information when he purchased the stock—at least if we accept the Berkshire Hathaway account.

According to Berkshire Hathaway, Sokol had not suggested the Lubrizol acquisition to anyone prior to his purchases.  He approached Buffett a week after his last purchase and the matter did not go to the full board until much later. Thus, the only nonpublic information Sokol could have had at the time of the trades was knowledge that he intended to suggest the Lubrizol acquisition to Buffett.

Was that material? Fortunately, Basic v. Levinson, decided by the United States Supreme Court in 1988, addresses this very question: whether information about a possible acquisition is material. Basic says that one must consider both the probability that the acquisition will occur and the magnitude of the transaction if it does occur.

It’s pretty clear that the magnitude of the Lubrizol transaction, if it did occur, was fairly high: it was a $9 billion deal offering a substantial premium above the pre-deal price of the Lubricol stock.

But the probability at the time Sokol purchased was extraordinarily low. Basic says to consider “indicia of interest in the transaction at the highest corporate levels.” Some of the indicia Basic points to are “board resolutions, instructions to investment bankers, and actual negotiations between the principals or their intermediaries.”

If one accepts the Berkshire Hathaway account, nothing even close to that had happened when Sokol bought his stock.  The Berkshire Hathaway board had not even discussed the Lubrizol deal, much less approved a resolution to negotiate with Lubricol. Sokol himself was not even a director  of Berkshire Hathaway. As far as is known, no one had contacted an investment banker. And, at the time of the trades, there had been no negotiations.  Sokol himself didn't talk to Lubrizol until after the stock purchases. Under Basic standards, the probability was virtually nil.

Basic says to weigh the probability and magnitude together to determine materiality, and the magnitude is high, but magnitude alone certainly can’t be enough if there is absolutely nothing to establish probable corporate interest in the deal. A thought in one employee’s head (unless, perhaps, that employee were Warren Buffett himself) does not make a possible acquisition material.

-Steve Bradford

Inside (The Academy) Job

I realize I'm late to the party here, but I just watched "Inside Job."  The thing that was most striking to me was the indictment of academics.

Frank Pasquale:

[T]he film … portrays an academic environment festering with direct and indirect conflicts of interests. Economists and B-school professors appear content to churn out papers and reports without revealing the full web of financial ties affecting their thinking…. Ferguson goes on to describe a multi-billion dollar industry of “academics for hire.”

Neil Buchanan:

The film does an excellent job of discussing the lack of professional standards governing disclosures of conflicts of interest in economics. Ferguson asks why economists who have been paid by Wall Street banks to write papers that support Wall Street's agenda are not required to disclose that fact. Various prominent economists tell him that this is absolutely no problem. When Ferguson points out that medical journals rightly insist that researchers disclose the sources of their funding, one Harvard economist is literally rendered speechless.

Buchanan, however, is not satisfied with director Charles Ferguson's apparent conclusion that this is somehow about academics telling lies to get paid.  Rather, "[t]hey are true believers whose arguments are congenial to Wall Street."  Buchanan continues:

The better question, therefore, is how it has come to pass that the economics profession is dominated by men (and it is still very much a boys' club) who believe such nonsense. Some of these guys still think that there was no bubble -- that the financial crisis was actually a rational, equilibrium response to economic fundamentals. And even those who will not say anything quite that crazy publicly are still unfazed by the manifest failures of their ideology.

One possible explanation (and I really am just thinking out loud here) may go as follows:  Imagine that the pool of really smart academic economists is made up of two evenly divided sides in terms of ideology.  One of the sides, however, has the added benefit of liberal (pun intended) financial support that includes opportunities to write reports, present papers, and testify before important panels, etc., that the other side does not.  When academic institutions are making hiring/promotion decisions, which group will be favored?

SJP

Income Volatility, Taxes, and State Budget Shortfalls

This article in the Wall Street Journal hasn’t received as much attention as it should have. I haven’t double-checked the Wall Street Journal’s statistics but, if correct, the story helps to explain the severity of some states' recent budget shortfalls.

In general, at both the state and federal levels, people with more income pay more taxes than people with less income. That would be true whether or not the income tax system was progressive, taking a higher percentage of tax from high-income earners than from low-income earners. Even in a flat tax system, people who earn more would pay more. For example, with a flat 10% tax, a person making $500,000 would pay $50,000 and a person making $30,000 would pay only $3,000.

I don’t want to debate how progressive our tax system is or whether it’s a good thing. But it’s clear that, on average, news stories of some big corporations paying no taxes notwithstanding, government derives more of its revenue from high-income taxpayers.

As a result of that, state income tax revenues can be heavily dependent on receipts from high-income taxpayers.  In some states, that can be very dramatic. As the Wall Street Journal article points out, prior to the recent recession, 45% of California’s income tax revenue came from the top 1% of taxpayers (households earning more than $490,000 per year).

The problem with that, as the article points out, is that income at those levels can be very volatile—more volatile than average incomes. From 2007 to 2008, the incomes of the top 1% fell 15%, compared to a drop of 4% for the nation as a whole. States that were heavily reliant on high-income earners saw their state income tax receipts drop precipitously.  Unless spending drops to match that drop in revenues, a budget shortfall results.

One answer, of course, is to plan for that volatility—to set aside tax revenues when times are good to be used when times are bad. But most states don't seem to be very good at doing that.

-Steve Bradford

What would you substitute for the New York Times?

As most of you have heard, the New York Times has begun charging for unlimited access to their online site.  You can view up to 20 stories a month for free, but after that (with some exceptions), you're going to have to pay--a minimum of $195/year after the introductory promotion.  (The Times says it will be offering a discounted academic rate, but the details have not yet been announced.)

I am a regular reader of the online Times, and I like it, but I'm not sure it's $195/year better than the non-pay sites that are available.  (I pay for the Wall Street Journal, but, for a business law professor, that's a slightly different issue.) Therefore, I'm posing the following question to our readers: if you had to substitute another newspaper's free site for the New York Times, which would it be?

-Steve Bradford

Different Fiduciary Obligations for LLC Managers and Corporate Directors

Lewis Lazarus recently posted Directors Designated By Investors Owe Fiduciary Duties to the Company as a Whole and Not to the Designating Investor at the Delaware Business Litigation Report.  In his article, he explained

[The Delaware] cases teach that directors designated by particular stockholders or investors owe duties generally to the company and all of its stockholders.  Where the interests of the investor and the company and its common stockholders potentially diverge, the directors cannot favor the interests of the investor over those of the company and its common stockholders.

Professor Bainbridge weighs in (here), agreeing that the above is the general rule, but that in some cases that may not be best.  He gives a few examples, such as a struggling company granting a union nominee a board position or a time when preferred shareholders can elect a board majority because no dividends were paid for a sufficient period of time. He then notes that a director's "sponsor might reasonably expect the directors not just to 'advocate' for the shareholder's position, but to vote for it and take other action."  Professor Bainbridge concludes that he still doesn't "think the sponsor should be able to punish the directors for failing to" vote as the sponsor desired and that such cases should be viewed "contextually."

This all got me thinking about VGS, Inc. v Castiel, 2000 WL 1277372 (Del. Ch.), which I recently covered in class.  That case involved a manager-managed LLC, with a three-person Board of Managers.  Castiel named himself and Quinn to the Board, and Sahagen added himself. Sahagen and Castiel got into a feud, and Quinn defected to Sahagen's side. Quinn and Sahagen then merged the LLC into VGS, Inc., without notice to Casteil, via written consent. (This case is also a great lesson into the perils of poor drafting.)  

Despite the plain language of the LLC agreement, the court bails out Castiel (and his lawyers) finding that 

As the majority unitholder, Castiel had the power to appoint, remove, and replace two of the three members of the Board of Managers. Castiel, therefore, had the power to prevent any Board decision with which he disagreed. 

. . . .

Notice to Castiel would have immediately resulted in Quinn's removal from the board and a newly constituted majority which would thwart the effort to strip Castiel of control. Had he known in advance, Castiel surely would have attempted to replace Quinn with someone loyal to Castiel who would agree with his views. 

This is not how we tend to react in the corporate context.  Sponsors generally can't bind directors to a specific vote, and they don't usually require notice of a director's intended votes.  Think Ringling Bros-Barnum & Bailey Combined Shows v. Ringling, 53 A.2d 441 (Del. Sup. Ct. 1947); McQuade v. Stoneham, 263 NY. 323 (1934); or even perhaps Ramos v. Estrada, 8 Cal. App. 4th 1070 (1992). 

In VGS, it seems to me the court should have determined this action was improper (if it was) because Sahagan and Quinn were acting in a way that implicates a conflict of interest and that they were inappropriately taking something that wasn't theirs.  That is, it was an act of fraud, self-dealing, or a conflict of interest.  At least then Quinn and Sahagan could defend their decision-making process and the decision itself.  

I have been working on a short piece arguing that the courts may be developing rules that respect LLCs as unique entities.  Professors Ribstein and Bainbridge, among others, have long advocated that courts apply rules appropriate for LLCs rather than blindly adopting corporate or partnership rules, and I would advocate a similar position here.  In VGS, however, my decision would place far more weight on the contract itself and respect the powers granted to the board. That is, I might allow Castiel the authority he sought and was granted in this case in the LLC context, even though that power is in conflict with general corporate law directors' rules.  But, I would only grant the power if Castiel expressly acquired that power on the front end.  Here, Castiel did not, and absent fraud or self-dealing, I think he should have lost.

--JPF

Dallas on the Great Recession

Lynne Dallas has posted Short-Termism, the Financial Crisis and Corporate Governance on SSRN with the following abstract:

This paper is a comprehensive exploration of why financial and non-financial firms engage in short-termism with particular attention given to the financial crisis of 2007-2009. Short-termism, which is also referred to as earnings management or managerial myopia, consists of the excessive focus of corporate managers, asset (portfolio) managers, investors and analysts on short-term results, whether quarterly earnings or short-term portfolio returns, and a repudiation of concern for long-term value creation and the fundamental value of firms. This paper examines how market and internal firm dynamics contribute to short-termism by considering various structural, informational, behavioral and incentive problems operating within firms and markets.

Regarding structural problems, this paper explores how the internal dynamics of traditional and shadow banks contribute to short-termism. It also explores the contribution of short-term (high turnover) trading, including momentum and high frequency trading, to short-termism. It examines the role of "dumb money" (noise traders) in causing overvalued equity resulting in over-investments by non-financial firms, and the role of transient institutional investors in contributing to earnings management by managers of non-financial firms. It also addresses the ability of activist shareholders through the use of shareholder voting rights or takeovers to use non-financial firms as short-term arbitrage opportunities.

This paper also examines competitive pressures on firms, such as where markets present manager with a prisoners’ dilemma in which the dominant strategy is to engage in earnings management. In addition, the paper considers how informational problems in markets lead firms to utilize myopic signal and signal jamming behaviors and how these inefficiencies create a market for lemons in which such behaviors are encouraged. It also considers behavioral factors that contribute to short-termism, such as overoptimism, herding, and the tendency to underestimate or disregard low-frequency economic shocks. This paper also explores cultural aspects of financial and non-financial firms that foster short-termism, particularly in trading firms, and the importance of executive compensation arrangements to firm cultures.

Finally, this paper considers various regulatory responses to mitigate short-termism, including an evaluation of relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The paper proposes coordinated and functionally equivalent regulation of the traditional and shadow banking system. It also proposes regulation of financial products, such as derivatives, collateralized debt obligations and subprime mortgages, and disclosure and due diligence obligations for those involved with such products, such as issuers, underwriters and credit rating agencies. It proposes a reexamination of financial reporting obligations to focus market participants on long-term value and true drivers of business success. In addition, it proposes that states change their corporation law to provide that only long-term shareholders may vote. Long-term shareholders would be defined by the duration of their share ownership and the characteristics of their portfolios. In addition, a reexamination of fees or taxes on securities transactions, including stock, debt and derivative transactions, is proposed as well as consideration of modifying capital gains taxes. Finally, changes in fiduciary duty law, board structure, and executive compensation arrangements are proposed to mitigate short-termism. It is the objective of this paper to seek changes that would prevent a financial crisis in the future, such as the financial crisis of 2007-2009 that has had such a devastating impact on the United States and global economies.

-ECC

Buy this book!

A few weeks ago, I noted a new book: Typography for Lawyers, by Matthew Butterick. I have now had an opportunity to read it and I urge everyone who cares about their written (or published) work to run out and buy it immediately.

Butterick is both a lawyer and a professional typographer, and he deals with all aspects of the typography of legal documents—everything from a detailed analysis of font selection to more complicated page-layout issues. He provides convincing illustrations of his points and the book also has its own web site that provides additional examples.  The book also explains how to set up most of the formatting choices he recommends in both Word and WordPerfect.

As several former law review editors will attest, I am very particular about my writing and how it appears on the printed page. Since reading Butterick’s book, I have changed my default font, my margins, and several other default document settings in Word. (None of that is visible here, since the blog has its own style requirements.) He even convinced me to change from two spaces to one at the end of sentences, something I have always been particularly stubborn about. I have also completely revised my vita (not that I’m going anywhere) and reformatted my exams. As stubborn as I am, I can give no stronger endorsement to the book.

The book’s web site is here. It’s on Amazon here.

-Steve Bradford

Let the Regulators Work It Out: AT&T's New Deal Policy?

Following the announcement of the AT&T merger with T-Mobile, theories abound about the potential value and goals of the proposal.  Over at the Wall Street Journal Deal Journal, it was noted that some believe AT&T may not care if it gets all or most of T-Mobile, as long as they get a sizable chunk: 

Citadel Securities weighed in with a very intriguing notion: Maybe AT&T doesn’t plan to buy all of T-Mobile, after all?

[W]e now believe AT&T’s strategy may not necessarily require getting full (or almost full) approval for the deal – nor do we think AT&T plans to call off the deal and pay the $3B reverse breakup fee. Rather, we think AT&T may simply be intent on acquiring however much of TMobile the regulators allow, and divesting the rest as required…..

Our read of the Stock Purchase Agreement filed Monday suggests AT&T is ready to divest up to 40% of T-Mobile’s subscribers –and we think AT&T may not be opposed to divesting even more in order to get the deal closed.

This is an interesting notion, and it is certainly possible. If so, though, I find it disappointing.   It's one thing to structure a deal you think can work (or hope can work) to see what happens.  It's quite another to just proceed and see what you can get without assessing the regulatory problems.  That is, if the Citadel Securities assessment is correct, AT&T may have just proposed a complete merger to see what it can keep, without assessing for itself what should be permissible and what is not under applicable law and regulations.  If I'm the regulator, and a significant part of the deal is improper (e.g., more than 40% of the deal), I'd be inclined to decline the whole thing. Let AT&T and T-Mobile come back with a plan that is, at least, in the ball park.  

I understand that some people don't like the antitrust laws and other laws and regulations, and it is certainly their right.  But if you are working on a deal with major antitrust implications, it seems to me you should be taking those laws and regulations into account in the proposed structure.  It's not the regulators' job to tell companies what deal will work; it's the regulators' job to determine whether the deal does work.  Unless, of course, you want even bigger, slower government. 

--JPF

Agreeing With Bainbridge ... Almost

Readers of this blog know that I'm a big fan of Stephen Bainbridge.  And this is despite the fact that we probably disagree on 70% of the issues on which our respective blogs overlap.  So, it's nice when I can post about something we appear to agree upon: The Supreme Court's problematic failure to put forth a coherent theory of the corporation to support its various proclamations about what rights corporations do and do not have. 

Bainbridge: US law confers personhood on the corporation without a coherent theory of why it does so or where the boundaries of that legal fiction are to be located.  As I complained after the recent AT&T decision:  Chief Justice Roberts could have summed up his opinion far more succinctly: "Because at least 5 of us say so."

Me: Sooner or later the Court is going to have to take this issue on.  Cases involving the rights of corporations aren’t going away any time soon, and ignoring the issue seems almost disingenuous.  For example, in Citizens United the majority told us that there was nothing about corporations qua corporations that justified restricting their political speech solely on the basis of their corporate status—corporations, after all, are merely associations of citizens.  But in FCC v. AT&T, corporations are effectively deemed to be so obviously different from individuals as to make it almost laughable that they should be understood to have personal privacy rights.  Wrote Justice Roberts:  “’Personal’ in the phrase ‘personal privacy’ conveys more than just ‘of a person.’  It suggests a type of privacy evocative of human concerns—not the sort usually associated with an entity like, say, AT&T.”  Well, before you said it was so in Citizens United, many would not have usually associated a constitutional right to unbridled political speech with corporations, as evidenced by the seemingly common response to the opinion: “Who knew that corporations were entitled to the same right to free speech that individual citizens are?”

However, having noted an apparent point of agreement, I must raise a question about Bainbridge's further assertion in the post linked to above:

Corporations have the same obligation to obey the law as natural persons. 

To the extent that corporations don't actually exist and thus can't be physically put in jail, this seems not quite correct.  Furthermore, the actual human decisionmakers and "owners" often appear to be significantly immunized from jail for corporate malfeasance because of the responsibility dilution inherent in doing business in the corporate form.  This is obviously to a significant degree an empirical question, but I'm certainly not going to take at face value the assertion that corporations are precisely as subject to the law as natural persons.  Particularly when that assertion is trotted out in support of fending off attempts to regulate corporations more rigorously because, "They have no soul to save and they have no body to incarcerate."

SJP

Would Howry Have Survived If It Was a Partnership?

Over at The Washington Post, Steven Pearlstein is suspicious:

For me, it is of symbolic and substantive importance that law firms are no longer partnerships in the strict legal sense.  Most, like Howrey, had transformed themselves into “limited liability corporations” or “limited liability partnerships,” a new hybrid form of business organization.  Unlike old-fashioned partners, those in an LLC or LLP are shielded from individual responsibility for the liabilities of the firm. That means that they are apt to be less careful in making decisions about what risks and expenses to take on, knowing they do not face the prospect of losing all of their net worth.  They also have less incentive to commit themselves to a long and difficult turnaround when the firm gets into trouble.

The article also provides an interesting overview of the evolution of the business of biglaw.

SJP

AT&T Deal Highlights

Steven M. Davidoff, at the New York Times Dealbook, has a great outline of the AT&T - T-Mobile Deal. It's really worth a read (here). He explains how different the deal is for a private sale.  And, if you are someone new to all of this, it helps provide an explanation for public company complexities.  My favorite part is this:

Regulatory

AT&T and Deutsche Telecom have negotiated an elaborate risk-sharing arrangement with respect to divestiture and other steps AT&T and Deutsche Telekom must take to obtain regulatory clearance of the T-Mobile purchase.

The agreement requires that AT&T take “reasonable best efforts” to obtain regulatory clearance. This is the standard formulation. But as you would expect in this controversial deal, it gets much, much more complicated after that.

See -- I took the "easy" part.

--JPF

Deposition Headaches

Excuse me for linking to something that's a week old, but I have been out of town and this one is too good not to point out. Pages and pages of deposition transcript regarding what a photocopying machine is. (Not sure why the plaintiff's lawyer didn't just ask if the county had any machine that makes paper copies of documents.)

For those of you who, like me, have suffered through obstructionist deposition tactics, this may raise painful memories.  The rest of you should be glad you're not litigators.

(Note: I'm not sure, but a Wall Street Journal on-line subscription may be required to read the entire article.)

-Steve Bradford

J. Robert Brown on "The Politicization of Corporate Governance"

Jay Brown has posted "Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors" on SSRN.  Here is the abstract:

The role of the Securities and Exchange Commission in the corporate governance process has shifted dramatically in recent years. The Commission has increasingly supplanted state law in determining substantive standards of corporate governance. The replacement of states with the Commission will have significant consequences.

For one thing, the regulatory philosophy will change. For another, governance practices will become increasingly politicized and volatile. The volatility will be less apparent with respect to rulemaking and more apparent with respect to staff interpretations, particularly those under Rule 14a-8, the shareholder proposal rule.

This is particularly clear in connection with changes to the interpretation of the “ordinary business” exclusion in Rule 14a-8. As a case study, the piece examines the phenomena in the context of proposals calling for shareholder approval of outside auditors. In 2005, the staff abandoned more than 50 years of consistent interpretation and found that proposals calling for shareholder ratification of auditors could be deleted from proxy statements under the “ordinary business” exclusion. The explanation for the shift is less likely changes in SOX that gave audit committees of some public companies the authority to select auditors and more likely a desire to reflect the views of the Commission.

Volatility imposes costs. The article recommends a number of changes to Rule 14a-8 that are designed to reduce staff discretion and the risk of political shifts in practice.

SJP

Similarities Between Materiality and Pornography

The United State Supreme Court yesterday ruled in Matrixx Initiatives, Inc. v. Siracusano (No. 09-1156) (Mar. 22, 2011) (pdf) that the test for materiality from Basic Inc. v. Levinson, 485 U. S. 224 (1988) lives on.  The Court declined to accept the suggestion that a possible concern about a company's primary revenue generator must be "statistically significant" before it is deemed material.  The Court explained that the

materiality requirement is satisfied when there is “‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’”  Id., at 231–232 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976)).  We were “careful not to set too low a standard of materiality,” for fear that management would “ ‘bury the shareholders in an avalanche of trivial information.’” 485 U. S., at 231 (quoting  TSC Industries,  426 U. S., at 448–449).

 . . . We observed that “[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.”  Id., at 236.  We thus rejected the defendant’s proposed rule, explaining that it would “artificially exclud[e] from the definition of materiality information concerning merger discussions, which  would otherwise be considered significant to  the trading decision of a reasonable investor.”

I find it somehow very satisfying to have a unanimous Court affirm this definition of materiality, even if the standard does have a lingering Justice Potter Stewart feel to it. 

--JPF

Utah entrepreneurialism

I have been spending a few days in Salt Lake City, visiting one of the best granddaughters anyone could ever have, and I have been struck by how much more vibrant and entrepreneurial the business environment is here than in Nebraska, where I reside.  I realize that Utah is more populous than Nebraska, but even on a per-capita basis, there's just a lot more going on in Utah.

Not only is there a lot of business construction, but much of it is small businesses, not just more chain outlets (although there's that, too).  As one would expect when there's a lot of entrepreneurialism, there's also a lot of failure.  But the empty stores I have seen all have signs for new businesses coming in to replace them.  It's exactly what the Austrian economists would predict.

I don't know why things are so different, but I can think of a number of possibilities:

• Culture: Utah's culture is very different from Nebraska's.  Perhaps the people in Utah are just more entrpreneurial on average.
• State regulation: Perhaps Utah's state regulatory structure is more conducive to small business. Nebraska has populist origins and, although it's heavily Republican now, you can still see those populist origins in state regulation. There's a strong anti-government sentiment in Utah.
• Relative age: Utah's average age is significantly lower than Nebraska's.  Perhaps people are more likely to be entrepreneurial when they're younger and have less to risk.

Whatever it is, we ought to try and bottle it and ship it to the rest of the country. It would do the United States good.

-Steve Bradford

The Perils of Insider Trading: Are Executives Unclear on the Risks?

Regardless of one's views on insider trading laws, the potential consequences remain very real.  Some executives at Steel Technologies, Inc. (STTX) are finding that out, as the SEC recently filed charges against four executives and their tippees.  (Press release here, complaint pdf here.)

The SEC alleges that the four STTX executives traded on confidential information about a pending acquisition by Mitsui & Co. (USA) Inc. The SEC also claims that three of the executives illegally helped family members or friends trade on the confidential information, too. All together, the charged traders purchased $578,000 of STTX stock in the month before to the acquisition was announced publicly, which earned them $320,000 in illegal profits.

Sometimes it amazes me what some executives try to do.  Even if it is permissible (and this case still must work through the process), the risks hardly seem to justify the actions.  As an example, one of the executives in this case, David Mark Calcutt, was and is an Officer and Vice President of Sales for STTX’s Southeast Region.  According to the complaint, Calcutt spent the early part of January 2007 selling off stock in STTX.  Then, after a hunting trip and other communications with STTX's President and Chief Operating Officer, the SEC states that Calcutt started buying STTX stock.  In late January and early February, he started buying the stock at a higher price than the price he received for the shares a few weeks earlier.  

If Calcutt had sold his stock at $17.38/share in early January, then bought it back at $16.75/share in late January, he would have to forfeit his profits under the short-swing profit rules of § 16(b) of the Securities Exchange Act of 1934. Here, however, Calcutt's subsequent purchases were made at $17.75/share and $18.50/share.  Did he think that no one would notice because his trades fell outside § 16(b)?  Or worse, that it was okay to do so because § 16(b) did not apply?  

It is, of course, possible that there is a good explanation for all of this that doesn't involve the use of inside information or otherwise implicate Calcutt and the charged traders.  But it doesn't look good. And when dealing with your company, and your livelihood, and your freedom, it makes sense to tread lightly.

Oh, and if I were with the acquiring company, I'd be absolutely furious right about now.  

--JPF 

Bipartisan Bill to Regulate Online Poker Introduced in House

"Given that millions of Americans currently play online poker, states across the country are recognizing the value in licensing and regulating the game and many are introducing their own laws ... while collecting millions in tax revenue," said Poker Player Alliance Chairman and former Sen. Alfonse D'Amato, R-N.Y. . . . Instead of a patchwork of state laws protecting only players in those states, D'Amato urged Congress "to step up and pass federal legislation."

The full story is here.

SJP

Popular Sovereignty and the Unnatural Separation of Liability and Control

My colleague Wil Huhn has a post up over at the Akron Law Cafe summarizing one of his recent articles wherein he proposes "seven fundamental principles of Constitutional Law [that] are derived from the notion of 'popular sovereignty.'"  The post caught my attention because I think popular sovereignty may be a reasonable answer to the question of how we have managed to get so far down the road of separating control from liability in the context of business organizations, in the face of an at least colorable argument that separating control from liability violates some version of natural law.  Of course, much has been written on the justifications of limited liability in its various forms--but one could do worse than to simply reply: Because we want it that way.

SJP

Safety Not Nuclear Power's Only Hurdle

As the nuclear reactor in Japan continues to be unstable and unsafe, new nuclear power's future in the United States is becoming even more complicated.  Financing was always a concern, even with significant government support, and finding money will be an even bigger concern now, as the National Journal reports:

“There’s nobody on Wall Street who’s going to offer money,” said John Deutch, an expert on energy technologies and financing at the Massachusetts Institute of Technology.

Building a nuclear power plant is an expensive endeavor. It costs $5 billion to $20 billion and can take a decade to complete, compared with the $1 billion to $3 billion and one to three years it takes to build coal or natural-gas power plants.

That’s just one reason there hasn’t been a nuclear reactor built in the U.S. since the 1979 meltdown at Pennsylvania’s Three Mile Island.

Wall Street always has a major impact on huge financing projects, and it appears that Wall Street has an even more greater skepticism of new nuclear projects after the recent events in Japan.  On this one, at least, it seems Wall Street and Main Street are finally on the same page.  

On a separate (and more pressing) note, the Nation (here) provides ways to help following Japan's most powerful recorded earthquake. Please help if you can.  

--JPF

Applications Down: Law Students Do Understand Economics

Law students may not know economics, but they certainly act economically. The Wall Street Journal reports that law school applications are down 11.5% from last year. This should come as a surprise to no one, given the weak job market for lawyers and the long-term trends.

If this enrollment trend persists, how will it affect law schools? Harvard and Yale aren’t going anywhere, even though their high cost and the decline of big law make private Top Ten law schools a bad deal for many of their students. The cheaper state schools with good regional reputations are probably safe. But what happens to the bottom tier? (I mean the bottom tier in as measured by market demand, which may or may not be the same as the bottom tier in U.S. News.)

Some of those bottom-tier schools are expensive and fill at least part of their classes with students who can’t get into other schools. A persistent drop in enrollment is going to put a lot of pressure on them. If they’re state-supported, and particularly if they’re not the only public school in the state, will the state continue to subsidize them? If they’re private, will the tuition they bring in be sufficient?

Many schools will be forced to dip even lower into the applicant pool, which will result in lower bar passage rates and the attendant accreditation issues. If the market doesn’t kill them, the American Bar Association might.

-Steve Bradford