Business Law Prof Blog

Online Poker's Black Friday

Go here for some analysis of yesterday's indictments against the three biggest online poker providers serving the US market (Full Tilt Poker, PokerStars, and Absolute Poker), as well as a number of banking institutions.  I'm not sure how long the currently accompanying banner ads will last, but right now Bodog poker is plastering the page with ads sporting the US flag and welcoming US players (apparently, Bodog doesn't really care what the US government is doing with these indictments because it has never planned to try to get in on what seemingly everyone expects will be a regulated US online poker market eventually--since Bodog offers online gaming that clearly falls within the definition of illegal gambling in addition to poker).  The banner ads remind me of one of the first lessons I learned from reading the Wall Street Journal--no matter how bad the news, someone stands to make a profit.  (Obviously, the expectedly temporary and limited loss of online poker in the US scarcely counts as "bad news" in the grand scheme of things--but I will assume you get my point.)

SJP

"Judges Are Not Ferrets" and Other Tips for Appellate Practice

The North Dakota Supreme Court website provides a link with Appellate Practice Tips. The Court is an especially appropriate source, because the North Dakota Supreme Court is also the state's appellate court, so they see just about everything.  And many of these tips are good in any practice setting, whether in court or at the bargaining table. 

Although some of the tips are fairly basic and restate conventional wisdom in this area, the tips are wide ranging, and many come from North Dakota cases.  Here are a few of my favorites: 

• "Civility is not too much to expect in a civilized society's alternative to brute force, stealth, and deception." See Jacobson v. Garaas, 2002 ND 181, ¶ 37, 652 N.W.2d 918.

• When you discover you are riding a dead horse, the best strategy is to dismount.

• A lawyer is not always protected by following the client's specific directions. See Jacobson v. Garaas, 2002 ND 181, ¶ 23, 652 N.W.2d 918.

• Summary judgment can't be reversed on appeal based on what you wish you had presented in the trial court, only on what was presented as competent evidence in the trial court.

• Not every lawyer excess is justified by the mantra of zealous representation. See Jacobson v. Garaas, 2002 ND 181, ¶ 23, 652 N.W.2d 918.

• "The best arguments are those that tell us how you believe we can do justice and maintain the integrity of the law at the same time." - former Justice Robert Vogel

• "Judges are not ferrets." Linrud v. Linrud, 552 N.W.2d 342 (N.D. 1996).

--JPF

Buy American?

American consumers are sometimes urged to “buy American.” Personally, I never have understood why, if a superior product is manufactured outside the United States, patriotism requires that I support a less efficient American business. And I know just enough of the economics of comparative advantage to understand the benefits of globalism.

But, economic arguments aside, what exactly does it mean to buy American? In today’s global economy, the “Buy American” argument is simply incoherent.

Consider, for example, this recent ranking from Motor Trend of the cars with the most domestic content. The top five includes the Toyota Camry, the Toyota Avalon, and the Honda Accord, all with 80% domestic content.

Motor Trend includes parts made in Canada as domestic content; Cars.com does not. Its top American-made cars? The Toyota Camry (made in Kentucky and Indiana) and the Honda Accord  (made in Ohio and Alabama). The Honda Odyssey, the Toyota Tundra, and the Toyota Sienna also make the top ten.

So buy American. Drive a Toyota.

-Steve Bradford

Justice may be blind, but it still needs to eat.

Over at the Akron Law Cafe, my colleague Brant Lee has put up a post noting that your chances of parole decline significantly the further the presiding judge is from his or her last meal.

Maybe some folks at Goldman will have an opportunity to leverage that information for their benefit, since: Senator Carl Levin is Planning to Refer Goldman Officials to the DOJ for Possible Prosecution.

SJP

Attorneys Seeking Advice on Listservs

I am on several listservs of lawyers practicing in areas of the law that I teach. Attorneys on those listservs sometimes post the facts of situations they are dealing with and ask others for advice. This raises two concerns.

Ethical Issues (and the new Oregon State Bar opinion)

Does the exposure of the facts of the client’s situation to outsiders, even if the client is not named, potentially breach the attorney-client privilege? A newly released Oregon State Bar opinion (available at www.osbar.org/_docs/ethics/2011-184.pdf) addresses this issue. The answer, according to the opinion, depends on whether the inquiry would allow others on the list to identify the client. If the facts provided would not permit outsiders to identify the client, the inquiry is not an ethical violation. But, “[w]here the facts are so unique or where other circumstances might reveal the identity of the consulting lawyer’s client even without the client being named, the lawyer must first obtain the client’s informed consent for the disclosures.” The opinion notes that lawyers representing adverse or potentially adverse parties may be participating in the listserv, and disclosure to them could potentially harm the client’s interests.

This opinion’s prohibition is broader than it might seem on first reading. If the client is already involved in negotiations or a relationship of some kind with another party, it would not take much to enable that other party’s attorney to identify the client—especially if the other party’s attorney knows the attorney posting the inquiry represents the client.

And what about the possibility of future identification of the client?  Assume that, at the time the inquiry is posted, no one is able to identify the client. Once the client engages in the transaction proposed in the inquiry, represented by the attorney who posted the inquiry, it will be much easier to identify who the client was. Would an adverse party in later negotiations or litigation be able to use the attorney’s earlier inquiry to the client’s detriment?

Should the Attorney Be Representing the Client on the Matter?

Some attorneys' inquiries on listservs demonstrate substantial knowledge of the subject matter—raising issues that only an expert in the field could have thought of. Other inquiries, however, show that the attorney obviously doesn’t have even a rudimentary understanding of the basic law in the area. This seems to be a particular problem with securities law issues; securities law is notoriously difficult for someone without any background in the area.

I wonder in some of these cases if the attorney should have accepted the representation in the first place. I am sure that, if the client knew how little the attorney understood the issue, the client would not want this particular attorney advising it. The problem is magnified by the naivete of some of the responses to such inquiries—answers that no one should be relying on.

Don’t Do It

My advice, whether or not it’s ethically required: don’t seek assistance on pending matters on listservs.

-Steve Bradford

Why Warren Buffett Probably Knew What He Was Doing

Much has been said about David Sokol, until recently a top advisor to Warren Buffett, and the possible insider trading case against him for his acquisition of nearly 100,000 shares of Lubrizol in early January. Not long after Mr. Sokol purchased the roughly $10 million of Lubrizol shares, Mr. Sokol in late January suggested to Warren Buffett that Berkshire Hathaway acquire Lubrizol.  

Now come reports that Mr. Sokol told Mr. Buffett of his ownership in "passing," which is causing some to question Mr. Buffett's role.  According to the New York Times Dealbook:

Mr. Sokol suggested a Lubrizol deal to Mr. Buffett on Jan. 14 or 15, according to Mr. Buffett’s letter. At the time, Mr. Sokol made a “passing remark” about his stake in Lubrizol to Mr. Buffett, who did not ask about “the date of his purchase or the extent of his holdings.”

Some analysts and corporate governance experts have criticized Mr. Buffett for not demanding further details.

“This is damaging to Berkshire’s reputation,” said Greggory Warren, a senior stock analyst at research firm Morningstar. “It brings up questions about Berkshire’s internal controls.”

Francine McKenna at Forbes.com also weighs in:  Sokol Knew; How Could Buffett Have Not?  She says:

Once Sokol had a $10 million stake in Lubrizol, his natural inclination would have been, as traders have told me, to “talk his book” and raise the price Berkshire would pay, not get the best deal for Berkshire. Berkshire agreed to pay a huge premium over the stock’s price in December of 2010 when Sokol first bought shares.

Maybe that's right, but I suspect that the price only would have become a major concern to Mr. Sokol if the purchase was not going to come at a premium, and that was not going to happen. The bigger risk was that Mr. Sokol would push to close a deal at any price.  He is certainly savvy enough to know that if a deal moved forward, it would be at a premium, which would mean a tidy profit for him.  The key to Mr. Sokol profiting, then, was a deal closing. (I have no idea what he was actually thinking, of course. This is just my suspicion.  I can't honestly figure out why he would do this at all, given the risks, so I suppose anything is possible.)

But the question has turned now to what Mr. Buffett knew or should have known.   My read of this is not that Buffett didn't know; it's that he (reasonably) did not care to know. That is, he trusted, without regard to Mr. Sokol's ownership, that Mr. Sokol would not suggest a purchase if Sokol didn't think it was a good idea. Mr. Sokol has a track record with Mr. Buffett that certainly seems to have supported that trust.

Perhaps the assertion that Buffett should care because it raises questions about internal controls is accurate in some instances, but I suspect very few Berkshire investors are worried about Mr. Buffett's ultimate decisionmaking.  And note that Mr. Sokol is no longer employed by Mr. Buffett.  It's not as though the transgression went unnoticed or unaddressed.

Recognizing that there may be some other explanation (and smoking gun e-mail), it seems to me, Mr. Buffett could have acted entirely rationally.  He may simply have trusted one of his top advisors, and didn't feel the need to ask additional questions.  Why? Because history suggested that Mr. Sokol made good decisions for Berkshire, and it was not in Mr. Buffett's interest to follow up on a top advisor like Sokol. This is hardly the sick and drunken Mrs. Pritchard leaving the kids to ransack the company.  In fact, had Mr. Buffett pushed on this, he would have found out about Sokol’s holdings, and he then would have had to deal with it in some other manner; a manner that was likely to cause just as much fallout (or more) for his company.  

Mr. Sokol clearly knows that insider trading rules (or should), and he had every reason to be careful. He chose not be. If this activity was an indication that Mr. Sokol had lost his compass (or business sense), better to let him hang himself than leave Berkshire to clean up the mess and possibly need to explain Sokol’s sudden departure.  Given Mr. Buffett's track record, I'm inclined to think, once again, he knew exactly what he was doing. 

--JPF

 

Miller on Securities Fraud

Geoffrey P. Miller has posted A Modest Proposal for Securities Fraud Pleading after Tellabs on SSRN with the following abstract:

This article criticizes the Tellabs standard for scienter pleading under federal securities law on the ground that it weeds out too many non‐frivolous cases. The article proposes a procedure designed to rectify the problem. Under the tentative dismissal approach, a dismissal under Tellabs would not end the litigation if the plaintiff filed an objection to the decision. Instead, the plaintiff would be required to pay the defendant’s attorneys’ fees incurred between the judge’s ruling on the motion to dismiss and the resolution of a motion for summary judgment.

-Eric C. Chaffee

Can Government Debt Be An Asset?

With a government shutdown successfully averted, the new issue is how to deal with the debt ceiling. The debt ceiling provides a statutory cap on the amount the federal government can legally borrow.  Of course, it's pretty well known that the debt ceiling needs to be raised, because Congress already committed to obligations in December that required raising the ceiling.  They conveniently punted on raising the debt ceiling then, and simply made commitments that would require future action.  As CNN.com explains: "[M]uch of the political rhetoric is misleading because the money has already been committed and lawmakers are arguing over whether to pay the bill, according to former Congressional Budget Office Director Rudolph Penner."

I am not a huge fan of our ever-increasing national debt, but I am even less fond of a national default on debt already incurred.  We, through our representatives, agreed to pay off our debt, and we need to follow through on those obligations.  It is possible that some cuts can be made to limit the necessary increase in the debt ceiling, too, which I support, but the solution needs to include not defaulting -- period.  

In the film (and book) Barbarians at the Gate, Henry Kravis was famously attributed with saying, "Debt can be an asset. Debt tightens a company."  Maybe that can be true for the government, too; maybe debt can tighten a country, so that our government can be more efficient, more focused, and more productive.  Of course, this can't happen if the nationl debt continues to increase without even acknowledging that the ceiling needs to be raised and accepting the concomitant criticism that follows at the time. The first order of business, then, should be to ensure that the government can't increase debt obligations without at least raising the debt ceiling (if needed) at the same time. There should be no punting the issue down the road.  By waiting to have the conversation about increasing the debt ceiling, the Congress that took on the obligations avoided the other consequence of taking on such debt, also as explained in Barbarians at the Gate: 

Henry Kravis: "Debt can be an asset. Debt tightens a company." 

F. Ross Johnson: "It does wonders for the sphincter, too."

Perhaps it's best that those go hand in hand when it comes to incurring government debt.

--JPF

What Exactly Is SEC Chairman Schapiro Doing?: The Full Text

On Saturday, Stefan noted the possibility that the SEC will make private capital raising easier. This possibility, and all of the recent press addressing it, arises from a letter SEC Chairman Mary Schapiro released on April 6. Her letter is a response to a letter Congressman Darrell Issa sent to the SEC on March 22. A full copy of Schapiro’s letter is available here.  (Click on the link in the “This Just In” section.)

Most of the 26-page letter is a discussion of the existing rules, their purposes, and what the SEC has done in the past to facilitate capital formation. But, at the end of the letter, Schapiro says:

I recently instructed the staff to review the impact of our regulations on capital formation for small businesses, specifically focusing on issues such as:

• the restrictions on communications in initial public offerings;
• whether the general solicitation ban should be revisited in light of current technologies, capital-raising trends and our mandates to protect investors and facilitate capital formation;
• the number of shareholders that trigger public reporting, including questions surrounding the use of SPVs that hold securities of a private company for groups of investors; and
• the regulatory questions posed by new capital raising strategies.

This review also will include evaluating the recommendations of our annual SEC Government-Business Forum on Small Business Capital Formation, as well as suggestions we receive through an e-mail box we recently created on our website. In addition, I expect our efforts to benefit from the input of our new Advisory Committee on Small and Emerging Companies.

The Advisory Committee on Small and Emerging Companies is a new committee Schapiro says earlier in the letter she is going to establish.

Frankly, given Schapiro's regulatory pedigree and the pro-regulatory stance of a majority of the Schapiro SEC so far, I'm not holding my breath.

I will post more later on one of the specific proposals she discusses: a proposal for a crowdfunding exemption.

-Steve Bradford

Kleinberger on "the decay in 'personal responsibility' under the Delaware law of business organizations"

Daniel S. Kleinberger recently posted his article, "Delaware Dissolves the Glue of Capitalism: Exonerating from Claims of Incompetence Those Who Manage Other People’s Money," on SSRN.  Here is the abstract:

This paper was presented at the 2lst Century Commercial Law Forum – Tenth International Symposium 2010 – sponsored by School of Law, Tsinghua University, Beijing, People’s Republic of China (October 30-31, 2010).

Delaware law is the leading source of non-federal law governing U.S. business organizations. Over the past 25 years that law has tilted further and further toward insulating individuals who manage business firms from any liability to the firms’ owners based on claims of misconduct. These developments have occurred both in corporate law and the law of unincorporated organizations. Although often described as consistent with market principles, these developments actually undercut the proper functioning of a market system. Effective competition among firms does not require a “dog eat dog” mentality within firms. Managerial responsibility is a prerequisite to healthy firms, which in turn are a prerequisite to a healthy market economy. This paper explores the decay in “personal responsibility” under the Delaware law of business organizations and argues that restoring confidence to market economies requires restoring some minimum level of accountability for those who manage other people’s money.

SJP