June 18, 2011
More Than Half Way There
Paul Caron ranks the Top 35 blogs edited by law professors with publicly available SiteMeters for the most recent 12-month period (Apr. 1, 2010 - Mar. 31, 2011) here. The cutoff for visits is 133,852. By my count we here at the BLPB had 68,622 visits over the course of the past 12 months. Thanks to everyone who has supported us. Please don't hesitate to drop us a line with any suggestions for how we can keep you coming back.
June 17, 2011
Peer-to-Peer Lending, Crowd-funding, and Securities Law
Stefan Padfield blogged yesterday about about peer-to-peer lending and the question of who is issuing the notes offered on peer-to-peer sites.
Peer-to-peer lending is just one part of the broader crowd-funding movement—business fundraising through small investments from a large number of investors. As I have previously noted, the SEC has promised to take a look at crowd-funding as part of its overall review of the impact of its regulations on small business fundraising.
Peer-to-peer lending, and crowd-funding in general, raise a number of issues under federal securities law. The first, and most obvious, issues relate to the registration requirements of the Securities Act. Are these sites offering securities and, if so, is there an exemption from the registration requirements of the Act? The issue in Stefan’s post falls within this general question.
But crowd-funding sites raise other potential issues as well. If the sites are offering securities , the sites themselves could be brokers, or even exchanges, within the meaning of the Securities Exchange Act. Alternatively, it is at least possible that crowd-funding sites are investment advisers subject to regulation under the Investment Advisers Act. The law on what constitutes a broker, exchange, or investment adviser is murky enough that there is no easy answer. That murkiness is partially because much of the relevant authority comes from no-action letters (See my earlier post on the problem with no-action letters.)
If the SEC wishes to facilitate peer-to-peer lending and other forms of crowd-funding, and it’s not clear to me that it really does, it’s going to take more than just an exemption from the Securities Act registration requirements. To be effective, any regulation is going to have to deal with these other issues as well. And Stefan’s post makes it clear that state blue sky law is also going to be a major issue. A federal exemption that does not preempt state law isn’t going to accomplish much.
I’m working on an article on crowd-funding that addresses all of these issues. When I have a full draft, which I hope will be within the next month, I will post the SSRN link for anyone who’s interested.
June 16, 2011
Koehler Reports on the Foreign Corrupt Practices Act Hearing
Mike Koehler of the FCPA Professor Blog has an interesting post on the House hearing regarding the Foreign Corrupt Practices Act. Mike notes, "The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980's in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business." Mike continues, "There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals . . . ." Given the increasing importance of the FCPA, it's little surprise that Congress is again considering amending the Act. Given the depth of Mike's expertise on the Act, his post is worth a read.
-Eric C. Chaffee
ND Chief Justice Requests Comments for the ABA 20/20 Commission
Chief Justice Gerald W. VandeWalle of the North Dakota Supreme Court today issued the State of the Judiciary Report 2011. The Chief Justice "serve[s] on the ABA 20/20 Commission whose charter is to examine the ethical and regulatory impact of advancing technology and increasing globalization on the legal profession and to make recommendations to the House of Delegates." Chief Justice VandeWalle is always thoughtful in his approach, and he means it when he asks for input. In closing the report, he noted a few things of potential interest to business lawyers.
The Commission has agreed on some recommendations on outsourcing, confidentiality-related ethics issues for lawyers' use of technology, and rules relating to inbound foreign lawyers. For the most part the latter would amend Rules 5.5 and 8.5 to allow foreign lawyers the right to temporarily practice in a jurisdiction that is given to lawyers from other states in this country. The big issues, alternative business structures, including non-lawyer ownership of a law firm, and alternative litigation financing are under hot debate.
If you have an interest in these matters I urge you to go to the ABA website carrying the 20/20 reports, requests for comment and recommendations. It is: http://www.americanbar.org/groups/professional_responsibility/aba_ commission_on_ethics_20_20.html. In fact I urge you to look at it even if you are not interested to the end that in the future you will not ask "why didn't someone tell me about this?"
I close with the observation that while we are not without flaws, I believe the state of the Judiciary in North Dakota is vigorous, vital and healthy.
Financial Dinosaurs: Wall Street General Partnerships
The Economist today published an interesting article on Brown Brothers Harriman, one of the last financial firms organized as general partnerships.
General partnerships used to be the norm for brokerage and investment banking firms, but there are only a few small holdouts left. BBH, the largest remaining investment banking partnership, has only $600 million in capital. (Yes, I know: I too would be happy to have "only" $600 million.) The firm's eight partners share a single office, the Partners’ Room.
I’m not sure why, but it’s vaguely comforting to know that firms like that still exist. I can just imagine one of the partners putting his arm around the young Turk’s shoulder and explaining “how we do things around here.”
Peer-to-Peer Lending: Who Is the Issuer?
Today's Wall Street Journal contains an article about the growth of peer-to-peer (P2P) lending. However, there are still a number of states that have concluded that the P2P business model does not satisfy their securities laws. Back in October, I was part of a panel discussing P2P lending at the Ohio Securities Conference, and Mark Heuerman, Registration Chief Council of the Ohio Securities Division, gave a great explanation for why Ohio is one of those state. At least one of the problems, as far as Ohio is concerned, is that while the trading platform (for example, Lending Club) is the one filing the prospectus, Ohio views the actual issuer of the notes as being the individual or entity seeking the loan. This creates a problem because under Ohio's merit review guidelines the Securities Division must conclude that "the business of the issuer is not fraudulently conducted," while the lending platform lacks the requisite information on the actual issuers to allow for such a finding. In fact, Prosper Marketplace apparently disclosed as part of its 2009 prospectus amendment that "[i]nformation supplied by borrowers may be inaccurate or intentionally false." You can view more details from Mark's presentation here. P2P lending should be in the news some more before the end of the summer because the Dodd-Frank Act calls for the Government Accountability Office to issue a report on the subject by July 21.
June 15, 2011
Possible Lessons from Business Education for Legal Education
The Economist has two stories that caught my eye this morning. The first is Tutors to the world: Business schools are globalising at a furious pace—which is largely a good thing. The article explains that business schools (graduate programs providing the MBA) are expanding and growing globally. While those schools are increasing their reach, they also run the risk of diluting the quality of education. Still,
the benefits of global business education far outweigh the costs. Business is globalising: the proportion of the world’s largest 500 firms that hail from emerging markets has doubled in five years, from 8.2% in 2005 to 17.4% in 2010. Business schools have no choice but to follow suit.
The article further notes that as business education takes a more global focus, it is becoming decidely "less American." That may or may not be a good thing, but my sense is that many think it is a postive turn.
The second is The Race to the Bottom, which reports that undergraduate "business studies" students are "according to a long article in The Chronicle of Higher Education, by far the idlest and most ignorant." The article continues:
What accounts for this educational wasteland? To some extent it is a matter of self-selection. Many people choose business studies precisely because they don't have a lot going on upstairs. And they prefer to spend their time networking and looking for jobs rather than, say, grappling with Schumpeter's ideas about business cycles. But universities also bear some of the blame. Many universities have treated business studies as a cash cow: there is lots of demand, business students do not require expensive laboratories, and business academics can supplement their incomes with outside consultancy. Business studies is also a mish-mash of subjects, many of them soft and ill-defined, like leadership and business ethics. It is notable that students who focus on “hard” subjects, such as finance, put in much more work than those who study “leadership” and the like.
(1) Are business schools that different from law schools? On the one hand, of course they are. Business is viewed globally, while law is (often) viewed locally (see, e.g. licensing requirements). As such, requirements and processes for students tend to vary (I think) much more significantly in law than in business from country to country. But as most of us know, the law is constantly becoming less local and more global. If business leaders are taking a global approach, it means they will need global counsel. Local counsel in every jurisdiction still works okay for litigation (it seems to me), but it doesn't work as well for transactional work. Good counsel understands the appliable legal regime as well as their client's business goals. As such, law schools need to work to keep up, and so do law firms.
Just adding a Singapore office doesn't make a firm any more global than a summer program in Greece or Norway makes a law school global. (I say this as someone who took and benefitted greatly from a summer law school program overseas.) It's what happens in those locations, who is part of what happens, and what comes back to the school/firm that matters. Just having the location is mostly marketing unless there is some real integration.
(2) Might student's choices of course be as telling in law school as it appears to be in undergraduate schools? Law students are often thought to "grade shop" and perhaps "effort shop" for courses that are likely to lead to good grades/less work. I don't know these "shopping" problems are as pervasive as some think, but it's worth trying to find out. (And I'm working on that.) Either way, it's worth knowing if there is a correlation between course choices and performance, both in school and beyond.
June 13, 2011
Primary Liability Under Rule 10b-5: The Janus Capital Decision
The Supreme Court released its opinion in Janus Capital Group, Inc. v. First Derivative Traders today. The plaintiffs in the case were attempting to hold mutual funds’ investment adviser liable for alleged misstatements in the funds’ prospectuses. In a 5-4 decision, the Supreme Court held that the adviser “cannot be held liable because it did not make the statements in the prospectuses.”
Justice Thomas wrote the majority opinion, which noted that, in order to be liable under 10b-5, one must “make” a false statement. According to Justice Thomas, “one who prepares or publishes a statement on behalf of another is not its maker,” only the person who has “authority over the content of the statement and whether and how to communicate it.” The prospectuses were issued by the funds themselves, not by the adviser, so only the funds made the statements.
Justice Breyer, who wrote the dissent, noted that the adviser was actively involved in preparing and writing the allegedly fraudulent statements; among other things, the complaint alleged that the adviser drafted and reviewed the prospectuses, and disseminated them through its parent company’s web site. Breyer believed this was enough to conclude that the adviser “made” the fraudulent statements.
If this opinion does nothing else, it puts to rest the argument that lawyers might be liable as primary violators under Rule 10b-5 because they draft a document for a client that the lawyer knows to be false. The client in that case would have the ultimate authority over the statement, not the lawyer, so the lawyer would not be making any false statement. The Janus Capital opinion is also going to make it harder to impose primary liability on corporate employees for corporate statements they did not directly make.
The majority saw its decision as a logical progression from the Central Bank decision rejecting liability for aiding and abetting and the Stoneridge Investment Partners decision rejecting liability for tangential participants in the fraud on whom injured investors did not rely. Justice Breyer’s dissent argued that neither Central Bank nor Stoneridge compelled the majority’s conclusion. I think Breyer may be right on this point, but Central Bank, Stoneridge, and Janus Capital certainly present a consistent theme. And, like the other two opinions, Janus Capital is going to be required reading in every Securities Regulation course.
2011 Marks a Century of State Securities Regulation
Back in March, the North American Securities Administrators Association (NASAA) joined state regulators around the country in observing the first state securities law, in Kansas, which went into effect on March 10, 1911. According to the association:
The most recent NASAA statistics show that in 2009, state securities regulators collectively initiated nearly 2,300 enforcement actions, which led to more than $4.7 billion ordered returned to defrauded investors and 1,786 years in jail for convicted con artists. State securities regulators also conducted more than 1,800 investor education presentations nationwide.
In my limited experience, state sercurites regulators, at least here in North Dakota, seem to have a stronger focus on protecting investors than they do proving they are protecting investors. That is, they seem to have their priorities right on who and what to pursue in fraud cases. Perhaps that is because of the people in charge or because they have more limited resources, but it raises some interesting questions about exactly how enforcement should be handled and at what level.
This look back at the Kansas statute reminds me of a helpful (and aptly named) piece on the history of blue sky laws from Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347 (1991). The article is availble in PDF via the Faculty Scholarship Series. Paper 1641. http://digitalcommons.law.yale.edu/fss_papers/1641
In case you still want more on this, you should know, "NASAA plans to celebrate the centennial of state securities regulation at its annual conference, September 11-13, 2011 in Wichita, Kansas."
June 12, 2011
O'Kelley on Corporate Law
Charles R.T. O'Kelley has posted The Theory of the Firm: The Corporation as Sole-Proprietor Surrogate on SSRN with the following abstract:
What is a corporation? Who owns a corporation? What is the purpose or function of corporation law, particularly fiduciary duty? What is a firm? What does the theory of the firm tell us about the answer to the first three questions? These core questions form the backdrop for the paradigm shift in corporation law scholarship which occurred between 1970 and 1980 and for the current search for a new paradigm. This article reassesses the currently dominant nexus-of-contracts paradigm, and the current controversy over the normative validity of shareholder primacy, and articulate a new vision of the corporation as sole-proprietor surrogate.
For four decades, until the 1970s, the Berle and Means paradigm dominated corporation law scholarship, much as it had dominated the New Deal reform agenda. This paradigm is based on the asserted empirical fact that shareholders, though unquestionably the owners of publicly-traded corporations, do not have effective control over most publicly-traded corporations. Berle and Means also made a normative claim: the primary purpose of corporation law – a regulatory purpose – is to protect shareholders from depredation at the hands of selfish or careless entrenched managers, a risk of harm made possible by separation of ownership and control. Not surprisingly, the dominant research agenda for corporation law scholars during the ascendancy of this paradigm was corporate law reform intended to better regulate the conduct of corporate managers or otherwise protect shareholders’ interests. Equally unremarkably, scholars working out the implications of the dominant paradigm – Progressives – gave little thought to the definition of a corporation, other than to distinguish it from other business forms with different legal attributes, and gave no thought at all to economists’ theorizing about the nature of the firm or the implications for law reform of classical microeconomic theory.
During the 1970s, fueled by the law and economics movement and neo-classical economists’ work on the theory of the firm, a remarkable paradigm shift occurred. By the early 1980s, paying homage to R. H. Coase, but more directly relying on the work of Jensen & Meckling, law and economics scholars had accomplished a corporation law coup d’etat, overwhelming the defenders of the Berle and Means paradigm, and installing a new paradigm – the nexus-of-contracts theory of the corporation, and the corresponding maxim that corporation law could best be understood through economic analysis. Under the nexus-of-contracts paradigm the corporation is depersonalized and described not as an artificial entity created by the state and subject to the state’s paternalistic shareholder-protective regulation, but instead as a nexus of voluntary contractual relationships between and among shareholders, managers, employees, bondholders, suppliers, customers and other corporate constituencies.
However, the now dominant contractarian model has not achieved the near universal acceptance that its predecessor achieved as evidenced by the growing number of scholars who identify as progressives, who reject the “politics” that they associate with new paradigm, and yet find certain aspects of contractarianism irrefutable. I suggest that the current lack of harmony in corporation law scholarship, and the resulting failure to fully integrate legal and economic insights about the firm and the corporation into our study of corporation law, begins with a universal but unrecognized move which all corporation law scholars seem to make – treating the terms “the firm” and “the corporation” as perfect substitutes for each other when referencing a particular incorporated business enterprise. Consider two statements: General Motors is a firm; General Motors is a corporation. As so used, the words “firm” and “corporation” have identical meaning for most economists and legal scholars.
The current dialog is further confused by viewing the firm as having no center. If we depict a sole proprietorship as a circle encompassing its constituents, that firm would have a center, the sole proprietor, who owns the firm’s property, serves as the node for all contracts, and determines and directs the firm’s policies. In contrast, all corporation law scholars apparently view the corporation as a firm with no center, or, as having at its center an artificial and empty contracting node provided by corporation law.
This article demonstrates that the equation of “the firm” and “the corporation” is a fundamental error which masks a principal role of corporation law – providing a substitute or surrogate for the sole proprietor in firms that find it desirable to split ownership among more than one individual – and which encourages the view that corporation law protects, or should protect, the interests of “other constituencies.” I demonstrate that if we conceive of the firm as a circle encompassing its constituents, the corporation should be depicted as a smaller circle within the firm, which smaller circle contains the corporation’s shareholders and directors. With this conceptual shift, corporation law can be described as focusing solely on the relationships between and among shareholders, officers and directors because they are the only constituents of the corporation. Moreover, we can see that the corporation is the smaller circle within the firm which serves as the locus, or contracting node, for the other contractual relationships that make up the firm, just as the sole proprietor is the party to all contracts in the classic firm.
Part I traces the evolution of the nexus-of-contracts paradigm from the work of Frank Knight and R.H. Coase to the present, highlighting the current debate as to whether the Shareholder Primacy norm is a central tenet of, or is inevitably legitimated by, the nexus-of-contracts account of corporation law. Part II introduces the Corporation as Sole-Proprietor Surrogate model and tests its utility in the context of the current debate over the shareholder primacy norm. The article concludes with some tentative observations about the research agenda suggested by the new theory, including its implications for the study of corporate governance and the discussion of corporate social responsibility.
-Eric C. Chaffee
Heminway on the Securities Exchange Commission
Joan MacLeod Heminway has posted Sustaining Reform Efforts at the SEC: A Progress Report on SSRN with the following abstract:
Many recent articles written by U.S. legal practitioners and law scholars in the wake of the financial crisis address regulatory reforms included in or omitted from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related agency initiatives. In contrast, this article focuses on institutional reforms - specifically those instituted at the U.S. Securities and Exchange Commission (SEC) since President Barack Obama took office in January 2009.
In an article published in the Villanova Law Review last year, I assessed the early reform efforts at the SEC in the Obama era from the vantage point of change leadership literature (a branch of business management scholarship). This article updates the preliminary findings reported in the Villanova Law Review article in light of the enactment and initial phases of implementation of the Dodd-Frank Act (which was in the final stages of congressional action when work on the Villanova Law Review article was completed in the spring of 2010) and the subsequent change in the composition of Congress as a result of the mid-term elections in November 2010. The article begins by identifying and assessing ongoing evidence of effective change leadership at the SEC in accordance with the framework used in my earlier article and continues by briefly addressing the potential effects of shortfalls in SEC funding. The article then concludes by making tentative predictions about the future of institutional reform at the SEC in this new political environment.
-Eric C. Chaffee
Johnson on Securities Class Actions in State Court
Jennifer Johnson recently posted a paper on SSRN entitled, "Securities Class Actions in State Court." Here is the abstract:
Over the past two decades, Congress has gradually usurped the power of state regulators to enforce state securities laws and the power of state courts to adjudicate securities disputes. This Paper evaluates the impact of Congressional preemption and preclusion upon state court securities class actions. Utilizing a proprietary database, the Paper presents and analyzes a comprehensive dataset of 1500 class actions filed in state courts from 1996-2010. The Paper first examines the permissible space for state securities class actions in light of Congressional preclusion and preemption embodied in the 1998 Securities Litigation Uniform Standards Act (SLUSA) and Class Action Fairness Act of 2005 (CAFA). The Paper then presents the state class action filing data detailing the numbers, classifications, and jurisdictions of state class action cases that now occupy the state forums. First, as expected, the data indicates that there are few traditional stock-drop securities class actions litigated in state court today. Second, in spite of the debate over the impact of SLUSA and CAFA on 1933 Act claims, very few plaintiffs attempt to litigate these matters in state court. Finally, the number of state court class actions involving merger and acquisition (M&A) transactions is skyrocketing and now surpasses such claims filed in federal court. Moreover, various class counsel file their M & A complaints in multiple jurisdictions. The increasingly large number of multi-forum M&A class action suits burden the defendants and their counsel, the judiciary and even plaintiffs’ lawyers themselves. The paper concludes that absent effective state co-ordination, further Congressional preemption is possible, if not likely.