Business Law Prof Blog

Judge Rakoff and the Citigroup Settlement Rejection

A journalist asked me some questions via email regarding Judge Rakoff's rejection of the Citigroup settlement.  (DealBook has the opinion, as well as an overview, here.)  Here are a couple of my responses:

I believe Judge Rakoff’s obvious frustration with the SEC practice of routinely entering into these sorts of agreements where the other side neither admits nor denies any wrongdoing is part of a growing trend.  One might even go so far as to see a connection to the Occupy Movement, which at least in part seems to be protesting a perceived “crony capitalism” wherein government regulates big business by way of wink-and-nod processes that leave both sides happy and the average citizen worse off.  (I’m not alone in making this connection.  Jonathan Macey had this to say at Politico (HT: Bainbridge): “The victory that Rakoff gave to the Occupy Wall Street movement Monday came from the federal courthouse — not far from Zucotti Park, the lower Manhattan headquarters of OWS.”; “Adopting the language of the Occupy Wall Street movement, Rakoff ruled that if judges do not have enough information on which to base their decisions, then the deployment of judicial power ‘serves no lawful or moral purpose and is simply an engine of oppression.’”)

I am somewhat ambivalent about the decision.  On the one hand, I recognize that there are good reasons for entering into these types of settlements.  Defendants like Citigroup have strong incentives to settle without admitting any wrongdoing in order to avoid those admissions being used against them in later private proceedings.  Meanwhile, the SEC has strong incentives to settle because of the costs and risks inherent in litigation.  On the other hand, while the agreements appear to make sense for the SEC and the defendants, it is much less clear whether they make sense for shareholders and the public.  The SEC suggests that there would be much less money available to return to investors if its power to enter into these sorts of agreements were to be curtailed.  One may question, however, whether the routine use of these agreements does not in some way foster more injury to investors and the public in the long run, since there is at least some message being sent to the alleged wrongdoers in these cases that they will avoid any meaningful personal penalty for similar conduct in the future.  One particular issue that I think needs to be examined more closely is the public’s perception of these settlements.  I have heard the SEC defend its practices in these cases by saying they support investor confidence.  I’m not so sure about that, and if the SEC is making decisions based at least in part on that presumption it is something that should be empirically tested.  Personally, I think the public has grown more and more suspicious of these deals—so I find that particular justification to carry little weight, if it doesn’t in fact cut the other way.

SJP

Ford & Hess on Corporate Governance

Cristie L. Ford and David Hess have posted Corporate Monitorships and New Governance Regulation: In Theory, in Practice, and in Context on SSRN with the following abstract:

Over the last few years, it has become increasingly common for government agencies to resolve corporate criminal law and securities regulations violations through the use of settlement agreements that require corporations to improve their compliance programs and hire independent monitors to oversee the changes. Based on our interviews with corporate monitors, regulators, and others, we find that these monitorships are failing to meet their full potential in reforming corrupt corporate cultures. After reviewing potential reforms to improve monitorships from a new governance perspective, we discuss the limits of these reforms that are due to the sociological and institutional environment in which monitorships are embedded.

-- Eric C. Chaffee

Nevada's Treatment of Officer/Director Liability

I recently read an interesting article by Michal Barzuza, Market Segmentation: The Rise of Nevada as a Liability-Free Jurisdiction. Barzuza discusses an interesting provision in Nevada’s corporation law that I’m embarrassed to admit, I wasn’t aware of. (I guess this proves the point of Carney, Shepherd, and Bailey about lawyers being rationally ignorant of non-Delaware law.)

Section 78.138(7) of the Nevada Revised Statutes provides that, unless the articles of incorporation provide otherwise, a director or officer is not liable

for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that:

(a) The director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and [my emphasis]

(b) The breach of those duties involved intentional misconduct, fraud or a knowing violation of law.

Because of subsection (b), the default rule is no duty of care liability at all, and only limited duty of loyalty liability. A Nevada corporation could always opt into greater liability in its articles, but compare that to Delaware, which imposes liability, but allows corporations to opt out of some of that liability. Even if a Delaware corporation elects to eliminate liability, as most do, it can’t eliminate as much as Nevada 's default rule does and it can only reduce the liability of directors, not officers.

-Steve Bradford

The Rise of Small Firms

In an article posted on Monday, Debra Cassens Weiss of the ABA Journal reports that an increasing number of associates at big firms are leaving their jobs to start their own practices.  This article evidence at least two things.  First, the need for practical skills training is increasing even at the upper eschelons of the legal academy.  Second, all law schools should be offering at least one course in law practice management.  Put another way, law schools need to be preparing graduates to "hit the ground running" at the beginning of their careers.

-- Eric C. Chaffee

Proposed Facebook Settlement

A copy of the Federal Trade Commission's proposed settlement with Facebook, Inc. can be found here.  Under the terms of the agreement, Facebook is required to refrain from misrepresenting its privacy practices, to notify users when their data is disclosed to third parties, to increase security of user information, and to implement a privacy program.  I'm guessing that George Orwell never thought that  Big Brother would be a twenty-something college dropout.  The news coverage of the settlement does evidence the metoric rise of Facebook and social networking in general.

--Eric C. Chaffee

It's a Wonderful Life--But Not a Very Realistic One

It's holiday season, and time once again to watch one of my all-time favorite movies, It's a Wonderful Life. But, as much as I like the movie, I have to admit it's not very realistic. I'm not talking about the angel part; I mean the legal part.

The bank examiner discovers that George Bailey's building and loan is $6,000 short, and Mr. Potter swears out a warrant on George for bank fraud. But George's friends collect enough money to make up the shortfall, the warrant is torn up, the bank examiner is satisfied, and everyone lives happily ever after.

Seriously, in what alternative universe is bank fraud excused if one's friends are able to come up with enough money to replace what you lost? It may make good theater, but it's ridiculous white collar criminal law.

I love the film and watch it every year, but, with all due respect to Frank Capra and the film's writers: Bah! Humbug!

-Steve Bradford

Stanford Law Review Online: Summe on Misconceptions About Lehman Brothers’ Bankruptcy

Over at the Stanford Law Review Online, Kimberly Summe has posted "Misconceptions About Lehman Brothers’ Bankruptcy and the Role Derivatives Played."  Here is an excerpt, but the entire piece is well worth a read:

Misconception #1: Derivatives Caused Lehman Brothers’ Failure ….

At the time of its bankruptcy, Lehman Brothers had an estimated $35 trillion notional derivatives portfolio. The 2,209 page autopsy report prepared by Lehman Brothers’ bankruptcy examiner, Anton Valukas, never mentions derivatives as a cause of the bank’s failure. Rather, poor management choices and a sharp lack of liquidity drove the narrative of Lehman Brothers’ bankruptcy…..

Misconception #2: Regulators Lacked Information About Lehman Brothers’ Financial Condition

The Valukas report was explicit that regulatory agencies sat on mountains of data but took no action to regulate Lehman Brothers’ conduct…..

Misconception #3: Derivatives Caused the Destruction of $75 Billion in Value ….

The allegation that derivatives destroyed value is flatly at odds with the fact that derivatives were the biggest contributor to boosting recoveries for Lehman’s creditors....

Misconception #4: Insufficient Collateralization

Policymakers focused on collateralization as a derivatives risk mitigation technique. Collateralization of derivatives, however, has existed for twenty years….

Misconception #5: The Bankruptcy Code Is Not Optimal for Systemically Important Bankruptcies ….

[U]nder the current settlement framework, Lehman Brothers’ bankruptcy will be resolved in just over three years—a remarkable timeframe given that Enron’s resolution took a decade.

Policymakers also focused on the wrong entities for failure. Banks, the most likely candidates for application of Dodd-Frank’s orderly resolution authority, have in fact been the least likely to experience failures due to derivatives losses, in part because of their efforts to hedge exposures. The largest derivatives failures to date involved non-bank entities such as Orange County, the hedge fund Long-Term Capital Management, and AIG Financial Products—entities with fewer risk management and legal resources than banks and which are less likely to hedge exposure. These types of entities are not covered by Dodd-Frank.

Conclusion

An alternative vision for policymakers in the aftermath of Lehman Brothers’ bankruptcy would have involved greater consideration of how liquidity can become constrained so quickly, as in the commercial paper and repo markets, and an effort to mandate the type and amount of collateral provided in these asset classes. In addition, a clarion call mentality among regulators with respect to critical issues such as the size and makeup of a bank’s liquidity pool and an insistence on adherence to banks’ self-established risk tolerances should be actionable. Instead, policymakers overlooked some of the principal causes of Lehman Brothers’ bankruptcy….

SJP

Thanks!

Thanks so much to my hosts here at Business Law Prof Blog for inviting me to guest blog this month. It was fun and I'll continue in my regular role as a reader with a lot of appreciation for folks who keep up the blogging that I enjoy so much.

Until next time!

--Elizabeth Pollman

Email: For Lawyers, It's Legal Writing; For Educators, It's An Opportunity

The Maryland Law Review Endnotes has posted The New Legal Writing: The Importance of Teaching Law Students How to Use E-Mail Professionally, by Kendra Huard Fershee.  Before you read any further, I want to be clear of my potential biases: Kendra is my wife (and, lest there be any doubt, I think she's great). And while students should be taught proper use of email in the legal world, it's not just students. If you read legal blogs, such as Above the Law, which has an email scandals section of the blog, you know that the proper use of mail is a lesson that needs to be learned by students in and outside of courses (see, e.g., here and here), law professors, and by lawyers everywhere.

Here's an excerpt rom the article:

The benefits of e-mail to lawyers are vast and cannot be easily quantified, but lawyers who are not careful can also suffer greatly through the misuse of e-mail. Problems with tone can inadvertently and counterproductively anger a client, opposing counsel, or the court.  . . . [A] lawyer can build credibility by evincing intelligence in her writing, and being articulate is one way to do that. It is, however, unfortunately much easier to lose credibility by sending inarticulate communications, particularly those that can be easily shared with others. E-mail mistakenly forwarded to the wrong person can create embarrassing consequences—even professional ethics repercussions—for the person forwarding the information.  And including sensitive client information in e-mail can create discovery problems that can adversely affect clients who are under investigation or engaged in litigation.

While electronic communication has a few potential downsides, the good news is that lawyers and law students can be trained to use e-mail properly. In fact, lawyers and law students must be trained to use e-mail properly to help them avoid making mistakes that electronic communication can invite. Obviously, there is no way to avoid every mistake that can be made in e-mail, but with careful instruction, those mistakes can be limited to the good old fashioned kind that lawyers have made on paper since the beginning of the legal profession. The combination of common use among lawyers and the potential for dangerous errors in e-mail make it imperative that legal writing professors include instruction about how to write e-mail as part of their curriculum. Failing to teach students how to use e-mail professionally could be likened to failing to teach students how to write a legal memorandum (setting aside, for the moment, the burgeoning debate about whether the legal memo is dead with the advent of the shorter, more direct legal analysis e-mail lawyers commonly use now).

There is empirical evidence that e-mail is the most commonly used form of legal communication, meaning it is a part of practice with significant risk and high potential rewards. To take this a step further, in my view, it's not just legal writing faculty who need to be teaching about the use of email; it's all faculty. If we are to prepare students for practice, they need to know that poor quality emails reflect poorly on their abilities as lawyers.  We need to provide feedback when email is used sloppily or inappropriately, and we need to provide opportunities for students to use email in professional or semi-professional settings. And this can be minor or major part of a course.  As a small example, when I require a paper in a course, I require students to turn in a hard copy and send me a soft copy via email.  I can use that opportunity to reinforce what I expect, individually and/or as a group. (The article has some useful tips for teaching in this context (e.g., "Remember Your Audience and Avoid Finger-Wagging"). 

Email is a major part of what most of us do, and we need to respect it as part of the educational process. It's one of many ways law schools can help demonstrate, on day one, that their graudates are in fact ready for the professional world, because most of them are. We should make sure they know how to demonstrate that in all settings, or we've come up short. 

--JPF

Welcome Guest Blogger Hanna Chung

We here at the BLPB are excited to welcome Hanna Chung for a month of guest-blogging.  Hanna currently clerks for the Honorable Deborah L. Cook of the Sixth Circuit Court of Appeals, and clerked the previous year for the Honorable Sidney A. Fitzwater, Chief Judge of the Northern District of Texas. Prior to guest-blogging here, she covered the scholarship presented in the University of Chicago Law School's biweekly Law and Economics Workshop as a student blogger for the University of Chicago Law School blog (for a sample, go here).

SJP

Two things you might not have expected together: Ayn Rand and yoga pants

Stretchy pants-retailer and public company, Lululemon, is grabbing some attention this week with its new shopping bags.   

If you’ve ever purchased something at this pricey athletic clothing store, you know that it comes in a reusable bag that is typically red and white, emblazoned with motivational text in a cheerful design.  They usually have a picture of a woman in a yoga pose and the patchwork of text says things like: “Breathe deeply,” “Friends are more important than money,” and “Do one thing a day that scares you.” If you look on the Lululemon website, you'll notice it calls this patchwork of text its “manifesto.”

The past few weeks, Lululemon shoppers haven’t received the usual upbeat and slightly preachy red bag, but instead a black bag that says only “Who is JOHN GALT?” in white lettering – a phrase from Ayn Rand’s Atlas Shrugged.

At this point, if you’re wondering “what the what?” you’re in good company. 

The company hasn’t offered an official explanation, but many people have gone to a blog post on the company’s website to figure out what these new bags are about.  The post, written by a staff member, explains that the company’s founder, Chip Wilson, read Atlas Shrugged when he was 18 and felt inspired to “elevate the world from mediocrity to greatness.”  The post further states: 

“Our bags are visual reminders for ourselves to live a life we love and conquer the epidemic of mediocrity. We all have a John Galt inside of us, cheering us on. How are we going to live lives we love?”

The comments section to the blog post is officially on fire.

Comments are ranging from the simple (“Just clothes. Stopping mixing in politics.”) to the more emphatic support or opposition (“This is the lamest thing ever. Package Republican propaganda in a $100 pair of pants and call it yoga.”).  Here’s one of the more elaborate comments:

“Lululemon, in reading the comments of some of your customers, I was reminded of a similar reaction to the Wall St. Journal’s op-ed by John Mackey CEO of Whole Foods in 2009 in which he attacked ObamaCare and proposed a free market solution to our health care crisis. It turned out that he, too, was an admirer of Ayn Rand.

Many of Whole Food’s customers were also outraged, as some of yours apparently are. But they went a step further and organized a boycott.

It was a total failure. As a matter of fact, Whole Food’s stock just reported record profits and their stock recently made all time highs.

I wish you similar success.”

Some customers have declared they won’t buy Lululemon clothes again and are retiring their logo-emblazoned gear to the back of the closet rather than showing it off in tree pose.  Many have expressed the sentiment that Rand’s philosophy is contrary to the teachings of yoga.

The media world is also abuzz with this story – everything from a mention on last night’s Colbert Report to the NY Times (see, e.g., here, here, here, here). (And an interesting Slate piece argues that yoga circa 2011 isn't such an odd fit with Rand’s ideology as yoga practice in America has become “hyper modern and individualist, a lifestyle devoted to realizing one’s own potential in the tightest, most space-age fabric possible.”) 

The aspect of this story that I find most interesting is how to interpret these new bags – are they just a new angle on the company’s marketing? Like when a perfume company or fashion designer uses suggestive ad campaigns or ads to raise awareness of social issues? Does the management think this will sell more yoga pants? Or is this political speech? And if so, what does this example illustrate about who is speaking when a corporation speaks?

--Elizabeth Pollman

 

Chaffee and Rapp on Peer-to-Peer Lending

Geoff Rapp and I have posted Regulating On-Line Peer-to-Peer Lending in the Aftermath of Dodd-Frank: In Search of an Evolving Regulatory Regime for an Evolving Industry on SSRN with the following abstract:

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act called for a government study of the regulatory options for on-line Peer-to-Peer lending. On-line P2P sites, most notably for-profit sites Prosper.com and LendingClub.com, offer individual “investors” the chance to lend funds to individual “borrowers.” The sites promise lower interest rates for borrowers and high rates of return for investors. In addition to the media attention such sites have generated, they also raise significant regulatory concerns on both the state and federal level. The Government Accountability Office report produced in response to the Dodd-Frank Act failed to make a strong recommendation between two primary regulatory options – a multi-faceted regulatory approach in which different federal and state agencies would exercise authority over different aspects of on-line P2P lending, or a single-regulator approach, in which a single agency (most likely the new Consumer Financial Protection Bureau) would be given total regulatory control over on-line P2P lending. After discussing the origins of on-line P2P lending, its particular risks, and its place in the broader context of non-commercial lending, this paper argues in favor of a multi-agency regulatory approach for on-line P2P that mirrors the approach used to regulate traditional lending.

-- Eric C. Chaffee

Secunda on Labor Law

Paul M. Secunda has posted The Perceptible Disconnect between the Global Economic Crisis and the Wisconsin Public Sector Labor Dispute of 2011 on SSRN with the following abstract:

The enactment in June 2011 of Wisconsin Act 10, legislation that eliminated most collective bargaining rights for most public employees in Wisconsin, did not necessarily follow from the economic conditions surrounding the global recession. The argument here is that it was a blatant power grab with political, social, and economic implications. Governor Walker’s claim that Act 10’s anti-collective bargaining approach was required to balance Wisconsin’s budget is belied by two unassailable facts. First, there were a number of provisions in the law, including an annual union recertification requirement and an anti-dues checkoff provision, which had absolutely nothing to do with cost savings. Perhaps even more tellingly, when Act 10 was finally enacted by the State legislature, Walker and his allies in the legislature employed a legislative procedure which could only be utilized if Act 10 did not have any impact on state fiscal policy. In short, Governor Walker used the global economic crisis, and Wisconsin’s budget situation more specifically, as a ruse to enact a punitive bill against public sector unions.

Although unions and their allies have drafted, and continue to draft, procedural and substantive legal challenges to Act 10 based on state open meeting laws and constitutionally-based freedom of association and equal protections provisions, these legal challenges have so far been unsuccessful. If such efforts continue to be unsuccessful, it indeed may be a long time before any real public sector collective bargaining will be permitted in Wisconsin. The subsequent loss of workplace rights not only adversely impacts public sector workers, but also the citizens of Wisconsin who will be that much poorer for having to live in a society where internationally-recognized rights of association and collective bargaining are not taken seriously.

This piece discusses this historic moment in Wisconsin public sector labor law in three parts. The first section describes the story of the enactment of Wisconsin Act 10 in chronological order. The second section then considers whether the global recession in fact lead inevitably to the enactment of Act 10. Finally, the third section concludes by normatively arguing for robust public sector bargaining rights in Wisconsin and throughout the United States.

-- Eric C. Chaffee

Learning About Teaching and Memory

Now that I am done teaching for the semester, I'm turning to a few other items that need be completed, including an article that needs finishing, an exam that still needs one more essay to be written, and reassessing how I will teach some of next semester's materials.  On this last front, I came across an interesting article in The Chronicle: Teaching and Human Memory, Part I.  The article discusses the fact that many of us teach without knowing much about how students learn.  I am certainly one of those people, even though I have been putting forth effort to learn more about how people learn.  The article explains:

Michelle Miller is a professor and chair of the psychology department at Northern Arizona University. A researcher and teacher in the fields of language, memory, and cognitive psychology, she has devoted much of her career to thinking about the relationship between her research areas and her classes. She has worked on a course-redesign project on her campus to help improve retention and performance rates in large classes.

Miller's article in College Teaching opens with an explanation of why so few of us may count ourselves as even amateur enthusiasts for cognitive theory: The field remains a relatively young one and has evolved rapidly over the past several decades. If you did happen to pick up some ideas 10 or 15 years ago about learning and cognition in a how-to-teach seminar in graduate school, what you learned there might have been superseded or even overturned since then by new information and theories.

Equally troublesome, research findings at the edge of the field don't always translate easily into pedagogical practice. As Miller describes the dilemma, "a working understanding of memory processes is clearly useful for instructors, who work very hard to promote long-term retention of course material, and fortunately, there is no shortage of theoretical research detailing the inner workings of memory. On the other hand, when this theoretical research is translated into specific suggestions for pedagogical practice, it is too often misinterpreted, oversimplified, or substantially out of date."

The materials I have been reading certainly support his point.  The information about how best to teach students varies widely and often conflicts.  Certainly some of this is because different researchers have different views on what is important, but it can be hard to tell what is state of the art, what is a good (or lucky) guess, and what will work in a law school setting.  Regardless, just thinking about these issues has value.  It can help us consider our true goals and whether what we are doing in the classroom is toward that end.  

For me, I have been focusing on the idea that I'm not only trying to teach information -- I'm trying to teach people to find information, then interpret it, understand it, and apply it where they need it.  This is why I can't always just give the answer, even though I know that has some appeal.  The point is not only knowing the rule -- it's knowing why the rule exists.  It's knowing how the rule came about.  It's knowing how to find a rule for another issue. That's what it means to be a lawyer.  It's not just knowing the business judgment rule or that FERC has jurisdication over wholesale sales of electricity.  It's knowing what that means for a client and how you can help your client avoid or mitigate trouble or pull together a deal.  

I certainly haven't figured it all out, but thinking about it is making me better at what I do.  I look forward to Part II of the article.  

--JPF

Facebook about to go public?

Rumor has it that Facebook may soon file to go public (see here and here). A lot of curious eyes will be on its S-1 and valuation. 

It will be interesting to compare the valuation for the IPO with recent prices in the secondary markets. The SharesPost ticker currently has Facebook at $31/sh ($73 billion implied value) and the social media giant's stock is listed at the top of the "most active" list.

--Elizabeth Pollman

Occupy Climate Change

Democracy Now recently published transcribed portions of "Occupy Everywhere," a panel hosted by The Nation magazine, "On the New Politics and Possibilities of the Movement Against Corporate Power" (here).  Naomi Klein was quoted as drawing a connection between the movement and the climate change debate, saying the following:

[T]here has been an ecological consciousness woven into these occupations from the start…. So, what I find exciting is the idea that the solutions to the ecological crisis can be the solutions to the economic crisis, and that we stop seeing these as two problems to be pitted against each other by savvy politicians, but that we see them as a ... single crisis, born of a single root, which is unrestrained corporate greed that can never have enough, and that ... trashes people and that trashes the planet, and that would shatter the bedrock of the continent to get out .. the last drops of fuel and natural gas. It’s the same mentality that would shatter the bedrock of societies to maximize profits. And that’s what’s being protested.... [T]he reason why the right is denying climate change now in record numbers— … 80 percent….. [is] because they have looked at what science demands, they’ve looked at the level of emissions cuts that science demands, 80 percent or more by 2050, and they have said, "You can’t do that within our current economic model. This is a socialist plot." [T]heir entire ideology, which is laissez-faire government, attacks on the public sphere, privatization, cuts to social spending, all of that, none of it can survive actually reckoning with the climate science, because once your reckon with the climate science, you obviously have to do something. You have to intervene strongly in the economy.

For more on this you can read her article "Capitalism vs. the Climate."

SJP