Business Law Prof Blog

Weekend Reading: On Politics, Poetry, and Finances

I had the opportunity to spend some time on a plane with Sunday's New York Times Magazine this weekend. It was a particularly good read.  Here are some highlights that have some applicability to business and business law:

Building a Better Mitt Romney-Bot: 

Mitt Romney’s campaign has decided upon a rather novel approach to winning the presidency. It has taken a smart and highly qualified but largely colorless candidate and made him exquisitely one-dimensional: All-Business Man, the world’s most boring superhero.

The Foul Reign of Emerson’s ‘Self-Reliance’

The excessive love of individual liberty that debases our national politics? It found its original poet in Ralph Waldo [Emerson]. . . .

The larger problem with [“Self-Reliance”], and its more lasting legacy as a cornerstone of the American identity, has been Emerson’s tacit endorsement of a radically self-centered worldview. It’s a lot like the Ptolemaic model of the planets that preceded Copernicus; the sun, the moon and the stars revolve around our portable reclining chairs, and whatever contradicts our right to harbor misconceptions — whether it be Birtherism, climate-science denial or the conviction that Trader Joe’s sells good food — is the prattle of the unenlightened majority and can be dismissed out of hand.

“A man is to carry himself in the presence of all opposition,” Emerson advises, “as if every thing were titular and ephemeral but he.” If this isn’t the official motto of the 112th Congress of the United States, well, it should be. The gridlock, grandstanding, rule manipulating and inability to compromise aren’t symptoms of national decline. We’re simply coming into our own as Emerson’s republic.

Europe’s Financial Crisis, in Plain English

[T]he bottom line is simple: Europe’s problems are a lot like ours, only worse. Like Wall Street, Germany is where the money is. Italy, like California, has let bad governance squander great natural resources. Greece is like a much older version of Mississippi — forever poor and living a bit too much off its richer neighbors. Slovenia, Slovakia and Estonia are like the heartland states that learned the hard way how entwined so-called Main Street is with Wall Street. Now remember that these countries share neither a government nor a language. Nor a realistic bailout plan, either.

This article on the Euro also notes that Lord Wolfson, CEO of Next (a European retailer) is offering a £250,000 prize to anyone who can "answer the question of how to manage the orderly exit of one or more member states from the European Monetary Union."  The PDF announcement is here.  Why does this matter? As the Times Magazine article explains: 

Q: Will the euro survive?

It’s a dangerous question to ask out loud. Suppose a credible rumor spread throughout Greece that, rather than accept the harsh terms of another bailout package, the government was plotting to revert to the drachma. Fearing the devaluation of their savings, Greeks would move their money somewhere safer, like a German bank. The Greek banking system would then, in all likelihood, implode.

But Greece’s economy is too small for an isolated collapse to cause any significant damage throughout the continent. (Even a collapse confined to Greece, Ireland and Portugal couldn’t take down Europe.)  So the concern about a run on the Greek banking system is largely about whether a panic might spread to Spain or — worse — Italy, which could topple Europe’s financial system.

If you have any ideas on how to orchestrate a reasonably smooth exit of one or more countries from the European Monetary Union, you could line your pockets with some British currency, while stabilizing European markets. That'd be a good day's work.

--JPF

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

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

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

Pizza is a vegetable. Really?

By now you've probably heard about Pizzagate--what some have described as: "Congress puts the food lobby above child nutrition." Here's Kermit's take (30-second ad up front):

 

SJP

Jordan on Business Roundtable v. SEC

My colleague Bill Jordan has written a review of the Business Roundtable v. SEC decision (striking down the SEC's proxy access rule) for his "News from the Circuits" column in the forthcoming 37 Administrative and Regulatory Law News 1.  Here's an excerpt:

The court criticized the agency’s rejection of studies favoring the management position in favor of “two relatively unpersuasive studies” purportedly showing the value of the inclusion of dissident directors on corporate boards.

The court’s dismissive treatment of the SEC’s response to these studies contrasts sharply with the longstanding principle of judicial, deference to agency assessment of complex technical and scientific studies.... Note that the court considered itself qualified to determine that the studies relied upon by the SEC were “relatively unpersuasive.” This is not the language of arbitrary and capricious review or even of hard look review.  This is the language of substantive judgment, even political judgment.

The contrast is particularly striking because this case essentially involved judgments about the value of democracy. In assessing electoral democracy, surely we assume that elections improve outcomes because they hold politicians accountable for their actions. It seems reasonable for the SEC to incorporate this fundamental principle of democratic institutions into the arena of shareholder democracy. At least a court should review such agency judgments – made by the politically accountable electoral branch of government rather than the unaccountable judiciary – with considerable deference. The D.C. Circuit’s review in this case was precisely the opposite. On one particular issue, the court characterized the agency’s explanation as “utterly mindless.”

It is difficult to determine the long-term significance of this decision. It suggests, among other things, that the D.C. Circuit (at least these three judges) consider themselves well qualified to second-guess agency decisions about issues of corporate structure and costs even if they should defer to agency decisions about scientific and technical issues.

SJP

Super Committee Failure a Super Short?

It appears that the Super Committee is giving up and going home. Apparently the idea of compromise and actually being accountable for budget cuts is more appalling than the idea of asking Congress to bailout the Super Committee for their ineffectiveness.  As CNN/Money explains:

The "automatic" budget cuts that were supposed to deter super-committee members from punting won't actually kick in until 2013. And that gives Congress more than 13 months to modify the law.

There will be tremendous pressure to do so.

Athough the market implication of failure to reach a compromise are not clear (at least to some), the early feedback is that the market doesn't like it, as this morning's headline, Dow Sinks 300 Points, explains.

So I got to thinking, does anyone benefit from not reaching a deal?  Certainly anyone who thought a failure to reach a deal would send the market lower could short the market. I think a lot of people expected that such a failure would drive the market lower.  What about people who knew a deal would fail?  Like members of the Super Committee and their staffs?  

Professor Bainbridge has been sharing his and others' views on congressional insider trading recently, see, e.g., here and here, so maybe that's why it's on my mind.  I can't help but wonder, did anyone of those key people take a short position on the market last week before news of the likely failure started to leak out? And does it matter?  

If so, it's not at all clear it would be illegal to do. It is pretty clear to me, though,  at a minimum, it would be very scummy.  

--JPF

Why haven't the Occupy coders used Facebook?

There's an interesting short piece at The Atlantic about the web developers coding the online presence of the Occupy movement and how their choices have reflected the organizational structure and ethos of the movement.  Check it out here.

It captures an interesting aspect of the movement and group speech.

--Elizabeth Pollman

The question that won't go away: Are boards simply not up to the task?

It often strikes me as somewhat of an emperor-has-no-clothes moment when I explain to my students that, in this era of too-big-to-fail, we continue to entrust oversight of institutions that have the potential to cripple the entire global economic system to folks who are doing so on very much of a part-time basis, and with some minor distractions to boot (like running their own TBTF enterprise as CEO).  I was reminded of this when I read Steven Davidoff's post, A Board Complicit in MF Global’s Bets, and Its Demise.  After pointing out that the failure of oversight in this case was not due to lack of expertise or knowledge, Davidoff suggests that perhaps "boards are inherently unable to do the job we want of them: to oversee the company and counteract the influence of its chief executive."  As a possible solution, Davidoff suggests that "[i]f the board members were to be penalized for their failures through forfeiture of their own compensation, perhaps directors would [be more] focused on creating a stronger risk management culture."  I have my doubts that we could ever implement any such system that wouldn't be left as anything other than a shell after Delaware got done with it.  Perhaps the answer lies in part in doing more of what some have suggested we do in the area of Securities Regulation--that is, stop pretending we have more oversight than we actually do and let the capital market discounting begin.

SJP

New Report on the S&P 500's Corporate Governance of Political Expenditures

Back in August, ten law professors, as the "Committee on Disclosure of Corporate Political Spending," submitted a petition to the SEC asking “that the Commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities.” 

The group includes Lucian Bebchuk, Bernard Black, John Coffee Jr., James Cox, Jeffrey Gordon, Ronald Gilson, Henry Hansmann, Robert Jackson Jr., Donald Langevoort, and Hillary Sale.  The petition explains:  “We differ in our views on the extent to which corporate political spending is beneficial for, or detrimental to, shareholder interests. We all share, however, the view that information about corporate spending on politics is important to shareholders—and that the Commission’s rules should require this information to be disclosed.”

I’ve been following with interest the comments to this petition. They’ve included statements from scholars like Ciara Torres-Spelliscy who has written extensively about corporate political spending, and this week the IRRC Institute has submitted a report on the S&P 500's corporate governance of political expenditures. In its submission cover letter, the IRRC Institute explains: “The report is the first to examine the governance policies of the full S&P 500; the first to report on spending of the full S&P 500; and the first to be part of a benchmarking time series, enabling trends to be examined robustly.”

Earlier this month, I posted about a recent report on the governance practices of the S&P 100, which the Center for Political Accountability and Wharton’s Zicklin Center for Business Ethics released.

I’m still digesting the new IRRC Institute report and may post more soon, but note for those interested in this area that it is well worth reading as it takes a broad and detailed approach, including information on topics such as governance about lobbying and whether companies provide public justifications for why they spend money on politics.

A few tidbits from the fascinating report:

On companies with “no spending” policies:  “The overall number of companies that assert they do not spend money in politics has grown to 57, up from 40 a year ago. But a comparison of spending records and policy prohibitions shows that only 23 companies with ‘no spending’ policies actually did not give any money to political committees, parties or candidates in 2010 (though they may still lobby). Only 17 of these firms avoided all forms of political spending, including lobbying. (Another 57 companies have no policies about spending but also do not seem to spend.)”

On transparency:  “Voluntary company disclosure of political spending remains limited and only 20 percent of S&P 500 companies report on how they spent shareowners’ money. Two‐thirds of the companies that appear to spend from their treasuries do not report to investors on this spending. The least transparent are Telecommunications and Financials firms; by contrast over 40 percent of Health Care companies explain where the money goes.”

On independent expenditures: “There has been a significant increase in the number of companies that discuss independent expenditures, which following Citizens United are allowed at the federal level for the first time in 100 years. Comparing companies in the index in both years (468 firms) shows that 19 more companies now say they will not fund campaign advertisements for or against candidates, generally will not do so, or are reviewing their policies—up from 58 last year. But only five companies now acknowledge in their policies that they make independent expenditures, even though careful scrutiny of voluntary spending reports adds a few firms to this tally.”

On the increasing adoption of indirect spending policies: “The proportion of companies that have adopted policies on indirect political spending through their trade associations has grown from 14 percent in 2010 to 24 percent. Half of the 100 biggest companies now disclose their policies on indirect spending through trade groups and other politically active non‐profit groups, but this commitment evaporates at smaller companies.”

On big companies spending big: “The top two revenue quintile companies were responsible for the vast majority of both federal lobbying and treasury contributions to national political committees and state political entities, with $915 million (93 percent) of the S&P 500’s total.”

On board oversight: “The 151 companies with board oversight of their spending disburse on average 30 percent more than their peers that do not have such oversight, when the latter comparison is controlled for revenue size. This may give some comfort to investors and others concerned about accountability and transparency, but not to those who think that corporate governance could be used as a lever to reduce spending.”

The report is also terrifically direct about information that is unknown, such as how much companies give indirectly through trade associations and other non-profit groups that spend in elections and on lobbying.

--Elizabeth Pollman

"[C]onstrained by Delaware Supreme Court precedent"?

Following up on both Elizabeth's post announcing that Chief Justice Myron T. Steele of the Delaware Supreme Court would be speaking at Stanford, and Josh's post on the Glom's Masters Forum on Chancellor William B. Chandler III's contributions to the Delaware Chancery Court, I note the following:

Over at the Glom, Afra Afsharipour discusses Chancellor Chandler's Airgas decision and notes that "like other commentators … I expected that Chancellor Chandler would uphold the pill. What I didn’t quite expect was Chancellor Chandler’s frank articulation of how decades of Delaware case law on the poison pill essentially gave him no choice but to reach the result that he did."

Meanwhile, a report from a recent panel discussion on cross-border issues in mergers and acquisitions notes that Chief Justice Steele interprets the case law differently:

Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide.

SJP

In Search of the Grand Unified Theory of Economic Policy

The Wall Street Journal reports (here) that:

(1) More than three-quarters of the country says the nation's economic structure is out of balance and favors a very small proportion of the rich over the rest of the country. They say America needs to reduce the power of major banks and corporations, as well as end tax breaks for the affluent and corporations. Sixty percent say they strongly agree with such sentiments.

(2) 53% of the country believes—and 33% believe strongly—that the national debt and the size of government must be cut significantly, that regulations on business should be pared back, and that taxes shouldn't be raised on anybody.

While the WSJ story is entitled "Poll Finds Voters Deeply Torn," there is nothing necessarily contradictory in these two sets of goals.  So, if anyone is looking for a winning platform for the upcoming election ....

SJP

NFL, Supreme Court Share View on Message Control

The Wall Street Journal has an interesting article about a unique-angle NFL video coverage that is shared on a very limited basis.  The video, known as "All-22," shows the whole field and every player.  The angle thus allows viewers to see everything, from defensive and offensive alignments to each player's actions during a play.  

The NFL apparently considered sharing the video (or otherwise selling it), but many football people objected to it.  According to the article: 

Charley Casserly, a former general manager who was a member of the NFL's competition committee, says he voted against releasing All-22 footage because he worried that if fans had access, it would open players and teams up to a level of criticism far beyond the current hum of talk radio. Casserly believed fans would jump to conclusions after watching one or two games in the All 22, without knowing the full story.

"I was concerned about misinformation being spread about players and coaches and their ability to do their job," he said. "It becomes a distraction that you have to deal with." Now an analyst for CBS, Casserly takes an hour-and-a-half train once a week to NFL Films headquarters in Mt. Laurel, N.J. just to watch the All-22 film.

I suppose he could be right that there could be more criticisms of coaches and players if the video were released, but I'm not convinced.  And, more important, it appears that with the All-22 video, the criticisms would be more accurate than they are currently.  In fact, the article gives an example of a TV producer with access to the All-22 video who explained how an in-game analyst was wrong to blame a player for being "late" on a play, because the player was doing his job in the defensive scheme. The play call was right to beat the defensive scheme, and the offense executed the play.

Certainly, there might be a learning curve. Fans would need to understand that players and coaches make mistakes in every game and that one or two plays may not be a fair representation of the body of their work.  But that's already true today.  For every player or coach who might take unfair criticism, the All-22 video is likely to exonerate another (or provide credit where credit was actually due).

In some ways, I suppose this is like the the question of whether video cameras should be allowed in the United States Supreme Court.  After all, in that case, people would be provided access to something they don't fully understand, and it might lead to unfair criticism of the Justices, lawyers, and the legal system. Still, regardless of your view of cameras at the Supreme Court, there is one big difference here: football is a game; it is, at it's core, entertainment. 

So, NFL, entertain us. Let's see the All-22. 

--JPF

Banking Fees and "the Market"

We often hear that the "market works" (and I happen to believe that, at least most of the time), but I think we often forget what that means.  I've been thinking about this a lot in connection with some of the proposed bank fees, like those from Bank of America and other banks that have gotten a lot of press lately.  

I have tried to bank with my college credit union and other small banks as I have moved around the country, and my current bank was a savings and loan that survived that crisis in the 1980s.  They don't charge crazy fees, and they even reimburse all ATM fees from any bank when I use other machines.  So I'm loyal to my small bank, and it's why I switched to them from my large bank when we moved here.

As Erik Gerding notes here, the idea that smaller banks or credit unions treat their customers better is not new.  Ryan Bubb (NYU Law) and Alex Kaufman (Board of Governors of the Federal Reserve System (FRB)) have a paper that suggests credit unions do treat their customers better.  At a presentation of the paper, Professor Gerding explains: 

One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less."  This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.

My question is why people tolerate annoying banking practices at all. If literally all banks start charging high fees for debit cards and other transactions, of course there is no value in switching, and there is not consumer choice.  But that has hardly been the case.  There are options for smaller banks that provide many of the same services as big banks, often at better rates.  Yet people have been reluctant to change in any significant way, at least until November 5th's Dump Your Bank Day. 

Ultimately, the reason banks have continued to impose fees that seem like they would make people mad is because the banks have largely gotten away with it. It's one thing for people to complain about high fees.  It's quite another for people to go to the trouble to change their direct deposit, automatic bill pay, and other banking services.  When you push too far, though, the market will tell you, as Bank of America seems to be learning.  Until then, the market doesn't really care, and that's why banks, cable companies, wireless companies, etc., act like they do: either we really do not have a choice or we don't really care that much (and the truth is, on a large scale, it's usually the latter).   Even where choice is limited (like my cable tv market), we often fail to make choices when we can.  And I have 48 movie channels I don't really need or want to prove it.  

--JPF

Poker as Sport

The World Series of Poker Main Event Final Table is underway.

There is an arena ... there are fans ... and they are rowdy.

SJP

Another Step to Blogging-As-Scholarship Legitimacy

"The Post: Good Scholarship from the Internet." (HT: Josh Wright.)

SJP

 

Immaterial Lies

A couple of weeks ago the Wall Street Journal ran an article entitled "Trust Me."  The article asserted that:

Infamous frauds and financial crises have wrecked the public's faith in business in recent years, leading many companies to try to repair the damage by emphasizing codes of ethics. But we do not have a crisis of ethics in business today. We have a crisis of trust.

Later on, the author suggested that:

Spirals of distrust often begin with miscommunication, leading to perceived betrayal, causing further impoverishment of communication, and ending in a state of chronic distrust. Clear and transparent communication encourages the same from others and leads to confidence in a relationship.

I have argued elsewhere that courts have in recent years excaberated this problem of distrust by routinely labeling misstatements "immaterial."  In other words, the judges in 10b-5 cases tell investors that even if we assume the CEO intentionally lied about the company's prospects in order to defraud investors there is no recourse because no "reasonable" investor would consider the statement important.  The article is entitled, "Immaterial Lies: Condoning Deceit in the Name of Securities Regulation."  Here is the abstract:

The financial crisis of 2008-2009 is once again raising the issue of investor trust and confidence in the market.... The pending flood of lawsuits following in the wake of this financial crisis provides an opportunity, however, for courts to restore some of this lost trust. This Article argues that one of the ways courts can do this is by curtailing their over-dependence on materiality determinations as the basis for dismissing what they deem to be frivolous lawsuits under Rule 10b-5. There are at least four good reasons for doing so. First, condoning managerial misstatements on the basis of immateriality arguably has a negative impact on investor confidence because whenever courts find a misstatement to be immaterial as a matter of law they are effectively concluding that there will be no relief for shareholders even if the statement was made with full knowledge of its falsity and with the requisite intent to defraud. Second, the materiality “safety valve” doctrines that have evolved to assist courts in dismissing frivolous suits are often in direct conflict with Supreme Court guidance as to both the proper definition and analysis of materiality in the context of Rule 10b-5. Third, the routine categorization of managerial misstatements as immaterial in order to dismiss frivolous suits creates a tension with the disclosure rules, which are premised on ideals of full and fair disclosure and often turn on materiality determinations. Finally, the dependence on materiality is unnecessary because other elements of Rule 10b-5, such as scienter, have been strengthened to the point where they allow courts to deal with the problem of frivolous suits without having to rule on the issue of materiality.

SJP

Americans for Financial Reform Conference: Evaluating The Volcker Rule

Next week, the Americans for Financial Reform are sponsoring an event on the Volcker Rule.  It looks like an interesting opportunity. I look forward to the outcome.  Here's the announcement: 

Wednesday, November 9^th,  9:30 to 1:00

Location – Hart Senate Office Building, Room 902

Presented By: Americans for Financial Reform

You are invited to join Americans for Financial Reform for a discussion of the recently released Volcker Rule proposal. This centerpiece rule of the Dodd-Frank Act is designed to separate risky proprietary speculation from core functions of the financial system, and will affect our largest banks in areas ranging from compensation to investment management. The discussion will feature outside experts as well as key Congressional architects of the rule.  Speakers will consider potential benefits of the Volcker Rule for the stability and effectiveness of the financial system and evaluate the strengths and weaknesses of the proposed rule.

Confirmed Speakers

Keynote address

Senator Carl Levin of Michigan

Senator Jeff Merkley of Oregon

Other participants

Anthony Dowd: Chief of Staff, Office of Paul A. Volcker; Former General Partner, Charter Oak Capital Partners

Nick Dunbar: Editor of “Bloomberg Risk”, author of “Inventing Money: the Story of Long-Term Capital Management” and “The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street… and Are Ready to Do It Again”

Gerald Epstein: Professor of Economics, University of Massachusetts at Amherst; Co-Director, Political Economy Research Institute

William Hambrecht: Founder, Chairman, and CEO, W.R. Hambrecht & Co.

 Kimberley Krawiec: Katherine Robinson Everett Professor of Law, Duke University Law School; expert on “rogue traders”

 Matthew Richardson: Charles Simon Professor of Applied Financial Economics, New York University Stern School of Business; Editor of “Regulating Wall Street: Dodd-Frank and the New Architecture of Global Finance” 

 --JPF

"Europe: How bad will it get?"

Today I attended a terrific event hosted by the Rock Center for Corporate Governance at Stanford on whether the Eurozone will survive in the present form. It seems the answer to this post's titular question is that it's going to get real bad. 

Robert Madsen from the Center of International Studies at MIT shed light on this quite dark subject. Madsen cut through all of the jargons and acronyms you might hear in discussions of sovereign solvency and the Eurozone crisis. He highlighted the following key issues:

• The structural flaws in the way the Eurozone was designed (the lack of a common business cycle, cultural barriers and other obstacles to labor mobility, the lack of a fiscal transfer mechanism, and issues with developing a shared political commitment)

• The massive increase in debt, public and private, in some European countries

• The cost of fixing the problem (in short: trillions, perhaps in the double digits)

As Madsen described the possible ways of moving forward, a palpable gloom hung over the room. A major financial restructuring seems unlikely. The present strategy of fiscal austerity and ad hoc measures is not promising. The other possibilities include preemptive changes to the Eurozone and some kind of delayed collapse. The takeaway: fasten your seatbelts.

The Rock Center website may have a video of the event soon.

--Elizabeth Pollman