October 17, 2011
Business-related cases and the Supremes
With the final round of 2011 oral arguments before the Supreme Court under way, I became curious to see what business and business-related cases are before the Supreme Court. The October/November calendar is available here. Below is a quick topical list with links to cases and supporting documents.
Insider trading statute of limitations
- Credit Suisse Securities v. Simmonds (to be argued Nov. 29th)
Copyright and patent issues
- the ability to revive a copyright-- Golan v. Holder (argued Oct. 5th)
- the ability to patent blood tests used to detect a breast cancer-indicative gene: Mayo Collaborative Services v. Prometheus Laboratories, Inc. (to be argued Dec. 7th)
- Kurns v. Railroad Friction Products Corp. (to be argued Nov. 9th)
- National Meat Association v. Harris (to be argued Nov. 9th)
Federal jurisdiction for private suits under the Telephone Consumer Protection Act
- Mims v. Arrow Financial Services, LLC (to be argued Nov. 28th)
Constitutionality of certain lawsuits under the Real Estate Settlement Services Act
- First American Financial Corp. v. Edwards (to be argued Nov. 28th)
Role of private arbitration under the Credit Repair Organizations Act
October 16, 2011
"Poker for Law Students" Course Update
I've previously written about my desire to teach a "Poker for Law Students" course (here). To that end, I am always on the lookout for supporting documentation and course materials (as I've also previously blogged about here). So, just in case this sort of thing interests you I thought I'd pass on a couple of additional items I've come across recently:
1. A PokerNews item on "Poker Players and Entrepreneurs: A Compatible Match"
October 15, 2011
Manesh on Contractual Freedom Under Delaware Alternative Entity Law
Mohsen Manesh has posted “Contractual Freedom under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs” on SSRN. Here is the abstract:
Notwithstanding the ongoing academic debate, little is known empirically about how unincorporated alternative entities - LLCs and LPs - actually utilize the contractual freedom afforded under Delaware law. To what extent do alternative entities take advantage of contractual freedom to wholly eliminate fiduciary duties? And to what extent do alternative entities employ so-called “uncorporate” substitutes - certain contractual devices designed to discipline and incentivize mangers - in lieu of fiduciary duties? In response to calls for empirical evidence on this issue, this study analyzes the operating agreements of every publicly traded Delaware alternative entity in existence as of June 2011. This study, the first of its kind, provides a snapshot of contractual freedom as it is applied under Delaware alternative entity law.
In particular, this study finds that the use of fiduciary waiver and exculpation provisions among publicly traded Delaware alternative entities is widespread. Yet, despite the widespread use of such provisions, this study also finds that publicly traded alternative entities have either failed to adopt uncorporate substitutes or adopted uncorporate substitutes that only trivially constrain managerial discretion. Thus, this study suggests that publicly traded alternative entities have largely utilized the freedom of contract to reduce managerial accountability to investors without committing to significant offsetting constraints on managerial discretion.
October 14, 2011
Another Meaningless Question: Has the Check Cleared?
The New York Court of Appeals has decided that the term "cleared" with regard to a bank check is ambiguous. Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 2011 NY Slip Op. 07144 (Oct. 13, 2011). H/T Above the Law & Eric Turkewitz)
From the opinion:
On September 27, 2007, a [Greenberg, Trager & Herbst, LLP (GTH)] partner called a representative of HSBC inquiring as to whether the check had "cleared" and if the funds were available for disbursement.[*4]According to GTH, a five year banking relationship existed between them. GTH was informed that the funds were available. Later that day, GTH wired $187,500 from its account to Hong Kong pursuant to the wiring instructions it received from Northlink. GTH claims that, but for the assurance that the check had "cleared," it would not have forwarded the funds. On September 28, 2007, HSBC confirmed to GTH that the wire transfer had been consummated.
On October 2, 2007, HSBC received an EARNS notice from Citibank that the check was being dishonored as "RTM [return to maker] Suspect Counterfeit." An HSBC Branch Manager later contacted GTH, informing them that the check had been dishonored and returned as counterfeit. HSBC then revoked its provisional settlement and charged back GTH's account.
. . . .
GTH's claim is based on the alleged oral statement by the HSBC representative that the check had "cleared" — an ambiguous remark that may have been intended to mean only that the amount of the check was available (as indeed it was) in GTH's account. Reliance on this statement as assurance that final settlement had occurred was, under the circumstances here, unreasonable as a matter of law. (footnote omitted)
Wow. I would have thought that was the right question to ask, too. The dissent explains:
HSBC makes much of the fact that the word "cleared" is not found in the UCC and the majority finds it to be ambiguous. However, UCC § 1-205 defines "course of dealing and usage of trade" as encompassing "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question" (UCC § 1-205 ). The term "cleared" is used liberally in the banking business. Indeed, the Federal Trade Commission in a bulletin addressed to consumers states that "it's best not to rely on money from any type of check . . . unless you know and trust the person you're dealing with or, better yet — until the bank confirms that the check has cleared" (Federal Trade Commission Facts for Consumers, Giving the Bounce for to Counterfeit Check Scams, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre40.pdf [January 2007]). Therefore, I disagree with the majority's position that relying on this statement was unreasonable as a matter of law (see majority op at 16)[FN9]. I suspect many business professionals would have done the same thing as Trager. . . .
Footnote 9: If the term “cleared” means anything in common banking usage, it is that final settlement has occurred (see Black's Law Dictionary [9th ed 2009] [defining the term as it relates to a bank as "to pay (a check or draft) out of funds held on behalf of the maker (the bank cleared the employee's check)"] [defining the term as it relates to "a check or draft" as "to be paid by the drawee bank out of funds held on behalf of the maker (the check cleared yesterday)"]).
I agree that a lot of business professionals would have done the same thing, too. If "cleared" is too ambiguous, what would I ask my banker? The majority doesn't suggest what would have been the proper question. Does the bank never have to tell me if the money is really mine or not? I just have to guess? It appears so. The courts explains that "GTH was in the best position to guard against the risk of a counterfeit check by knowing its client."
Silly me. I had always thought the bank, at some point, would be able to tell me whether a check was good or not, even if it came from a Nigerian prince or someone seeking help collecting on a divorce settlement "in my jursidiction." I mean, this is all electronic -- if nothing else, isn't there a time when the bank knows the money is real? It's one thing for a bank to say, "The money is available to you now, but we won't know for sure the money was actually transferred and available for X days, so you proceed at your own risk."
I am no banking expert, but I do know there is a lot of nuance to all of this. It just seems to me that the people in the best position to prevent this kind of loss, are the people who understand this nuance. Why not have a rule that requires banks to tell it like it is, or at least say, "We're not sure, either."? The reason the banking system works, and e-commerce has been so successful is because we can count on it. This decision says to me you can until you can't. Talk about ambiguous.
October 13, 2011
Lin & Zhang on Price Implications of Privatizing Airports
Ming Hsin Lin (Osaka University of Economics - Faculty of Economics) & Yimin Zhang, Airline Pricing and Airport Charges in Hub-Spoke Networks with Congestion. As someone who lives in a small airline market (served by a "spoke airport"), this article is of particular interest. Grand Forks International Airport (GFK) features the new Byron L. Dorgan Terminal, which cost of "$24.9 million, $18 million of which was federal funds Senator Dorgan helped secure." GFK is served primarily by Delta, which means you can get almost anywhere in the world from here, as long as you go through Minneapolis. And that "flexibility" comes at a premium.
This article is also worth a look because airlines are a classic regulated industry, even though much has changed over the years. Here's the abstract:
This article investigates airline pricing and airport congestion charges in hub-spoke networks. When a public hub airport and two public spoke (local) airports independently levy their charges, airlines will eventually set a ticket price that overcharges the passengers for congestion delay cost and overcompensates for airline markups. Privatizing only local airports will always lead to more overcharge, whereas privatizing only the hub airport or all airports could result in lesser overcharge if the network markets are competitive. The degree of overcharge under a private hub and public local airports is always lesser than that under a public hub and private local airports, implying that privatizing a hub airport could yield higher social welfare than privatizing a local airport. Furthermore, investigation on compensation for airline markups also finds that privatizing a hub airport is preferable to privatizing a local airport. These findings have policy implications for airport privatization.
October 12, 2011
Volcker Rule Proposed by the SEC
More than a year after the passage of Dodd-Frank, the S.E.C. voted today to propose a rule to implement section 619 of the Dodd-Frank Act, commonly known as the "Volcker" rule. The Volcker Rule under Dodd-Frank generally prohibits federally-insured banks and their affiliates from engaging in derivative trading for the bank's own account. Dodd-Frank also prohibits banks from owning or having a substantial relationship with a hedge fund or private equity fund. The SEC proposed rules seek to fulfill this mandate by requiring institutions trading in derivatives to report quantitative measurements to the SEC while also allowing for a broad range of exemptions to the registration and reporting requirements under the rule. (SEC Press Release; Commissioner Shapiro's comments on the Volcker Rule). The SEC, which is acting in concert with the FDIC, Federal Reserve, and the OCC, will be taking comments on the proposed rule until January 13, 2012-- both the text of the proposed rule and the comment process are available here.
SSRN has a laundry list of articles dissecting Dodd-Frank, but here are a few that are focused on the Volcker Rule:
- Charles Whitehead (Cornell), The Volcker Rule & Emerging FInancial Markets
- Andrew Tuch (a Harvard SJD candidate), Conflicted Gatekeepers
- Hrishikesh Vinod (Fordham Econ Dept.), Financial Reform, Innovative Hedging and the Volcker Rule
October 11, 2011
How North Dakota Became Saudi Arabia & How to Keep It That Way
The Wall Street Journal's recent Weekend Interview was of particular interest to me, and I thought it worth mentioning. The article was titled, How North Dakota Became Saudi Arabia: Harold Hamm, discoverer of the Bakken fields of the northern Great Plains, on America's oil future and why OPEC's days are numbered.
It's an interesting interview with Harold Hamm, who is the founder and CEO of Continental Resources. Mr. Hamm is certainly a leader in the U.S. oil resurgence, and his views carry a lot of weight in many circles. His facts are hard to refute, though I might put a little different spin on it. Here's a key part of the article:
One reason for the [U.S. oil industry] renaissance has been OPEC's erosion of market power. "For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil," he recalls. "They had unlimited production capacity, and company after company would go bust."
This is certainly true. OPEC cannot dictate the market in the same way as they once could, because the market for oil has increased so dramatically, especially in India and China. As such, increased production will simply lead to modestly lower prices, as emerging markets take all the oil the market is willing sell. The article continues:
Today OPEC's market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. "Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse." When OPEC was at its peak in the 1990s, the U.S. imported about two-thirds of its oil. Now we import less than half of it, and about 40% of what we do import comes from Mexico and Canada. That's why Mr. Hamm thinks North America can achieve oil independence.
This is true, too, although there is an implication here that OPEC is no longer a factor. That's not true, just because their market share had dropped. Most certainly, OPEC's ability to impact price in the ways it did in the 1970s, 1980s, and 1990s, has been diminished. Still, OPEC is a power player, and the revenues U.S. oil companies are seeing are coming into OPEC, too. After all, it's nice to have 80% market share of a $1 million industry, but it's better to have 20% of $10 million market. Of course, here were talking about a lot more zeroes than that.
Further, oil independence has its appeal, certainly, but it's not all it might seem. In this instance, the only reason we might be able to achieve independence from foreign-sourced oil is because oil prices are so high. Are we really better off being energy independent with oil at $90 per barrel, or would the U.S. economy be better served with Saudi oil at $25 per barrel? At $25 or even $50 per barrel, the broad-scale U.S. oil industry can't compete with other world producers.
But the market has changed. Mr. Hamm is right that the U.S. oil industry doesn't need to worry about the boom-and-bust cycle of years past because the price is not going back to $25 per barrel. The new market is great for him, great for those with new jobs, and great for those cashing royalty checks. And it's been great for many parts of North Dakota. I appreciate all of that, and I think regulators, politicians, and citizens should be looking at these facts as they consider energy and other economic policy.
Mr. Hamm finally argues that taxes are likely to stop drilling. He explains:
The White House proposal to raise $40 billion of taxes on oil and gas—by excluding those industries from credits that go to all domestic manufacturers—is also a major hindrance to exploration and drilling. "That just stops the drilling," Mr. Hamm believes. "I've seen these things come about before, like [Jimmy] Carter's windfall profits tax." He says America's rig count on active wells went from 4,500 to less than 55 in a matter of months. "That was a dumb idea. Thank God, Reagan got rid of that."
Here's where we diverge. I am not arguing that President Carter's windfall profits tax had an impact -- it was not good policy at the time. But that was in part because of OPEC's market power. The U.S. oil industry was operating in the zone where the profit margin was such that the tax rate could impact drilling. From what I understand, most North Dakota oil drilling is profitable with oil at about $65-$70 per barrel. Thus, at $85 per barrel, there's a lot of room to increase taxes without having an impact on the drilling. I'm not suggesting that a large new tax would be a great move, but it's not likely to have the dire consequences it could have had in years past. I'm at least okay with the status quo here. Perhaps we would get more drilling if we added more incentives to oil exploration, but my suspicion is that we would be rewarding people for doing what they were going to do anyway.
I think the energy industry, including traditional resources, is vital to U.S. economic interests, and I think our policies should support the current growing and evolving oil and gas industry. I happen to think there is room for everyone. My biggest worry for the oil and gas industry is that someone gets careless with their new drilling methods and causes a major environmental disaster. The harm to the environment would be a major concern, of course, but I think most people want that protected. This is not news.
The greater harm to the industry, and the economy, though, of such a disaster is often missed. The economic key to this oil and gas boom is to keep it going -- and the biggest threats are no longer OPEC, taxes, or the electric car. It's an environmental disaster that leads to a large-scale shutdown. That would be the ultimate lose-lose situation.
October 09, 2011
The Failure to Regulate as Success
H.R. 2308, the “SEC Regulatory Accountability Act,” would establish a significant number of additional specific standards for cost-benefit analyses for Commission rules and orders. Said SEC Chairperson Mary Shapiro:
My fear about this legislation is that it layers so much analysis on top of what we already do that we’re set up to fail. There is no way this agency or any other agency could do all of these things, some of which conflict.
Well, perhaps not so much “fail” as “fail to regulate.” To some that’s failure, to others that’s success.
October 08, 2011
If you love corporations, you might want to start taking the protesters a bit more seriously.
Yesterday, Stephen Bainbridge explained why he loves corporations. In the course of his post he referenced "The Company," by John Micklethwait and Adrian Wooldridge. I, too, am a fan of that book--though not because (as Bainbridge notes) the authors identify the corporation as "the best hope for the future of the rest of the world." (I am at best agnostic on that point.) Rather, my recollection of the book (which I admit may well be distorted by the passage of years since I last read it) is that the authors did a decent of job of acknowledging that the history of corporations is marked by evil as well as goodness, including "imperialism and speculation, appalling rip-offs and even massacres" (p. xx). Of course, the authors do note that corporations "pillage the Third World less than they used to" (p. 188).
What I liked about the book is that the authors recognized that "[t]o keep on doing business, the modern company still needs a franchise from society, and the terms of that franchise still matter enormously" (p. 186). Furthermore, they acknowledged that "[t]here is a widespread feeling that companies have not fulfilled their part of the social contract: people have been sacked or fear that they are about to be sacked; they work longer hours, see less of their families--all for institutions that Edward Coke castigated four hundred years ago for having no souls" (p. 188). (Note that these are all pre-financial crisis quotes.)
All of which leads me to conclude that if you love corporations you might want to start taking the "Occupy" protesters a little more seriously. You may think they are "illiterates," silly and absurd--but they are growing in number and they may well end up having something to say about the nature of the franchise corporations need in order to survive.
October 06, 2011
What's Wrong With Picard v. Katz? Just About Everything.
Editor’s Note: The following post comes to us from Dr. Anthony Michael Sabino, a Professor in the Department of Law at The Peter J. Tobin College of Business at St. John’s University. (SJP)
WHAT’S WRONG WITH PICARD V. KATZ? JUST ABOUT EVERYTHING.
Anthony Michael Sabino, Professor of Law, St. John’s University, Tobin College of Business; Partner, Sabino & Sabino, P.C.
I have long been an admirer of Judge Jed Rakoff of New York’s Southern District. Like many, I have long considered him to be the dean of the federal securities bar, at least as to its judicial contingent. However, I found his latest decision, entitled Picard v. Katz, to be so deeply mistaken, particularly as to its usurpation of settled bankruptcy law doctrine, that I can scant believe this is the same jurist. Since an appeal is a near certainty, I can only look forward to the Second Circuit righting this wrong.
For the (few that remain) unacquainted, the plaintiff is Irving Picard, the trustee of the defunct investment advisory business of the infamous Bernard Madoff, now about two years into his 150 year prison sentence for masterminding the greatest Ponzi scheme of the new century. Defendant “Katz” is Saul Katz, business partner of Fred Wilpon, and, along with Wilpon, an owner of Major League Baseball’s New York Mets. All are defendants in the instant case.
The Wilpons and various of their enterprises were heavy investors with Madoff, and reaped many millions in profits over the years, some of those profits going to fund the Mets’ cash flow. With the vast majority of those profits now proven to be fictitious, and the discovery that said “profits” were paid from monies deposited by subsequent Madoff victims, at bottom this litigation is all about Trustee Picard’s efforts to recover anywhere from $ 300 million to $ 1 billion from the Mets’ owners, based upon various theories, the paramount ones being “fraudulent conveyances,” as set forth in the Bankruptcy Code and New York state law.
In addition to the above preface, let me be clear that, in this limited space, I am not addressing Judge Rakoff’s earlier decisions, both as to these parties and similarly situated Madoff defendants, where the court discarded somewhat “novel” theories that the Trustee claimed entitled him to recover up to a billion dollars from the Wilpons alone. Rather, I am strictly confining myself to the new Katz decision, wherein Judge Rakoff tossed out causes of action so fundamental and traditional to litigation of this kind, that I was frankly aghast at the outcome. My consternation is focused upon three key points.First, Judge Rakoff dismissed the “constructive fraud” count of the fraudulent conveyance claim. Briefly, constructive fraud is proven by a straightforward and purely objective test, to wit, a simple arithmetical calculation of what you received as compared to what you paid. By its nature, the early beneficiaries of a Ponzi scheme receive more than they paid in, and so easily fail the test. Case law, including that of the Second Circuit, is clear that Ponzi beneficiaries unfailingly are liable to return false profits, since those monies came from subsequently defrauded investors. Indeed, the Second Circuit’s most recent decision in the Madoff case, in validating Trustee Picard’s methodology for calculating the actual losses of Madoff’s victims, reflects that jurisprudence. Then how can Judge Rakoff’s decision be so at odds with those clear precedents? Not for long, I hope.
In addition, constructive fraud, because it is an objective test, will survive where the “actual fraud” allegation, dependent upon subjective proof, will oft times fail. Yet Katz is permitting the actual fraud allegations, the ones far more susceptible of being tossed for a lack of proof of the defendants’ state of mind, to proceed, while the more durable allegations, based upon simple math, are dismissed. This makes no sense. Lastly, Katz limits the fraudulent conveyance claims to the two year statute of limitations found under the Bankruptcy Code. Wrong---Trustee Picard sued in parallel under New York’s fraudulent conveyance statutes, which provide a more liberal six year limitary period to reach back to recover fraudulent conveyances. This misapplication of the correct statutory periods is sure to be corrected by the appellate court.
My second point of contention is Katz’s complete confusion of “settlement payments,” as defined in Title 11, with the ill gotten goods the Defendants allegedly received here. The court immunizes the Defendants’ receipts from the Trustee’s allegations, by characterizing them as settlement payments from a broker. That misses the mark by a country mile. First, while the statutory definition of settlement payment is admittedly lucid, both the text and its history make clear as crystal that monies so paid are protected because they represent payments by brokers to customers as part of actual securities transactions.
That is not what happened here. These defendants allegedly took out far more than they invested, based upon fictitious profits produced by Madoff’s fertile and devious imagination. As we learned to our sorrow, Bernie Madoff never actually bought or sold any securities. As such, monies received by these defendants are inapposite to the settlement payments (and the underlying transactions) the law is designed to protect. Put another way, Congress wrote statutory protections for settlement payments into the Bankruptcy Code, at the behest of the legitimate securities industry, in order to protect the orderly flow of actual business. Money paid out in a Ponzi scheme is light years away from that, and thus wholly undeserving and unintended for such protections.
Moreover, Katz is internally inconsistent in this regard. It notes that Ponzi schemes such as Madoff’s transpire “without any actual securities trades taking place.” Yet in the next paragraph it bestows statutory protection upon those same non-existent transactions. If the transaction is a sham, how can it be deserving of the law’s “safe harbor”?
Third, Katz purportedly seeks to reconcile important provisions of the Bankruptcy Code with the federal securities laws, foremost from the latter body the Securities Investor Protection Act, called “SIPA.” Having extensively litigated and written about the intersection of bankruptcy law with the federal securities statutes, I agree this is no small task. But Katz does not provide an intersection; it gives us a train wreck. For instance, Katz asserts that in this context “bankruptcy law is to be informed by federal securities law.” Yet what this opinion provides instead is an annihilation of the Bankruptcy Code in favor of misconstrued concepts of the securities laws.
Katz ignores that a SIPA liquidation of an investment firm (as is the case here with Madoff’s investment advisory business) is to be conducted in harmony and in conjunction with the Bankruptcy Code. That is why the Code contains specific provisos for stockbroker liquidations, and SIPA cases are administered in bankruptcy courts by bankruptcy trustees. Trustee Picard was not stripped of his traditional powers to recover fraudulent conveyances under bankruptcy or state law. Nor are the securities laws to be construed to artificially restrict his powers. This has long been the law of the Second Circuit, and things will surely be put to rights on the appeal (Trustee Picard’s attorneys have already indicated that an interlocutory appeal will be sought).
In closing, Katz perpetrates a great wrong: first by utterly misunderstanding fraudulent conveyance law, particularly the aspect of “constructive fraud;” second, by misconstruing portions of the federal securities laws to immunize fraudulent conveyances from rightful recovery; and third, by crushing established bankruptcy and SIPA provisos via the misapplication of the federal securities laws.
The fortunate news is that the cases are legion, especially in the Second Circuit, in proof of the errors of Katz. Surely a swift appeal will put this misbegotten decision to rest, and these defendants will find their exposure on the “constructive fraud” fraudulent conveyance counts will amount to nearly $300 million. We should yet see legitimate victims benefiting by recoveries from the recipients of fictitious profits paid out with their money.
 ___ F.Supp.2d ___ (S.D.N.Y. Sept. 27, 2011) (11 Civ. 3605) (JSR).
 11 U.S.C. § 548. The Bankruptcy Code is often referred to as “Title 11,” per its ordination in the U.S. Code.
 New York Debtor and Creditor Law (“D.C.L.”) § 270, et seq.
 In re Bernard L. Madoff Investment Securities LLC, ___ F.3d ___ (2d Cir. August 16, 2011) (Jacobs, C.J.).
 Compare Sabino, “Applying the Law of Fraudulent Conveyances to Bankrupt Leveraged Buyouts: The Bankruptcy Code’s Increasing Leverage Over Failed LBOs,” 69 North Dakota Law Review 15 (1993).
 Sabino, “Failed Stockbrokers and the Bankruptcy Courts in the 21st Century: Bringing Order to Chaos,” Annual Survey of Bankruptcy Law 2002 317 (West 2002).
 Katz, slip op. at 14.
 Parenthetically, Judge Rakoff claimed that he declined the defendants’ request to convert their Rule 12(b)(6) motion to dismiss to a motion for summary judgment pursuant to Rule 56. Katz, slip op. at 13 n.8. Yet I find that contradictory, as in pertinent part it appears to me the court is more according summary judgment on these claims than merely dismissing them.
 Katz, slip op. at 11 n.6.
October 03, 2011
Michael Lewis Returns with Boomerang
Michael Lewis, the author of Moneyball and The Blind Side, among other things, has a new book about the cheap credit crisis. An interview with National Public Radio is here. There is also an excerpt of the book available here. Rather than paraphrase Mr. Lewis, here is an excerpt of the excerpt, to give you an idea of where this book is headed:
In Kyle Bass's opinion, the financial crisis wasn't over. It was simply being smothered by the full faith and credit of rich Western governments. I spent a day listening to him and his colleagues discuss, almost giddily, where this might lead. They were no longer talking about the collapse of a few bonds. They were talking about the collapse of entire countries.
And they had a shiny new investment thesis. It ran, roughly, as follows. From 2002 there had been something like a false boom in much of the rich, developed world. What appeared to be economic growth was activity fueled by people borrowing money they probably couldn't afford to repay: by their rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. "We've never had this kind of accumulation of debt in world history," said Bass. Critically, the big banks that had extended much of this credit were no longer treated as private enterprises but as extensions of their local governments, sure to be bailed out in a crisis. The public debt of rich countries already stood at what appeared to be dangerously high levels and, in response to the crisis, was rapidly growing. But the public debt of these countries was no longer the official public debt. As a practical matter it included the debts inside each country's banking system, which, in another crisis, would be transferred to the government. "The first thing we tried to figure out," said Bass, "was how big these banking systems were, especially in relation to government revenues. We took about four months to gather the data. No one had it."
I haven't read all of his books, but I always enjoy Mr. Lewis's writing. I hope to get to this, as soon as I work my way through the two books I am currently reading: (1) Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely, and (2) Straight Man: A Novel, by Richard Russo.
October 02, 2011
Smythe on The Rise of the Corporation
Donald J. Smythe has posted “The Rise of the Corporation, the Birth of Public Relations, and the Foundations of Modern Political Economy” on SSRN. Here is the abstract:
The rise of the modern corporation was an integral part the Second Industrial Revolution. This important economic and social transformation would not have occurred if business entrepreneurs had been unwilling to make the large investments necessary to implement the new technologies that drove the industrial growth and development, and entrepreneurs would have been reluctant to make the investments without the shield of limited liability and the opportunity to spread their risks across diversified portfolios of corporate stocks. Nonetheless, the rise of the modern corporation created problems. The most successful corporations grew to unprecedented proportions, and the public’s concerns about their growing economic and political power contributed to the Progressive Movement and pressures for social and political reform. There were no federal or state constitutional protections for corporate speech in the early twentieth century. Indeed, corporations were regarded as creatures of state law, whose powers were usually defined by their charters under state incorporation statutes. The federal and state governments could have enacted sweeping regulations on corporations’ speech and related behavior. But they did not. Corporations thus began to make sustained attempts to alter public attitudes and improve their public images through systematic public relations campaigns and corporate welfare programs. The public never came to think of the corporation as a person or anything other than a business entity, but the public relations campaigns succeeded in humanizing the corporation and integrating it into the American public’s sense of community. More importantly, perhaps, they succeeded in rationalizing the role of the corporation in the American economy and legitimizing its role in modern American life. This has had profound implications for the way that American business law and public policy have evolved during the twentieth century.
October 01, 2011
Seattle Law Review's Second Annual Symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society
What follows is a list of the symposium pieces. You can find the full articles here.
- “Directors as Trustees of the Nation? India’s Corporate Governance and Corporate Social Responsibility Reform Efforts,” by Afra Afsharipour
- “The Problem of Social Income: The Entity View of the Cathedral,” by Yuri Biondi
- “Does Critical Mass Matter? Views From the Boardroom,” by Lissa Lamkin Broome, John M. Conley, and Kimberly D. Krawiec
- “Fiduciaries, Federalization, and Finance Capitalism: Berle’s Ambiguous Legacy and the Collapse of Countervailing Power,” by John W. Cioffi
- “The Twilight of the Berle and Means Corporation,” by Gerald F. Davis
- “Frank H. Knight on the ‘Entrepreneur Function’ in Modern Enterprise,” by Ross B. Emmett
- “Behind Closed Doors: The Influence of Creditors in Business Reorganizations,” by Michelle M. Harner and Jamie Marincic
- “Hurly-Berle—Corporate Governance, Commercial Profits, and Democratic Deficits,” by Allan C. Hutchinson
- “Financial Institutions in Bankruptcy,” by Stephen J. Lubben
- “Of Mises and Min(sky): Libertarian and Liberal Responses to Financial Crises Past and Present,” by Brett H. McDonnell
- “Berle and Veblen: An Intellectual Connection,” by Charles R. T. O’Kelley
- “Is Social Enterprise the New Corporate Social Responsibility?” by Antony Page and Robert A. Katz
- “The Judicial Control of Business: Walton Hamilton, Antitrust, and Chicago,” by Malcolm Rutherford
- “Toward an Organizationally Diverse American Capitalism? Cooperative, Mutual, and Local, State-Owned Enterprise,” by Marc Schneiberg
- “The Cosmetic Independence of Corporate Boards,” by Nicola Faith Sharpe
- “Berle’s Conception of Shareholder Primacy: A Forgotten Perspective For Reconsideration During the Rise of Finance,” by Fenner Stewart Jr.
- “Berle and Social Businesses: A Consideration,” by Celia R. Taylor
- “Chicago’s Shifting Attitude Toward Concentrations of Business Power (1934–1962),” by Robert Van Horn
September 30, 2011
Bank of America: Principles of Government Regulation
Bank of America announced yesterday that it will start charging customers who use their Bank of America debit cards a fee of $5 a month. The New York Times reports that other banks are already testing similar fees. The Dodd-Frank Act restricted the fees that banks may charge merchants for debit-card transactions. Unable to charge merchants more, the banks have turned to the other side of those debit-card transactions, the consumers.
These changes illustrate two principles of government regulation. First, the government cannot legislate costs out of existence. The cost to banks of handling debit card transactions doesn’t go away just because Congress wants it to. And a decision by Congress as to how much debit card transactions should cost doesn’t change the market. If banks can’t charge merchants, they will try to recover from consumers. If the government next limits what banks can charge debit-card consumers, they will try to cover their costs by raising other banking costs. If they can’t do that, bank shareholders will bear the cost.
Second, government regulation often has unintended consequences. I’m pretty sure that whoever came up with the limit on merchant charges didn’t intend for consumers to pay more. But it’s very hard to control how people respond to regulation. It’s like a balloon: squeeze it at one point and it bulges out at another point. And, no matter how hard you try, you can’t legislate to prevent all the possible bulges.
September 29, 2011
CML V, LLC v. Bax: In Defense of (My Read of) DGCL Section 327
A little while back I wrote that section 327 of the Delaware General Corporate Law, as written, excluded the right to a derivative action for anyone but a shareholder. (In CML V v. Bax, the court determined that the Delaware Limited Liability Company Act, 6 Del. C. § 18-1002, does not permit creditor-based derivative actions for LLCs, despite the argument that the LLC Act was meant to track the court's interpretation of the DGCL.) Obviously, the Delaware Supreme Court does not agree with me about section 327, as the Court granted creditors the rights to proceed in a derivative suit where the company is insolvent. N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).
A comment to my prior post also takes issue with my read of section 327. Ht4 says:
You're putting the rabbit in the hat.
This is where your analysis breaks down: "My reading of section 327 is that derivative claims are unambiguously reserved to shareholders." I disagree. 327 applies it restrictions to "derivative suit[s] instituted by a stockholder of a corporation." It does not purport to apply its restrictions to all derivative actions and, therefore, leaves open the possibility of other derivative suits. 18-1002, on the other hand, is written in exclusive language; it applies to ALL derivative actions. It does not leave open the possibility of other proper plaintiffs. That is the crutial difference.
I appreciate the comment, and I guess we'll have to agree to disagree. I concede that ht4's interpretation is plausible, especially in light of current Delaware law. (And, after all, there is a maxim or canon of construction that can help lead to most any conclusion on this.) Still, I think that inherent in section 327 was the assumption that only a shareholder could bring a derivative action. Section 327 explains which shareholders have such a right of action. The failure to mention in the statute any other type of derivative action tells me that no other type was contemplated. Section 327 simply limits the scope of shareholder derivative actions that are permitted.
It is certainly plausible that the drafters intended to allow creditors or even other stakeholders to have a right to a derivative action, but then why not have some mention, or some prerequisite, as provided for shareholder actions in section 327, to allow the suit to proceed? It is hard for me to imagine a legislature contemplating an easier road to a derivative action for someone other than shareholders, and yet that's what is implied (or at least permitted) if section 327 is not exclusive to shareholder actions.
Further, in affirming the right of derivative actions for creditors, the Delaware Supreme Court provided a prerequisite for creditor standing: insolvency (or, arguably, a company close to insolvency). N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). The Court determined that "equitable considerations," and not the DGCL, "give creditors standing to pursue derivative claims against the directors of an insolvent corporation." Id. Thus, the DGCL provides the scope of shareholders who can bring such suits, and equity (via the Court) does the same for creditors. Although this outcome is one reasonable interpretation, it is hardly required.
I'm of a mixed mind about whether creditors should have a right bring a derivative suit against an insolvent corporation or LLC. I am, however, reasonably certain that if there is to be such a right, it should be created via statute. In Delaware, I maintain that, as drafted, neither the DGCL or the LLC Act permit such rights to creditors. Obviously, the Court has spoken, and there is now a body of law that makes the law clear in both instances. But section 327 still looks exclusive to me.
September 25, 2011
Davidoff on Britain’s new takeover rules
Over at DealBook, Steven Davidoff provides some excellent analysis of Britain’s new takeover rules, which went into effect this past Monday. The title of his post sums up his predictions: “British Takeover Rules May Mean Quicker Pace but Fewer Bids.”
If this sort of thing interests you, you’ll definitely want to read the entire post—but I’ll note some of the highlights here. First, Davidoff reports that a wide array of rules were originally considered by the Takeover Panel of Britain, but the most controversial of these (requiring a two-thirds vote, requiring disclosure upon acquisition of 0.5 percent, and disenfranchising shareholders who acquired shares after the offer was announced) were rejected. Second, the rules that were adopted, “set up a nice dichotomy with the American takeover scheme”:
In the United States, targets can agree to large termination fees and provide extensive deal protections to an initial bid. Targets can also adopt a shareholder rights plan, or poison pill, which can prevent a company from acquiring the target. But in Britain none of these devices are allowed.
As mentioned above, Davidoff sees the net result of these new rules being less initial bids (because bidders will be entering the fray subject to more risks), but more competition for targets once bids are launched.
September 25, 2011 in Corporate Governance, Current Affairs, Government and Business, International Business, Investing, Mergers & Acquisitions, Politics, Securities Markets, Securities Regulation | Permalink | Comments (0)
September 24, 2011
Westbrook on the 100th anniversary of the first “blue sky” law
Amy Westbrook has posted “Blue Skies for 100 Years: Introduction to the Special Issue on Corporate and Blue Sky Law” on SSRN. Here is the abstract:
Kansas enacted the first state securities law in the United States on March 10, 1911, thereby ushering in a new era of financial regulation. House Bill 906, entitled “An Act to provide for the regulation and supervision of investment companies and providing penalties for the violation thereof” (1911 Act), was the product of disparate forces, including the ongoing struggle over Kansas’ new bank guarantee act, progressive pressures within the Republican Party, strong agricultural markets, the increasing prevalence of traveling securities salesmen, and the work of the charismatic Kansas Commissioner of Banking, Joseph Norman Dolley. This year marks the 100th anniversary of the Kansas “blue sky” law, and this issue of the Washburn Law Journal uses the occasion to look back on the genesis of securities regulation and to think about its future. It is true that the financial markets in 2011 are profoundly different from the markets in 1911. Moreover, the 1911 Act was passed under a specific combination of politics, economics, technology and social forces at work in Kansas in 1911. Although a lot has changed in 100 years, the persistence of the regulatory systems established during the early twentieth century, with respect both to securities and to corporate governance more generally, suggests that era may have more to interest us than “mere” history.
September 22, 2011
Is our current system "benefiting the few instead of the many"?
A Reuters column by Peter Apps (here) identifies the widening wealth gap as central to growing discontentment and possible increased political instability. He quotes U.S. counterinsurgency specialist Patricia DeGennaro, a senior fellow at the World Policy Institute and professor at New York University, as seeing a wider "global uprising" or "worldwide insurgency," with the rising wealth gap as key:
"That is at the root of the insurgency. In essence, people are tired of how the system is benefiting the few instead of the many ….”
William Galston, a former policy adviser to President Bill Clinton and now a senior fellow at the Brookings Institution in Washington, is also quoted:
“[W]hen you have a large middle class that is shrinking and where you have alarm and despondency over the future, that is where politics can become very volatile and even dangerous. That's what we saw in Europe in the 1930s.”
Apps cites the rise of the right-wing Tea Party as being “widely seen as part of a trend toward extremes and volatility.”
As I've noted recently (here), whatever rising tide there is left--it appears to no longer be lifting all boats. And, as I've also noted previously (here), it has been written that: "REVOLUTIONS arise from inequalities . . . ."
September 18, 2011
A rising tide?
The Economic Policy Institute reports (here) that "the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009." Meanwhile, "[t]he bottom 60 percent of households actually had less wealth in 2009 than in 1983."
September 17, 2011
Coates and Lincoln on Fulfilling the Promise of Citizens United
John Coates and Taylor Lincoln have posted “SEC Action Needed to Fulfill the Promise of Citizens United” over at the Harvard Forum. Here’s a brief excerpt:
[T]he Supreme Court’s Citizens United decision to let corporations spend unlimited sums in federal elections was premised on a pair of promises: Corporations would disclose expenditures, and shareholders would police such spending. Those promises remain unfulfilled …. The best chance to fulfill those promises may now rest with the SEC, which was recently petitioned to begin a rule-making process to require disclosure of political activity by corporations.