Tuesday, October 4, 2016
Here we go again:
Plaintiff seeks to collect the outstanding balance owed from Defendant Healthcare Enterprises, L.L.C. d/b/a Princesse Pharmacy and Defendant Octavio RX, Enterprises, L.L.C., d/b/a Christian's Pharmacy & Medical Supplies (collectively “Corporate Defendants”) as well as Defendant Christian. (Dkt. No. 13 at 3). Plaintiff alleges that Corporate Defendants “are shell corporations or alter egos of [Defendant] Christian, owner of the different establishments known as Princesse Pharmacy, [and] Christian's Pharmacy & Medical Supplies.”
The defendants Octavio Rx Enterprises, LLC and Healthcare Enterprises, LLC are shell corporations or alter egos of Gerard Christian, owner of the different establishments known as Princesse Pharmacy, Christian’s Pharmacy & Medical Supplies.
Monday, October 3, 2016
The Stanford Law Review Online has just released a series of essays on Salman v. United States, scheduled for oral argument on Wednesday. I plan to blog more about the Salman case as/if I can find time this week, but I wanted you to have this link right away--first thing this morning. The essays are a veritable insider trading feast and are written by some of the most thoughtful scholars in the area: Jill Fisch, Don Langevoort, Jonathan Macey, Donna Nagy, and Adam Pritchard. There's something in at least one of the essays for almost everyone out there.
Sunday, October 2, 2016
Saturday, October 1, 2016
I have to say, it pains me that this is even news – that price maintenance as a form of fraud on the market should, I believe, be unexceptionable, indeed, necessary for the theory to function properly.
But the idea has been at least somewhat rejected by the Fifth Circuit – see Greenberg v. Crossroads Sys., 364 F.3d 657 (5th Cir. 2004) – and defendants are vigorously disputing the legitimacy of price maintenance elsewhere.
So it comes as something of a relief that in In re Vivendi, S.A. Sec. Litigation, 2016 U.S. App. LEXIS 17566 (2d Cir. Sept. 27, 2016), the Second Circuit has now joined the Eleventh Circuit, see FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011), and the Seventh Circuit, see Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408 (7th Cir. 2015), with a full-throated endorsement of the idea that even if a fraudulent statement does not introduce “new” inflation into a stock’s price – even if it simply maintains existing inflation by confirming an earlier false impression – that too violates Section 10(b) and is actionable using the fraud on the market doctrine.
Beyond this simple holding, though, there are some interesting nuggets buried in the reasoning that are worth exploring.
First, the Second Circuit discussed the policy reasons for recognizing price maintenance as a form of fraud. It offered a hypothetical example of a company where – due to its past operating history – investors make certain assumptions about the quality of its products. Those assumptions are false with respect to a new product. Under such circumstances, the stock price is inflated, but not because of any fraud by the company. In that situation, if price maintenance is not actionable, the company would be completely free to fraudulently confirm investors’ false assumptions.
I’d only add to that that there are plenty of situations where the initial inflation might be due not to investors’ faulty assumptions, but due to the company’s own actions. In FindWhat, for example, the initial inflation was introduced by the company’s own false statements – but the Eleventh Circuit concluded that the original statements were not made with scienter, so they were inactionable. If price maintenance theory is not accepted, then once a company negligently misinforms the market, it is free to intentionally do so (but see the duty to correct, discussed below).
Similarly, in IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775 (8th Cir. 2016) (which I previously discussed here, the initial false statements were immunized by the PSLRA’s safe harbor. If price maintenance theory is not accepted, companies can simply lie via forward looking statements, and use the resulting artificial inflation to lie about related facts.
The second thing worth discussing is that one of Vivendi’s arguments was that even if a statement confirmed previous (false) information, that statement could only have “propped up” the previously-inflated price if silence would have revealed the truth. That is, in Vivendi’s view, if simply remaining silent would have had the same effect as the confirmatory false statement (and silence was an option, i.e., there were no affirmative disclosure requirements in play), then the statement cannot be said to have impacted price.
That’s an argument that’s been endorsed by Don Langevoort (see Compared to What? Econometric Evidence and the Counterfactual Difficulty, 35 J. Corp. L. 183 (2009); see also Judgment Day for Fraud-on-the-Market: Reflections on Amgen and the Second Coming of Halliburton, 57 Ariz. L. Rev. 37 (2015)), and I’ve also gone back and forth about here and in my essay Searching for Market Efficiency, 57 Ariz. L. Rev. 71 (2015).
But the Second Circuit rejected the silence comparator wholeheartedly. Part of the reasoning was kind of a burden-shifting idea: we’ll never know what would have happened if the company remained silent, because Vivendi chose to speak. And Vivendi is responsible for that.
But additionally, the Second Circuit fell back on the point that once a company chooses to speak, it has a duty to speak fully and accurately. In other words, once Vivendi chose not to remain silent, it did not have the option of failing to reveal the truth.
The reason I find this striking is that it’s a roundabout way of getting at what would have been a much simpler frame: The duty to correct.
The duty to correct is fairly uncontroversial in theory. See, e.g., Overton v. Todman & Co., 478 F.3d 479 (2d Cir. 2007); Gallagher v. Abbott Labs., 269 F.3d 806 (7th Cir. 2001)). Once a company knows it has issued false statements, it has a duty to correct them.
Here, the plaintiffs must have proven that Vivendi was aware of the fraud – we wouldn’t even be discussing price maintenance if it was unaware – so presumably, Vivendi did not have an option of remaining silent; it was legally obligated to confess.
But the duty to correct has always been a bit tough to parse, if for no other reason than it is difficult to pinpoint which person precisely in the corporation has that duty. See United States v. Schiff, 602 F.3d 152 (3d Cir. 2010); but see Barrie v Intervoice-Brite, 409 F.3d 653 (5th Cir. 2005). In Vivendi, the jury found the corporate defendant liable but absolved the individual ones, which renders the problem more complex.
Moreover, it's not clear how the duty to correct comes into play if the original statements were immunized - like, say, via the PSLRA safe harbor.
So rather than discuss whether Vivendi had an affirmative duty to speak once it realized that earlier statements were false, the Second Circuit instead simply said that the confirmatory statements were themselves the equivalent of half-truths that gave rise to a duty of a full confession. As the Second Circuit put it, “in suggesting that, had it remained silent, the misconception‐induced (whether or not fraud‐induced) inflation would have persisted in the market price, Vivendi assumes it is even relevant what would have happened had it chosen not to speak. Yet in framing the argument this way, Vivendi misunderstands the nature of the obligations a company takes upon itself at the moment it chooses, even without obligation, to speak. It is well‐established precedent in this Circuit that ‘once a company speaks on an issue or topic, there is a duty to tell the whole truth…’”
In any event, the upshot is: Price maintenance as an argument solidly prevails; we’ll see if defendants have better luck with their opposition in other circuits.
Friday, September 30, 2016
The Journal of Legal Studies Education ("JLSE") is accepting article and case study submissions. The JLSE is a peer-reviewed legal journal focused on pedagogy. In 2015, I published a case study with the JLSE, had an excellent experience, and received helpful comments from the reviewers. The announcement is below:
The Journal of Legal Studies Education is seeking submissions of manuscripts. The JLSE publishes refereed articles, teaching tips, and review of books. Manuscripts must relate to teaching, research, or related disciplines such as business ethics, business and society, public policy and individual areas of business law related specialties. The Editorial Board selects high quality manuscripts that are of interest to a substantial portion of its readers.
The JLSE is a double-blind peer-reviewed journal.
Please submit directly to Stephanie Greene, JLSE Editor-in-Chief, at email@example.com.
Stephanie M. Greene
Chair, Business Law Department
Professor, Business Law
Carroll School of Management
Chestnut Hill, MA 02467
Thursday, September 29, 2016
Call for Papers-The Anti-Corruption Law Interest Group of the American Society of International Lawyers Law (ASIL)
Proposal Due October 7, 2016
Wednesday, September 28, 2016
On Monday, Doug Moll posted a great question about RUPA 404(e), which also got some great comments. I started to write a reply comment, but it got so long, I though it worked better as a separate post. Doug asks the following (whole post here):
Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty. Section 404(b)(1) prevents the “appropriation of a partnership opportunity.” When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?
Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”?
Here's where I come out it:
As I think about it, I am with Frank Snyder's comment that "a partner is entitled to pursue her own interests in voting her partnership interest, unless there's some agreement to the contrary." I also think, though, that § 404(e) sanctions self-interested votes, subject to “the obligation of good faith and fair dealing” required under § 404(d).
So, I am not that troubled by the example from the comments that Doug cites, though I see where his concern comes from. To repeat the comment:
For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.
First, because it’s clear that the partner first got consent to own the shopping center, the partner is not competing with the partnership, as I see it. Actually, the partnership wants to compete with the existing center, which one partner owns with consent of the partnership. As such, because of the consent, I don’t think § 404(b)(3) is a concern here. Section 404(e) says a self-interested vote is permissible, so the question is whether such a vote is consistent with the obligation of good faith and fair dealing from § 404(d).
Given that the partnership consented to ownership of the shopping center, it seems that the rest of the partnership would reasonably expect that the partner would not be excited to create a competitive shopping center. With this knowledge on both sides, it seems to me that casting a vote against a new shopping center can occur in good faith and mean the partner dealt fairly. The rest of the partnership can still proceed with the plan if they have enough votes under the partnership agreement, and if not (e.g., unanimous vote was needed), too bad.
Even without disclosure and consent, this might be permissible. Suppose existing partnership A owns a car dealership. The dealership was a Pontiac, Oldsmobile, and Saturn, dealer, and they are done and new use for the property will be needed. Suppose that one of the partners also owns a shopping center with another group of people, as part of partnership B. Should that partner be precluded from voting against converting the dealership in partnership A to a shopping center? I don’t think so.
In addition, Gottacker v. Monnier, 697 N.W.2d 436 (Wis. 2005) provides an interesting LLC parallel to this situation. Under the Wisconsin LLC act, the court says:
We determine that the WLLCL does not preclude members with a material conflict of interest from voting their ownership interest with respect to a given matter. Rather, it prohibits members with a material conflict of interest from acting in a manner that constitutes a willful failure to deal fairly with the LLC or its other members. We interpret this requirement to mean that members with a material conflict of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its other members. This inquiry contemplates both the conduct along with the end result, which we view as intertwined. The inquiry also contemplates a determination of the purpose of the LLC and the justified expectations of the parties.
Id. ¶ 31. In that case, two members effectively transferred property from one entity to another, leaving a third member out. There was no question they were conflicted in their votes, but the test was not whether they could act vote in a conflicted manner (as they did). Instead, the question was whether they dealt fairly and in good faith, which had to be decided on remand (the court said they did). In assessing whether the entity or other members are injured, then, as long at the voting was done consistent with the organizing agreement, I think the test is whether the partner in question is getting something unfairly to the detriment of the other members.
Lastly, to Doug's example, in the comments to his post, he said: “[W]hen I vote to, for example, block the partnership from raising the rent on a property that I originally leased several years ago from the partnership (and with the partnership's permission), it is hard for me to understand why that vote should not be considered a breach of duty.” It seems to me that should not be a breach of fiduciary duty unless it violates some express agreement to the contrary.
There can be good faith and fair dealing under § 404(d) in such a case, and the partnership agreed to the terms up front. The question to me is simply, what kind of vote is needed to raise the rent? Again, if it requires unanimous consent, that’s the partnership’s problem. They could have changed that when they originally agree to the deal. If it’s majority vote, the other partners can change the rent despite the conflicted partner's no vote. I see no need to protect this kind of transaction with mandatory fiduciary duties. There’s not a disclosure or fair dealing problem to me, so I would sanction it, and I think that's the specific intent of § 404(e).
I admit, I am sometimes amazed at how much of a contractarian I have become.
Tuesday, September 27, 2016
As law professor, most of my students are Millennials. What does that mean? Well, Neil Howe and William Strauss, in their book Generations: The History of America's Future, 1584 to 2069, published in 1991, defined Millennials as those born between 1982 and 2004. I'll go with that. As one who is firmly part of Generation X (the age group and not the band, though that would be cool), I'm curious. It seems that some people think so. I don't think Gen Xers think of themselves as such very often.
What made me think of this? A political ad from NextGen Climate, funded by hedge fund billionaire/environmental activist Tom Steyer, apparently seeks to generate more support for Hillary Clinton by targeting Gary Johnson. The ad is below. The ad begins: "Thinking about voting for Gary Johnson? In case you missed it, climate change will cost millennials over $8 billion if no one does anything about it."
That's just weird to me. I know it's trying to motivate that age group of voters, but I am not sure many Millennials would think of themselves as such. That is -- does it resonate at all to have this ad targeted at them in that way?
I guess age-group labels like this are thrown around a lot, and I just forgot. The ABA has a mentoring article from 2004 called Generation X and The Millennials: What You Need to Know About Mentoring the New Generations. It's for "Boomers" who have to deal with us Gen Xers and Millennials. The piece makes some pretty bold assertions (some of which certainly aren't true twelve years later). For example:
All Millennials have one thing in common: They are new to the professional workplace. Therefore, they are definitely in need of mentoring, no matter how smart and confident they are. And they'll respond well to the personal attention. Because they appreciate structure and stability, mentoring Millennials should be more formal, with set meetings and a more authoritative attitude on the mentor's part.
Perhaps most of that is right. There is some value here, even though my experience is that formal mentoring is not always well received. Then again, maybe that's my bias. After all, "members of Generation X dislike authority and rigid work requirements. An effective mentoring relationship with them must be as hands-off as possible. . . .Gen Xers work best when they're given the desired outcome and then turned loose to figure out how to achieve it." I don't know about the first part, but last two sentences are definitely me.
So, while I find the description of Millennials a little overbearing, as I think about it, it explains a lot. I think a lot of us from the Gen X world can't understand why we can't tell students what we want and have them come back with a solution. That's what WE do, not necessarily what they do (unless we make it clear that's what we want).
I don't like broad generalizations of groups, but I have to admit that the 2004 article's suggestions for working with Millennials is actually consistent with a lot of what I have been doing (and working toward). I just never thought of it as trying to reach Millennials. I thought of it as trying to reach students. Turns out, in most cases, that's the same thing.
I remain skeptical of the likely efficacy of the ad, but maybe there's more here than I originally thought. Still, I'm not sure an anti-Gary Johnson ad gets anyone very far right about now.
Monday, September 26, 2016
In recent weeks, co-bloggers Ann Lipton and Anne Tucker both have posted on issues relating to the upcoming Supreme Court oral argument in Salman v. U.S. Indeed, this is an important case for the reason they each cite: resolution of the debate about whether the receipt of a personal benefit should be a condition to tippee liability for insider trading (under Section 10(b) of/Rule 10b-5 under the Securities Exchange Act of 1934, as amended), when the tipper and tippee are close family members. Certainly, many of us who teach and litigate insider trading cases will be watching the oral argument and waiting for the Court's opinion to see whether, and if so, how, the law evolves.
Having noted that common interest (as among many) in the Salman case, as I earlier indicated, I have a broader interest in the Salman case because of a current project I am working on relating to family relationships and friendships in insider trading--both as a matter of tipper-tippee liability (as in Salman) and as a matter of the duty of trust and confidence necessary to misappropriation liability. The project was borne in part of a feeling that I had, based on reported investigations and cases I continued to encounter, that expert network and friends-and-family insider trading cases were two very common insider trading scenarios that implicate uncertain insider trading doctrine under U.S. law.
While I have been distracted by other things, my research assistant has begun to gather and reflect on the data we are assembling about publicly reported friends and family insider trading acting between 2000 and today. Here are some preliminary outtakes that may be of interest based on the first 40 cases we have identified.
- 16 of the cases involve friendships;
- 7 cases involve marital relationships;
- 7 cases involve romantic relationships outside marriage (e.g., lover, mistress, boyfriend);
- 5 cases involving siblings;
- 3 cases involve a parent/child relationship; and
- 3 cases on involve in-laws.
Those categories capture the vast majority of cases we have identified so far. The cases represented in the list are primarily from 2011-2016. Some cases involve more than one type of relationship. So, the number of observations in the list above exceeds 40.
Another key observation is that most initial tippers in these cases are men. Notable exceptions are SEC v. Hawk and SEC v. Chen, described in this 2014 internet case summary. Six cases found and analyzed to date involve female tippees.
Theories in the cases derive from both classical and misappropriation scenarios. I will say more on that in a subsequent post. For now, however, perhaps the most important take-away is that my intuition that there are many cases involving exchanges of material nonpublic information in family relationships and friendships appears to be solid. Hopefully, the Court will help resolve unanswered questions about insider trading doctrine as applied in these cases, starting with the personal benefit question raised in Salman.
Fresh from the presidential debate,** I find myself writing about board room diversity.*** Over the 2016 summer, SEC Chairwoman Mary Jo White signaled intent to revisit diversity in U.S. boardrooms. In 2009 the SEC adopted a diversity disclosure rule requiring companies to disclose how their nominating committees considered diversity and whether the company had a diversity policy. The full rule can be viewed here. The SEC did not define (nor did it mandate a singular definition of ) diversity, and companies have been left to define diversity individually, often without regard to gender, ethnic, racial or religious identities. The result, criticized by Chairwoman White, has been vague disclosures without apparent impact.
SEC diversity rule making (past and future) was the backdrop for a recent corporate governance seminar class where I asked students: Why should they care about board room diversity? And if the 2009 disclosure rule changes, how should it change? How do other countries approach the issue of boardroom diversity? Can it be a mandated or legislated endeavor? To guide our discussion we read Aaron A Dhir's brilliant and thorough: Challenging Boardroom Homogeneity: Corporate Law, Governance and Diversity and consulted Catalyst.org to understand the panoply of diversity choices from other jurisdictions.
Dhir's Challenging Boardroom Homogeneity was a helpful and powerful book, equipping students with facts and language to think about and discuss diversity. Dhir engaged in a qualitative, interview-based methodology to investigate, and ultimately compare the Norwegian quota system with the U.S. diversity disclosure experience. While noting the costs and the translation problems from Norway to the world writ-large, Dhir interpreted his results as follows:
"female directors, present in substantial numbers, may enhance the level of cognitive diversity and constructive conflict in the boardroom. They are more apt to critically analyze, test and challenge received wisdom. In doing so, they appear to have harnessed for their boards the value of dissent, a key driver of effective governance."
In focusing on the U.S. experience, however, Dhir found that U.S. firms defined diversity in terms of experience not identity, and that this initiative fell short of the goal of encouraging or promoting boardroom diversity. Dhir recommended that the SEC define diversity as containing socio-demographic components and encourage companies to incorporate such considerations in governance by imposing a comply or explain regime in the U.S. While some have lamented that the SEC's primary challenge is how to define what diversity means, Dhir, through his research and analysis has a pretty good staring point. Should someone send Chairwoman White a copy of this book?
More than even the careful methodology, the refreshing comparative perspective and thoughtful recommendations tied to data and observable trends, the book provides a common language to explain the phenomenon of why diversity, as an initiative, is even necessary in the first place. Chapter two engages with a nuanced set of issues, irrefutable fact and explanations of bias--implicit and explicit. Here I think, more so than even other parts of the book, students connected with the materials linking language to real experiences and observations in their own lives. The attack on the pool problem critique (there aren't enough qualified women and it variant: we hired the most qualified candidate from our pool) alone warrants my effusive praise for its persuasive presentation and ability to generate thoughtful student debate.
**The debate wasn't the impetus, rather writing this post is just an exercise in settling my nerves before trying to sleep.
Every year I teach RUPA (1997) § 404(e), and every year I am confused. That section states that “[a] partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.” The comment makes the following observations (emphasis added):
Subsection (e) is new and deals expressly with a very basic issue on which the UPA is silent. A partner as such is not a trustee and is not held to the same standards as a trustee. Subsection (e) makes clear that a partner’s conduct is not deemed to be improper merely because it serves the partner’s own individual interest.
That admonition has particular application to the duty of loyalty and the obligation of good faith and fair dealing. It underscores the partner’s rights as an owner and principal in the enterprise, which must always be balanced against his duties and obligations as an agent and fiduciary. For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.
I have always found this shopping center example to be puzzling. Assume that the partner believes that it would be beneficial for the partnership to open a shopping center, but harmful to the partner’s individual interest (because it will compete with his personal shopping center). In other words, the partner is voting against a proposal not because the partner believes that it is in the partnership’s interest to do so, but solely because the partner believes that it is the right decision for him personally. Is § 404(e) conveying that voting in such a manner is not a breach of the partner’s duty of loyalty or the implied covenant?
Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty. Section 404(b)(1) prevents the “appropriation of a partnership opportunity.” When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?
Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”? While the partners have consented to the partner owning his own shopping center, that consent presumably does not extend to self-interested conduct designed to foil the partnership’s effort to open its own shopping center. When a partner votes against what he believes would benefit the partnership solely to protect his own competing business, isn’t that a form of competition with the partnership?
Might the vote violate the implied contractual covenant of good faith and fair dealing? One could argue that the partnership agreement assumes that partner voting will be based on what the partner thinks is good for the partnership. Surely the spirit of the agreement is that a partner has to consider the partnership’s interests, and not solely the partner’s personal interests, when voting.
Is the answer simply that voting is always protected by § 404(e)? A partner’s vote can never give rise to a breach of fiduciary duty or implied covenant claim? Cf. Thorpe v. CERBCO, Inc., 676 A.2d 436, 444 (Del. 1996) (noting that the controlling shareholders “were entitled to pursue their own interests in voting their shares,” and acknowledging “their entitlement as shareholders to act in their self-interest”); see also Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584, 598 (Del. 1986) (observing that the law “does not … require … controlling shareholders [to] sacrifice their own financial interest in the enterprise for the sake of the corporation or its minority shareholders”); Willard v. Moneta Bldg. Supply, Inc., 515 S.E.2d 277, 288 (Va. 1999) (concluding that majority stockholders are entitled to vote their shares as they see fit absent illegal, oppressive, or fraudulent conduct).
I welcome your thoughts.
Sunday, September 25, 2016
Saturday, September 24, 2016
I’m sure I’m not alone in having followed the spectacular fall of Theranos over the past year. Elizabeth Holmes was a fairytale come to life – and now, the main question seems to be whether she intentionally defrauded her investors and the public, or whether she was simply in denial about the limitations of her technology.
(I personally don’t see the two as mutually exclusive – many fraudsters lie in the expectation that they can soon turn things around and no one will be any the wiser. In this case, there’s just too much evidence that Holmes was consciously evasive when questioned about her technology for me to believe that she wasn’t intentionally misleading people)
It’s probably too tempting to try to draw lessons from the Theranos debacle, but there are some interesting issues it raises.
First, I wonder whether Theranos is an argument for or against initiatives like the JOBS Act that make it easier for companies to raise large amounts of capital without holding an IPO.
On the one hand, because Theranos never went public, the fallout was contained; we haven’t seen the spectre of thousands of retail investors directly or indirectly losing their pensions.
On the other hand, Theranos illustrates exactly why we subject companies to the IPO process. There were, apparently, plenty of red flags right from the beginning, which caused the most savvy venture capitalists to steer clear of it. If the company had been forced to file an S-1 and subject it to general scrutiny, the problems might have been uncovered a lot sooner, and a lot of the damage prevented. If the company had been forced to file an S-1 before raising such large amounts of capital, it probably never would have raised the capital at all.
If nothing else, then, Theranos highlights the inadequacy of the accredited investor definition.
The second aspect of Theranos that I find fascinating is that a young woman was able to pull off this kind of fraud. It’s no secret that women in general have a hard time raising start up capital; in general, it’s the province of white men – relying on a pedigree and an image – to bewitch investors so thoroughly. Yet somehow Elizabeth Holmes was able to sell a convincing story built on technobabble and a romantic story. It’s almost heartening, in a dark sort of way – how far we’ve come! – but more seriously, I worry that Holmes will now serve as a cautionary tale for investors considering companies helmed by women.
With all that said, I'm filled with glee at the prospect of the movie – which apparently will star Jennifer Lawrence, under the direction of Adam McKay (who also directed The Big Short). That’s going to be a hoot!
Friday, September 23, 2016
In January 2015, I wrote about a resolution to take a break from e-mails on Saturdays.
That resolution failed, quickly.
Since then, I have been thinking a lot about my relationship with e-mail.
On one hand, I get a lot of positive feedback from students and colleagues about my responsiveness. On the other hand, constantly checking and responding to e-mails seems to cut against productivity on other (often more important) tasks.
Five or six weeks ago, I started drafting this post, hoping to share it after at least one week of only checking my e-mail two times a day (11am and 4pm). Then I changed the goal to three times a day (11am, 4pm, and 9pm and then 5am, 11am, 4pm). Efforts to limit e-mail in that rigid way failed, even though very little of what I do requires a response in less than 24 hours. On the positive side, I have been relatively good, recently, at not checking my e-mail when I am at home and my children are awake.
A few days ago, I read Andrew Sullivan’s Piece in the New York Magazine on “Distraction Sickness.” His piece is long, but worth reading. A short excerpt is included below:
[The smart phone] went from unknown to indispensable in less than a decade. The handful of spaces where it was once impossible to be connected — the airplane, the subway, the wilderness — are dwindling fast. Even hiker backpacks now come fitted with battery power for smartphones. Perhaps the only “safe space” that still exists is the shower. Am I exaggerating? A small but detailed 2015 study of young adults found that participants were using their phones five hours a day, at 85 separate times. Most of these interactions were for less than 30 seconds, but they add up. Just as revealing: The users weren’t fully aware of how addicted they were. They thought they picked up their phones half as much as they actually did. But whether they were aware of it or not, a new technology had seized control of around one-third of these young adults’ waking hours. . . . this new epidemic of distraction is our civilization’s specific weakness. And its threat is not so much to our minds, even as they shape-shift under the pressure. The threat is to our souls. At this rate, if the noise does not relent, we might even forget we have any. (emphasis added)
Academics seem to vary widely on how often they respond to e-mails, but I’d love to hear about the experience and practices of others. Oddly, in my experience with colleagues, those who are most prompt to respond to e-mails are usually also the most productive with their scholarship. I can’t really explain this, other than maybe these people are sitting at their computers more than others or are just ridiculously efficient. As with most things, I imagine there is an ideal balance to be pursued.
One thing I have learned is that setting expectations can be quite helpful. With students, I make clear on the first day of class and on the syllabus that e-mails will be returned within 24 business hours (though not necessarily more quickly than 24 business hours). I often respond to e-mails much more quickly than this, but this is helpful language to point a student to when he sends a 3am e-mail asking many substantive questions before an 8am exam.
Our students also struggle with "distraction sickness," and most of them know they are much too easily distracted by technology, but they are powerless against it. Ever since I banned laptops in my undergraduate classes, I have received many more thanks than pushback. The vast majority of students say they appreciate the technology break, but some can still be seen giving into the technology urge and (not so) secretly checking their phones.
Interested in how our readers manage their e-mails. Any tricks or rules that work for you? Feel free to e-mail me or leave your thoughts in the comments.
Thursday, September 22, 2016
Lately, I’ve been researching the twelve nation Trans-Pacific Partnership Treaty (“TPP”) because I am looking at investor-state dispute settlements (ISDS) in my work in progress proposing a model bilateral investment treaty between the U.S. and Cuba.
The TPP, which both Trump and Clinton oppose, has the support of U.S. business. Although President Obama has pushed the treaty as part of his legacy, just this morning, Vice-President Biden added his pessimistic views about its passage. More interestingly, over 220 law and economics academics, led by Harvard’s Laurence Tribe, have come out publicly to oppose TPP, stating:
ISDS grants foreign corporations and investors a special legal privilege: the right to initiate dispute settlement proceedings against a government for actions that allegedly violate loosely defined investor rights to seek damages from taxpayers for the corporation’s lost profits. Essentially, corporations and investors use ISDS to challenge government policies, actions, or decisions that they allege reduce the value of their investments... Through ISDS, the federal government gives foreign investors – and foreign investors alone – the ability to bypass th[e] robust, nuanced, and democratically responsive legal framework. Foreign investors are able to frame questions of domestic constitutional and administrative law as treaty claims, and take those claims to a panel of private international arbitrators, circumventing local, state or federal domestic administrative bodies and courts. Freed from fundamental rules of domestic procedural and substantive law that would have otherwise governed their lawsuits against the government, foreign corporations can succeed in lawsuits before ISDS tribunals even when domestic law would have clearly led to the rejection of those companies’ claims. Corporations are even able to re-litigate cases they have already lost in domestic courts. It is ISDS arbitrators, not domestic courts, who are ultimately able to determine the bounds of proper administrative, legislative, and judicial conduct… This system undermines the important roles of our domestic and democratic institutions, threatens domestic sovereignty, and weakens the rule of law.
Senator Warren, who also opposes TPP has argued, "“ISDS allows a small group of ultra-rich investors to extract billions of dollars from taxpayers while they undermine financial, environmental and public health rules across the world.” I look forward to the upcoming debates to see whether either Trump, who has labeled the proposal the “rape of our country,” or Clinton, who previously supported the deal, will cite the academics' letter as additional reason to oppose TPP.
Wednesday, September 21, 2016
The enticing facts of insider trading have me writing about the topic again (see an earlier post here) as the US Supreme Court prepares to hear oral argument in Salman v. US on October 5th. In Salman, the Supreme Court is asked to draw some careful lines in the questions: what benefit counts and how to prove such a benefit under Dirks v. SEC.
Recall that in Dirks, the Supreme Court focused the test on whether an insider benefitted—either by trading or by tipping in exchange for a benefit from the person to whom she tipped material nonpublic information. After Dirks, the 10b inquiry is whether the insider breached a duty by conveying the information for the insider’s personal benefit, and whether the tippee knows or at least should know of the breach. The Court explained that even in a case against a tippee who trades "Absent some personal gain [by the insider], there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach [by the tippee]."
The Salman case highlights a circuit split: the Second Circuit case United States v. Newman and the Ninth Circuit's ruling in Salman. In Salman, the question is whether prosecutors had to prove that the brother-in-law, Maher Kara, disclosed nonpublic securities information in exchange for a personal benefit. Is it enough that the insider and the tippee shared a close family relationship or must there be direct evidence as required in Newman?
The Ninth Circuit framed the benefit requirement inquiry, established in Dirks, as a gift of confidential information to a trading relative or a friend. The prosecution offered direct evidence of nonpublic information as a gift. The Ninth Circuit, and the Government, relied upon this passage in Dirks:
There may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.
The Second Circuit read the Dirks benefit test more narrowly, saying it required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”
So what is the right answer? The Government lamented the Newman decision as "dramatically limit[ing] the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading.” Whereas others (see here) have criticized the Government's position in Newman and the subsequent basis of the Salman ruling as reviving the “parity of information” standard rejected by Supreme Court in both Chiarella and Dirks. Focusing on friendship and defining it broadly weakens the benefit test advanced in Dirks.
As someone who teaches insider trading and has followed the fascinating case facts for years, I am looking forward to oral argument and see the next step in the evolution of insider trading. Co-blogger Ann Lipton tee'd up the Salman case in her post earlier this week with her usual whit and charm.
Tuesday, September 20, 2016
Here’s a new one on the “LLC as corporation” front. A court in the Southern District of New York says the following:
[T]his Court has subject matter jurisdiction, since the parties are diverse and the amount in controversy exceeds $75,000. Hermes and Swain are “citizens” of different states; Hermes, a French limited liability corporation, has its headquarters in New York, while Swain is a New Jersey resident.
Hermés of Paris, Inc. v. Swain, 2016 WL 4990340, at *2 (S.D.N.Y., 2016)
In most such circumstances, when a court refers to a “limited liability corporation,” it meant to say “limited liability company.” See, e.g., Avarden Investments, LLC v. Deutsche Bank Nat'l Trust Co., No. 16-CV-014-LM, 2016 WL 4926155, at *2 (D.N.H. Sept. 15, 2016) (“Avarden is a limited liability company organized under the laws of New Hampshire. New Hampshire law permits a limited liability corporation to assign management responsibility of a limited liability company to a ‘manager.’ RSA 304-C:13.”). But not this time.
Bloomberg says Hermès of Paris, Inc. operates as a subsidiary of Hermes International SA. The French version of an LLC is not an SA, it often viewed as an SARL.
So, technically, a corporation is a “limited liability corporation” because corporations come with a grant of limited liability. The source of this language in this opinion is, in seems, the petition to compel arbitration, which states in paragraph 10: “Petitioner Hermés, an entity engaged in ‘commerce’ as defined in the FAA §1, is a limited liability corporation, with its United States headquarters in New York, New York.”
Another interesting (to me) note is that that court and the pleadings don’t ever say where Hermés is incorporated. They just say where it is headquartered. I see nothing that says its state of origin. I am not as up on my civil procedure (jurisdiction) as maybe I should be, but couldn’t that matter? That is, if Hermés of Paris, Inc., is a New Jersey corporation with headquarters in New York, might that not be a problem for diversity jurisdiction? (It looks like it’s not, though. I looked. But they do have a New Jersey warehouse. Still, the state of formation seems mildly important to note.)
Anyway, although I don’t like the use of the term at all, because it creates potential for confusion (is it an LLC or a corporation?), at least this time the words are correct, even if that’s not generally how we refer to the entity type. I’d still prefer the court to have just called it a corporation, though.
Monday, September 19, 2016
This Friday, I will co-present on a continuing legal education panel on "The New Crowdfunding Laws for Private Investors & Other Ways to Legally Raise Money For Your Project" at the Americanafest--the Americana Music Festival and Conference. The program description is set forth below.
There have been significant changes in federal and state laws related to soliciting investors through crowdfunding and other types of investment activities. These new changes are designed to make certain types of investments easier and more accessible to people and businesses who seek investors for their projects. This panel will discuss those new laws and strategies of how to seek small to moderate size investments under today’s federal and state law. The panel will also discuss “dos” and “don’ts” for those seeking out investors and what to look for when offered an investment opportunity.
I love cultivating this ground, even if I have done much of it in the past with different audiences. I will prepare some specialized information relating to financing music and other creative projects, for example, for this program. I also plan to discuss important traps for the unwary.
What I really want to know is: what else might folks working with and in the music industry (or with other artistic and creative business venturers) want to know? I have some ideas based on my research on crowdfunding to date. But send me your ideas . . . . No doubt, a whole new discussion may be generated from audience questions. But I would love to be as prepared as possible.
Sunday, September 18, 2016
Saturday, September 17, 2016
As part of my “scared straight” strategy for teaching insider trading, I like to tell my students horror stories of attorneys who have been caught up in scandals (as well as the collective *facepalm* reaction of the bar, which is as much due to the stupidity of the schemes as to their immorality).
Last year, I recounted the curious case of Robert Schulman and King Pharmaceuticals.
Schulman was an attorney representing King Pharmaceuticals, and he learned that the company would soon be acquired by Pfizer. He told his friend and investment adviser, Tibor Klein, who promptly purchased King shares for himself and his clients (some of which were allocated to Schulman’s account). All told, Klein generated about $328K in profits.
The SEC charged Klein with insider trading in 2013. Interestingly, the SEC did not accuse Schulman of tipping; instead, the SEC’s theory was that Schulman had gotten tipsy at dinner and shot off at the mouth, ultimately blurting out, “It would be nice to be King for a day.” (When I tell my students this part, I imagine how that might have been said – presumably, with an exaggerated wink and heavy emphasis on the word “King”). Klein, having been given the information in confidence, wronged Schulman by misappropriating it for his own use.
Except it seemed to me that the SEC never really believed Schulman’s claim that he had never intended to tip his friend. Why? Because most of the time, when the SEC files a complaint that involves nonparties, the SEC is careful to conceal their names. (For example) If necessary, the SEC might describe them as Person A or Witness B, that kind of thing.
But not in the King case. There, the SEC could not have been more forthcoming with Schulman’s name, which it repeated ad nauseam throughout the complaint – along with the potentially career-destroying details of his drunkenness, and his desire to impress his friend as a “big shot.” So it always struck me that the subtext here was, if the SEC couldn’t prove that Schulman intended to tip his friend, by god, it was going to embarrass him as much as it could.
Well, it took another three years, but the SEC has finally gotten its man, in a way: the Brooklyn US Attorney has charged both Schulman and Klein with criminal insider trading, with potential penalties of up to 20 years in prison.
King for a day, under a sword of Damocles.