Monday, January 9, 2017
The members of Friday's AALS discussion group about which I wrote last week came to an inescapable--if unsurprising--overall conclusion: the U.S. Supreme Court's opinion in the Salman case does little to address major unresolved questions under U.S. insider trading law. That having been said, we had a wide-ranging and sometimes exciting discussion about the Court's opinion in Salman and what might or should come next. I found the discussion very stimulating; a great way to start a new semester--especially one in which I am teaching Securities Regulation and Advanced Business Associations, both of which deal with insider trading law. I will offer brief outtakes from the proceedings here for your consideration and (as desired) comment.
John Anderson and I framed three questions around which we structured the formal part of the discussion session (which commenced after brief introductory comments from each participant).
- What, if anything, does the Court's Salman opinion say by its silence?
- What, if anything, is left of the Second Circuit opinion in the Newman case after Salman?
- Is law reform needed after Salman, and if so, should we continue to permit it to occur through further, incremental judicial developments or should reform be undertaken through legislation or regulatory rule-making or guidance?
The questions drew both divergent and overlapping responses. It would take too long to try to capture it all, but a recording of the discussion will be available, if all went well with the technology, etc., on the AALS website in the coming months.
I want to pass on here, however, two key reading recommendations that Don Langevoort made to all of us that offer a basis for responding to all three questions--and more. First, Don recommended that we all read the Solicitor General's Brief for the United States in the Salman case. From this, he suggested (among other things), we can review issues not addressed in Salman and get an idea of how the U.S. government--at least at present--is processing those issues as across the Department of Justice and the Securities and Exchange Commission. Second, he recommended reading the First Circuit opinions in the Parisian and McPhail cases--two criminal prosecutions alleging insider trading violations (tipping and trading) by members of a golf group. These opinions also address important issues not taken up by Salman--including how the "knew or should have known" language from the Court's Dirks opinion relates to both the mens rea requirement in criminal insider trading actions (which require proof of a "willful" violation under Section 32(a) of the Securities Act of 1933, as amended) and misappropriation actions--and may offer windows on future judicial decision making.
No doubt, insider trading law in the United States remains a bit of an open book in many respects after Salman. Given that, I may report on more from this AALS discussion session in future posts. But I will leave the matter here, for now, having posed a few questions for your consideration and passed on some good advice from a trusted colleague who has followed U.S. insider trading law for many years . . . .
Monday, January 2, 2017
Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman. He invited comments. So, I sent him one! He has started posting comments in a mini-symposium. Mine is here. Andrew Verstein's is here. There may be more to come . . . . I will try to remember to come back and edit this post to add any new links. Prompt me, if you see one before I get to it . . . .
Postscript (January 5, 2017): James Park also has responded to Steve's call for comments. His responsive post is here.
Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here. And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively. Steve collects the posts here.
Tomorrow, I am headed to the Association of American Law Schools ("AALS") Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister). I want to highlight a program at the conference for you all that may be of interest. John Anderson and I have convened and are moderating a discussion group at the meeting entitled "Salman v. United States and the Future of Insider Trading Law." The program description, written after the case was granted certiorari by the SCOTUS and well before the Court's opinion was rendered, follows:
In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.
This discussion group will focus on Salman and its implications for the future of insider trading law.
Of course, we all know what happened next . . . .
The discussants include the following, each of whom have submitted a short paper or talking piece for this session:
John P. Anderson, Mississippi College School of Law
Miriam H. Baer, Brooklyn Law School
Eric C. Chaffee, University of Toledo College of Law
Jill E. Fisch, University of Pennsylvania Law School
George S. Georgiev, Emory University School of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
Gregory Gilchrist, University of Toledo College of Law
Michael D. Guttentag, Loyola Law School, Los Angeles
Joan M. Heminway, University of Tennessee College of Law
Donald C. Langevoort, Georgetown University Law Center
Donna M. Nagy, Indiana University Maurer School of Law
Ellen S. Podgor, Stetson University College of Law
Kenneth M. Rosen, The University of Alabama School of Law
David Rosenfeld, Northern Illinois University College of Law
Andrew Verstein, Wake Forest University School of Law
William K. Wang, University of California, Hastings College of the Law
The discussion session is scheduled for 8:30 am to 10:15 am on Friday, right before the Section on Securities Regulation program, in Union Square 25 on the 4th Floor of the Hilton San Francisco Union Square. The AALS has posted the following notice about discussion groups, a fairly new part of the AALS annual conference program (but something SEALS has been doing for a number of years now):
Discussion Groups provide an in-depth discussion of a topic by a small group of invited discussants selected in advance by the Annual Meeting Program Committee. In addition to the invited discussants, additional discussants were selected through a Call for Participation. There will be limited seating for audience members to observe the discussion groups on a first-come, first-served basis.
Next week, I will post some outtakes from the session. In the mean time, I hope to see many of you there. I do expect a robust and varied discussion, based on the papers John and I have received. Looking forward . . . .
Thursday, December 29, 2016
Ten days ago, I posted on conflicts of interest and the POTUS. Today, friend-of-the-BLPB Ben Edwards has an Op Ed in The Washington Post on conflicts of a different kind--those created by brokerage compensation based on commissions for individual orders. The nub:
In the current conflict-rich environment, Wall Street gorges itself on the public’s retirement assets. While transaction fees are costs to the public, they’re often juicy paydays for financial advisers. A study by the White House Council of Economic Advisers found that Americans pay approximately $17 billion annually in excess fees because of such conflicts of interest. The high fees mean that the typical saver will run out of retirement money five years earlier than he or she would have with better, more disinterested advice.
The solution posed (and fleshed out in a forthcoming article in the Ohio State Law Journal, currently available in draft form on SSRN here):
[S]imply banning commission compensation in connection with personalized investment advice would put market forces to work for consumers. This structure would kill the incentive for financial advisers to pitch lousy products with embedded fees to their clients. While the proposal might sound radical, Australia and Britain have already banned commission compensation linked to investment advice without any significant ill effect. While some might pay a small amount more under such a system, the amount of bias in advice would go down, likely more than offsetting the additional cost with investment gains.
I have been following the evolution of Ben's thinking on this and recently heard him present the work at a faculty forum. I encourage folks interested in the many areas touched on (broker duties, broker compensation, conflicts of interest generally, etc.) to give it a read. This is provocative work, even of one disagrees with the extent of the problem or the way to solve any problem that does exist.
Tuesday, December 27, 2016
New Book from Martin & Kunz: When the Levees Break: Re-visioning Regulation of the Securities Markets
My friend and colleague, Jena Martin's coauthored book (which she wrote with another West Virginia University professor Karen Kunz) has just been released: When the Levees Break: Re-visioning Regulation of the Securities Markets. I have just started the book, and I look forward to working my way through it. I cannot say Prof. Martin and I always see eye to eye on things (though we often do), she always has a thoughtful and interesting take. It's been an interesting read so far, and I recommend taking a look. Following is a synopsis of the book:
The stock markets. Whether you invest or not, the workings of the stock market almost certainly touch your life. Either through your retirement fund, your mutual fund or just because you work for a place that invests (or is invested in)—the reach of the securities markets is expanding, like an ever growing tidal wave.
This book discusses what happens when that wave hits the shore. Specifically, this book argues that, given the mounting deluge from misplaced regulation, fast-paced technology, and dominant financial players, the current US regulatory structure is woefully inadequate to hold back the tide.
Using vivid imagery and plain language, Karen Kunz and Jena Martin take the problems involved in regulating the complex world of securities head on. Examining everything from the rise of technology and the role of hedge funds to our bloated agency system, Kunz and Martin argue that the current structure is doomed to fail and, when it does, the consequences will be disastrous.
Sending out a call to action, the authors also offer a bold vision for how to fix the mess we’ve made—not by tinkering around the edges—but instead by building a whole new structure, one that can withstand the next storm that is sure to come.
Tuesday, December 13, 2016
U.S. Securities and Exchange Commission Chair Mary Jo White has vowed to press on in her efforts to adopt new rules related to derivatives and mutual funds, among other issues, says a Reuters report. The Senate Banking Committee’s top two Republicans, Chairman Richard Shelby and Mike Crapo of Idaho, sent a letter asking her to stop the rule making process while the Trump administration reviews the SEC's agenda. She declined.
Chair White replied that the SEC must “exhibit a spirit of firm independence” in continuing its work “without fear or favor.” She further wrote, “I am not insensitive to the issues raised by your letter and have carefully considered what impact, if any, the election should have on the current work of the Commission.” (Reuters saw the letter, but I have not found a copy.)
I am on record as saying (e.g., here and here) I'd like to see the SEC and Congress take a break from new regulations and focus on enforcement, though I know some of the proposed rules are (at least in some form) required by Dodd-Frank. Still, even where I disagree with some of the proposals, I think it's right for independent agencies to continue on with their work. Each such agency can be respectful of the incoming administration, while continuing on with their workload. Just because the incoming Congress and president may disagree with some of the policies or rationales, the SEC has statutory obligations to put forth rules, and the business of the country doesn't stop between terms. Ultimately, I'd be quite content to see the SEC decide to put the a lot of these rules on hold (or make them more narrow) because the Commission thinks that's the best course of action, but not because the top Senate Banking Committee members asked.
Monday, December 12, 2016
It used to be that Friday night was Domino's Pizza night in our house . . . . My, how things change if one lets 15-20 years slip by unnoticed. No more of that in our house!
I guess Domino's is doing OK without us, however. Third quarter 2016 financial results for Domino's Pizza, Inc., a Delaware corporation with common stock listed on the New York Stock Exchange, were favorable as compared to the firm's 2015 results, accordingly to the most recent quarterly earnings release. Somebody's eating a lot of Domino's pizza, even if it isn't the Heminway family.
Apparently, Domino's wants to share the wealth--with its customers. Co-blogger Haskell Murray pointed this recent press item out to me and co-blogger Ann Lipton in an email message last week, knowing full well that we both were or would be interested. He was right. Ann may have more to say on this in a later post. (She also noted that other firms are adopting consumer benefit plans similar to the Domino's plan I describe here today.)
Of course, as a corporate finance/securities lawyer, I immediately had visions of Ralston Purina dancing in my head. (Not quite like visions of sugarplums, in this holiday season . . . . But I will take what I can get.) So, I went looking for a registration statement/prospectus. And I found what I sought! No Ralston Purina-like Section 5 violation here.
Domino's has filed a shelf registration statement on Form S-3 and a Rule 424(b)(5) prospectus with the SEC (both filed December 2, 2016). The plan of distribution is summarized in the prospectus in two short sentences: "The Piece of the Pie Program is just one of the ways we are giving thanks to our customers. Through the Plan, we are offering our eligible customers the opportunity to be entered into drawings for a chance to be selected to receive ten Shares."
The prospectus goes on to describe the way the plan operates plan in more detail. Here's a slice off the top:
Shares for the Plan will be purchased in the open market by Fidelity Brokerage Services LLC and o Fidelity Capital Markets,Fidelity or, at our election, provided by us to Fidelity out of our authorized but unissued shares and will be initially deposited in a custody account in the name of the Company (“Custody Account”). Open market purchases will be effected by Fidelity, with all Shares to be credited to the applicable participant’s Fidelity Account. Fidelity has full discretion as to all matters relating to open market purchases, subject to the terms of our agreement with them, including the number of Shares, if any, to be purchased on any day or at any time of day, the price paid for such Shares, the markets on which Shares are purchased (including on any securities exchange, in the over-the-counter market or in negotiated transactions) and the persons (including brokers and dealers) from or through whom such purchases are made.
The Plan is not designed for short-term investors, as participants will not have complete control over the exact timing of redemption transactions or the market value of our Common Stock redeemed pursuant to a Piece of the Pie Award under the Plan. See “—Timing of Purchases.” The Plan is designed primarily for customers who have a long-term perspective and affinity for the Company and its values.
Notably, Domino's is planning to use shares that it repurchases in the market as well as, perhaps, authorized and unissued shares. The use of market repurchases may signal management's belief that the market is undervaluing those shares. It also is a means of preventing dilution to existing stockholders. Public companies often use market purchases to fund dividend reinvestment and other equity-based employee benefit plans.
Customers can enroll in the plan on the Domino's Pizza app at no charge. Here's what the overall offering looks like:
. . . We have established the Plan to provide our eligible customers with the opportunity to be entered into drawings under the Plan to receive ten shares of our Common Stock as a thank you for being a loyal customer. Between December 5, 2016 and November 30, 2017 (the “Offer Period”), we will conduct 25 drawings per month. An eligible customer who has enrolled in the Plan prior to a particular drawing date will be automatically entered into that drawing. Eligible customers will not be eligible to participate in drawings occurring prior to the date of enrollment in the Plan. An eligible customer who is selected in a drawing to receive an award under the Plan will be presented with an offer (the “Offer”) to receive ten shares of our Common Stock (each a “Share” and collectively, the “Shares”) under the Plan (each a “Piece of the Pie Award”).
Redemptions of Piece of the Pie Awards will be fulfilled through Fidelity and will require that, as a condition to redemption of a Piece of the Pie Award, the selected eligible customer open a brokerage account with Fidelity into which the Shares can be deposited. Fidelity will obtain the Shares to be delivered upon redemption of Piece of the Pie Awards through open market purchases or, to the extent determined by the Company, delivery by the Company to Fidelity of newly-issued shares. A Piece of the Pie Award must be redeemed within 30 days of receipt, after which time such Piece of the Pie Award will expire if not previously redeemed. Piece of the Pie Awards are limited to ten Shares per selected eligible customer and no eligible customer may receive more than one Piece of the Pie Award. In order to enter for a chance to receive a Piece of the Pie Award, eligible customers must enroll in the Plan using their account on the Domino’s Pizza App or by registering on the www.dominos.com website. An eligible customer who enrolls in the Plan will only be eligible to participate in drawings occurring after the date of such enrollment.
I am a member of a bunch of consumer loyalty programs--for department and drug stores, restaurants, etc. But few businesses from which I buy goods and services have offered me the opportunity to invest. And none have offered me the opportunity to "win" an equity interest in a firm through a drawing sponsored by a consumer affinity program. Query whether, if equity-based consumer benefit plans like this one are successful and continued to be valued, an exemption like Rule 701 will be promoted in Congress and at the SEC to ensure there is a registration exemption available for these offerings.
I will leave it at that for now. But this is a phenomenon to watch, for sure. And it fits in nicely with my Securities Regulation course next semester. You never know where it might pop up . . . .
Tuesday, December 6, 2016
In a relatively brief opinion released this morning, the U.S. Supreme Court affirmed the Ninth Circuit's judgment in Salman v. United States. The decision of the Court was unanimous. The big take-aways include:
- doctrinally, the Court's complete, unquestioning reliance on the language in Dirks v. Sec's Exch. Comm'n, 463 U. S. 646 (1983), as to when the sharing of information through a tip is improper, and therefore a basis for insider trading liability (quoting from the text on page 662 of the Dirks opinion: “'[T]he test,' we explained, 'is whether the insider personally will benefit, directly or indirectly, from his disclosure.'”);
- factually, the emphasis placed by the Court on the value proposition represented by the information-sharing between the close brothers, Maher and Michael--that information passed on with the knowledge that it will be traded on was effectively a substitute for a monetary gift ("In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher’s offer of money, and instead requested and received lucrative trading information."), noting "[a]s Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother.";
- constitutionally, the Court finding no vagueness ("Dirks created a simple and clear 'guiding principle' for determining tippee liability") and also rejecting on a similar basis application of the rule of lenity; and
- procedurally, because of the Court's ruling on the merits, the Court finding the jury instructions entirely proper.
The opinion offers some clarity on the application of U.S. insider trading doctrine by unanimously affirming the "gift" language from Dirks in a solid way: "To the extent the Second Circuit held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends, . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks." Having said that, the Court also hints in several places that the facts in these cases do matter. The following quote is particularly relevant in this respect:
Salman’s conduct is in the heartland of Dirks’s rule concerning gifts. It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” . . . But there is no need for us to address those difficult cases today, because this case involves "precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.”
In that context, the Court reminds us that "the disclosure of confidential information without personal benefit is not enough." This, indeed, places continuing pressure on the nature of the relationship between the tipper and the tippee and other facts relevant to the transmission of the information, all of which must be ascertained and then proven at trial. And so, it goes on . . . .
Tuesday, November 29, 2016
When it comes to regulations and economic policy, I am quite conservative. Not a Republican-type conservative (probably more Libertarian in a political sense), but in the sense that I often advocate for less regulation, and even more often, for less changes to laws and regulations. People need to be able to count on a system and work within it. As such, whether it is related to securities law, energy and environmental law, or other areas of the law, I find myself advocating for staying the course rather than adding new laws and regulations.
For example, a while back, co-blogger Joan Heminway quoted one of my comments about securities law, where I noted "my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive."
After the BP oil blowout of the Deepwater Horizon well in the Gulf of Mexico, I similarly argued that we should approach new laws with caution, and that we might be better served with existing law, rather than seeking new laws and regulation in a hasty manner. I explained,
[T]here are times when new laws and regulations are necessary to handle new ways of perpetrating a fraud or to address new information about what was previously viewed as acceptable conduct. But often, new laws and regulations are not a reaction to new information or technology; they are a reaction to a unique and unfortunate set of facts that is more likely related to timing or circumstances than an emerging trend. Other times, it is a lack of enforcement of existing protections meaning the problem is not the law itself; it is the enforcement of the law that is the problem.
Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability After Deepwater Horizon, 36 Wm. & Mary Envt'l L & Pol. Rev. 1, 19 (2011) (footnotes omitted). More recently, I have taken the same view with regard to hydraulic fracturing regulations:
There may well be a need for new regulations to improve oversight of hydraulic fracturing and other industries that pose environmental risks, but new regulations do not necessary lead to better oversight. . . . There is a strong argument that the problems related to hydraulic fracturing (and, for that matter, coal extraction, chemical storage, and hazardous waste operations) are more linked to a lack of enforcement and not a lack of regulation.
Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania, 116 W. Va. L. Rev. 819, 847 (2014).
I swear I have a point, beyond just quoting myself. Here it is: I'd like to urge the President-Elect and the 115th Congress to sit back and stay the course for a little bit to see where things are headed. I have a strong suspicion things are headed in the right direction from an economic perspective. This is not to suggest that there are not holes in the economy or people in desperate need of jobs, training, and education (there are -- I live in West Virginia. I know.). But with a White House and a Congress controlled by the same party, the GOP play should be simply: we're in charge now, and the economy is ready to move ahead.
We have already seen it -- the stock market is up and economic indicators look better. And there has been no new legislation or regulation (or repeals of either). It's just consumers believing the economy will get better. And consumer confidence is key to expansion. Who cares that it started before the election? What matters is whether we're going in the right direction. And it seems we are. The Financial Times reported today:
A gauge of US consumer sentiment has hit a post-recession high, painting a positive outlook ahead of the key holiday shopping season as recent data point to a strengthening US economy.
The Conference Board’s consumer confidence index climbed to 107.1 in November from 100.8 in October, the highest since July 2007 and above analysts’ forecast of 101.5.
Most of the survey was conducted before the presidential election on November 8. But “it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome,” said Lynn Franco, director of economic indicators at the Conference Board. “With the holiday season upon us, a more confident consumer should be welcome news for retailers.”
And, just to reinforce that is not a post-election position, I have been making this argument on this blog since at least 2010, when I wrote, How to Fix the "Broken" Financial System: Stop Trying to Fix It.
So, let's stay the course for a bit and see how people respond to a little stability. Let's see what a surge in consumer confidence can do for the U.S. and world economies. Let's make sure it's broken (and if so, how), before anyone tries to fix it. And maybe, in the meantime, we can spend a little time treating each other better.
Tuesday, November 15, 2016
Rep. John Shimkus (R-Ill.) has already started soliciting support as he seeks to chair the House Energy & Commerce Committee. He says in his letter:
[W]e will use our oversight and investigative authority to rebalance the federal government, recommending changes so future administrations won’t have the same ability to abuse their power. In particular, this will entail building the case against the Chevron Deference, which has enabled executive agencies to upend congressional intent through the courts.
Our success in this area will restore Congress as the sole lawmaking apparatus of the federal government.
This is rather funny to me. First of all, Chevron was a case during the Reagan Administration in which the Administration decided to take a view of the Clean Air Act with which the Natural Resources Defense Council, Inc. disagreed. The court sided with the Administration. The power of deference has value to who ever is in charge of the executive branch.
More important, though, Congress has always been the sole lawmaking apparatus of the federal government. Congress can eliminate Chevron deference by statute. Congress can repeal Massachusetts v. EPA by statute. Congress has the power. They are just unwilling or unable to wield it. This is true as to the EPA and SEC and FCC and any other agency. So, sure, one can blame the role of the courts and the executive if they don't like how agencies operate. But I'd suggest that, for members of Congress who don't like that, the first place they should look is in the mirror.
Thursday, November 10, 2016
I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.
I am serving as a panelist and a moderator at the ABA's annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect's public statements that he plans to dismantle much of President Obama's legacy, including a number of his executive orders.
President-elect Trump's plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling "every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.
Plaintiffs' lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That's probably true. However, I have the following broader business-law related questions:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
9. What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.
November 10, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Law, Legislation, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (2)
Wednesday, November 2, 2016
General Electric (GE) and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations. GE and Baker Hughes will form a partnership, which will own a publicly-traded company. GE shareholders will own 62.5% of the "new" partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share. The new company will have 9 board of director seats: 5 from GE and 4 from Baker Hughes. GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli, CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.
Reuters is describing the business synergies between the two companies as leveraging GE's oilfield equipment manufacturing ("supplying blowout preventers, pumps and compressors used in exploration and production") and data process services with Baker Hughes' expertise in " horizontal drilling, chemicals used to frack and other services key to oil production."
Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.
As I plan to tell my corporations students later today: this is real life! A high-profile, late-semester merger of two public companies is a wonderful gift. The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.
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.
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.
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.
Friday, September 16, 2016
Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure regime in general.
Under the proposed Financial Choice Act (with the catchy tagline of "Growth for All, Bailouts for None"), a number of Dodd-Frank provisions would go by the wayside, including conflict minerals because:
Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements. There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries. SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as a cudgel to force public companies to disclose extraneous political, social, and environmental matters in their periodic filings.
The House report cites a number of scholars and others who raise some of the same issues that I addressed in an amicus brief when the case was litigated at the trial and appellate level years ago.
This weekend I am attending the Business and Human Rights Scholars Conference co-sponsored by the University of Washington School of Law, the NYU Stern Center for Business and Human Rights, the Rutgers Business School, the Rutgers Center for Corporate Law and Governance, and the Business and Human Rights Journal. I present on Cuba, human rights, and investor-state dispute resolution, but a number of papers concern conflict minerals and disclosure in general.
As I have argued in the past, I’m not sure that repeal is the answer. I do believe that the law should be re-examined and possibly reformed to ensure that the diligence and disclosure actually leads to tangible and sustained benefits for the Congolese people. In short, I want to see some evidence of linkages between this corporate governance disclosure and reductions in rape, violence, child slavery, pillaging of villages, and forced labor. I want to see proof that the individual ethical consumers who claim in surveys to care about human rights have actually changed their buying habits because of this name and shame campaign.
Although I do not agree with many of the proposals in the House report and I am not against all disclosure, I do not believe that the SEC is the appropriate agency to address these issues. The State Department and others can and should take the lead on the very serious security and justice reform issues that I witnessed firsthand in Goma and Bukavu when I went to the DRC to research this law five years ago. These issues and the violence perpetrated by rebel groups, police, and the military persist. I look forward to hearing how and if proponents of the conflict minerals rule address this report during the conference.
Friday, September 2, 2016
I previously wrote on the Commonsense Principles of Corporate Governance released by high profile investors and corporate titans such as Jamie Dimon and Warren Buffet. Others, such as Steve Bainbridge have also weighed in. Now proxy advisory firm Glass Lewis has spoken, stating in part:
While the Principles may disappoint investors expecting a more comprehensive and robust approach similar to that found in the UK and other countries, there are a few areas where the principles promote forward-thinking stances. For example, the Principles criticize dual class voting structures and state that companies should consider specific sunset provisions based upon time or a triggering event to eventually eliminate dual class structures. This is notwithstanding the dual class structure at signatory Warren Buffet’s company Berkshire Hathaway…
There are several areas the Principles do not address, including key anti-takeover defenses such as poison pills, supermajority vote requirements and classified boards. The Principles generally address some issues such as special meeting rights and term/age limits for directors but do not recommend specific thresholds or tenure limits…
Despite the Principles’ relatively narrow scope and high level, we believe they contain enough substance to spark a dialogue inside boardrooms, which could lead to increased shareholder engagement from boards that traditionally have relied on executives and investor relations departments to lead those efforts. In our view, direct engagement between investors and boards leads to greater transparency and fosters mutual understanding of the company and its strategy, promoting long-term value creation. As a result, the Principles could have a salutary effect on companies, shareholders and the market.
Given the concern expressed by some in the business community and Congress about the "undue influence" of proxy advisory firms, the Glass Lewis statement is worth a read.
Wednesday, August 31, 2016
House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities. The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.
Representative Maloney requested the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.
Representative Maloney requested the agencies analyze the data and respond to the following questions:
The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on proprietary trading. To the extent that the data did not show a significant change in the banks’ trading activities leading up to the July 21, 2015 effective date, whether the agencies believe this is attributable to the banks having ceased their proprietary trading activities prior to the start of the metrics reporting in July 2014.
Whether there are any meaningful differences in either overall risk levels or risk tolerances — as indicated by risk and position limits and usage, VaR and stress VaR, and risk factor sensitivities — for trading activities at different banks.
Whether the risk levels or risk tolerances of similar trading desks are comparable across banks reporting quantitative metrics. Similarly, whether the data show any particular types of trading desks (e.g., high-yield corporate bonds, asset-backed securities) that have exhibited unusually high levels of risk.
How examiners at the agencies have used the quantitative metrics to date.
How often the agencies review the quantitative metrics to determine compliance with the Volcker Rule, and what form the agencies’ reviews of the quantitative metrics take.
Whether the quantitative metrics have triggered further reviews by any of the agencies of a bank’s trading activities, and if so, the outcome of those reviews
Any changes to the quantitative metrics that the agencies have made, or are considering making, as a result of the agencies’ review of the data received as of September 30, 2015.
The agencies' response to the request may provide insight into Dodd-Frank/Volcker Rule, the role of big data in the rule-making process (and re-evaluation), and bigger issues such as whether systemic financial risk is definable by regulation and quantifiable in data collection. I will post regulatory responses, requested by October 30th, here on the BLPB.
August 31, 2016 in Anne Tucker, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Investment Banking, Legislation, Private Equity, Securities Regulation, Venture Capital | Permalink | Comments (0)
Monday, August 22, 2016
We are now more than three months into the Title III crowdfunding experiment. I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on! So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016). [Note to the powers that be at the SEC: EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis. I hope that changes as EDGAR continues to improve . . . .]
At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here). These reports offer some nice summaries. This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings. At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.
First, however, the top-level Westlaw-based summary:
Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2
The remainder of this post takes a shallow dive into the updates and withdrawals. Filings in each case are presented in reverse chronological order by filing date. All referenced dates are in 2016. Issuer names are copied from filings and may not be the actual legal names of the entities.