Saturday, August 11, 2012
The Nevada Supreme Court has held that the son of a divorcing couple is not disqualified from representing his father in the litigation:
This original petition for a writ of mandamus raises two novel issues regarding attorney disqualification: should an attorney who represents one of his parents in a divorce action between both parents be disqualified either (1) because the attorney’s representation will constitute an appearance of impropriety or (2) because representing the parent will violate the concurrent-conflict-of-interest rule in Nevada Rule of Professional Conduct (RPC) 1.7? Because appearance of impropriety is no longer recognized by the American Bar Association, and we have not recognized the appearance of impropriety as a basis for disqualifying counsel except in the limited circumstance of a public lawyer, we reject that conclusion when the alleged impropriety is based solely on a familial relationship with the attorney. We also conclude that absent an ethical breach by the attorney that affects the fairness of the entire litigation or a proven confidential relationship between the nonclient parent and the attorney, the nonclient parent lacks standing to seek disqualification under RPC 1.7.
The court reversed the trial court, which had disqualified the son.
The Las Vegas Review-Journal noted that the representation might be contrary to common sense, if not legal ethics. (Mike Frisch)
Tuesday, January 24, 2012
In a decision reversing the Circuit Court and Court of Special Appeals, the Maryland Court of Appeals reached a decision with respect to legal fees charged in foreclosure sales:
We hold that , in the absence of specific authority in the contract of indebtedness or contained in statute or court rule, it is an impermissible abuse of discretion for trustees or the lenders who 'bid in' properties to include the demand for additional legal fees for the benefit of the Trustees in the advertisement of sale, or in any other way, in that it is contrary to the duty of trustees to maximize the proceeds of the sales, and, moreover, is not in conformance with state or local rules and... is against public policy.
The court noted that the practice of charging for such fees was, prior to its decision, the customary practice in Maryland foreclosure sales. (Mike Frisch)
Thursday, January 19, 2012
In the case involving the murder of Chandra Levy, the District of Columbia Court of Appealls has reversed and remanded a trial court order denying the Washington Post access to completed jury questionnaires.
The Post's request was made after the trial jury had been selected and the trial had begun. The government contended that the request was thus untimely.
On remand, the trial judge must start with a presumption that the completed questionnaires should be completely disclosed. If any answers touch on "deeply personal matters," the judge may provide the jurors with an opportunity to raise concerns in camera. The court may then enter specific individualized findings on the necessity of redaction that a capable of appellate review. (Mike Frisch)
Friday, April 22, 2011
The Maryland Court of Appeals held today that lawyers who publish to the press copies of their state complaint, make oral statements of like kind to the press, and republish pleadings on the internet are protected by an absolute privilege where (1) the reasonably contemplated proceeding satisfies the two-part test of a 1981 Maryland case; (2) the lawyers statements were made, "at least in part, in increase awareness of a proposed class action suit..." and (3) the "statements are related reasonably and rationally to the subject matter of the contemplated proceeding."
The plaintiff in this defamation litigation was not a named defendant but had been identified as involved in a mortgage scam. (Mike Frisch)
Tuesday, April 19, 2011
In a case involving a plaintiff struck by a truck while in a crosswalk, the Utah Supreme Court held that defense counsel's "McDonald's coffee case" reference in closing argument warranted reversal:
Before we analyze this statement, it may be useful to explain the cultural context of the McDonald’s coffee case, more formally known as Liebeck v. McDonald’s Restaurants, P.T.S., Inc. Few cases have ever achieved as much notoriety among the general public of this country as the McDonald’s coffee case, fueled by its wide-ranging and repeated publicity in national and local news media. It has been mocked in extremely popular entertainment television, including The Tonight Show, The Late Show, and Seinfeld. It has been debated on talk shows, parodied in television commercials, mentioned in congressional debates, and is firmly lodged in the public consciousness. Mark B. Greenlee, Kramer v. Java World: Images, Issues and Idols in the Debate over Tort Reform, 26 CAP. U. L. REV. 701, 702–03 (1997). “What made the headlines and what is most commonly recalled by the general populace about the . . . case is the size of the verdict and the source of the injury—$2.9 million for spilled coffee.” Id. at 718. In U.S. popular culture, the case has come to symbolize greedy plaintiffs and lawyers who file frivolous lawsuits and win hugely excessive sums in a broken legal system.
The defendant admitted liability and the case was tried solely on damages. Defense counsel argued
Ladies and gentlemen, they want a lot of money for this. A lot of money. What’s been written on the board is called a per diem analysis. . . . How many days has it been since the accident? How many days for the rest of his life. And how much per day is that worth? That’s what’s been done here. That’s how we get verdicts like in the McDonald’s case with a cup of coffee.
The court found the argument improper and prejudical
Given the uniquely iconic nature of this case, the passion it has produced in the media, and the general misunderstanding of the totality of its facts and reasoning among the public, we find it hard to imagine a scenario where it would be proper for a party’s counsel to refer to it before a jury. Generally, as here, such a reference would seem to have the sole purpose of recalling the public outrage over isolated elements of the case—thus improperly appealing to a jury’s passions. It is not the jury’s job to make legal determinations, so no legal arguments from the case are relevant. The facts in the McDonald’s coffee case were not in evidence before this jury and were also utterly irrelevant. Indeed, the one attempt counsel made to make her reference seem relevant was a misrepresentation because the high punitive damages award in the McDonald’s coffee case had nothing to do with a per diem analysis. It is certainly unfair to require the other party to clarify all the misconceptions about this irrelevant case in the limited time allotted for closing argument. The great latitude provided in closing arguments regards reasonable inferences about evidence properly before the jury and does not extend to misrepresentations or efforts to appeal to a jury’s passions. Thus the reference to the McDonald’s coffee case in closing argument was improper.
Reversed. We have this one listed under Hot Topics. (Mike Frisch)
Sunday, February 20, 2011
What information concerning legal experience may a law graduate provide to a prospective employer without running afoul of confidentiality obligations? The North Carolina Bar has a January 21, 2010 formal opinion:
Providing Conflicts Information to Hiring Law Firm
Opinion rules that a hiring law firm may ask an incoming law school graduate to provide sufficient information as to his prior legal experience so that the hiring law firm can identify potential conflicts of interest.
After his second year of law school, a law student worked as a summer clerk for Law Firm A in Raleigh. One of the many projects Law Firm A assigned to the law student was legal research that was part of Law Firm A’s preparation of Lawsuit X.
After the law student graduated from law school, Law Firm B hired the now law graduate as an associate in its Chicago office. After the law graduate left Law Firm A, but before he joined Law Firm B, Law Firm A filed Lawsuit X. After Lawsuit X was filed, lawyers in the Charlotte office of Law Firm B were retained to defend the case.
The law graduate was unaware that Lawsuit X had been filed, or that Law Firm B had been retained to defend it. Before the law graduate joined Law Firm B, the firm asked him to provide information about the identity of the client matters he worked on at Law Firm A so that potential conflicts could be addressed. The law graduate contacted Law Firm A, which directed him not to disclose any information about matters he had worked on or clients for whom he had worked.
Law Firm A learned that law graduate was associated with Law Firm B in Chicago and moved to disqualify Law Firm B from Lawsuit X. Law Firm B established a screen immediately upon learning that law graduate had worked on Lawsuit X.
Does law graduate have a conflict of interest that is imputed to the other lawyers in Law Firm B, disqualifying those lawyers from the representation of the defendant in Lawsuit X?
No. A law firm may hire a law graduate although the law firm is representing a client in a matter on which the law graduate previously worked for the opposing party while clerking at another law firm. Conflicts of interest created by work performed as a law clerk are not imputed to other members of a law firm under Rule 1.10. See Rule 1.10, cmt. . Nevertheless, the law graduate should be screened from any participation in the matter. Id. (Note that Rule 1.10(c) allows a law firm to hire a lawyer who previously worked for the opposing party while employed at another law firm so long as the lawyer is timely screened from any participation in the matter and written notice is given to any affected former client.)
Will a Rule 1.0(1) screen of the law graduate from Lawsuit X implemented when Law Firm B learned of law graduate’s involvement in Lawsuit X be deemed “timely” and protect the lawyers of Law Firm B from disqualification?
In order to be effective, screening measures must be implemented as soon as practical after a law firm knows or reasonably should know that there is a need for screening. Rule 1.0, cmt. . The purpose of screening is to assure the affected parties that confidential information known by the disqualified individual remains protected. Rule 1.0, cmt. . If the screen is implemented prior to any participation by the law graduate in the matter and prior to the communication of any confidential information, the purpose for the screening procedure will have been effectuated.
Is it improper for a law firm to ask law graduates or graduates not yet admitted to the practice of law, who have worked as law clerks, to identify client matters on which they worked as law clerks so that the hiring law firm can identify potential conflicts of interest?
No. When a new law school graduate, or any new lawyer, joins a firm, the hiring firm has an obligation to protect their clients against harm from conflicts of interest. See Rule 1.7. Comment  to Rule 1.7 provides that, to determine whether a conflict of interest exists, a lawyer should adopt reasonable procedures to determine in both litigation and non-litigation matters the persons and issues involved. However, the identity of the persons and issues involved in a matter are protected client information under Rule 1.6(a).
Rule 1.6(a) of the Rules of Professional Conduct provides that a lawyer shall not reveal information acquired during the professional relationship with a client unless (1) the client gives informed consent; (2) the disclosure is impliedly authorized; or (3) one of the exceptions set out in Rule 1.6(b) applies. One of the exceptions set out in Rule 1.6(b) provides that a lawyer may reveal confidential information to comply with the Rules of Professional Conduct. Rule 1.6(b)(1).
The ABA Standing Committee on Ethics and Professional Responsibility recently opined that lawyers moving between firms should be permitted to disclose the persons and issues involved in a matter because the prohibition of such disclosure would preclude lawyers from conforming with the conflicts rules. ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 09-455 (2009). Similarly, it is appropriate for a law firm to ask an incoming law school graduate to provide sufficient information so that the hiring law firm can identify potential conflicts of interest.
However, as noted in the ABA opinion, “any disclosure of conflict information should be no greater than reasonably necessary to accomplish the purpose of detecting and resolving conflicts and must not compromise the attorney-client privilege or otherwise prejudice a client or former client.” Id. In addition, a lawyer or law firm receiving conflict information may not reveal such information or use it for purposes other than detecting and resolving conflicts of interest.
Is a law firm that a law graduate worked for permitted to disclose to a different law firm the identity of clients and matters that the law graduate worked on at the law firm so that the hiring firm can identify potential conflicts of interest?
Yes. See Opinion #3.
Wednesday, February 9, 2011
The Winter 2011 edition of the Georgetown Journal of Legal Ethics has just hit the streets. Among the highlights are an analysis of the value of U.S. legal education in the global services market by Professor Carole Silver and an article on interference with law school clinics from Professors Robert Kuehn and Bridget McCormack.
The edition may be ordered through this link.
As co-faculty advisor (with Professor Mitt Regan) to the journal, my thanks to the editors for their fine contribution to the profession. (Mike Frisch)
Wednesday, December 1, 2010
From the web page of the Pennsylvania Disciplinary Board:
Can a lawyer ethically get access to an opposing party’s Facebook page? We previously reported on a Philadelphia Bar Association opinion concluding that a lawyer may not, personally or through an agent, seek to “friend” an opposing party or witness without revealing.
But is there another way? A Pennsylvania Court of Common Pleas has held that a party may be compelled through the discovery process to provide an opponent with access to his Facebook and MySpace accounts. In a decision in the case of McMillen v. Hummingbird Speedway, Inc., handed down September 9, 2010, President Judge John Henry Foradora of the Court of Common Pleas of Jefferson County held that access to one’s social networking sites is not protected by any privilege, and that the plaintiff in a personal injury action could be compelled to reveal the usernames and passwords of his Facebook and MySpace accounts to counsel for the defendants (but not to the defendants themselves). The court looked closely at the privacy and disclosure policies of the sites in question, and concluded that users are on notice that information posted on them may be revealed to persons who have access to such information by process of law.
A New York trial court decision reached the same result by a very similar analysis.
It becomes increasingly obvious that lawyers should be counseling their clients on the use of Internet social media. More than ever, there are few secrets on the Internet.
Monday, November 15, 2010
...is the title of a presentation we do annually at Georgetown Law to provide students with information about selecting and passing a state bar as well as admission issues relating to character and fitness to practice. This web link should take the interested student to the one-hour talk.
Thanks to recent Georgetown graduates Sarah Black and Tim Daly for their insights.
While the video does not cover "everything," perhaps there are some useful tips. (Mike Frisch)
Friday, October 15, 2010
Wednesday, June 2, 2010
Posted by Alan Childress
One of my students doing a brief "independent study" on legal ethics wrote her paper on the 2009 Louisiana bar regulation of advertising, including internet and web advertising and blogging, and certain per-use fees and screening the bar requires. The rules were modeled on the restrictive Florida rules. The Louisiana act was challenged in federal district court late in '09 to a mixed result, as she details -- the judge nixing some procedures and fees while approving other parts of the act.
It's an interesting story and she helpfully explains what this means in nearly 25 other states. The student is Brittany Buckley--now a proud Tulane grad--and she said I could share it on LPB. It is called Intersecting the First Amendment, Ethics, and the Internet: Memo to Other States From the Louisiana Experience, and you can Download Buckley_ch 1 here.
This paper was turned into chapter one of the student book, called Hot Topics in the Legal Profession~2010, sold digitally on Amazon and Smashwords in nine formats including simple PDF (plus soon available for Nook and Apple--though iPad can read it now on its Kindle app). You do not need to own a Kindle to read Kindle books, but anyway there is always pdf or rtf from Smashwords. I blogged about the project here and included my Foreword as a download. This chapter should give you another taste of what the overall book includes, such as friending judges and judicial elections; ancillary businesses of law firms under labor law, actual friendships of judges, settlement ethics, and the Caperton case and final result. Get it while it is hot, and remember that sales benefit Tulane's nonprofit Public Interest Law Foundation.
The ethics book is featured on my publishing website at Quid Pro Books. We seek submission of books or monographs on law, legal history, and law and society -- and of course legal ethics -- plus other academic subjects. For information for you to submit your dissertation, here is my earlier post, but we also publish panel presentations, proceedings, and original manuscripts. Information for prospective authors is here.
Tuesday, May 25, 2010
Current events in U.S. legal ethics, 2009-2010, according to my students (and benefit Tulane's PILF)
Posted by Alan Childress
Several students writing Independent Studies papers this spring on legal ethics for me, joined by some from an advanced ethics seminar taught by a colleague, have their work collected into a new digital book on current events May 2009 to present. I edited the papers and wrote a Foreword to it, which explains its origins, topics covered, and other stories of the year, plus an ode to Mike Frisch here and John Steele at LEF as the leading bloggers for immediate ethics news and insights. Mike breaks a ton of stories, you already know, and posts multiple times each day, and John among his regular posts does a nice annual roundup of the year's big stories, each December. Some of those stories got covered, I explain, and some not, but in any event I think users will find the collection useful. As the Foreword details, it is for a good cause. Proceeds benefit the Tulane Public Interest Law Foundation, a nonprofit student org that sponsors
indigent client representations and placements in public interest work. Note: Download FOREWORD here.
More details on the book itself and topics to come (and some chapters to be posted), if you do not want to read the Foreword, but mainly I wanted to preview the opportunity to buy this work. Already it is available on Smashwords in multiple formats, such as ePub, PDF, HTML, rtf, and Palm, so anyone can read it without an app or Kindle. There the best format is PDF (footnotes do link) or the one for Sony readers, but we covered everything.
An even better format, with search function enabled and all links I added active, is on Kindle or its free apps for PC, iPad, Mac, iPhone, BlackBerry, and related devices or laptops. The Amazon webpage for this timely book is now active and accepts downloads now, to an app. But at least for now, Smashwords makes more money for PILF and also has the PDF, printable version, so that may be where you will go if you are not yet into Amazon ebooks. Oh, on the iPad, use the Amazon app and the format should work great. If not, let me know.
This is a followup to the post Publish Your Dissertation (but on topic for the blog!), and I can also help you publish other student seminar work and papers from academic conferences, preferably as part of the TPILF series. The website for all this will be qpbooks.com, active tomorrow. Submissions are on law and related subjects, not only legal ethics. Much more info on proposals and other books sold are on the website. For example, CLS scholar and Tikkun editor Peter Gabel did a digital version of The Bank Teller with me.
Friday, April 30, 2010
Posted by Alan Childress
[The Society of American Law Teachers has a list of past presidents and board members that reads like a who's who of the law prof world. A letter sent to Dean Griffin of Tulane today, by its presidents, Profs. Raquel Aldana and Steven Bender, reads in its body as follows --ed.]
Since 1974, the Society of American Law Teachers (SALT) has been an independent organization of law teachers, deans, law librarians, and legal education professionals working to make the profession more inclusive, to enhance the quality of legal education, and to extend the power of legal representation to under-represented individuals and communities. We write to you on behalf of SALT to express SALT’s opposition to SB 549, which undermines academic freedom and interferes with an essential public service provided by the clinical programs at the four Louisiana law schools. SB 549 threatens to prevent law school clinics from meeting their professional obligation to expand access to justice for their clients by seriously limiting the types of representation they can undertake.
SALT is particularly concerned with Section 2 of SB 549. Section 2 of the bill prohibits law clinics from filing any action against a government agency or filing a suit for monetary damages against any individual or business. It also prohibits law clinics from raising challenges to the Louisiana constitution.
These prohibitions would eliminate law student representation of clients in most civil law actions. Should this bill become law, future Louisiana lawyers would suffer from the lack of litigation skills training necessary to the effective practice of law, and clients would suffer from not having access to lawyers to take their cases through the justice system using the most relevant legal theories available. Legal representation without the ability to pursue applicable claims does not constitute meaningful representation for either the students trying to learn or the clients which they serve.
Furthermore, our system of checks and balances, a necessary component of good government, values the ability of lawyers to challenge governmental action – this right is protected in the federal and Louisiana constitutions and statutes. Law clinic clients should be guaranteed the same constitutional and statutory rights as everyone else in Louisiana. . . .
The importance of the ethical principle at the heart of the legal profession, the duty to represent those who otherwise would not have access to justice, is a core value that students are taught in the classroom, but often experience and internalize only in their representation of clients in a clinic. ...
[The rest of the letter, a powerful one, follows in full by pdf: Download SALT Letter]
"A Serious Blow to Legal Education": La. to Effectively End Clinics? (Or Dialysis Patients Will Suffer?!)
Posted by Alan Childress
Law School clinics in several states, notably in Maryland and Louisiana now, are under fire. Real people may be hurt beyond imagination -- from indigent clients and neighborhood assocations to law students and ordinary medical patients (the latter because the pending La. bill would cut off funding for their treatments at Tulane). Here is the story by Nick Marinello at Tulane about a pending bill in La. which would effectively kill most clinics at our four law schools.
A pending bill in the Louisiana Legislature that would restrict the roles of university law clinics could "deal a serious blow to legal education in our state," according to a letter written by law school deans from Tulane and Loyola universities to members of the state senate. In that letter, Tulane Law School interim dean Stephen Griffin and Loyola University Law School dean Brian Bromberger describe the essential role of clinical legal education and decry the chilling effect that the bill would have on university law clinics.
The bill purports to regulate legal clinics but would in fact cripple them, write Griffin and Bromberger.
Senate Bill 549 by Sen. Robert Adley, R-Benton, would prohibit law clinics at any state or private university that receives state funding from suing government agencies. In addition, the bill would forbid clinics from suing individuals and businesses for financial damages and curtail the ability to raise constitutional challenges.
As stipulated in the bill, any violation of the law will "result in the forfeiture of all state funding to the university for that fiscal year."
In an interview, Griffin said that he believes the restrictive language of the bill is targeting a particular clinic. "Although the bill is aimed at the Environmental Law Clinic, the target it actually hits is far more broad and affects nearly all of our clinics negatively, which would severely hurt our curriculum and our ability to serve the community by providing access to justice."
Along with the Environmental Law Clinic, Tulane Law School operates clinics representing indigent clients in civil litigation, criminal law, domestic violence, juvenile law and legislative and administrative advocacy.
According to Griffin, SB 549's prohibition of suing the government and restriction on raising constitutional issues would have a profound and negative impact on the attorney-client relationship. "You can't say, 'yes I'll represent you but, by the way, I can't make an argument based on a state constitutional challenge'," said Griffin.
The legislation also calls for all university law clinics to be subject to oversight by the House Committee on Commerce and the Senate Committee on Commerce, Consumer Protection and International Affairs. Currently, the Louisiana Supreme Court supervises law clinics.
"Clinics have always been supervised by the courts," said Griffin. "They operate under the strictest limitations in the country. More regulation is simply unnecessary."
Currently the bill is under review before the Senate Commerce Committee. Griffin encourages anyone interested in the welfare of clinical legal education to contact members of the committee to voice their concern.
The law deans' letter appears here [Download Deansletter]. Contact info for the Committee, in case you can share your view. What a sad way to celebrate the second week of JazzFest: resisting a bill that may be targeted by petrochemical industries at our environmental clinic -- this, ironically, while the fishing industry tries to salvage its shrimp bed from oil -- but really will end one of the best things about legal education and about Loyola and Tulane. Have they no shame? And will this effort stop at La. and Md.?
Update: letter from SALT opposing bill, here.
Thursday, April 29, 2010
The web page of the Ohio Supreme Court announced yesterday changes in criminal discovery rules:
The Supreme Court of Ohio today filed with the Ohio General Assembly final amendments to the annual update of the Rules of Practice and Procedure, including changes to the criminal discovery process that were developed through a collaborative process led by the late Chief Justice Thomas J. Moyer and including the criminal defense bar and prosecutors.
The amendments concern changes to the rules of criminal procedure and the rules of appellate procedure. Specifically, the amendments to Criminal Rule 16 call for a more open discovery process, and the revision of several rules of appellate procedure implements a procedure for en banc consideration in courts of appeals when separate three-judge panels within the same court of appeals reach conflicting decisions on the same matter of law.
The new discovery process would allow defense counsel access to materials that, under the current rule, prosecutors did not have to divulge. Changes in Crim.R. 16 also call for establishing a defendant’s reciprocal duty of disclosure and seek to protect victims and witnesses from potential harassment.
The discovery reforms were developed through an extraordinary cooperative process that involved leaders of the Ohio Prosecuting Attorneys Association and Ohio Association of Criminal Defense Lawyers. Chief Justice Moyer had urged them to collectively develop proposed rules that would be considered for adoption by the Supreme Court.
“The patience and spirit of cooperation required to realize these important and necessary changes to the discovery process speak volumes about Chief Justice Moyer’s collaborative, collegial nature,” said Justice Paul E. Pfeifer. “His vision and persistence and, finally, his stubbornness in supporting a just cause, led to this remarkable achievement for our legal system. For well over a decade, he worked for this change, and we have been through numerous starts and stops. But today, we stand in a great place – the proposed Crim.R. 16 emerged from this court by a unanimous vote, has the support of prosecutors and defense attorneys, and, we think, bipartisan support in the General Assembly. All of that is the direct result of Tom’s stewardship.”
The en banc provisions of the appellate procedure rules result from the Supreme Court’s decision in McFadden v. Cleveland State Univ. The Court held that “if the judges of a court of appeals determine that two or more decisions of the court on which they sit are in conflict, they must convene en banc to resolve the conflict.” Language was also added to the proposed amendments to ensure that an order or entry in reconsideration that results in an intra-district conflict also could be subject to en banc consideration.
Other changes to the criminal procedure rules include amending Crim. R. 12(K) to accommodate the new interlocutory appeal to review a trial court’s ruling on a prosecutor’s non-disclosure of material granted under proposed Crim. R. 16(F)(2). Amendments to Crim. R. 41 permit applications and approvals of search warrants to be accomplished by electronic means, including facsimile transmission.
The amendments were adopted unanimously by the seven Justices of the Supreme Court, with the exception of Crim. R. 41, which was adopted 6-1 with Justice Terrence O’Donnell voting no.
According to the Ohio Constitution, amendments to rules of procedure must be filed with the General Assembly. After the initial filing, which must occur before Jan. 15, there was a period of public comment; the Court revised the amendments and filed final versions with the General Assembly before the constitutionally mandated deadline of May 1. The amendments take effect on July 1, unless before that date the General Assembly adopts a concurrent resolution of disapproval. The process also included another public comment period after the amendments were first published last October.
The text of the rule change is available through this link. (Mike Frisch)
Tuesday, April 27, 2010
Posted by Jeff Lipshaw
Thoughts in no particular order:
1. Ben Heineman, the former Senior V.P. and General Counsel of General Electric has some thoughtful comments on the difference between legal and right (at the Harvard Forum on Corporate Governance and Financial Regulation), and how Goldman Sachs ought to be approaching that issue from a public relations standpoint. I'm not even sure the Goldman Sachs market making was wrong, much less illegal, but I agree with Ben that there's no mileage at this point in Wall Street taking the "millions for defense but not a penny for regulation" posture.
2. As many readers know, I was a big firm, big case litigator for the first ten years of my career, and as I mentioned to someone in the last few days, when I see somebody walking down the street with a Redweld file or a big litigation briefcase, or a I see a deposition transcript, my stomach (21 years later) still turns over. That's what these hearings do to me as well. I'm from Michigan, and I've known Carl Levin and his extended family for years (his wife Barbara was an associate in my law firm the summer of 1978 when I was a summer clerk and he was still the president of the Detroit City Council and running for the Senate against Marvin Esch), and I think he's a smart good guy with tons of menschiness. But he is a politician through and through, and there's no winning and, indeed, very little reason, when politicians are doing the front of the house rather than the backroom stuff. The Congress has no basis for moral superiority if we are really going to start looking at how the sausages of the markets and legislation get made. I was an industry representative at a meeting the automotive suppliers held with the two Michigan senators back in about 1998, and I remember Senator Levin telling the group why he wouldn't support NAFTA: it was the usual "good is the enemy of the perfect" rationalization. Said he, when everybody is a free trader, I'll support being a free trader. I remember thinking, "wait a minute, Senator, would you take the same position on affirmative action? That is, preferences are vile, and so I'll simply wait until everybody is colorblind." No, you can't win by reasoned argument or facts with people who buy ink by the barrel, and you can't win with senators who want to create sound bites for their constituencies.
3. Why does the conversation between the Senate Committee and the Goldman men (see next comment) remind me of the bumper sticker "My Kid Beat Up Your Honor Student"?
4. Why are all of the Goldman witnesses young to middle-aged trim athletic looking white men?
Tuesday, April 20, 2010
Posted by Jeff Lipshaw
Regardless of one's stance (normatively speaking) on the the Goldman Sachs civil suit, it's tough to find reporting or commentary that gets the nuanced facts right. And because everything depends on the metaphor (see Erik Gerding's recent post - oh, and by the way, isn't cool to see how the way our minds categorize and analogize makes such a difference in the real world?), seeing that entire industry as a kind of casino makes a difference in things like duty and materiality. So kudos today to Andrew Ross Sorkin in the New York Times for getting it right. (Erik is also quoted extensively.)
Moreover, Sorkin frames what I think is the real issue: is there a social value to this kind of derivative trading? That's a question whose answer I don't know. I know there is social value, for example, in currency derivatives. It allows companies that want to be conservative lock in their profits against currency devaluation, while foregoing the possibility of speculative currency gains. It does mean, however, that the conservative company either needs to have a counter-bettor that is either another company with a similar but reversed conservative position, or a pure speculator. So that's the question: what, if any, is the conservative strategy to lock in non-casino gains that products like synthetic CDOs serve?
Monday, April 19, 2010
Posted by Jeff Lipshaw
Well, gosh, I haven't had this much fun reading the Wall Street Journal and the New York Times on a Monday morning in a long time. First of all, I want to note that while I use the first rate Choi & Pritchard, Securities Regulation 2d (great teacher's manual!), as the casebook for my class, I disagree with the idea of teaching Rule 10b-5 litigation before teaching the 1933 Act stuff on public offerings. So I teach the book out of order. The benefit is that we are moving into the elements of Rule 10b-5 in the next two weeks, and I'm thinking about scrapping my prepared materials in favor of this case. (A more devious me would use it as a question on the final exam.) I just want it to be noted that my syllabus is evidence I predicted this crisis, and now am in a position to benefit from it.
Second, I can't help being amused by some of the public commentary. The Wall Street Journal carries a headline referring to a statement by Gordon Brown (the British Prime Minister) that Goldman was "morally bankrupt." Oh, come on. That puts Goldman in the class of all other occupations that make money on the churn, like real estate brokers, executive recruiters, Las Vegas casinos, every state that conducts a lottery or allows parimutuel betting on horses, car dealers, and advertising agencies.
Third, in the past I advocated a standard of conduct in which one ought not to engage in conduct that one would be embarrassed to see highlighted on the front page of the Journal or the Times. I think I need to amend that to include that one ought not to be in a business in which one cannot explain the products being sold if they were to appear on the front page of the Journal or the Times. Let me give a breaking news example. My friend Erik Gerding has run a series of very helpful commentaries over at Conglomerate. I am pretty sure I disagree with a number of his conclusions (perhaps because having done deals in the real world for a long time I am more jaundiced about the number of times anybody actually gets led down the primrose path, and particularly in the never-never land of financial products). But that's what makes betting on horse races or synthetic CDOs. I've commented on one of his more interesting insights, but I decided to bring it out of the hinterlands of the way comments work over there. (I am grateful to Erik for having found the article and opened the debate on this aspect!)
Erik highlights this morning a paper by Arora et al., entitled "Computational Complexity and Information Asymmetry in Financial Products" to the effect that it really was material to the synthetic CDO investors that Mr. Paulson selected the Reference Portfolio. The gist of the paper is that it's very easy to create a computationally complex system from simple factors, but almost impossible to work the other way and select the factors that gave rise to the resulting system. Hence, conclude the authors, if an arranger of CDOs wants to hide "lemon" assets among the good ones, it's an intractable computational problem to find the lemons. See this blog post to which Erik links for another good explanation.) Thus, if Paulson had a hand in selecting the Reference Portfolio he really did have an advantage over those poor victims at IDK Deutsche Industriebank and ABN Amro.
Granted that blogging often is to research what journalism is to literature; nevertheless we don't always believe what we read in the newspaper and we need to be careful in assessing real-time commentary. The gist of my comment over at Conglomerate is that I think there's a flaw in Erik's move from applying the "Intractability Theory" in cash CDOs to a justification for a conclusion that who selected the Reference Portfolio in a synthetic CDO is material. In a cash CDO, there is only a long position - that is, the arranger has no interest other than in having investors believe that the underlying assets and the collateral are all good. The lemons in that case are the underlying mortgage assets. (Indeed, much of the math in the Arora paper is beyond me, but I believe that the authors argue the computational complexity increases the farther you get from the actual lemons, say by creating CDOs out of the CDOs.) Part of the problem may be terminology: the cash CDOs themselves are "derivatives" because their value derives from the value of the underlying assets. The point is that if the arranger-seller did slip in some lemons, the buyer would never be able to discover it.
How does that carry over to somebody who isn't actually compiling a portfolio of mortgages to package in a CDO to sell to investors, but instead is selecting the securities on which to bet in a synthetic CDO? Let's assume Paulson did select the synthetic portfolio. He doesn't want to slip a lemon asset in among the good assets. He wants ALL the assets to be lemons, not because he's trying to hide a pig in a poke (as if he were the actual arranger of a CDO), but because he wants to bet against the whole portfolio. He doesn't accomplish his goal at all if he gets IKB and ABN Amro to bet on really good assets with a lemon hidden among them. He ought to be worried that there are GOOD assets baked in there that he can't find!
Even assuming that Arona et al. have a point, I suspect Paulson doesn't qualify as the arranger who had the information advantage. The Reference Portfolio consisted of fewer than 100 already assembled CDO securities, each with a notional value of $22,222,222, and each being made up of many, many underlying mortgages (indeed, the flip book refers to the CDO security as "midprime" if the average weighted FICO score was above 625, and as "subprime" if the equivalent number was below 625). To put it more simply, if you are the bettor looking from the outside at a synthetic CDO portfolio, looking either to be long like IKB or ABN Amro or short like Paulson, and not the actual arranger of the cherries, peaches, plums, and lemons that went into the portfolio, you are no better off, informationally speaking, in trying to gauge whether you want to bet for it or against it.
Sunday, April 18, 2010
Posted by Jeff Lipshaw
It's certainly not my goal to defend Goldman Sachs any more than it is to defend bookies. And I acknowledge that as to materiality, it's entirely possible that you get to the trier of fact on the question whether the actual selector of the Reference Portfolio was something for which there is a substantial likelihood that a reasonable investor would find that the information significantly altered the total mix. (That's the legal standard.) But, as we teach our students, the mere materiality of undisclosed information doesn't create liability for its omission; as opposed to a misrepresentation, the culpability of an omission depends first on a duty to disclose.
So here's a quote from the Goldman Sachs flip book under "Risk Factors." And remember this thing wasn't going to Mom and Pop up in Lowell; it was going to IKB Deutsche IndustrieBank and ABN Amro:
- Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.
- Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore. Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the issuer thereof, any Reference Entity or any obligation of any Reference Entity.
Isn't there a real question whether Goldman owed a legal duty that would make the omission actionable? Didn't Goldman tell the Investors in the flip book that it might well have non-public information relating to the Reference Portfolio? Didn't it say that it might have "short positions in . . . other derivatives identical or related to those mentioned here"? This is the "bespeaks caution" doctrine: optimistic forecasts or projections in a prospectus aren't actionable if they are accompanied by meaningful disclaimers or warnings of the risk involved.
I'd like to be a fly on the wall when the sophisticated investor representatives get deposed on this issue.
Q: "Did you read the flip book?"
A: "Well, parts of it."
Q: "Which parts?"
A: "The parts that talked about the Reference Portfolio."
Q: "Did you read the disclaimer about 'non-public information' that Goldman might have?"
A: "I don't recall at this time."
Q: "You don't disagree that the disclaimer is there, do you?"
Q: "Did you ask Goldman to reveal to you the undisclosed information?"
A: "I don't recall at this time."
Q: "Did you read the risk factor that said Goldman might be shorting the identical reference portfolio?"
A: "I don't recall at this time."
Q: "Did you actually ask Goldman if it was shorting the identical reference portfolio?"
A: "I don't recall at this time."
Q: "Remind me again how long you've been in this business."
I find myself in a funny position, intellectually speaking. The lawyer in me, applying a legal model to what I've seen so far, is saying this case is a real stretch. The business ethicist in me is saying, "ugh, what a squirrelly business to be in. You must have to take a scalding shower when you get home every night to play it that close to the vest." The sociologist-psychologist-philosopher-Tina Turner in me is saying: "Well, of course, Jeff, what's law got to do with it?" The cognitive scientist in me is saying, "It all depends on the metaphor. If you think of Goldman as the bookie, and ABN Amro as a high roller, you reach one result. If you think of Goldman as your doctor or lawyer, you reach another one."
Saturday, April 17, 2010
Posted by Jeff Lipshaw
I really think this should have been the epigram on the SEC's complaint against Goldman Sachs: "I'm shocked, shocked to find gambling is going on in here!" I've spent a little time in the last couple days digging past the allegations to the structure of the deal, and conclude that blaming Goldman Sachs for this is about as sensible as blaming the Race & Sports Book at Caesars Palace for taking bets on both sides of the game.
Seriously. Bookies don't gamble. They facilitate gambling. They set odds to equalize the betting on both sides. When the game or the race is over, they gather up what the losing side lost, pay what the winning side won, and skim a little bit for themselves. You know when you place a bet with a bookie that it's the nature of the system that the bookie HAS to have a counter-bet to offset your own. Now imagine that you'd like to bet against the Pakistani badminton team in its upcoming match against Indonesia because you think there are a lot of crazed Pakistani badminton fans who will bet the farm on their team. There aren't any bookies who take badminton action. So here is what you do. You find a reputable bookie and ask him to set odds on the match for no other reason than you see those Pakistanis as suckers just waiting to be taken. You'll even pay the overhead to set up the line. Caesars posts a line on the match; you bet Indonesia; the Pakistanis bet Pakistan; Indonesia creams Pakistan; Caesars collects the Pakistani bets, pays you off, and makes a little money in the process.
Then, horror of horrors! The bettors on the Pakistani team sue Caesars because it didn't disclose that it set the badminton line and took the action because somebody wanted to bet on Indonesia! Ludicrous, you'd say.
But as far as I can tell that's exactly what Goldman did here. What made the deal work for Goldman was that it was the purchaser from ABACUS of credit default swap bets on the reference portfolio and the seller of matching credit swap bets to Paulson on the same portfolio. I'm afraid that what's going on is that the deal is indeed so complex in its structure and terminology that even the sophisticated public is flummoxed. SYNTHETIC CDOS WERE NOTHING BUT GAMBLES ON THE DIRECTION OF THE HOUSING AND SUBPRIME MARKET. Like all derivatives, they might well have served as a conservative strategy if one had an underlying business that was exposed, and wanted to hedge away losses at the cost of additional speculative gains, either going long or short on the market. If ABN Amro and IDK Deutsche Bank wanted to bet on the subprime market, they had to have a bookie with counter action to create an opportunity for the bet!
At first I thought this case was odd for its secondary actor liability issues. Now I think it's just as interesting on issues of materiality, reliance, and causation.