Saturday, June 19, 2010
Posted by Jeff Lipshaw
The always insightful and interesting Howard Wasserman (FIU, left) provoked a discussion over at PrawfsBlawg on "student centered" teaching that, in the comment thread, turned into that ancient debate about all those theorist law professors at odds with their practical minded students. I posted a comment, responding to "Vladimir" and "BL1Y", that I thought was worth re-posting here. I think, as a long time practitioner AND law professor (me) interested in highfalutin' theory (that is, given my odd background, I think I could teach a jurisprudence class, a trial skills class, and a transactional skills class), I have some credibility on both sides of the issue.
How the legal academy came to its present configuration wasn't the result of some logical exercise, but a matter of historical happenstance. That's not uncommon. Most intractable social and political realities arise that way (see Northern Ireland or Israel-Palestine). The reality now is that you are both correct in your fundamental observations: there IS a gap between what most law students want (unless they go to Yale) out of their educations, and what most law professors want out of their careers. It may well be that something like the financial crisis of the last couple years, and the shrinking of big law firms engenders a complete restructuring of the legal academy into a Ph.D. like "department of jurisprudential studies" with its place in the College of Arts and Sciences, and more trade school like professional schools, but I doubt it for two reasons that undercut both polar positions.
1. Law professors can't merely be theorists and have their gravy train survive. What allows so many law professors to engage in theory is the fact that their students who have little such interest fund the theoretical pursuit. First, law schools are notorious cash cows. When is the last time you heard of anyone organized a proprietary or for-profit sociology department? The cost of providing the education, unlike in the hard sciences or med schools, is relatively low compared to the market price of the tuition. Second, it's the salaries in private law firms that by and large set the benchmark for law professor salaries. Even if you take a pay cut to move into academia from the big law firm that is the typical immediate pre-professor job, you aren't getting paid like an assistant professor in the English department.
2. Law students don't REALLY want to be trained in the legal equivalent of the barber college or truck driver school. While law students may get frustrated with the theory often foisted upon them by their professors, the present paradigm in the academy (and, honestly, this preceded the influence of US News, because the elite schools in US News were the elite schools when Bob Morse was still wearing short pants), they show over and over again that they are significantly influenced by the brand of the law school, regardless of the specifics of the pedagogical program. And the brand, as the institution of the legal academy has developed, has a lot to do with all that theoretical stuff law professors are churning into law review articles. I'm not arguing that is good or bad (although I wouldn't be a law professor just to teach; it's the theory that floats my boat after all those years of practice); it's just the reality. Seriously, tell me that a rational student, faced with the choice of Stanford or UCLA, with all those practice-challenged theorists, or an excellent "skills-focused" third or fourth tier school, and no significant difference in tuition (see point 1) (and maybe not even then, but that's an interesting econometric question), wouldn't choose Stanford or UCLA?
My "dean speech" (that nobody has asked me to give) is that this is an intractable polarity that the profession is simply going to have to manage by way of leadership that provokes empathetic perspective at both poles. The poles aren't coherent, and there is no rule of nature that says they have to exist, much less coexist. But they can, just like lots of polarities, continue to coexist. Faculties simply have to make concessions to the concerns and needs of students or their gravy train is going to disappear; students and alumni are going to have to acknowledge the driving forces of academic prestige and advancement, or they are going to lose that patina (and brand, and earning power) that comes with a law degree other than from ITT Tech, DeVry (which owns a med school on the island of Dominica, "a lush, classically Caribbean environment"), or the University of Phoenix, all of which would be perfectly capable of offering what BL1Y wants (InfiLaw already does).
Monday, June 7, 2010
A majority of the Georgia Supreme Court held today that the Administrator of the state's Fair Business Practices Act has no authority to compel a law firm engaged in debt collection on behalf of creditors to comply with his investigative demands. The majority found that
...the nature of ...representation of clients in a legal capacity is not destroyed by the utilization of "staffing, training, equipment or support personnel." (citation omitted) Indeed, the manner in which such support is used and managed in the representation of clients is part of the actual practice of law and, therefore, does not involve the entrepreneurial or commercial aspects of professional practice within the contemplation of the [Act].
Justice Melton, joined by Justices Hines and Nahmias, dissented:
Because the [Act] is a law of general application that has nothing to do with impermissibly regulating the practice of law in violation of separation of powers, I must respectfull dissent from the majority's erroneous conclusion that the remedies relating to [the law firm's] allegedly abusive debt collection practices "must be found outside the [Act]." (quoting the majority) Investigating violations of the law that happen to involve lawyers does not automatically amount to impermissibly "regulating" the practice of law, as a lawyer who violates the law is just as subject to investigation as any other common offender.
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, June 1, 2010
Posted by Jeff Lipshaw
I can tell you that one of the most difficult things for an aspiring professor to do is actually to get a paper read! Hence, if you write in the area of business law, I strongly recommend that you give serious thought to submitting a paper to Conglomerate's Junior Scholars Workshop, now in its fifth iteration. The deadline for submissions to Christine Hurt (Illinois) (email@example.com) is June 26, 2010, and the presentations will begin July 19, 2010.
Tuesday, May 25, 2010
The Ethics Committee of the South Dakota State Bar opines that a contingent fee may be charged in a contract action betwen domestic partners. Rule 1.5(d) prohibits such arrangement in domestic relations actions involving divorce, support or the value of a property settlement. The claims here do not fall within the prohibitions:
...since the desired recovery is based on a cash transaction for the purchase of real property, it is much more in the nature of an ordinary contract action than a domestic relations action. It is therefore not subject to the restrictions of Rule 1.5(d) and a contingent fee is permissible.
Monday, May 24, 2010
The South Carolina Supreme Court held that the State may not directly appeal an order disqualifying an assistant solicitor. The facts:
The defendant in this case...was charged with the murder of his ex-wife...as well as one count each of first-degree burglary and possession of a firearm during the commission of a violent crime and three counts of assault with intent to kill.
An assistant solicitor in Clarendon County was assigned to prosecute the case. Defense counsel...moved to disqualify the individual assistant solicitor based on the fact that the husband of the assistant solicitor had represented Wilson in his divorce from the murder victim just sixteen months before the alleged murder, and the brother-in-law of the assistant solicitor had represented Wilson at his bond hearing on the criminal charges.
The circuit court granted the motion for disqualification. The State appeals from this pretrial order, arguing the circuit court applied an incorrect legal standard in granting the motion for disqualification.
The court concluded:
We hold the policy implications present in Hagood, i.e., the right of a party to retain counsel of his or her choosing and the development of an attorney/client relationship, are not compelling factors when considering the disqualification of an assistant solicitor. The reasons the Court articulated in Hagood as justification for allowing the direct appeal are not present here, as the State has no substantial right that has been invaded, and the State's ability to appeal has historically been limited in criminal matters.
The appeals in which this Court has considered the issue of disqualification of either one solicitor or an entire solicitor's office have been appeals arising after the defendant's conviction, as they are in the posture of the defendant raising the issue as a ground for reversal. This is consistent with the general rule that a defendant may not appeal until after he is convicted and sentenced. We see no justification for extending different treatment to the State so as to allow direct appeal of this pretrial order. (citations omitted)
Friday, May 7, 2010
The South Dakota Supreme Court affirmed a trial court's permanent injunction prohibiting the unauthorized practice of law by a graduate of the University of South Dakota School of Law3 who has never been admitted to practice in South Dakota. The enjoined graduate had contacted represented criminal defendants, which resulted in complaints from the public defender. The accused also had attempted to participate in a child abuse case, calling herself an "independent investigator and advocate." She defended her conduct by stating that she had "merely assisted individuals whose attorneys had failed them. "There were also a number of other incidents that the trial court found amounted to the unauthorized practice of law.
The court also rejected a number of challenges to the trial court's order, including that a case involving a defendant named Fast Horse was referred to as the Fast Wolf case. The court found that this error created no valid appeal issue.
The court also found that a provision of the injunction that prohibited the accused from contacting represented defendants without permission of counsel did not violate her rights of association.
A news report from last year in the Rapid City Journal provides additional details about the subject of the injunction. (Mike Frisch)
Wednesday, May 5, 2010
The Wisconsin Supreme Court has affirmed a determination that the Milwaukee Symphony Orchestra must pay a 5% tax on the sale of concert tickets. The symphony had argued that the concerts were primarily intended to be for education, rather than entertainment, and were thus exempt from taxation. The court found that there was an evidentiary basis for the conclusions of the Tax Appeals Commission that the concerts were properly treated as entertainment.
There is a concurring/dissenting opinion that would hold that the primary purpose of certain youth concerts was educational, applying an analysis of the question:
...because the Youth Concerts will cause a child's knowledge to expand as the child is presented with a new musical genre or the exposure to orchestral instruments with which he is not familiar, thereby educating the child, and during the concerts the child's time will pass agreeably, thereby entertaining the child, I must determine how the Youth Concerts' taxable and nontaxable attributes are to be evaluated. See Webster's Third New International Dictionary, 723, 757 (1961) (defining educate and entertainment). In so determining, I examine the Youth Concerts' attributes first from the perspective of the Milwaukee Symphony, the entity that presented the concerts, and then from the perspective of the educators who took their classes to the concerts during the school day, based in part on the way in which the Youth Concerts were marketed.
The concurring/dissenting opinion examined the various performances to high school, middle school and other venues including Kinderkonzerts. (Mike Frisch)
Tuesday, May 4, 2010
The New York Appellate Division for the First Judicial Department affirmed an order denying an attachment sought by a law firm suing for unpaid fees. The court's concluded:
Order, Supreme Court, New York County...entered October 5, 2009, which, in an action for unpaid attorneys' fees, denied petitioner law firm's application to attach in aid of arbitration respondent former client's interest in the action that petitioner had first been retained to represent respondent wherein respondent sought, inter alia, the return of a down payment on an airplane, but enjoined respondent from assigning his interest in that action, unanimously affirmed, with costs.
The denial of an attachment was a provident exercise of the court's discretion, as there was no showing that a potential arbitration award may be rendered ineffectual without an attachment. Petitioner's papers contain no details as to respondent's financial condition, nor is there any assertion that respondent "will secrete, dissipate or otherwise squander his assets" before the arbitration award is rendered. There is also no evidence or allegation contradicting respondent's sworn statement that he has never had any judgments rendered against him, and that he is financially solvent and stable. (citations omitted)
A case decided on May 3 by the Massachusetts Supreme Judicial Court affirmed abuse of process and malicious prosecution claims brought by an attorney who had represented a divorce client. The attorney had been sued by the opposing husband, his business partner, and their corporation. the court summarized the facts:
The defendants-in-counterclaim, Millennium Equity Holdings, LLC (Millennium), and two of its partners, David Rabinovitz and Joseph P. Zoppo (collectively defendants), appeal from the decision of a Superior Court judge holding them liable for abuse of process and the malicious prosecution of Attorney Edward M. Mahlowitz. The underlying dispute in this bitter litigation arose when Mahlowitz, representing Rabinovitz's wife in her divorce action against Rabinovitz, obtained an attachment on her behalf in the Probate and Family Court on Rabinovitz's interest in property owned by Millennium. The attachment was secured after the wife discovered by happenstance that Rabinovitz was concealing from her the imminent sale of the property.
The defendants made no attempt to dissolve or modify the attachment in the Probate and Family Court, despite ample opportunity and specific court rules permitting them to do so. Rather, eighteen months after the attachment had issued, and approximately one year after the attachment had been dissolved, Rabinovitz, Zoppo, and Millennium brought suit against Mahlowitz for abuse of process, malicious prosecution, and interference with contractual rights for obtaining the attachment. After failing to secure dismissal of the lawsuit, Mahlowitz counterclaimed against the defendants for abuse of process and malicious prosecution in connection with their suit against him.
After an eight-day, jury-waived trial in the Superior Court on the defendants' abuse of process claim, and on Mahlowitz's counterclaims, the judge ruled in favor of Mahlowitz both on the defendants' claims against him and on his counterclaims against them, awarding damages to Mahlowitz for the latter. She denied Mahlowitz's motion for sanctions pursuant to Mass. R. Civ. P. 11, 365 Mass. 753 (1974), against Robert S. Sinsheimer, the attorney representing Rabinovitz, and Isaac H. Peres, the attorney representing both Zoppo and Millennium at trial.
The Appeals Court reversed the judgment in favor of Mahlowitz on his counterclaims; it otherwise affirmed the trial judge in all respects. Millennium Equity Holdings, LLC v. Mahlowitz, 73 Mass.App.Ct. 29 (2008). None of the defendants sought further appellate review. We granted Mahlowitz's application for further appellate review on his counterclaims against the defendants, as well as the judge's order denying his request for sanctions.
Contrary to the defendants' assertion that the judge's findings were replete with error, we first conclude that the record supports Mahlowitz's claim of abuse of process against Rabinovitz. Specifically, the evidence, including the reasonable inferences therefrom, supports the judge's conclusion that the only motivation Rabinovitz had in bringing his lawsuit against Mahlowitz was to cause the removal of Mahlowitz as counsel for his wife in their divorce action. The judge also acted within proper bounds as a finder of fact in concluding that Zoppo and Millennium acted in concert with Rabinovitz to that same end. We thus affirm Mahlowitz's abuse of process claim against all of the defendants.
Mahlowitz's malicious prosecution claim is substantially similar to his abuse of process claim, and his damages under each are identical. Because we affirm the judgment on the abuse of process claim, we need not and do not reach Mahlowitz's malicious prosecution claim against the defendants.
As to damages, we conclude that the judge made errors in her evaluation of some aspects of the damages that require remand for recalculation of two discrete issues pertaining to damages alone. Last, we agree with the judge that Mahlowitz has not met his burden of proving that Peres and Sinsheimer acted in bad faith in representing the defendants in their claims against Mahlowitz, and that he is not entitled to sanctions against them.
Among other things, the court affirmed the award for damages to the attorney's reputation:
We are in full accord with the judge's observation that "an attorney is not much more than his reputation and that once sullied it is very difficult ... to undo the tarnish." The judge found that several pieces published about the lawsuit in Massachusetts Lawyers Weekly, "damaged Mr. Mahlowitz, both in the esteem with which he is held in the community of divorce lawyers and judges in the Probate Court." In particular, Mahlowitz testified that since the appearance of the Massachusetts Lawyers Weekly items, he had not received any appointments from Probate and Family Court judges in Middlesex County, who had often appointed him in the past. This evidence alone is compelling: we cannot imagine a more damaging result for an attorney than the loss of his credibility on the part of judges before whom he routinely must appear.
The judge additionally found, and we agree, that the publications in Massachusetts Lawyers Weekly were a foreseeable consequence of the lawsuit, and that the adverse publicity against Mahlowitz was "orchestrated," at least in part, by Rabinovitz. Among the four items published in that newspaper, one was a letter to the editor from Rabinovitz that sharply criticized Mahlowitz's conduct as dishonest, and suggested that he had lied to a judge in the Probate and Family Court. Although one article was arguably in favor of Mahlowitz-- remarking that it was "scary" that lawyers could be sued for abuse of process when placing ordinary liens in the course of divorce proceedings--the judge's finding that the widespread publicity about the case in the legal community damaged Mahlowitz's reputation is well supported.
The defendants nevertheless assert that Mahlowitz cannot recover for harm to reputation because he did not prove "real business loss" or other pecuniary harm resulting from damage to his reputation. We do not discern authority for such a requirement in this context, nor have the defendants directed us to any relevant source. In the context of defamation, we have explained that actual injury is "not limited to out-of-pocket loss" but instead includes "impairment of reputation and standing in the community, personal humiliation, and mental anguish and suffering."...Here, Mahlowitz can recover for intangible harm to his reputation separate from and in addition to any loss of business or other pecuniary harm he may have suffered. There was no error. (citations and footnotes omitted)
The case is Millenium Equity Holdings LLC and others v. Mahlowitz. (Mike Frisch)
Monday, April 26, 2010
The Maine Supreme Court vacated a judgment disqualifying a Washington, D.C. law firm in a matter in which an employee claimed a hostile and discriminatory work environment while employed at the Maine Education Association.
The Association hired the law firm to conduct an investigation of the employee's allegations. The employee was interviewed by a firm attorney with her own counsel present. The attorney advised the employee that he did not represent the Association but was conducting an independent investigation. The employee claimed, but the interviewing attorney denied, that she was assured of confidentiality. The attorney later substantiated the employee's allegations of discrimination.
When the employee filed a complaint against the Association, two other law firm attorneys entered an appearance as pro hac vice counsel. The attorney who had interviewed the employee had departed. The trial court granted the employee's motion to disqualify the law firm in the litigation.
Here, the court concluded that the moving party has the burden of establishing an affirmative ethical rule violation that would result in actual prejudice. General allegations will not suffice. The trial court must make express findings in that regard. The moving party had "failed to point to any particular prejudice she has suffered or will suffer and...the [trial] court made no such finding of actual prejudice."
A concurring justice would find the question closer than the majority and views it as "better practice not to have the same firm perform a discrimination investigation and represent the employer in any resulting litigation."
A dissenting justice would affirm the disqualification order, concluding that the interviewing attorney had misled the employee into believing he was an independent investigator and had disclosed information to the employer in violation of his commitment to her. The dissent also concluded that the attorney-investigator may be a necessary trial witness. (Mike Frisch)
The New Jersey Supreme Court has reversed an order disqualifying a law firm from representing a municipality in defense of tax appeals during 2006-2007. The court concluded that the prosecution of individual taxpayer' 2009 tax appeals against the municipality was not "substantially related" to the matters handled on behalf of the municipality. The law firm had been disqualified by the Tax Court and the order was affirmed by the Appellate Division.
The court here found disqualification unwarranted because the law firm did not receive confidential information from the municipality that could be used against it in the taxpayer appeals: "In this record, the City has not met its burden of proving that, in fact, the current and former representations are 'substantially related. ' The superficial similarity of the subject matter of both representations-- the propriety of real estate tax assessments-- does not withstand closer scrutiny." The party seeking disqualification was unable to point to any confidential information that could be used against it. (Mike Frisch)
Thursday, April 22, 2010
The Supreme Court of Montana has responded to a petition by its Commission on the Unauthorized Practice of Law by entering an opinion and order dissolving the commission effective April 20, 2010. The original petition had proposed rule changes that were submitted for public comment. The court noted that an array of persons and organizations had filed "voluminous, thoughtful comments...Indeed, we cannot recall a matter on which there has been more comment by members of the public on a matter before [the court]."
The committee had responded to the comments by filing a motion to dissolve under an agreement that has complaints of unauthorized practice handled by the state Attorney General's Office of Consumer Protection. Lawyers who are licensed elsewhere will be referred to the Office of Disciplinary Counsel by the Attorney General.
The court concluded (contrary, I believe, to the holdings of many state high courts) that it lacks the authority to regulate or even define the unauthorized practice of law. Further, the parameters of unauthorized practice are not clearly defined ("...we are mindful of the movement towards nationalization and globalization of the practice of law, and with the actions taken by federal authorities against state attempts to localize, monopolize, regulate, or restrict the interstate or international provision of legal services.").
The court commended the commission for it's "excellent, and often frustrating, work..." along with the State Bar and Attorney General for establishing a "better way for handling complaints of unauthorized practice."
Tuesday, April 20, 2010
The web page of the Ohio Supreme Court reports:
The Supreme Court of Ohio’s Board of Commissioners on Grievances & Discipline has issued an advisory opinion about whether a lawyer’s notes must be turned over to a client when requested.
Opinion 2010-2 addresses the following question: “Are a lawyer’s notes of an interview with a current or former client considered client papers to which the current or former client is entitled upon request?”
The opinion finds that it depends upon whether “the notes are items reasonably necessary to the client’s representation” pursuant to Prof. Cond. Rule 1.16(d), which requires the lawyer to exercise his or her professional judgment.
For example, the opinion states that: “A lawyer’s notes to himself or herself regarding passing thoughts, ideas, impression, or questions will probably not be items reasonably necessary to a client’s representation. … But, a lawyer’s notes regarding facts about the case will most likely be an item reasonably necessary to a client’s representation.”
The opinion also states that a lawyer may ethically redact portions from the note not reasonably necessary or prepare a note for the client that contains only the necessary items needed for representation.
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.
Thursday, April 8, 2010
The New York Appellate Division for the First Judicial Department reversed an order directing that a deposition of a representative of Verizon be conducted in California:
Respondent, a publicly traded corporation, with over 600 employees, has failed to meet its burden of demonstrating that appearing in New York City for deposition would cause it substantial hardship...Respondent merely asserts, without more, that its chief executive officer, who respondent acknowledges travels throughout the world almost six months out of the year, will be unable to be deposed in New York. Nor has respondent proffered any reason why none of its other 600 plus employees are appropriate witnesses. (citations omitted)
Sunday, March 28, 2010
Posted by Jeff Lipshaw
Unfortunately, I can't provide a link because the online version of today's New York Times doesn't seem to include it, but the second page of Sunday Business is the "Corner Office" interview with Debra L. Lee, the chairwoman and CEO of BET (and successor to Bob Johnson, who founded the network before it got sold to Viacom). Buried in the interview are a couple observations I found interesting, given that Ms. Lee was BET's general counsel before being appointed as the chief operating officer.
Q. Looking back, it sounds as if it was a big leap to go from general counsel to C.O.O.
A. As a general counsel, you're taught research, research, find out every case, find out every opinion, think about it. It's almost like you are a judge.
So when I went from being general counsel to C.O.O., that's the way I first approached it. Well, it doesn't work. I had to learn to make decisions quicker and follow my gut. You're not going to be able to run the numbers and come up with perfect answers.
I certainly agree with her observation about being a COO or a CEO, but I think that most COOs and CEOs would get very, very frustrated with a general counsel who couldn't either translate all of the legal stuff into something that could factor into an executive's gut-based decision, or couldn't make quick and gut-based business decisions herself that placed the legal concerns alongside the non-legal ones.
The example I give in The Venn Diagram of Business Lawyering Judgments (forthcoming, 46 Seton Hall L. Rev., Issue 1 (2011)) is the decision whether to proceed with an acquisition in which there is significant competitive overlap. The synergies arising from that overlap may well be part of the purely business decision whether the acquisition is attractive, and the analysis whether a Hart-Scott-Rodino pre-merger filing is necessary, and whether there are substantive Section 7 concerns is almost purely legal, but the decision whether the acquisition is attractive enough to merit the risk and cost of the antitrust review is one of mixed law and judgment that I believe only a "well-attuned to the business" GC is in a position to make.