Business Law Prof Blog

Another University Shooting, This Time Mine

It's tough to know what to write here today.  I was fortunate enough to be working from home when I started getting emails from the University.  This is what the first ones said:

(11:51 a.m.) University Police responding to report of shots fire in BEH evacuate to a safe area, RUN-HIDE-FIGHT.

(11:57 a.m.). University Police responding to confirmed active shooter in BEH. This is not a test.  RUN-HIDE-FIGHT.

My first thought was to wonder why they were not texting me.  Then it was to realize that if I were not getting texts, many of my colleagues might not either.  The BEH building code meant the shooter was at the Business School--just a short, short walk from the law school.  I started texting my colleagues.  At least all of them that I had numbers for.  As people checked in, I learned that my colleagues were sheltering in place as the school locked down.  I reached out to some students who I'd worked with and had numbers for to make sure they were okay.  Fortunately, the two that I connected with were not on campus.  But they very easily could have been.  Our final exams have started and students not taking exams usually hole up at the law school to study.

Yesterday seemed to drag on with my phone buzzing every few minutes with someone trying to find out if I was okay as the news spread around the globe.  Early reports coming in where chaotic and confusing.  At one point, we thought there might be two shooters.  We also heard that over twenty people had been shot.  There have been so many of these events that people now know that the early information is often unreliable.  But it's also terrifying.

My two-year-old daughter attends a suburban pre-school here.  They locked down in response to the news about the shooting.  Other colleagues have their own children in the University daycare and preschool.  They locked down.  I can't imagine the horror and anxiety of being forced to shelter in place in your campus office knowing a shooter was firing off rounds near you and your child in the campus daycare.

This isn't the first time I've been relatively near to a mass shooting.  The 1 October shooting happened in Vegas right around when I moved to Vegas.  I lived in Orlando about a mile and a half from the Pulse nightclub shooting.  I was in downtown Charleston when the Mother Emanuel shooting happened.  I'm not unique.  There are way too many mass shootings.   

Something about this feels different though. I walk through the buildings where the shooting occurred all the time.  On any day, I could have been over there.  The faculty killed were people I might have worked with, had their lives not been ended.

Next semester, I will teach two classes.  We'll start with a review for how to escape the building.  It's how all my classes will start from now on. 

I'm freaked out.  My students will undoubtedly be freaked out.  

Assistant/Associate/Full Professor Positions in Business Law and Ethics, Indiana U. Kelley School of Business

Dear BLPB Readers:

"The Kelley School of Business at Indiana University in Bloomington seeks applications for a tenured/tenure-track position or positions in the Department of Business Law and Ethics, effective Fall 2024. The candidate(s)selected will join a well-established department of 27 full-time faculty members who teach a variety of courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. It is anticipated that the position(s) will be at the assistant professor rank, though appointment at a higher rank could occur if a selected candidate’s record so warrants.
Candidates with appropriate subject-matter expertise and interest would have the opportunity to be involved on the leading edge of a developing interdisciplinary collaboration between the Kelley School of Business and the Kinsey Institute, the premier research institute on human sexuality and relationships and a trusted source for evidence-based information on critical issues in sexuality, gender, and reproduction. Such expertise, however, is not required to be qualified and considered for the position or positions."

The complete job posting is here.

Rotten Eggs and Congressional Insider Trading

In June, at the National Business Law Scholars Conference in Knoxville, I sat in on a paper panel featuring Sarah Williams's work in process, Regulating Congressional Insider Trading: The Rotten Egg Approach.  A draft of the resulting paper, forthcoming in the Cardozo Law Review, has been made available on SSRN.  The abstract is copied in below.  

A 2004 study revealed that the stock portfolios of members of Congress were consistently outperforming those of the investing public. The financial success of federal lawmakers was statistically correlated to the use of nonpublic information obtained in connection with the performance of legislative responsibilities – reasonably characterizable as insider trading. Cries of dismay over such profiteering by lawmakers have been echoing in the public domain since Samuel Chase, Maryland’s representative in the Continental Congress, cornered the flour market in 1788 after learning that copious quantities of the product would be purchased by the government to support the Continental Army. Notwithstanding efforts to apply insider trading law to curb this behavior and the enactment of the Stop Trading on Congressional Knowledge (“STOCK”) Act, fortuitous securities transactions by members of Congress continue to occur in connection with headlining national events; it was recently observed with respect to news of the financial collapse of certain regional banks.

While there is scholarly and political support for laws that would effectively ban such rotten egg behavior, this Article proposes that the conduct be regulated under the statute created with rotten eggs in mind – the Securities Act of 1933. The Securities Act creates speedbumps for persons in a control relationship with issuers who want to sell the issuer’s securities in the secondary market. The speedbumps require both public disclosure and broker inquiry. This article asserts that senators and house representatives are in a control relationship with issuers such that they transcend the status of ordinary investor in the securities law regime and must navigate the obstacles established under the Securities Act for such persons before selling their securities in the secondary market. This approach eliminates the legal and evidentiary challenges of insider trading theory, provides a disclosure mechanism that is vastly more effective than that provided by the STOCK Act, and deploys broker-dealers as gatekeepers to ensure that such trades do not undermine the maintenance of fair markets.

As you can see, she takes a novel, creative approach to a tough, longstanding issue.  I look forward to reading the draft.

A Tale of Two Anti-Activist Bylaws

This week, we had two interesting, and very different, decisions on the validity of anti-activist bylaws.

The first decision, out of Delaware, upheld certain advance notice bylaws in the context of a motion for a preliminary injunction, while the second, from the Second Circuit, rejected control share acquisition bylaws adopted by a closed-end mutual fund.

The first decision, Paragon Technologies v. Cryan, concerned Paragon’s activist attack on penny stock Ocean Powers Technology (OPT).  After Paragon expressed interest, OPT adopted an advance notice bylaw requiring director nominees offer a wealth of information, including any plans that would be required to be disclosed on a 13D, any business or personal interests that could create conflicts between the nominees and OPT, and any circumstances that could delay a nominee receiving security clearance, while simultaneously adopting a NOL pill (for more on those, read Christine Hurt).

Paragon submitted some documents in connection with the bylaw, but the “plans” only said it would “fix OPT.”  OPT identified numerous deficiencies in Paragon’s submission, Paragon submitted more information including that its plans were to reduce expenses and focus on industry growth.  Long story short: OPT kept finding deficiencies to complain about, and ultimately Paragon’s nominees were rejected.  Paragon had also requested an exemption from the pill, which was denied.

On Paragon’s motion for a preliminary injunction ordering that its nominees be permitted to stand for election, and for relief from the pill, VC Will concluded that neither side had covered itself in glory.  She agreed that OPT very possibly had nitpicked Paragon’s application, and some of its demands – like the security clearance thing – were vague and potentially unnecessary.  But she also found that Paragon had deleted certain text messages, which contributed to her finding that the record was inconclusive as to whether Paragon had complied with even reasonable bylaws.  Like, it might have had plans that were not disclosed; there were discussions among Paragon personnel about a stock-for-stock upside down merger with Paragon.  Like, there was the possibility that such a merger would also have had to have been disclosed as a potential conflict.  Like, even if the security clearance demand was vague, on this record, Will could not be sure that Paragon had been genuinely confused.  And though the timing of the NOL pill was certainly suspicious, the OPT Board’s tax advisor had pointed out that there was a real financial risk to OPT if it granted Paragon’s exemption request.

Given these factual disputes, she concluded that Paragon had not met its burden of proof that it was entitled to an injunction suspending operation of the bylaw and the pill.

I admit, I’m a bit uncomfortable with this holding, because it seems to me that with these kinds of bylaws, it will be very easy for boards to create factual “disputes” about whether all of an activist’s plans were disclosed, or whether there was some undisclosed conflict lurking somewhere, or whether a bylaw really was vague in application, and with those factual disputes in hand, stave off a proxy challenge for at least another year, which may render it uneconomical for an activist to even litigate the bylaw issues in the first place.  Perhaps the board’s actual conduct – evasiveness and foot-dragging when addressing requests for clarification – should carry more weight.  But I don’t want to overstate; deleted text messages were a real issue, Paragon’s first 13D disclosures were laughable, and Will suggested that she might have looked more favorably on a different request for relief, such as, delay of the annual meeting until trial on Paragon’s claims that OPT breached its duties with respect to the bylaw and the pill.  Still, I do think there needs to be more work on how advance bylaws function to undermine activists’ strategies and to what extent that’s good – or at least acceptable – or bad, and unacceptable.  (If that paper’s been written, point me to it!)

But then we come to the Second Circuit’s decision in Saba Cap. CEF Opportunities 1, Ltd., Saba Cap. Mgmt., L.P. v. Nuveen.  Saba launched an activist attack on a Nuveen closed-end fund, and Nuveen passed a control share acquisition bylaw – any shares Saba acquired in excess of 10% would lose their voting rights, unless the remaining shareholders voted to restore them.

The Second Circuit held that the bylaw violated the Investment Company Act’s requirement that all shares have equal votes.  Per the court:

Read together, these two provisions of the ICA control. The first provision requires that all shares of stock must be “voting stock” and have “equal voting rights.” Id. § 80a-18(i). The second defines an umbrella term, “voting security,” as one “presently entitling” the owner to vote. Id. § 80a-2(a)(42).  The language is plain and unambiguous. In addition to requiring that all investment company stock be voting stock, the statute defines it with reference to its function—that it “presently entitles” the owner to vote it. Id. § 80a-2(a)(42).

Nuveen’s Amendment violates this provision because under it, if an owner of Nuveen stock cannot “presently” vote their stock, the stock loses its function and is not “voting” stock. The Amendment also violates Section 80a-18(i) because it deprives some shares of voting power but not others—contrary to the provision’sguarantee of “equal voting rights.” Id. § 80a-18(i).

The court distinguished Delaware decisions as being about, you know, Delaware, and noted that poison pills – if permissible at all, which the court would not say definitively – at least are different in that they distinguish shareholders’ economic interests, not the voting rights of the shares.  The court repeatedly made somewhat derisive references to Nuveen’s claim that the bylaws were intended to “limit[] the risk that the [f]und will become subject to undue influence by opportunistic traders pursuing short-term agendas adverse to the best interests of the [f]und and its long term shareholders,” obviously believing such arguments to be irrelevant to the statutory provisions at issue.

What do I find interesting in all this?

First, it is more evidence for one of my recurring themes, namely, that corporate governance is not an exercise in private ordering, but that the hand of the state is now less visible in operating companies than it is in regulation of investors.  Corporate organization may carry the patina of private ordering, but the levers of governance are held by institutional investors who are subject to far more intrusive regulations than Delaware ever dreamed of imposing on companies themselves. 

Second, Delaware would almost certainly have accepted Nuveen’s claim to be protecting itself against Saba’s desire to “alter[] investment strategies away from long-term investments, all to turn a ‘quick profit,’” while the Second Circuit nearly laughed the argument out of court.  And that’s interesting because Delaware’s invocation of “long termism” has often been interpreted as a sub rosa grant of permission for corporate managers to consider stakeholder interests instead of shareholder ones.  I.e., Delaware would never say so explicitly, but every time it permitted directors to fend off a hostile takeover to protect company “long term” interests, it functionally was permitting directors to adopt a stakeholder model of governance. 

The Investment Company Act, according to the Second Circuit, grants no such permission.  Shareholder primacy reigns supreme.  Which means our tightly federally regulated investors are engineered for pure profit seeking without regard for other concerns.  Federal law doesn’t contain the “give” of Delaware law, and that’s an aspect of governmental choice, as well.

Some Op-Eds and the DOL Fiduciary Process

As these may also be of interest to our readers here, I wanted to link to a couple of recent op-eds. 

As to the first, I drafted one with Joe Peiffer about FINRA's expungement process. It ran in Financial Planning Magazine on November 15.  The crux of the argument is that FINRA's reforms to its expungement process won't fully solve the problem and will instead burden state regulators with additional unfunded responsibilities.  Here is a small excerpt:

Ultimately, the current reforms offer incremental improvements that will likely slow the deletion of valuable public records. Sadly, however, the current system continues to outsource expungement decisions away from FINRA — the primary regulator for brokerage firms — and onto independent contractor arbitrators. This system leaves the responsibility for educating those arbitrators about reasons not to grant expungements to complaining customers and thinly resourced state regulators.

This approach benefits FINRA because it allows it to avoid entangling itself on these issues. It also shifts costs away from FINRA. After all, parties seeking expungements pay hefty fees to FINRA for arbitration costs. Yet the public pays the price when FINRA  outsources responsibility for wise expungement decisions to poorly informed arbitrators who usually only hear from the brokers seeking expungement. 

Ultimately, FINRA should take this issue out of arbitration entirely and have its Office of Hearing Officers make decisions about which matters merit expungement. Unlike the broken arbitration process, this system would allow for error correction because decisions can be appealed to FINRA's National Adjudicatory Council, its board of governors, the SEC and the federal courts.

To be clear, the reforms are a good thing and will make some real improvements.  But they won't go far enough and will likely fail to solve the underlying problems.  The op-ed calls for adopting a solution James Fallows Tierney and I advocated for in a forthcoming law review article--moving expungement out of arbitration entirely.

As to the second, I put out a quick piece in The Hill on Twitter/X's decision to file a claim against Media Matters.  It argues that Musk won't be able to establish causation because his own actions have done much more to drive advertisers away. The op-ed closed this way:

Ultimately, the lawsuit appears to be another misstep by Musk. This thin-skinned retaliation undercuts any claim that X offers a home for free speech. The litigation will also struggle with showing that the Media Matters reporting actually caused advertisers to depart. After all, Musk’s recent round of antisemitic amplification was widely reported and condemned by the White House. The litigation seems much more likely to focus additional attention on Musk’s own statements — and the toxic accounts pushing hate speech and conspiracy theories on the site.

Disney's CEO recently took this position publicly after the op-ed ran.  As everyone likely already knows, Mr. Musk offered some choice comments to advertisers yesteday:

"If somebody's gonna try to blackmail me with advertising, blackmail me with money? Go fuck yourself," he said.

"Go. Fuck. Yourself. Is that clear? I hope it is. Hey, Bob, if you're in the audience," he added, in an apparent reference to Robert Iger, chief executive of Walt Disney (DIS.N), which pulled ads on X. Iger spoke earlier at the event and said that Disney felt the association with X following Musk's move "was not a positive one for us". A spokesperson from Disney did not immediately respond to a request for comment.

And for today's quick third item, the regulatory process for the Department of Labor's fiduciary rulemaking continues to chug along.  Yesterday marked the deadline to request to appear and testify before the department of Labor.  The names of the persons and entities requesting to comment are available here.  It appears that a good mix of insurance industry personnel, financial services professionals, and consumer advocates will likely appear.  This should give the DOL a chance to hear a range of perspectives. Testimony will likely occur Dec. 12-13.

Open Postdoctoral Scholar Position - Berkeley Center for Private Law Theory

Dear BLPB Readers:

"Private law structures the legal building blocks that most profoundly affect our social and economic life, notably property, contract, and torts as well as central aspects of family law, trust law, work law, and more. It thus governs our relationships with each other in arguably the most important spheres of our lives: in the market, the workplace, the neighborhood, and intimate relations. Private law theories develop conceptual and normative analyses of these building blocks and critically investigate their meanings, their interrelationships, their varied institutionalizations, and their implications in these and other social settings. The theory of private law has a proud legacy stretching back to antiquity, which has been continually renewed and updated. The need for a new generation of private law theory has become all the more acute given questions and challenges posed by rapid technological change, economic globalization, and the rise of new forms of family and personal relations.

The Berkeley Center for Private Law theory promotes interdisciplinary research on these themes. We organize a variety of activities designed to stimulate dialogue, to exchange and advance knowledge, and to explore new ideas. The Berkeley Center for Private Law Theory aims to foster insights into the legal building blocks of our social and economic life and contribute to making them fair and just.

The University of California, Berkeley invites applications for the position of Postdoctoral Scholar. The successful candidate will be mentored by Professor Hanoch Dagan and the dynamic and collaborative research team of the Berkeley Center for Private Law Theory."

The complete position description is here.

 

Of Directorships: Reconfiguring the Theory of the Firm

It always is a great pleasure to pass along and promote the work of a colleague.  And today, I get to post about the work of a UT Law colleague!  Many of you know Tomer Stein, who came to join us at UT Law back in the summer.  He is such an ideal colleague and, like many of us, has broad interests across business finance and governance.

This post supports a recent draft governance piece, the title of which is the same as this post--Of Directorships: Reconfiguring the Theory of the Firm.  You can find the draft here.  The abstract is included below.

This Article develops a novel account of directorships and then uses it to reconfigure the theory of the firm. This widely accepted theory holds that firms emerge to satisfy the economic need for carrying out vertically integrated business activities under a fiduciary contract that substitutes for the owners’ multiple agreements with contractors and suppliers. As per this theory, the fiduciary contract is inherently incomplete, yet often preferable: while it cannot address all future contingencies in the firm, it will effectively direct all unaccounted-for firm events by placing them under the owners’ purview as a matter of default, or residual right. Under this contractual mechanism, firm owners, such as corporate shareholders, acquire the status of residual claimants who have the power to decide on all contractually unenumerated contingencies.

This view of the firm is conceptually flawed and normatively mistaken. Firms do carry vertically integrated business activities managed by their fiduciaries, but those fiduciaries—agents, trustees, and directors—are not functional equivalents from either the legal or economic standpoint. Unlike agents and trustees who receive commands from principals and settlors, respectively, directors manage the firm’s business by exercising decisional autonomy. Conceptually, shareholders who hire directors do not run the firm’s business as residual claimants. Rather, it is the directors who manage the firm as residual obligors—all contractually unaccounted for contingencies are placed under the fiduciary’s purview as a matter of obligation. This feature makes directorship an attractive management mechanism that often outperforms other fiduciary mechanisms, and the residual-claimant structure that stands behind them, in a broad variety of contexts. By developing this critical insight, the Article proposes not only to reconfigure the prevalent theory of the firm, but also to redesign both federal and state laws in a way that will facilitate directorships not only in corporations, but also across several indispensable dimensions of our financial, communal, and familial organizations.

As someone who understands both the central role of the director in corporate governance and the incomplete and inaccurate principal/agent relationship between shareholders and directors, I have enthusiasm for this project!  But I also am intrigued by the thought that the ideas in the paper can be translated to non-business institutions and groups.

Read on, and enjoy!

Call it Anti-Anti-ESG

The big corpgov news this week is obviously L’Affaire du OpenAI, but I have no idea what I think about that so instead I’m quickly going to highlight an interesting new lawsuit filed by a retired Oklahoma pensioner, alleging that the state’s anti-ESG law violates the First Amendment, as well as both state and federal requirements.

You can find all the relevant documents at this link, but the backstory is that Oklahoma passed a law prohibiting state agencies from contracting with financial institutions that “boycott” oil and gas interests.  OPERS – the state retirement system – took advantage of an exception that allowed continued investment if necessary to fulfill fiduciary responsibilities, which then prompted some nastygrams back and forth between the State Pension Commission (headed by the Treasurer, who is on the OPERS board, but was outvoted) with OPERS itself, regarding whether OPERS qualified for the exception.

And now, a former officer of the Oklahoma Public Employees Association has sued, claiming that the state is using his retirement assets to make an (illegitimate) political statement instead of protecting retiree savings.  The lawsuit is backed by the Oklahoma Public Employees Association.

Anyway, I’m not going to express an opinion on the merits of the suit but I am fascinated by the political economy here, given that OPERS’s board appears to be mainly political appointees.  Despite that fact, the Treasurer stood alone in his insistence on severing ties with “boycotting” institutions.  And I’m constantly trying to wrap my mind around how the First Amendment issues should play out, given the Supreme Court’s insistence that corporate speech may be controlled by shareholders through “the procedures of corporate democracy” – which of course should include shareholders like, say, state pension funds.

Governance, Finance, and HBO Max's Succession

The title of this post is the name of the advanced business associations law course I will teach in the spring.  I got the idea for this course after talking to students about decreasing enrollments in advanced business law courses.  Although they attributed much of the decrease to grade shopping, they also noted that they and their peers often base course registration decisions on course names (from which they make assumptions) without reading the course descriptions.  So, a course named "Advanced Business Associations," no matter how creatively it is taught (and I teach it as a discussion seminar), is not likely to attract positive attention.  When I floated using the HBO Max series Succession as a jumping off point for a discussion seminar on business law, they responded favorably.  The rest is, as they say, history. The proof of the pudding will be in the registration numbers.

The idea for the Succession-oriented course came to me quite naturally. I already was writing an essay on fiduciary duties relating to the series--forthcoming in the DePaul Law Review in a special volume focusing on Succession.  So, it was only a small jump to think about teaching more broadly from the many business law situations in the four seasons of the show.

Some of my friends from West Publishing heard about my teaching plans when they were visiting UT Law recently.  They mentioned the course to their colleague, Leslie Y. Garfield Tenzer, who produces a podcast for West Academic, Legal Tenzer: Casual Conversations on Noteworthy Legal Topics.  Leslie reached out and asked me to record an episode with her on the series and my course, which I recently did.  The podcast was released last week.  You can find it here.

My Succession course syllabus is still under construction.  If you have a favorite episode that you would like me to include--one that illustrates concepts from business governance or finance--let me know.  I admit that I am excited to teach from the material in Succession, a series that I enjoyed watching.

I’m having flashbacks to the IPO Cases

Back when I was in practice, so many years ago, I spent a bit of time on the IPO Cases, namely, a series of around 300 class actions involving dot-com startup IPOs that, we alleged, had been manipulated by underwriters.  Details differed from case to case, but the typical claim was that the underwriters used manipulative techniques, such as laddering, to cause dot com startups to “pop” in price upon their initial offering, thereby violating Section 10(b).

But we stumbled at class certification.  For false statements, there’s a well established paradigm for creating a classwide presumption of reliance that satisfies Rule 23.  For manipulative conduct there isn’t a paradigm, and our cases faltered.  The Second Circuit reversed one grant of class certification and remanded, In re IPO Securities Litigation, 471 F.3d 24 (2d Cir. 2006) and 483 F.3d 70 (2d Cir. 2006).  We moved for class certification a second time, and eventually matters settled.

Anyway, the recent decision denying class certification in In re January 2021 Short Squeeze Litigation, 21-2989-MDL-ALTONAGA (S.D. Fla. Nov. 13, 2023), takes me back.  It is not on Westlaw or Lexis yet, so all I can do is link the Law360 article, which attaches the opinion.  Anyway - 

This a Robinhood case, where plaintiffs alleged that Robinhood manipulated the prices of various meme stocks when it halted trading and closed out positions.  This was done, plaintiffs alleged, because Robinhood was experiencing liquidity issues at National Securities Clearing Corporation, but Robinhood misled the market as to the full extent of its actions and the reasons behind them.

The plaintiffs survived a motion to dismiss, but the court held that they could not prove reliance on a classwide basis.  The plaintiffs explicitly alleged that the market was not efficient – Robinhood was manipulating it, by halting trades!  Therefore, the plaintiffs could not claim the fraud on the market presumption of Basic v. Levinson, 485 U.S. 224 (1988), based on Robinhood’s lies.  And because Robinhood affirmatively lied, there could be no omissions liability under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972). 

What about reliance on the manipulative conduct, specifically, that allegedly distorted market pricing?  The court said, it would not accept some kind of lightened fraud on the market presumption for manipulation cases, that did not depend on market efficiency as articulated in Basic, because such a presumption “would prove too much while doing too little. Prove too much, because it would obviate the need for plaintiffs in manipulative conduct cases to prove reliance; do too little because it does not complete the causal connection between a plaintiff’s transaction in securities and a defendant’s manipulation.” (Op. at 60, quoting Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir. 2009) (O’Scannlain, J., concurring)).  Therefore, no class certification.

Well, I’m not in the weeds of the facts enough to be able to say whether the class should have been certified, but the court misunderstood – just as the Desai court misunderstood – the argument for a reliance presumption in manipulation cases.  Properly interpreted, plaintiffs in manipulation cases should get a presumption of reliance, but they have a higher burden than for statement cases, and not a lower one, and plaintiffs do not need to ask for anything beyond what Basic already established.

We begin by observing that the fraud on the market presumption is actually two distinct propositions.  As the Supreme Court explained in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014):

The [Basic] Court based that presumption on what is known as the “fraud-on-the-market” theory, which holds that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.” Id., at 246, 108 S.Ct. 978. The Court also noted that, rather than scrutinize every piece of public information about a company for himself, the typical “investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price”—the belief that it reflects all public, material information. 

See the two ideas?  When I teach it, I call them the “objective” presumption – which is about how markets absorb information – and the “subjective” presumption – which is about how investors think about markets.  The Halliburton Court was clear in distinguishing these when it discussed the defendant’s attacks on Basic:

Halliburton’s primary argument for overruling Basic is that the decision rested on two premises that can no longer withstand scrutiny. The first premise concerns what is known as the “efficient capital markets hypothesis.”…. Halliburton also contests a second premise underlying the Basic presumption: the notion that investors “invest ‘in reliance on the integrity of [the market] price.’”

See the two premises, objective, and subjective?  Of course, as we know, the Supreme Court beat back Halliburton’s challenges, and the two presumptions – the objective and the subjective – remain intact.  (That said, the subjective presumption is in fact somewhat controversial – many argue it shouldn’t be necessary to prove a case at all, see eg Donald C. Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151 – but it’s there, so I accept it.)

Together these two presumptions establish: first, that the false statements impacted market prices, and second, that investors relied on market prices when trading.  Together, they create a syllogism: by relying on a price that was in fact manipulated, investors are deemed to have relied on the original false statement.  That is ultimately what reliance means in this context: Investors relied upon a market price that defendant’s fraudulently manipulated.

In the typical fraud on the market class action, plaintiffs bring in experts to attest as to market efficiency.  They demonstrate the market was liquid, followed by analysts, they show correlations between price movements and new information, they analyze bid-ask spreads, all in service of demonstrating that this is the kind of market to which the fraud on the market presumption should apply.

That evidence is important, but only for the objective presumption – namely, that false statements impact market prices.  If the market is not liquid and widely followed and has not historically reacted to new information etc etc, then it may very well be inappropriate to simply presume, without more, that a false statement influenced price.

But is this evidence important for the subjective presumption, namely, what investors think about markets?

I submit not.  No one conducts an event study to identify historic correlations between price and new information before they place a trade; they just trade.  Investors, when deciding whether they “rely” on market prices, use a much looser set of criteria – is it widely traded, a famous stock, heavily analyzed, on a major exchange?  That’s probably enough to get at whatever it is investors are in fact relying on in their heads when they “rely” on market prices, and it’s reasonable for them to do so.

If that’s right, then those loose indicia of market efficiency should be enough to presume that investors subjectively believed prices to reflect true value or a market price validly set or whatever work it is we think the subjective presumption is doing.

The detailed analysis, the event studies, the Cammer factors – that stuff is only necessary for the objective presumption, namely, that false statements did in fact impact the market.

Now, let’s think about manipulation claims – where the argument is “investors are misled to believe that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.”  ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007).

There is no reason why the criteria should change for when we adopt the subjective presumption.  That is, if we can presume investors rely on market prices from basic indicia of efficiency in the context of false statements – widely traded stock on a major exchange – we should be able to presume investors rely on market prices in manipulation cases from the same criteria.  So, if the case concerns a widely traded and followed stock on a major exchange, the subjective presumption should be satisfied.

What about the second presumption, that false statements affect prices? 

In a manipulation case, there are no false statements.  Therefore, there is no presumption of price impact.  Instead, the plaintiffs are expected to prove price impact.  They are expected to come into court with evidence that the defendants’ manipulative conduct in fact affected the market price of the stock.  They do not ask for or receive a presumption at all.

If they do that, if they satisfy their burden, they will have satisfied both halves of the Basic syllogism.  The subjective presumption allowed them to show that investors relied on market prices, and the objective presumption was absent – it was replaced by actual facts proof.

In other words, manipulation plaintiffs are asking for less, not more.  They want only half of the Basic presumptions; they will prove the other half.  And they should be entitled that first half presumption.

So the Robinhood court was wrong when it followed Desai in holding that a presumption of reliance in the manipulation context would “Prove too much, because it would obviate the need for plaintiffs in manipulative conduct cases to prove reliance; do too little because it does not complete the causal connection.”   The presumption that plaintiffs need is one that Basic readily provides; beyond that, plaintiffs don’t need a presumption at all. 

Call for Papers - ABLJ 2024 Special Issue: Doing Business in a Disaster Economy

Dear BLPB Readers:

"In 2022, the United States experienced 26 natural disasters, more than any other country in the
world. One storm alone, Hurricane Ian, cost the economy more than $110 billion dollars. Beyond
flooding, drought, and wildfire, in recent years the world has also seen the previously
unimaginable impact of the COVID-19 pandemic and multiple areas of human conflict,
including the war in Ukraine, which has disrupted global food supply and upended life for
millions of people. Each of these disasters brings a unique mix of impact to local businesses,
human lives, and the global economy.

What should businesses, regulators, lawmakers, and attorneys do to prepare for life in an
economy in which disasters are both more likely to strike, due to climate change, and more likely
to have profound multinational impacts, due to globalization? The American Business Law
Journal (ABLJ) seek manuscripts that address this question.

The “Doing Business in a Disaster Economy” special issue will take a broad perspective.
Submissions may cover a wide variety of topics addressing legal planning and regulatory
mechanisms for addressing disasters–before, during, and after the event. Paper topics may
include but are not limited to:
• Insolvency and financial aid, particularly for SMEs post-disaster.
• Meeting health care needs, particularly in underserved or rural areas.
• Addressing the impacts of systemic racism and ethnic bias on disaster preparedness and
the impact of disasters on communities of marginalized populations.
• Economic programs related to unemployment, loan repayment, or essential industry
protection or rebuilding.
• Land use and other environmental programs intended to mitigate predicted impacts of
natural disasters on local and national economies.
• The role of digital assets in a disaster economy.
• Evaluating previous relief programs (such as the American Rescue Plan) and making
recommendations for future programs.
• Valuation of property and insurance issues in high-risk areas.

Submissions incorporating interdisciplinary approaches and/or comparative and international law
are welcome, as are submissions from researchers based outside of North America. It is expected
that four papers will be accepted for the special issue; papers not accepted may be resubmitted to
the ABLJ for publication outside of the special issue.

Articles selected for the special issue will be published in Issue 4, Volume 61 (2024), of the
ABLJ. Submissions must be received by March 1, 2024 for consideration. Submissions should
be made to [email protected]. Authors will be notified of their acceptance by March 15,
2024." 

The complete call for papers is here: Download ABLJ 2024 Special Issue Call for Papers

Open Tenure-track Assistant/Associate Professor Position in Business Law - Babson College

Dear BLPB Readers:

"Babson College invites applicants for a tenure-track Assistant/Associate Professor position in our Accounting & Law division, beginning Fall 2024. We seek an intellectually curious colleague who is aligned with Babson’s mission of educating responsible entrepreneurial leaders who create economic and social value everywhere. Our commitment to diversity of all kinds empowers our students to consider possibilities beyond their own individual experiences – to design products and services, found companies and create value that will transform businesses, communities, and lives. As such, Babson is continually focused on attracting exceptional talent that will add richness to the academic experience. Babson is an Affirmative Action/Equal Opportunity employer."

The complete job posting is here.

Listservs, Emails, Texts, and Maintaining Relationships

As I reflect on the current contentious world environment, I cannot help but note the impact that electronic communication has on maintaining quality personal and professional relationships.  Although it sometimes may seem that business law professors are less impacted by domestic and global events, our work's engagement with broader economic, social, and political issues and our individual intersectionalities can keep us in the throes of it all.  As someone who cares deeply about (and believes in the power of) human relationships and interpersonal communication (leading me to co-design and co-teach small group communication course for our leadership curriculum), I offer some food for thought here.

We all enjoy free speech.  And I respect that right deeply.  I bear a tattoo on my body (an open "speech bubble" on my right scapula) as a symbol of that belief.

I also believe in the careful, considerate exercise of that important right.  I have written a bit about this before, in another blog space, arguing for well considered communication.  My conclusion in that post?

Just because a person can say something in the exercise of their rights to free speech, does not mean that the person should say something. And if someone chooses to say something, the way in which the communication is made can make all the difference. Through mindful collegiality, Ubuntu, civility, and other conduct reinforcing inclusion, a lawyer-leader can motivate action and loyalty in and outside their law practice.

Although I wrote that post back in February of 2022, what I say in the post still rings true to me.

Electronic communication seems to be an enabler of suboptimal behaviors in this regard.  I am, of course, not the first to observe this.  But I see relationships falling apart right and left (political pun acknowledged) because of people's choices in using electronic communication, especially (although not exclusively) in group settings.  Most recently, as some of you readers know, this has been happening on the Association of American Law Schools Section on Women in Legal Education listserv.  This has saddened me.  That group, and the listserv that binds us, has historically been an inclusive space.  I hope we can revive that ethos of inclusion, even as long-term members of the section determine to disengage from communication in that forum.

There is so much information on the Internet about etiquette in electronic communication.  In the course I taught this semester, my co-instructor and I assigned some of those publications.  We had a robust discussion with the students.  Some expressed their surprise at the way certain words and phrases in emails and text messages may impact the reader in unintended ways.  We discussed whether to communicate electronically at all, and if so, how.  We assigned out-of-class work on related issues.  I felt good about the information we conveyed and the discussions we had.  That positive feeling was borne out when one of the students in the course used the material in another course (Corporate Finance) in which I also am the instructor.

I wish we had covered listservs in our course.  I plan to add that to future iterations of the course.  I have discovered that many organizations, undoubtedly struggling with the threat that listservs will disrupt group relations, have formalized rules about their usage.  This seems like a sensible approach to help avoid (or at least limit) the disrespect that may be shown to listserv managers and moderators in the event of a conflict over the appropriate use of the listserv.  For example, the American Bankruptcy Institute has listserv guidelines.  They provide instruction on best practices (including a statement on topic scope) and also on prohibited practices.  Among the prohibited practices is one that seems relevant to communications I now notice more frequently.

Subjects Generating More Heat Than Light

Occasionally, a subject will come up that generates lots of posts because of its controversial nature. If the discussion threatens to overwhelm our mailboxes or becomes nasty, we will ask that those interested in discussing it further take the discussion off the list.

Do not challenge or attack others. The discussions on the lists are meant to stimulate conversation, not to create contention. Let others have their say, just as you may.

The guidelines also include instructions on brevity, advise users how to alert readers to message content and length, and caution folks to "[o]nly send a message to the entire list when it contains information that everyone can benefit from."  Other websites I reviewed offered similar guidance (in some cases using some of the same wording).

I offer all of this up for what it may be worth to you.  I am committing myself to working on being the best group member I can be because I value my relationships with members of the groups to which I belong.  These people have helped me ride over many bumps in my personal and professional lives over the years.  They have supported me in handling stress caused by deaths, recessions, bullying/verbal abuse, a global financial crisis, a global pandemic, a number of wars and political conflicts, and much more.  I know my students will benefit more from my teaching if I can manage that stress.  I also aim to teach them some of what I have learned about the importance of relationships as opportunities arise.

Moreover, as I earlier noted here on the BLPB, I am writing an essay that connects with this topic based on a presentation I gave at the annual Business Law Prof Blog symposium, "Connecting the Threads," last month.  The essay, Business Lawyer Leadership: Valuing Relationships, will cover the connection of business law and lawyering to relationship building and maintenance.  It will be published in a forthcoming (spring 2024) volume of Transactions: The Tennessee Journal of Business Law that will feature works presented at the symposium together with faculty and student commentary.  I will post on the essay and the volume once online access is available.

Ethical and Practical Issues for Lawyers Using AI

I’m a law professor, the general counsel of a medtech company, a podcaster, and I design and deliver courses on a variety of topics as a consultant. I think about and use generative AI daily and it’s really helped boost my productivity. Apparently, I’m unusual among lawyers. According to a Wolter’s Kluwers Future Ready Lawyer report that surveyed 700 legal professionals in the  US and EU, only 15% of lawyers are using generative AI right now but 73% expect to use it next year. 43% of those surveyed see it as an opportunity, 25% see it as a threat, and 26% see it as both.

If you’re planning to be part of the 73% and you practice in the US, here are some ethical implications with citations to select model rules. A few weeks ago, I posted here about business implications that you and your clients should consider.

• How can you stay up-to-date with the latest advancements in AI technology and best practices, ensuring that you continue to adapt and evolve as a legal professional in an increasingly technology-driven world? Rule 1.1 (Competence)
• How can AI tools be used effectively and ethically to enhance your practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards? Will it be malpractice NOT to use GAI in the future? Rule 1.1 (Competence), Comment 8, duty to understand the benefits and risks associated with relevant technology; Rule 1.3 (Diligence)
• How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information)
• How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information). Tip- Make sure your engagement letter discusses the use of technology and specifically addresses the responsible use of GAI.  If needed, amend your engagement letter. Adequately anonymize client information in your prompts. Make sure to opt out of data sets. Check the terms of service and privacy policies of your AI tools.
• How do you rethink billing clients and what’s ethical if you have reliable AI models that can do some work in a fraction of the time? Is it still ethical to bill by the hour or do you use a flat rate? Rule 1.5 (Fees)
• How can you effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel? Rule 3.3 Candor Toward the Tribunal; Rule 4.1 Truthfulness in Statements to Others
• What measures should you implement to supervise and train your staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice? Rule 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers); Rule 5.3 (Responsibilities Regarding Nonlawyer Assistance)

Then there are the harder questions:

• How many lawyers and legal professionals will you replace?
• How many should you replace?
• Who and how will you retrain and upskill?
• Should your firm be developing your own large language models as some are already doing?  What are the risks? The 2022 ABA Legal Technology Survey Report found that accuracy is the top barrier preventing many lawyers from adopting AI. Some insurance brokers have indicated the existing GAI tools are not fit for law practice because of reliability, accuracy, confidentiality, and copyright concerns,

If you're ready to take the deep dive or maybe just dip your toe in the AI waters, here are some resources to help you get started on the journey. Of course, with the way things are changing so rapidly on the legislative and tech development front, this list could be relatively useless in the next few weeks.

•ABA House of Delegates Resolution 604

•Task Force on Responsible Use of Generative AI for Law- MIT

• NIST AI Framework

•FTC AI Guidance

•EEOC Artificial Intelligence and Algorithmic Fairness Initiative

•National Conference of State Legislatures-2023-legislation

•SEC Investor Advisory Committee Establishment of an Ethical Artificial Intelligence Framework for Investment Advisors

•ABA Task Force on the Law and Artificial Intelligence

•Health AI Partnership

•National Association of Insurance Commissioners

•ISO 27701- International Standard for Protecting Personally Identifiable Information

Partnership on AI

Are you using generative AI in the classroom? How are you preparing the next generation of lawyers? If you’re a practicing lawyer, are you ready to be part of the 15% this year or the 73% next year? 

Follow the Money

Today, I am at the ILEP conference that Joan blogged about, honoring the career of Jill Fisch.  In keeping with the ESG theme of the conference, this week, I’ll make a brief observation.

For the past couple of years, there has been a rising anti-ESG backlash on the right, accusing Disney and Target and Bud Light of engaging in “woke” marketing, and seeking to bar the likes of BlackRock and other large asset managers from taking ESG factors into account.  The latest salvos are taking place in Congress, where subpoenas are being issued to groups like As You Sow, accusing them of antitrust violations, and another hearing was just held to criticize ESG investing – this time, focusing on the Department of Labor’s new rules.

Now, the thing about the anti-ESG push on the right is, it’s not making headway with voters.  Which isn’t surprising; most people don’t think much about corporate law or investing guidelines, so I’d honestly be more surprised if the anti-ESG push was getting political traction.

So when politicians continue to ostentatiously push this line, the obvious question is – why?  And my instinct has always been, despite the attention paid to DEI initiatives and trans rights and so forth, this is all originating with oil money.  The oil companies are, it seems, putting real resources behind a push to stop fossil fuel divestment initiatives and considerations of climate change in investing.

The reason that is intriguing is that the usual line is that taste – like, divestment as a means of boycott and so forth – can’t affect public stock prices.  Which means, you would think, if climate change-aware investing is not financial, it should be having no affect on oil company stock, and the oil companies would not waste all this money campaigning against it.  And if it is financial, then all the campaigning in the world won’t actually change anything – and oil companies are still wasting their campaign donations.

I tend to think that companies spend money rationally, which means, one way or another, they think campaigning can affect asset pricing.

Which is why I found this article, Voice Through Divestment, rather interesting.  Authors Marco Becht, Anete Pajuste, and Anna Toniolo conclude that divestment initiatives do affect stock prices, but it’s not just the fact of divestment.  The campaign itself raises awareness, puts pressure on companies to reduce their emissions, and thereby increases regulatory risk for oil companies – which causes even purely financial investors to adjust their risk-benefit calculations and devalue the stock.

In other words, there is a neat story here of how “financial” ESG and “profit-sacrificing” ESG interact with each other.

Big Briefs Filed in Alpine's Challenge to FINRA in the DC Circuit

If you've been following along, you know all about the pending challenge to FINRA in the D.C. Circuit.  Many amicus briefs have come in, including my own.  To make it easier for people to see what's happening, I've pulled the briefs and put them in a Google Drive folder for easier access.  The briefs in the folder include:

• FINRA
• Alpine Opening
• DTC & Clearing Groups
• National Futures Association
• North American Securities Administrators Association
• Public Investor Advocate Bar Association
• Securities Exchanges
• Horseracing
• Free Enterprise Chamber of Commerce
• New Civil Liberties Alliance
• The United States of America
• Benjamin P. Edwards

We also have additional litigation raising similar issues now pending in North Carolina.

I predicted that we'd see these challenges and that they could pose big risks to the financial system in my Supreme Risk article.  So far, I've been cited by Alpine and the DTC and other clearing corporation's amicus.  The DTC  brief agreed with my assessment and block quoted the article.

Any perceived weakness in Amici's authority to enforce their rules could undermine their ability to deliver critical functions to the markets, such as individual participant risk monitoring, the setting of collateral requirements to cover credit, market, and liquidity risk present in financial markets, and the orderly management of participant defaults. These functions not only enable Amici to manage risk for their participants throughout the exchange of trillions of dollars' worth of assets every trading day; they also create a firewall that prevents single instances of firm failure from spreading to other markets and throughout the economy--a responsibility that falls uniquely on Amici's shoulders as SIFMUs. A ruling that undermines Amici's abilities to execute these functions invites economic chaos by paving the way to frontal attacks on the SRO clearing-agency rules that undergird those singular abilities in the first instance. As one commentator describes, citing Amici as examples:

If a market participant successfully challenged a clearing firm decision on the ground that the clearing firm rules were unconstitutional, markets may cease to function. If clearing firms were not able to clear trades, enormous downstream consequences would ensue. People would not be able to buy or sell securities or derivatives. Consequentially, all of the wealth stored within these financial products would become suddenly inaccessible.

 

The DTC and other clearing corporations cited me and Tom Lin's Infinite Financial Intermediation article.  Obviously, I think the DTC is correct about the risk here and that courts need to be careful in how they proceed lest they wreck the financial system.

 

Hopefully this post will make it easier for those covering the case to see what the briefs are saying and understand the issues facing the D.C. Circuit.

 

Open Lecturer Position(s) in Dept. of Bus. Law & Ethics - Indiana University Kelley School of Business

Dear BLPB Readers:

"The Kelley School of Business at Indiana University in Bloomington seeks applications for a full-time, non-tenure-track lecturer position or positions in the Department of Business Law and Ethics, effective Fall 2024. The candidate selected will join a well-established department of 27 full-time faculty members who teach a variety of residential and online courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. Lecturers have teaching and service responsibilities but are not expected to engage in research activities."

The complete job posting is here.

The Future of ESG - Symposium on Thursday & Friday

I am proud to be presenting (alongside a stellar group of business law folks) at this symposium and honoring my friend and our wonderful colleague Jill Fisch. More information, including information on how to register to attend (if you are in the neighborhood) can be found here.

Texas Tech University School of Law Seeks Candidates

Texas Tech University School of Law, Lubbock, Texas

Summary Information

The School of Law at Texas Tech University invites applications for a full-time, 9-month tenure-track Professor of Law position to begin in August of 2024.  The position is open to both entry-level candidates and candidates who are on the tenure-track or tenured at another school.  Candidates who satisfy Texas Tech University’s requirements to be hired with tenure will also be eligible to hold the Frank McDonald Endowed Professorship in business law.

Required Qualifications

In line with TTU’s strategic priorities to engage and empower a diverse student body, enable innovative research and creative activities, and transform lives and communities through outreach and engaged scholarship, applicants should have experience or demonstrated potential for working with diverse student populations at the undergraduate and/or graduate levels within individual or across the areas of teaching, research/creative activity, and service.

Specific required qualifications are:

1. Candidates should have a J.D.;
2. Candidates should have a demonstrated potential for excellence in research, teaching, and service; and
3. Candidates should have demonstrated potential for excellence in the areas of Contracts and in corporate/business law, such as Business Entities, Securities Regulation, Mergers & Acquisitions, and related courses.

Preferred Qualifications

In addition to the required qualifications, individuals with the following preferred qualifications are strongly encouraged to apply:  Experience teaching corporate/business law courses and scholarly publications in corporate/business law areas.

About the University and School of Law

Established in 1923, Texas Tech University is a Carnegie R1 (very high research activity) Doctoral/Research-Extensive, Hispanic Serving, and state-assisted institution. Located on a beautiful 1,850-acre campus in Lubbock, a city in West Texas with a growing metropolitan-area population of over 300,000, the university enrolls over 40,000 students with 33,000 undergraduate and 7,000 graduate students.  As the primary research institution in the western two-thirds of the state, Texas Tech University is home to 10 colleges, the Schools of Law and Veterinary Medicine, and the Graduate School.  The flagship of the Texas Tech University System, Texas Tech is dedicated to student success by preparing learners to be ethical leaders for a diverse and globally competitive workforce.  It is committed to enhancing the cultural and economic development of the state, nation, and world.

The School of Law has approximately 440 students and 38 full-time faculty members.  The School of Law is an integral part of the University and offers 10 dual-degree programs with other Texas Tech schools and colleges. The School of Law has a strong focus on students and is committed to a practical education to produce practice-ready graduates.

About Lubbock

Referred to as the “Hub City” because it serves as the educational, cultural, economic, and health care hub of the South Plains region, Lubbock boasts a diverse population and a strong connection to community, history, and land.  With a mild climate, highly rated public schools, and a low cost of living, Lubbock is a family-friendly community that is ranked as one of the best places to live in Texas.  Lubbock is home to a celebrated and ever-evolving music scene, a vibrant arts community, and is within driving distance of Dallas, Austin, Santa Fe, and other major metropolitan cities.  Lubbock’s Convention & Visitors Bureau provides a comprehensive overview of the Lubbock community and its resources, programs, events, and histories.

Equal Opportunity Statement

All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, gender expression, national origin, age, disability, genetic information or status as a protected veteran.

To Apply for this Position

Please include the following documents in your application at the Texas Tech Jobs website  https://www.depts.ttu.edu/hr/workattexastech/

• Curriculum Vitae
• Cover Letter
• List of references

Questions about this position should be directed to Jarod Gonzalez, J. Hadley and Helen Edgar Professor of Law and Chair, Faculty Appointments Committee at [email protected]. For your application to be considered, you must submit it at the Texas Tech Jobs website. If you need assistance with the application process, contact Human Resources, Talent Acquisition at [email protected] or 806-742-3851.

 

Application Process

Submission of applications is preferred by December 31, 2023. To ensure full consideration, please complete an online application at https://www.depts.ttu.edu/hr/workattexastech/ Requisition # 34777BR. 

 

Sell the News

The Financial Times recently reported that

A group of veteran US financial journalists is teaming up with investors to launch a trading firm that is designed to trade on market-moving news unearthed by its own investigative reporting.

The business, founded by investor Nathaniel Brooks Horwitz and writer Sam Koppelman, would comprise two entities: a trading fund and a group of analysts and journalists producing stories based on publicly available material…

The fund would place trades before articles were published, and then publish its research and trading thesis….

I saw a lot of online commentary asking why this isn’t just a model for insider trading, and even though Matt Levine went through some of the issues here and here, I am moved to do something I rarely do and delve into insider trading law to explain the matter further.  For a lot of readers, this is probably nothing new, but hopefully this will be helpful for some of you.

So, the first thing to make clear is that the rules for what counts as insider trading in the U.S. are bizarre and arcane.  And the reason for that is, with a few exceptions like the “Eddie Murphy” provisions of Dodd-Frank, there are no statutory prohibitions on insider trading.  What the statutes prohibit is fraud, mainly through Section 10(b) of the Securities Exchange Act.  And, beginning in the 1960s, courts and the SEC began to interpret Section 10(b) fraud to include insider trading.  Except that meant they had to define the contours of what kind of trading is and is not permitted, and those definitions came about through meandering and contradictory common law rulemaking.  The caselaw is meandering and contradictory because people have very different instincts about what should be illegal and what should not be illegal.  As one article amusingly summed it up:

Manifesting the extent to which even authorities on the subject are unable to articulate a compelling legal theory of what insider trading is and why the conduct it encompasses should be declared unlawful, a large body of case law and commentary, for instance, variously portrays insider trading doctrine as based on principles drawn from or analogous to the law of fraud, breach of fiduciary duty, agency, theft, conversion, embezzlement, trusts, property, contracts, corporations, confidential relationships, unjust enrichment, lying, trade secrets, and corruption.

Andrew W. Marrero, Insider Trading: Inside the Quagmire, 17 Berkeley Bus. L.J. 234 (2020).

In general, there are those who believe insider trading should try to level the playing field, by giving all traders equal access to information, or at least equal opportunity to attain access, and there are those who believe that equal access is impossible – ordinary retail traders will never match the resources of professional firms – and what actually protects ordinary traders is market efficiency, which only comes about from informed trading that sets the price appropriately for everybody.  So the caselaw tends to contain rhetoric that switches back and forth between extolling the virtues of a level playing field versus extolling the virtues of informed market prices.  I also think some of the instincts here are driven by specific distributional concerns – i.e., the print shop employees of the world usually have less access to information than the white-shoe M&A lawyers of the world – and so when prohibitions on insider trading are very narrow, the poor stay poor and the rich get rich.

Anyway, you end up drawing a lot of distinctions that do not, from the outside, appear to make a lot of moral sense.

So, back to this new fund model.  The company is called Hunterbrook, and financial journalists will be tasked with writing articles about publicly traded companies.  The plan, quite explicitly, is for the journalists to rely solely on public information.  I.e., carefully read SEC filings and news reports and use big data calculations and perhaps access obscure but not secret information (Matt Levine suggested FOIA requests).  Before publication, the fund will decide whether to place a trade – long, or short, securities, but also commodities and currencies.  And then, the article will run, and the hope of course is that the article’s insights will move markets, which will then permit the traders to profit from their position. 

That model is similar, but not identical, to those of activist short sellers – they too ferret out information and publish reports, but less formalized as journalism, and only for shorting purposes; this model wants to have some kind of regular news arm attached, and will go long as well as short.  It is, under current law, legal.  The entity is generating its own in-house information – including information about which stories it will run – and trading on the information that it generates.

This is very different than, say, the R. Foster Winans case, where a columnist for the Wall Street Journal tipped a broker about the companies he planned to feature in Heard on the Street. Because in that case, the information – which columns would run – did not belong to Winans, but to the Wall Street Journal, and Winans misappropriated it.  (No, David Carpenter was not Winans’s “roommate,” but this was 1986, so.)

But the Hunterbrook model envisions that the trader is the same entity that owns the information.

That raises the question whether, in the Winans case, the Wall Street Journal could have traded on its own knowledge of upcoming columns – or sold that information to a third party.  And the answer to that is, it depends.  Remember, the Hunterbrook model is that all the information used in the articles is public.  If that were true of the Heard on the Street columns, then yes, the Wall Street Journal could have traded on advance knowledge of its own publication plans.  But Wall Street Journal articles are typically based on inside sources.  Trading on that information, whether by the WSJ or anyone else, depends on an analysis of those sources and their relationship to the WSJ.

Let’s say the sources were revealing inside information about someone else – like, say, information about their employers, or clients, or people they do business with.  There might be all kinds of laws that those sources broke by revealing information to a newspaper (trade secret laws, employment contracts and NDAs, etc), but for the law of insider trading, the only issue is whether that source revealed information to the journal wrongfully, and wrongfully is defined in a particularly convoluted manner. 

First, the source must be bound by some kind of duty to keep the information confidential – that duty can come from law, or contract, or just a personal relationship where there is an expectation of privacy.  And second, the source must be revealing the information to the WSJ for an improper reason.  For a long time, improper reasons meant the source/tipper expected to “personally benefit” from the tip.  And that usually meant, the tipper was paid – like, someone paid them off for their information.  Or the tipper expected to receive confidential tips in return, that he could trade on, and there was a regular practice of people going back and forth tipping each other.  Sometimes, it meant that the tipper expected to “gift” the information to a close friend, in lieu of monetary compensation.  “Happy birthday, Mom, I didn’t have a chance to buy flowers, but Amazon is acquiring Whole Foods.  Buy yourself something nice!”  It might even mean the source expected a job offer – “Look how valuable I am to you, I can tell you that Amazon is buying Whole Foods!”  What it did not mean was, say, whistleblowing.

So, on first order analysis, if the WSJ’s sources were whistleblowing – and not expecting any personal benefit by talking to the paper, they were not being paid for their information – then the information would not have been wrongfully revealed, and the WSJ would be free to trade on it.

But we are not done.

The “personal benefit” test is difficult to apply; it sent government prosecutors searching for any quid pro quo, including steak dinners or theater tickets or plumbing services or other kinds of trivial rewards.  Eventually, then, in United States v. Martoma, the Second Circuit declared that it would be sufficient if the government could show the source tipped someone in the expectation that the recipient of the information would trade – i.e., instead of hunting for a personal benefit to the source, we’d look to see if the source was trying to benefit someone else – like the Mom’s birthday hypothetical above, but now extended to all relationships, not just especially close ones.

Additionally, in United States v. Blaszczak I, the Second Circuit looked at a brand new securities fraud statute – not Section 10(b) of the Exchange Act, but Section 1348 of Sarbanes Oxley – and held that the fraud prohibitions in Section 1348 do not require a showing that the tipper personally benefitted.  I, personally, never understood that logic – the “personal benefit” requirement was, in a roundabout way, intended to identify when tipping inside information constituted deceptive conduct, and since Section 1348 prohibits fraud, just like Section 10(b), you’d think they’d be read the same.  But no matter, because in Blaszczak I, the Second Circuit held that instead of showing a personal benefit, it would be sufficient to show that the information was “misappropriated” for one’s own use – including to give to another to trade on.  In the end I don’t see a whole lot of daylight between that standard and Martoma, so, fine, they are roughly the same. (Then, the Second Circuit decided United States v. Blaszczak II and two judges on a 3-judge panel suggested they might want to go back to a personal benefit test even for Section 1348 fraud, so who knows what that even means now).

Under this analysis, the question would be, did the WSJ’s source provide information intending that the newspaper would trade on it?

Again, the answer would probably be no, and so – on first blush – the information was not provided wrongfully, and the WSJ would be free to trade.

But we still are not done.

Because if the source gave this information to the WSJ as, say, a whistleblower – not for the purpose of having the WSJ trade – it’s possible a court would say that if the WSJ traded, then the WSJ violated its own duty of confidentiality to the source, in a manner of speaking, and misused the information for its own benefit. 

That would be sort of a weird argument, because the source never intended confidentiality – the source intended publication! – but courts tend to punish based on gut instincts of fairness and it’s not at all difficult to imagine a court holding that the WSJ misappropriated information that was given to it for a specific purpose, and, hence, fraud.

But now let’s translate all of this to the Hunterbrook context.  If the journalism arm is attached to a trading arm, then for sure any source who gives the journalist information knows it will be used for trading.  And we’re back to that first analysis: It’s wrongful to give someone confidential information, derived from an employer or a client or whatever, so that they can trade.  And maybe our source could thread the needle – “I knew they would trade but that’s not why I told them; I told them to expose the bad stuff!!” – but I wouldn’t want to be that source’s lawyer, is what I’m saying.

Anyway, all of this means that Hunterbrook will not be talking to confidential sources, but instead believes it has a viable business model by synthesizing and digesting public information, which it can use to earn a trading advantage and move markets.  Note, for whatever reason, Hunterbrook does not thinking trading alone will do it – it does not trust that the market will eventually catch up to Hunterbrook’s own wisdom, or, will do so on a fast enough time frame for Hunterbrook to profit.  No, Hunterbrook has to trade, and then move things along by publishing what it discovers. 

And I don’t know if they can pull it off or they can’t, but if they do manage to regularly publish breaking news stories culled entirely from public information, which have the effect of moving markets and allowing Hunterbrook to earn outsized returns – what do you imagine will happen when securities fraud plaintiffs bring follow-on complaints against the companies targeted with Hunterbrook’s negative information?  Do you think the obvious evidence that this “public” information was nonetheless not incorporated into market prices will make courts any more likely to accept that transaction causation and loss causation have been properly alleged?  (Reader, it will not.)