Thursday, September 16, 2021
Earlier, I posted a copy of the abstract to my new law review article, Supreme Risk here. Since that time, I've spun out two different summaries of it elsewhere. The first, you can find at the CLS Blue Sky Blog here. The other, you can find at the Duke FinReg Blog here. The two summaries are different, but they're both great introductions to the article, which has now been placed with the Florida Law Review.
Fortunately, Florida has given me until early October to continue refining the piece. I'd be grateful for any comments or thoughts on the draft if you're able to send them my way.
Wednesday, September 15, 2021
Professors Houser and Baker on Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money
Dear BLPB Readers,
I'm delighted to share that my recent article written with Professor Kimberly Houser, Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money (forthcoming, NYU Journal of Law & Business) is now posted to SSRN.
Here's its abstract:
Facebook’s Diem proposal, the growing interest in cryptocurrencies, and the decreasing use of cash have all raised concerns regarding the government’s ability to enact monetary policy and retain monetary sovereignty. While China has already launched their own sovereign digital currency (SDC), the U.S. Federal Reserve (the Fed) appears to be more concerned with getting an SDC “right rather than quickly.” As money and payment systems keep evolving, and the divergence between money and legal tender becomes greater, there is a need to investigate not only what effect any potential SDC would have on the financial system, including the possible disintermediation of banks, but also its impact on privacy and data security.
In this article we delve into the evolution of money and why the government finds itself at a crossroads with regard to the establishment of an SDC. Although numerous reasons have been given for establishing a SDC, the one aspect that must be acknowledged is the potential for a global stablecoin to displace any potential SDC due to the network effect. We explore money alternatives, types of sovereign digital currencies, and the design decisions involved with creating an SDC. Whether direct or indirect, token-based or account-based, there are risks that must first be discovered and addressed. After discussing the global impact of SDCs, including the potential first-mover advantage and impact on reserve currency, we explore the future of money alternatives concluding policymakers in the U.S. have an unbelievably difficult series of decisions to make. This article endeavors to highlight some of the most pressing issues.
Tuesday, September 14, 2021
Campbell University's Norman A. Wiggins School of Law in Raleigh, NC is hiring for two positions. They are especially interested in candidates in the following areas: (1) business organizations, (2) commercial law (including sales law), and/or contracts. Details here or after the break.
Monday, September 13, 2021
The Section on Transactional Law & Skills has extended its deadline for paper proposals for its program at the 2022 Annual Meeting to Friday, September 17. Submissions can be sent directly to Megan Shaner at email@example.com. I cribbed the following from a message she wrote to the section membership last week. (Thanks, Megan!)
The topic of the section's program this year is "Transactional Lawyering at the Intersection of Business and Societal Well-Being" and, according to the preliminary program for the conference, the program is tentatively scheduled for 11 a.m. to 12:15 p.m. on Friday, January 7, 2022. The first part of the program focuses on how to incorporate ESG issues and impact topics across the transactional curriculum, including in clinics and other experiential courses, as well as in doctrinal courses. The second part of the program consists of scholarly presentations to be selected from the Call for Papers set forth below. If you incorporate ESG, corporate social responsibility, impact investing or governance, or related topics into your scholarship in any way, you should consider submitting your paper in response to the Call for Papers.
CALL FOR PAPERS
AALS SECTION ON TRANSACTIONAL LAW AND SKILLS
Transactional Lawyering at the Intersection of Business and Societal Well-Being
2022 AALS Annual Meeting
The AALS Section on Transactional Law and Skills is pleased to announce a call for papers for its program, “Transactional Lawyering at the Intersection of Business and Societal Well-Being,” at the 2022 annual meeting of the AALS. This program will explore how ESG and broader societal considerations are increasingly influencing the flow of capital in the global marketplace, corporate governance planning, merger and acquisition activity and structures, as well as other transactional topics. The events of 2020, for example, have shifted the focus of business entity governance, equality and access in securities markets, and transactional planning and deal structures in significant and lasting ways – questioning whether current structures and systems are working well for all stakeholders and society more broadly. COVID-19 and social movements have broadened ESG efforts to include previously overlooked issues such as human resource policies (e.g., sick leave, parental leave), workplace health and safety, supply chain management, continuity and emergency planning, and diversity and inclusion hiring practices and training. In addition, proposals are being considered (and some adopted) to require gender diversity on boards of directors as well as additional disclosures related to human capital. This program will look at how transactional lawyering in a variety of contexts can address/respond to recent calls for increased consideration and balancing of ESG issues and impact topics.
The annual meeting will be held virtually from January 5-9, 2022, with the Section on Transactional Law and Skills panel scheduled for Friday, January 7, from 11 a.m.-12:15 p.m. (EST). In addition to the paper presentation, the program will feature a panel focusing on how to incorporate these topics and issues across the transactional curriculum, including in clinics and other experiential courses, as well as in doctrinal courses.
The Section on Transactional Law and Skills invites any full-time faculty member of an AALS member school who has written an unpublished paper, or who is interested in writing a paper on this topic, to submit a 1 or 2-page proposal or full draft to Megan Shaner, Chair of the Section, at firstname.lastname@example.org on or before September 17, 2021. Papers accepted for publication but that will not yet be published as of the 2022 meeting are also welcome. Please remove the author’s name and identifying information from the submission and instead include the author’s name and
contract information in the submission e-mail.
After review and selection by the Section’s Executive Committee, the authors of the selected papers will be notified in mid-September 2021. The Call for Paper presenters will be responsible for paying their registration fee for the conference.
Any inquiries about the Call for Papers should be submitted to the Section Chair Megan Shaner, University of Oklahoma College of Law, at email@example.com or (405) 325-6619.
On behalf of the Section on Transactional Law and Skills
Chair: Megan W. Shaner (University of Oklahoma)
Chair-Elect: Eric Chaffee (The University of Toledo)
Past Chair: Matthew Jennejohn (Brigham Young University)
Members of the Executive Committee:
Andrea Boyack (Washburn University)
Patience Crowder (University of Denver)
Cathy Hwang (University of Virginia)
Jay Kesten (Florida State University)
Praveen Kosuri (University of Pennsylvania)
Greg Shill (University of Iowa)
Saturday, September 11, 2021
So, Coinbase has made a lot of noise recently about the SEC’s warning that its “Lend” product may be a security and thus subject to registration under the securities laws.
The Lend product, as I understand it, would allow Coinbase to lend certain cryptocurrency held by its clients to other actors; the borrowers will pay an interest rate to Coinbase, which Coinbase will share with clients, resulting in a guaranteed minimum 4% interest payment to the client. Essentially, Coinbase wants to be a bank, and to treat its clients as depositors, without the bother of banking regulation. Per Coinbase’s blog post, the SEC is “assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves.... These two cases are from 1946 and 1990.” Leaving aside the baffled tone (Howey? Reves? What is this sorcery?), and the language designed to make me feel old (I still wear clothes I bought in 1990), what is interesting to me is that the SEC is using both tests.
This is an unsettled area when it comes to the definition of a security. Howey is used to determine whether an instrument is an “investment contract” as that term is used in the definition of a security contained in the Securities Act of 1933 and the Exchange Act of 1934; Reves is used to determine whether a “note” is a security as defined in those Acts. And it’s not always clear which test applies when. Technically, a “note” is a definite promise to pay a particular sum. But in SEC v. Edwards, 540 U.S. 389 (2004), the Supreme Court used the Howey test for a sale-and-leaseback arrangement that included a promise to pay $82 per month, rather than the Reves test. That leaves a fair degree of uncertainty as to how to determine whether new instruments count as “notes” in the first place so that the Reves test is appropriate. Are the two tests alternatives? Is one preferable to the other in some situations? The answer isn’t clear.
And it matters because the tests themselves are similar but not identical. Both consider whether the product is sold to many people or to a single person; both consider the purposes of the transaction, but Reves is a fuzzy multifactored balancing test whereas Howey requires that all elements be met.
Why is the law like this?
It’s actually, as far as I can tell, the product of the sometimes dysfunctional development of the common law. (Something I previously discussed in the context of United Food and Commercial Workers Union v. Zuckerberg. In that blog post, I talked about a different example of the common law creating an unnecessary multiplicity of tests: Aronson and Rales. I should add, though, that in that post, I was wrong in predicting what the plaintiffs would do; Zuckerberg is currently pending before the Delaware Supreme Court and the plaintiffs are arguing for a reinterpretation of Aronson that would distinguish it from Rales.).
So, back to securities: In 1946, the Supreme Court had to decide if interests in an orange grove constituted an investment contract/security, and it came up with the four-factored Howey test: investment of money, in a common enterprise, with the expectation of profit, due to the managerial efforts of others. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
Nearly 30 years later, in 1975, the Supreme Court decided United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975). In Forman, a New York City co-op was created as part of a program of low income housing. To get an apartment in the co-op, you had to buy a share of “stock” in the corporation, but the stock itself had none of the features of traditional stock and mainly was used as a security payment for the apartment. When the residents/stockholders sued, claiming they had been sold securities, the Supreme Court held that the stock was not “stock” as that term was meant in the securities laws, and then further held that it was not even an investment contract under the Howey test. Why? Among other things, there was no expectation of profit as Howey envisioned. As the Supreme Court put it:
By profits, the Court has meant either capital appreciation resulting from the development of the initial investment . . . or a participation in earnings resulting from the use of investors’ funds. . . .
Lower courts did two things with this. First, they decided that all instruments allegedly subject to the securities laws – stock, notes, anything else – would get the Howey test. Second, they read Forman’s concept of profit narrowly, to mean that the expectation of profit had to be something like profits generated specifically from the success of the enterprise. Fixed rates of return, especially at a market rate, would not count as “profit” because those amounts would be due to the investor regardless of whether the enterprise was a success or failure.
And then came Reves v. Ernst & Young, 494 U.S. 56 (1990), with the question whether a demand note was a security. The Eighth Circuit applied Howey and concluded that the fixed rate of return excluded it from the security definition. See Arthur Young & Co. v. Reves, 856 F.2d 52 (8th Cir. 1988) (“the interest rate was fixed by an established market rate. The demand noteholders did not participate in the Co-op's earnings by virtue of their ownership of the demand notes, nor was there any prospect of capital appreciation. Therefore, the demand noteholders did not expect a ‘profit’ as that term is defined in Howey.”)
But debt instruments often have fixed rates of return!! It’s kind of the point! If you do this, you end up with a lot of debt instruments being entirely uncovered by the securities laws!
So, off it goes to the Supreme Court. And the Court – rather than interrogate the lower courts’ interpretation of Forman, see Reves, 494 U.S. at 68 n.4 – decides that notes should have an entirely different test.
Now there are two tests. Howey and Reves. (Okay, three, if you think of Forman, and subsequently Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985), as setting forth a definition of whether something is “stock”).
But we’re not done. Because in SEC v. Edwards, the Court finally did confront the narrow definition of “profit” that courts were using for Howey. And there, applying Howey, it held that fixed rates of return can in fact be “profits.”
But if the instrument has a fixed rate of return, there’s going to be a specific payment due at a particular time, and that might make it a note!
The whole point of Reves, I submit, was to get around an unduly narrow interpretation of Howey. Once that interpretation changed, we’re left with two tests, no clear reason for them, and no clear guidance when one should apply and when it should be the other.
And that’s why the SEC is testing Coinbase’s Lend product – which involves a fixed rate of return – under both Reves and Howey.
Friday, September 10, 2021
Dear BLPB Readers:
Assistant Professor for Legal Studies in Business
Department of Management
Spears School of Business
Oklahoma State University – Stillwater, Oklahoma
Position: The Management Department in the Spears School of Business at Oklahoma State University invites applications for one tenure track position in Legal Studies at the assistant professor rank to begin as early as August 2022.
Candidates should demonstrate an interest in and a capacity for both conducting high-quality scholarly research and working with colleagues, as well as a high level of teaching competence. Assistant professors are given minimal service assignments and course preps as well as summer support to allow them to focus on their research programs. Salary and teaching loads are commensurate with a R1 comprehensive research university. Our preference is to hire research active faculty members with a 2:2 teaching load (12 credits).
The complete job posting is here: Download 2022 Fall Job Ad - LSB Asst Prof
Wednesday, September 8, 2021
Dear BLPB Readers:
Duties include teaching undergraduate and graduate business law courses; conducting research leading to scholarly publications as recognized by the college in the area of business law; and providing service to the students of Texas State University, the department, the college, and the profession. All positions are subject to availability of funds.
The complete job posting announcement is here.
Monday, September 6, 2021
It is hard to believe (at least for me), but the official calendar marker for the end of the summer now is upon us. It is a time for smoking pork, backyard barbecues, and enjoying the pool and the beach like a kid. It is time after which we are admonished to stop wearing white (until Memorial Day), according to conservative traditions ignored in the breach by me. It is Labor Day.
According to the U.S. Department of Labor website:
Observed the first Monday in September, Labor Day is an annual celebration of the social and economic achievements of American workers. The holiday is rooted in the late nineteenth century, when labor activists pushed for a federal holiday to recognize the many contributions workers have made to America’s strength, prosperity, and well-being.
That history seems so important to remember today, given significant labor dislocations in the United States since the beginning of 2020. The significant amount of illness and death attributable to COVID-19 is just the beginning of the story. Complex social, economic, and legal factors have combined to make for volatility and dissonance in U.S. labor markets. The U.S. Bureau of Labor Statistics recently released its August 2021 report on the national employment situation, describing trends and supplying relevant data.
The news media has offered ongoing commentary. I was especially drawn to an article published by The Washington Post on Saturday entitled "Why America has 8.4 million unemployed when there are 10 million job openings." Misalignments between the available jobs, on the one hand, and the obtainable, qualified labor, on the other hand, have become apparent. "There is a fundamental mismatch between what industries have the most job openings now and how many unemployed people used to work in that industry pre-pandemic," the article offers. The article also mentions that people are resigning and retiring in larger numbers and earlier than projected, at least in some sectors of the economy. Entrepreneurship also is on the rise.
There has been informal and formal debate about the effect that law has had and may continue to have on our labor markets. The mandatory shutdowns (through lockdown and stay-at-home orders) imposed by state governors in 2020, for example, certainly played a role in separating businesses from their workers. Congressionally approved federal unemployment benefits have been blamed for slower-than-expected returns to work, but as Saturday's Washington Post article notes, "in 22 states that already phased out those benefits, workers didn’t flood back to jobs." A September 1 article in The Wall Street Journal entitled "States That Cut Unemployment Benefits Saw Limited Impact on Job Growth" (behind a paywall) offers similar observations. "Economists who have conducted their own analyses of the government data say the rates of job growth in states that ended and states that maintained the benefits are, from a statistical perspective, about the same."
Both business and law (and the lawyers that serve them) may be part of the solution as much as they are part of the problem. Workplaces are changing and workers are changing. The changes in each may foster changes in the other. A June article in The New York Times notes the role of pay and benefits in the return-to-work equation, citing "the proliferation of low-paid jobs with few prospects for advancement and too little income to cover essential expenses like housing, food and health care." Others note that, to attract qualified, desirable candidates, businesses will have to focus core attention not only on worker pay and benefits, but also on other terms and conditions of employment, including the possibility of mandating, promoting, or permitting employees to engage in more remote work (whether for the benefit of the employer or the employee--or both). But government also can refocus its efforts to support sustainable business in this changed and changing socio-economic environment. An opinion piece from back in June in The Washington Post addressing impediments to full employment notes that: "[a]ccess to reliable child care remains a significant obstacle. So does the availability of public transit. Workers may continue to worry about risks to their own or their family’s health if they take public-facing jobs . . . ." A May article in The Washington Post also mentions childcare availability and health care risks as factors in the decision of unemployed people to return to work. If employers are not facilitating access to affordable and appropriate child care and transportation and are not voluntarily providing adequate protections from health care risks in the workplace, then legal or regulatory solutions may be useful if we want those businesses to survive. The coming months will be telling as we continue to address the ongoing pandemic and its direct and indirect effects on productivity.
I have always valued work. Years ago, I found a quote (apparently misattributed, with related quotes, to the Buddha) that resonated with me: "Your work is to discover your work and then with all your heart to give yourself to it." Yes. I certainly have done that to great satisfaction. I am fortunate to hold a position that has survived the effects of the pandemic to date. I feel needed and wanted in my workplace. I am lucky and privileged, indeed.
Congress instituted labor day as a national legal holiday on June 28, 1894, following on the adoption of similar municipal ordinances and state legislation. The Department of Labor's website notes this and concludes its history of the national holiday by highlighting the role that workers have played in the history of the United States.
American labor has raised the nation’s standard of living and contributed to the greatest production the world has ever known and the labor movement has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pays tribute on Labor Day to the creator of so much of the nation's strength, freedom, and leadership – the American worker.
Today, I hope that we can reflect on this rich history and celebrate both these aggregate contributions and our own individual work notwithstanding current uncertainties in our labor markets.
Saturday, September 4, 2021
Happy Labor Day Weekend!
It's time to relax and recharge. If you're a professor or a student, you've likely just started class again. If you're like me, you're already behind and a bit overwhelmed. If you're a practicing lawyer, you may be working at home, in an office, or both. With all of the uncertainty about office re-openings, the economy, wildfires, hurricanes, and COVID, you may be a bit stressed, and not in a good way (yes, there is "good" stress). Lawyers, as we know, have high rates of burnout, chronic stress, suicide, depression, substance use disorders, and other maladies that could affect the way we practice law and our level of fulfillment while practicing.
I've been a happy lawyer for thirty years. But I've had personal and health challenges, so I've spent most of the past eighteen months learning healing modalities to help me physically and mentally. I've become certified in meditation facilitation, NLP (neurolinguistic programming), EFT (emotional freedom technique)/tapping, reiki, mental health first aid, and hypnotherapy.
Below are some of the quick fixes that work for me. I've also conducted CLEs for lawyers on stress management, and have received feedback that the methods below work. I've even taken some students through some of these breathing exercises during office hours to help them calm down (admittedly, sometimes I cause that stress).
Don't worry, I won't ask you to sit in a lotus position chanting "om" or do any yoga poses (although I do that too).
I just want you to breathe. You do this all the time, but are you breathing in a shallow way? Probably. How many breaths are you taking a minute? How are you oxygenating your blood and brain?
As you do more breathwork, try to imagine the breathing coming from your heart (try the HeartMath coherence technique), and make the exhale longer than the inhale.
Remember, if you feel lightheaded or dizzy, please stop. I'm not a doctor, so please check with a healthcare provider before trying anything in this post. Once you receive the go-ahead, try them all and see which works for you. Better yet, get your family involved. If you have children, have them participate or count the seconds while you breathe. Soon they may join in. Imagine a world where children grow up with tools to regulate their emotions.
All of the tips below take 5 minutes or less. If you can go on for longer, that's great. If you only have 1-2 minutes, that works too. But if you say you don't even have a minute for deep breathing, then you need to stop and breathe more than anyone else.
Tip #1- Breathe through your nose for a count of 4 seconds. Make sure that y
our stomach expands on the exhale (imagine a baby sleeping with the belly rising and falling). Hold your breath for 2 seconds. Breathe out for 6 seconds through your mouth. Repeat for 3-5 minutes.
Tip #2- Alternate nostril breathing. Close your eyes. Put your thumb over your right nostril. Put your ring finger on your left nostril. Exhale slowly and deeply through your right nostril. Repeat for 3-5 minutes. Longer is better.
Tip #3- Close your eyes. Put one hand on your heart. Put the other hand on your belly. Take a deep breath in through your nose for 6 seconds. Your hand on your belly should rise. Exhale fully through your mouth. Let out a sound like a big sigh. As you breathe, you can say to yourself, "I breathe in peace, I breathe out stress." Repeat for 3-5 minutes.
Tip #4- Sit, stand, or lie down. Imagine there is a white column of light 300 feet above your head showering you with light. Imagine your feet are roots going to the center of the earth. Take deep breaths in through your nose and exhale through your mouth. On the inhale, say "peace" and on the exhale, say "calm" or another word. Repeat the breathing and calming phrases for 3-5 minutes while you imagine the light around you.
Tip #5- 5-4-3-2-1- Take 3, long, deep, slow breaths. With your eyes open, notice 5 things you can see. With eyes open or closed, think of 4 things you can touch, 3 things you can hear, 2 things you can smell, and one thing you can taste. Take 3 deep breaths. This is especially helpful when you're feeling anxious because it forces you to focus on the present, even for a few moments.
Tip #6- If the breathing is too much, find your favorite song. Pick a song you would dance to or sing to no matter where you were. Dance like no one is watching. Sing loudly and badly. Try this for one or two songs. This can both energize and calm you. I often do this between calls and meetings.
If you want to try something more advanced, try the Wim Hof breathing method. With Wim Hof, you will be lightheaded. You will tingle. It may be scary. But there are science-based reasons for all of those sensations, and people have seen remarkable results. You can also take cold showers, which have great health benefits. Start at 15 seconds in cold water and then build your tolerance.
If you really want to push yourself, try an ice bath. All of my breathwork and meditation training made it a breeze to sit in a tub of ice for over six minutes. Maybe you don't want to do an ice bath. You just want to make it through the next meeting. You have nothing to lose by trying some of these tips. I'll close with a quote from Oprah Winfrey. "Breathe. Let go. And remind yourself that this very moment is the only one you know you have for sure."
Have a safe and healthy holiday. And remember to breathe.
Friday, September 3, 2021
I suggested in my last two posts (here and here) that as Congress and the SEC contemplate reforms to our current insider trading regime, it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” With this in mind, I developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).
In the previous post, I offered a scenario that would result in liability under equal-access and parity-of-information regimes, but not under the fiduciary-fraud and laissez-faire models. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.
In today’s post, I offer two scenarios to test our attitudes regarding trading under the fiduciary-fraud model. This model recognizes a duty to disclose material nonpublic information or abstain from trading on it, but only for those who share a recognized fiduciary or similar duty of trust and confidence to either the counterparty to the trade (under the “classical” theory) or the source of the information (under the “misappropriation” theory). The trading in the following scenario would incur liability under the classical theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal-access models), but not under the misappropriation theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp. with XYZ Corp. The shares of BIG Corp will skyrocket when the deal is announced in seven days. The senior VP asks the CEO and board of Big Corp if he can purchase shares of BIG Corp for his personal account in advance of the announcement. The CEO and board approve the senior VPs trading. The senior VP buys Big Corp. shares in advance of the announcement and he makes huge profits when the deal is announced.
Note the difference between this scenario and the scenario in last week’s post. Here the counterparties to the trade are existing Big Corp shareholders who (if they had the same information as the senior VP) presumably would not have proceeded with the trade at the pre-announcement price. The theory assumes that such trading on the firm’s information (even with board approval) breaches a fiduciary duty of loyalty to the firm’s shareholders (fair assumption?). In last week’s post, the counterparties to the trade were XYZ Corp.’s shareholders, so the board-approved trade did not breach any fiduciary duty. Do you agree that the senior VP’s trading in the scenario above is deceptive, disloyal, or harmful to shareholders? If so, do you think such trading should be subject to civil or criminal sanction (or both)?
The trading in the next scenario would incur liability under the misappropriation theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal access models), but not under the classical theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp. The shares of BIG Corp and XYZ Corp will both skyrocket when the deal is announced in seven days. At the closing party, the CEO and Board of BIG Corp explain to everyone on the deal team that they would like to keep the deal confidential until it is announced to the public the following week. Immediately after the party, the senior VP goes back to his office and buys shares of XYZ Corp for his personal online brokerage account. The senior VP makes huge profits from his purchase of XYZ Corp shares when the deal is announced a week later.
Here the senior VP at BIG Corp. trades in XYZ Corp. shares, so he does not breach any fiduciary duty to his shareholders. Assuming a reasonable person would conclude that a request of confidentiality includes a request not to trade (fair assumption?), the VP’s trading does, however, breach a duty of loyalty to BIG Corp. Is this trading wrongful? If so, is it more/less/equally wrongful by comparison to the trading in the classical scenario above? Finally, if you do think this trading is wrongful, should it be subject to civil or criminal sanction?
Again, the hope is that walking through these scenarios will help bring some clarity to our shared understanding of when trading on material nonpublic information is wrong and harmful—and (given our answers to these questions) the nature and extent to which it should be regulated.
Wednesday, September 1, 2021
Last spring, I blogged about a University of Colorado Law School Symposium honoring Professor Art Wilmarth (here). Professor Jeremy C. Kress recently posted his symposium-related piece, Who's Looking Out For The Banks? It addresses an important bank governance issue that thus far has received too little attention. Here's its abstract:
When the Gramm-Leach-Bliley Act authorized financial conglomeration in 1999, Professor Arthur Wilmarth, Jr. presciently predicted that diversified financial holding companies would try to exploit their bank subsidiaries by transferring government subsidies to their nonbank affiliates. To prevent financial conglomerates from taking advantage of their insured depository subsidiaries in this way, policymakers instructed a bank’s board of directors to act in the best interests of the bank, rather than the bank’s holding company. This symposium Article, written in honor of Professor Wilmarth’s retirement, contends that this legal safeguard ignores a critical conflict of interest: the vast majority of large-bank directors also serve as board members of their parent holding companies. These dual directors are therefore poorly situated to exercise the independent judgment necessary to protect a bank from exploitation by its nonbank affiliates. This Article proposes to strengthen bank governance — and better insulate banks from their nonbank affiliates — by mandating that some of a bank’s directors must be unaffiliated with its holding company. As long as banks are permitted to affiliate with nonbanks, this reform is essential to ensure that someone is looking out for the well-being of insured depository institutions.
Tuesday, August 31, 2021
Dr. Anne R. Bromberg of Dallas has committed $2 million to SMU for the creation of The Alan R. Bromberg Centennial Chair in Corporate, Partnership, Business and Securities Law in honor of her late husband, a renowned professor in the SMU Dedman School of Law. The new chair will support the Law School in strengthening research and coursework in corporate, partnership, business and securities law, honoring Professor Bromberg’s prolific scholarship and mentoring style of leadership. We anticipate appointment at the rank of full professor beginning in Fall 2022. J.D. degree required. To ensure full consideration for the position, the application submitted by October 1, 2021, but the committee will continue to accept applications until the position is filled.
Applications must be submitted electronically via Interfolio (https://apply.interfolio.com/91455). These materials should include a cover letter, resume, research agenda, writing sample(s) and a list of references. Reference Position No. and (Area of Law): 00053425 (Bromberg Chair).
SMU will not discriminate in any program or activity on the basis of race, color, religion, national origin, sex, age, disability, genetic information, veteran status, sexual orientation, or gender identity and expression. The Executive Director for Access and Equity/Title IX Coordinator is designated to handle inquiries regarding nondiscrimination policies and may be reached at the Perkins Administration Building, Room 204, 6425 Boaz Lane, Dallas, TX 75205, 214-768-3601, firstname.lastname@example.org.
Monday, August 30, 2021
Friend of the blog Bernard Sharfman has posted The Problem of Three In the Voting of Public Company Shares over at RealClearMarkets. A brief excerpt follows.
The problem of the Big 3’s concentration of voting power is illustrated in Engine No. 1’s proxy fight at ExxonMobil …. Engine No. 1’s stated objectives in seeking the election of its own nominees was to: 1) enhance the value of ExxonMobil’s common stock; 2) reduce ExxonMobil’s carbon emissions; and 3) transition ExxonMobil into a global leader in profitable clean-energy production. Yet Engine No. 1 never provided specific recommendations on how it was going to accomplish these objectives. This was odd, as one would expect Engine No. 1 to present such recommendations if it were to convince shareholders that its director nominees were worthy of being elected.
The inability to provide such recommendations must have been a clear indication to the shareholders of ExxonMobil, including the Big 3, that Engine No. 1 was not truly informed about the operations of ExxonMobil or how it was going to achieve its stated objectives. Nevertheless, Engine No. 1 succeeded in getting three of its four nominated directors elected to Exxon’s board. How in the world was it able to do this?
…. I argue in my writing that Engine No. 1 was able to get the Big 3’s support by appealing to their desire to be perceived as investment advisers who are making a difference in mitigating climate change…. Such opportunistic shareholder voting by investment advisers is arguably a breach of an investment adviser’s fiduciary duties under the Investment Advisers Act of 1940. If so, it is up to the SEC to provide the necessary investor protection through enforcement actions. Alternatively, there is a potential market solution for mitigating the “Problem of Three.” This market solution … is for index funds to provide investors with some policy control over their proportional voting interest, as represented by their percentage of ownership in a specific fund.
SOUTH TEXAS COLLEGE OF LAW HOUSTON
Location: Houston, TX
Subjects: Criminal Law; Criminal Procedure; Evidence; Professional Responsibility; Business Associations
Start Date: August 1, 2022
South Texas College of Law Houston invites applications from entry-level or lateral faculty for up to three full-time, tenure-track positions at the assistant or associate professor level beginning in the 2022-23 academic year. Our curricular needs include criminal law, criminal procedure, evidence, professional responsibility, and corporations, with additional areas of potential interest in health, international, energy, and environmental law. We seek candidates with outstanding academic records who are committed to excellence in teaching and sustained scholarly achievement. Members of minority groups and others whose backgrounds will contribute to the diversity of the faculty are especially encouraged to apply.
South Texas College of Law Houston is committed to fulfilling our mission of providing a diverse body of students with the opportunity to obtain an exceptional legal education, preparing graduates to serve their community and the profession with distinction. The school, located in downtown Houston, was founded in 1923 and is the oldest law school in the city. South Texas is a private, nonprofit, independent law school, fully accredited by the American Bar Association and a member of the Association of American Law Schools, with 60 full-time and 60 adjunct professors serving a student body of 900 full and part-time students. South Texas is known for its collegial culture and commitment to student success. The school is home to the most decorated advocacy program in the U.S. and the nationally recognized Frank Evans Center for Conflict Resolution. Additional information regarding South Texas is available at http://www.stcl.edu.
Applications may be directed to Professor Joe Leahy, email@example.com.
South Texas College of Law Houston is an Equal Opportunity/Affirmative Action Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national or ethnic origin, ancestry, age, disability, sexual orientation, gender identity, veteran status, or any other characteristic protected by law.
Sunday, August 29, 2021
The University of North Dakota School of Law invites applications for one or more tenure-track positions beginning fall 2022. Areas of interest include Federal Indian Law, Lawyering Skills, Civil Procedure, Business Associations, Energy, and Oil & Gas. Please feel free to share this announcement widely.
The UND School of Law seeks colleagues dedicated to fostering well-rounded and public-minded legal professionals with skills to serve as effective, self-reflective, and ethical leaders who will contribute greatly to their communities. Our distinctive character as one of the nation’s smaller public law schools—and as the sole law school in North Dakota—informs our program of legal education, which reflects a thoughtful and collaborative approach to teaching and learning. We maintain a close relationship with our state’s bench and bar and a special interest in connecting with and serving our state’s rural as well as urban populations. UND is committed to creating a welcoming atmosphere for everyone in our community, and our law school strives to cultivate a friendly and supportive learning environment to help our students develop into conscientious legal professionals. We value teachers who demonstrate intentionality and creativity and are interested in infusing their teaching with writing, research, cooperative learning, interpersonal skills, and/or other pedagogies. We also seek scholars with innovative research agendas and encourage work that transcends disciplinary boundaries, including the scholarship of teaching and learning. We desire colleagues who view service to the law school, the academy, and the legal profession as integral to their own success.
UND is committed to creating an inclusive and equitable environment that respects, acknowledges and celebrates diversity and individual differences. Successful applicants for this position will demonstrate a commitment to equity and inclusion through interest or past experience, as well as the ability to work and collaborate in a diverse, multicultural, and inclusive setting.
Interested candidates may find additional information and may apply at https://campus.und.edu/human-resources/careers/job-openings.html.
If you have any questions, please feel free to contact the UND School of Law’s Faculty Selection Committee at firstname.lastname@example.org.
Saturday, August 28, 2021
A couple of weeks ago, I posted about how courts are not terribly precise when evaluating allegations of corporate scienter in Section 10(b) claims. Since then, a couple of cases were decided that provide some useful examples of the problem.
First up, there’s the Second Circuit’s Plumbers & Steamfitters Local v. Danske Bank, decided earlier this week. Apparently, the Estonia subsidiary of Danse Bank got into trouble for money laundering, and the plaintiffs alleged this resulted in a number of false statements by Danse Bank itself. The court dismissed all of the statement claims on various grounds, and then turned to the final allegations that, due to Estonia’s conduct, Danse Bank had engaged in a scheme to defraud. The court rejected the claim in a few brief sentences:
At no point do [the plaintiffs] articulate with precision the contours of an alleged scheme to defraud investors, or which specific acts were conducted in furtherance of it. Instead, the claim rests upon the incorporation of the previous 140 pages of the pleading paired with the conclusory assertion that “Defendants carried out a common plan, scheme, and unlawful course of conduct that was intended to . . . deceive the investing public” and “artificially inflate the market price of Danske Bank ADRs.” App’x at 160. Money-laundering at a single branch in Estonia cannot alone establish that Danske Bank itself carried out a deceptive scheme to defraud investors. Absent some sort of enumeration of which specific acts constituted an alleged scheme in connection with the purchase or sale of securities, the Funds’ claim does not comply with the applicable heightened pleading standard and cannot go forward.
The court did not explain why a Danse Bank subsidiary is being treated as distinct from Danse Bank itself, or how one should assess Danse Bank’s actions and intent distinct from the behavior of its subsidiaries. I can’t even say the decision was wrong, because I don’t know what standards the court used to reach it.
Next up, there’s Hurst v. Enphase Energy, 2021 WL 3633837 (N.D. Cal. Aug. 17, 2021), where, as relevant here, plaintiffs tried to demonstrate scienter by pointing out that several insiders made unusual sales prior to the end of class period disclosure. The court rejected the argument by saying:
Defendants correctly highlight that seven of the eight identified insiders are not named in this action, and such sales are irrelevant to scienter.
No further analysis was provided; the court simply cited two other cases, Wozniak v. Align Tech., Inc., 2011 WL 2269418 (N.D. Cal. June 8, 2011) and In re Splash Tech. Holdings, Inc. Sec. Litig., 160 F.Supp.2d 1059 (N.D. Cal. 2001). Wozniak, like the Enphase court, did not discuss the matter further.
But let’s unpack this.
Insider trading is often described in 10(b) opinions as a “motive” to commit fraud – for example, in Splash, the court didn’t exactly say that nondefendants’ trades were never relevant, but it did suggest they’d only be relevant if there was evidence the trades were intended to manipulate the stock to assist their colleagues’ fraud. But that is too broad brush. Insider trading may also be a result rather than a cause. I.e., imagine a corporation where insiders are committing fraud for some reason – they feel pressure from stockholders or their bosses to get results, they have bonuses on the line, they’re afraid of losing their jobs, whatever it is. Now they, and possibly other people in the organization, have inside information that the company is not in fact as successful as it pretends to be. Anyone with this knowledge may decide to sell stock and cash in while they can; the sales, in this scenario, are not the reason for the fraud, but they do evidence someone’s knowledge that something in corporate reporting was amiss. That knowledge may contribute to an inference of scienter, in the sense that information was known to someone demonstrating that the defendants’ public statements were false and would mislead investors.
Why, then, would nondefendants’ trades be relevant here?
There are a number of possibilities, and they depend on your theory of scienter.
In the simplest example, suppose the selling shareholders worked closely with the individual defendants who spoke publicly. Or suppose they sat in the surrounding offices. It might very well be a reasonable inference that if they knew something was amiss, the individual defendants – who worked with them – knew it as well. Maybe it’s not a strong inference, maybe it doesn’t carry the day, but it’s not an irrational one and it hardly makes sense to dismiss the possibility with a bright line declaration that nondefendants’ sales are irrelevant.
But let’s say we’re talking about corporate scienter rather than individual scienter. Now, again, nondefendant individual sales may be relevant here, but how they are relevant depends on your theory of how to attribute scienter to a corporation.
Suppose corporate scienter is gleaned from the overall functioning of the organization. The fact that there is evidence that at least some insiders (maybe highly placed ones) had knowledge of the truth, and yet the company issued false statements despite that knowledge, may give rise to an inference of exactly the kind of communication breakdown that justifies treating the entity as though it behaved recklessly.
Or, suppose corporate scienter is based on the scienter of someone who – as some circuits have held – approved the false statement, or furnished information for inclusion. These insiders may very well have done that. Maybe they approved false statements, or supplied false information to someone else. Their sales indicate knowledge of the truth; their actions permit their own scienter to be attributed to the entity.
Why not just name them as defendants, then? Simple: Their internal involvement with corporate information flow may not be enough to constitute a false statement under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), and though they may have participated in a scheme to defraud under Lorenzo v. SEC, 139 S. Ct. 1094 (2019), given how narrowly the Supreme Court has read reliance in the 10(b) context, see Stoneridge Inv. Partners LLC v. Scientific- Atlanta Inc., 552 U.S. 148 (2008), it’s not clear plaintiffs would be able to state a claim against them individually. Thus, evidence of their knowledge contributes to an inference of scienter against the entity, but they are not proper defendants individually.
And, indeed, in Splash – which was cited by the Enphase court and held that the trades of nondefendants were irrelevant – the actual individuals who traded had been defendants earlier in the case, and were dismissed because plaintiffs could not show they had personally made any false statements.
Or! There is another possibility. As I discussed in my post two weeks ago, some circuits have held that if truthful information was available to persons who played a role in approving or furnishing false information, etc, plaintiffs may be able to create a pleading stage inference that someone who approved or furnished false information acted with scienter, even if they cannot identify who that person is in their complaint. And those allegations might create a strong inference of corporate liability for 12(b)(6) purposes, with the specific guilty agent to be identified later.
Insider sales by nondefendants may help contribute to that inference. Maybe plaintiffs can’t show they were personally involved with generating the false statements, but there may be enough of them – highly placed – that you can infer at least one of them probably was. Or, going back to the proximity issue, if they are adjacent to power, their knowledge may contribute to an inference that the truth was widely known at least among higher level people, so that, again, it is likely that at least one such person contributed to the false statements while knowing the truth.
I am not saying that any of these inferences were appropriate in Enphase – maybe not. And how strong they are likely to be is necessarily going to vary case by case. But the issue deserves more unpacking than a simple maxim that nondefendant sales are irrelevant to to scienter.
Thursday, August 26, 2021
For your reading enjoyment, I've posted a new draft, Supreme Risk, to SSRN. This is the abstract:
While many have discussed the social issues that might arise because of a majority-conservative Supreme Court, one critical consequence of the current Supreme Court has been overlooked: the role of the Supreme Court in generating or avoiding systemic risk. For some time, systemic financial risk has been regulated by a mix of self-regulatory organizations (SROs), such as the Depository Trust Corporation, and federal regulators such as the Financial Stability Oversight Council. However, the Supreme Court’s recent jurisprudence now creates real risk that federal courts will declare keystone SROs unconstitutional because they do not fit neatly into an eighteenth-century constitutional framework.
SROs are under-appreciated regulatory entities comprised of industry members regulating their own industries with deferential oversight from federal administrative agencies. While ordinary civics discussions entirely omit SROs, they play a critical legal and economic roles and exercise enormous power delegated to them by the federal government. Yet as nominally private entities, they enforce federal law and their own rules without abiding by the restrictions imposed on governmental entities, such as providing due process.
This article makes three contributions to the literatures in financial regulation and constitutional law—disciplines which rarely interact. First, it provides a detailed account of how SROs became functionally integrated into the federal government and serve as federal law enforcement and regulators. Second, it shows how four different constitutional doctrines, now resurging under a conservative-majority Supreme Court, pose existential threats to existing SRO models. Third, the Article explains how Supreme Court decisions declaring SROs unconstitutional or limiting their powers generate systemic risk and may trigger a financial crisis.
NOTRE DAME LAW SCHOOL may have one or more tenured or tenure-track faculty positions that will begin in Fall 2022. At the heart of a Catholic university, Notre Dame Law School aims to educate lawyers and sustain a community of scholars who understand law as a vocation—a way to serve God and humankind. Our Catholic mission also moves us to be open and welcoming to people of all viewpoints and religious traditions. The Law School’s interest is not limited to any particular subject or subjects. Applicants for these positions should possess excellence in academic background and either demonstrated excellence in scholarship and teaching or the potential for such excellence. Notre Dame is an Equal Opportunity/Affirmative Action Employer of all protected classes including veterans and individuals with disabilities. We welcome applications from women and people of color who will enrich and diversify our faculty.
The University of Notre Dame supports the needs of dual career couples and has a Dual Career Assistance Program in place to assist relocating spouses and significant others with their job search. The University is also a member of the Greater Chicago Midwest Higher Education Recruitment Consortium. Contact: Professor Sam Bray, Vice Chair, Faculty Appointments Committee, via email at email@example.com or by mail at Notre Dame Law School, P.O. Box 780, Notre Dame, IN 46556.
Tuesday, August 24, 2021
Assistant/Associate Professor of Law Positions
Georgia State University College of Law invites applications for two tenure-track Assistant or Associate Professor positions to begin no later than the 2022-23 academic year. In particular, we seek candidates who will teach in one or more of the areas of contract law, corporate law, evidence, civil procedure, and commercial law.
Part of a comprehensive research university, the College of Law is a dynamic urban-centered law school located in the heart of Atlanta with approximately 650 full- and part-time law students. We seek candidates who will make substantial and meaningful scholarly contributions, participate actively in the life of the law school, and who will enhance the College of Law’s strong teaching reputation. We encourage applications from candidates who would diversify our faculty.
The faculty of Georgia State University College of Law is a collegial and accomplished community of scholars and teachers. Faculty members have published in leading law reviews and peer-reviewed journals, have authored books and book chapters, opinion pieces, and white papers, and have frequently appeared in national and international news outlets. Faculty scholarship is supported through research assistance, summer stipends, travel support, and awards. The College of Law is consistently recognized as a best-value law school and a top-ranked school for diversity and achieves excellent bar passage and post-graduate employment rates. The College of Law also features innovative and nationally renowned programs in access to justice, legal analytics, health law, metropolitan and urban growth, and sports and entertainment law.
Applicants will have a J.D. or foreign equivalent and a strong academic record. In addition, applicants should demonstrate a track record or promise in teaching and research. The successful candidates will teach 3-4 courses per academic year in the College of Law and advise graduate students. Applicants should apply with a statement of interest, full curriculum vitae, research agenda, teaching evaluations (if applicable), diversity statement (if applicable), and list of references at https://academicjobsonline.org/ajo/jobs/19259. Please note that applicants may be required to submit further documentation prior to a campus interview, including three written letters of recommendation.
Review of applications will begin immediately and continue until the positions are filled. To ensure full consideration, please submit your application by September 15, 2021. Applications received after this date may be considered at the discretion of the College of Law Recruitment Committee. For any questions related to the positions, please contact Professors Erin Fuse Brown (firstname.lastname@example.org) or Yaniv Heled (email@example.com).
Georgia State University, a University System of Georgia unit, is an equal opportunity educational institution and an equal opportunity/affirmative action employer. As required by Georgia State University, an appointment is contingent upon successfully demonstrating degree attainment and completing a background investigation.
Monday, August 23, 2021
Please note the deadline extensions on the following previously posted calls for papers for the 2022 AALS Annual Meeting.
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Section on Securities Regulation: Open Call for Papers
The AALS Section on Securities Regulation invites submissions for its session at the 2022 annual meeting of the AALS. The annual meeting will be held virtually from January 5-9, 2022, with Section on Securities Regulation panel scheduled for Saturday, January 8 from 12:35-1:50pm. We welcome submissions at any stage of development, although preference may be given to more fully developed papers over abstracts and paper proposals. The submission should relate to the following session description:
Equality and Access in Securities Markets
Recent years have seen increasing attention to issues of equality and access in securities markets. Nasdaq has proposed requiring listed company boards to include at least one female member and one member from an underrepresented minority. The SEC recently amended Regulation S-K to add human capital as a broad topic for disclosure, but declined to require companies to divulge diversity data. In addition to issues relevant to regulated companies, gaps remain in the gender and racial diversity of the SEC’s own commissioners and staff. More broadly, equity and access in securities markets have expanded due to Robinhood and similar modalities, as exemplified by the “meme stock” phenomenon. This panel will provide a forum for securities regulation scholars to discuss the reforms on the table as well as others that require more attention.
By August 31, 2021, please send your submission to Jackie Walters at firstname.lastname@example.org. The authors of the selected papers will be notified in September 2021. In addition to the proposal submission please also indicate (a) whether you are tenured, pre-tenure, or other; and (b) whether you are in your first five years as a law professor (including any years spent as a fellow or visiting assistant professor).
Section on Securities Regulation: Emerging Voices in Securities Regulation
The AALS Section on Securities Regulation invites submissions from junior scholars (defined as those who have been in a tenure-track position for 7 or fewer years) for its Emerging Voices session at the 2022 AALS annual meeting. The session will be held virtually on Saturday, January 8 from 4:45-6:00 p.m. (EST). The session brings together junior and senior securities regulation scholars for the purpose of providing junior scholars feedback on their scholarship and helping them prepare their work for submission for publication. Junior scholars’ presentations of their drafts will be followed by comments from senior scholars and further audience discussion.
If you would like to present your draft as a junior scholar, by August 31, 2021, please send your draft to Professor Jeremy McClane at email@example.com. We welcome submissions at any stage of development, although preference may be given to more fully developed papers over abstracts and paper proposals. The authors of the selected papers will be notified by mid-September 2021.
If you would like to volunteer to provide feedback as a more senior scholar, please let Professor McClane know, at firstname.lastname@example.org, by August 31, 2021. Thank you in advance for your generosity.
On behalf of the Section on Securities Regulation
Chair: Jeremy McClane (University of Illinois)
Chair-Elect: Kristin N. Johnson (Emory University)
Member of the Executive Committee:
Benjamin Edwards (University of Nevada, Las Vegas)
Gina-Gail S. Fletcher (Duke University)
Arthur B. Laby (Rutgers University)
Usha R. Rodrigues (University of Georgia)
Andrew Tuch (Washington University in St. Louis)
Yesha Yadav (Vanderbilt University)