Business Law Prof Blog

The Political Economy of SEC Enforcement

Jonas Heese has posted an interesting paper to SSRN, Government Preferences and SEC Enforcement, where he argues that the SEC goes easy on firms that contribute significantly to employment in a particular area.  He finds that the effect is magnified in presidential election years in swing states, and for firms that are headquartered in districts senior congresspersons who have SEC oversight responsibilities.  This effect cannot be explained by the hypothesis that labor-intensive firms simply have better accounting; according to Hesse, they actually have worse accounting than other comparable businesses (which may in fact reflect their knowledge that the SEC is less likely to target them).  He concludes, essentially, that the SEC is responding to political/voter pressures to take a hands-off approach to firms that are responsible for providing jobs.

One of the interesting points he makes is that this kind of pressure is independent of “special interest” lobbying; rather, this kind of pressure is a result of government actors responding to voter preferences.

The paper is available for download here.

Simpler

I recently purchased and read two Cass Sunstein (Harvard) books: Simpler: The Future of Government and Wiser: Getting Beyond GroupThink to Make Groups Smarter (with Reid Hastie (Chicago))

Cass Sunstein is a enjoyable writer to read, and Simpler was an easy, relatively short read (though he admits that his editor prompted the cutting of 30,000 words from the original manuscript). I may do a separate post on Wiser at a later date.

Simpler provides an inside look at Cass Sunstein's time at the head of the Office of Information and Regulatory Affairs ("OIRA") from 2009-2012. Supposedly, OIRA was created by the Paperwork Reduction Act in 1980. OIRA plays an important role in overseeing federal regulation.

A few random thoughts about Simpler:

• If you have read Sunstein's earlier work, Kahneman (Princeton), and Ariely (Duke) much of Simpler will be familiar behavioral economics;
• Sunstein's political confirmation process sounds absolutely awful. I wonder how many qualified potential civil servants are scared away by processes like this;
• The Food Plate (below) is much simpler than the Food Pyramid I grew up with;
• Sunstein reminded me that sometimes rule-makers (including professors - e.g. with our syllabi) can become experts in rule systems, and not realize how complex their rules may seem to outsiders;
• The impact of the complex regulation is felt by many, including by small businesses (and by all of us during tax season); 
• Sunstein admits that there is a tenancy to regulate from hunches, anecdotes, and to please (or not upset) special interests, but he claims he tried to favor statistics, cost-benefit analysis, randomize controlled trials, and public comments;
• Government has a long way to go before it gets "simple." Sunstein's biggest challenge was explaining the ACA and Dodd-Frank in the context of this book; I don't think he rose to this challenge and he did not even try very hard. He pointed to a few simple parts of the complex laws, but then concluded by saying "Rome was not built in a day."

For those who are interested, Cass Sunstein's talk on Simpler at University of Chicago is here. 

 

A Proposal to Fix the Dodd-Frank Conflict Minerals Rule

I oppose the Dodd-Frank conflict minerals rule, which requires companies to conduct due diligence and report on their sourcing of certain minerals from the war-ravaged Democratic Republic of Congo and surrounding countries. As I have written before repeatedly on this blog, a law review article, and an amicus brief, it is a flawed “name and shame law” that assumes that consumers and investors will change their purchasing decisions based upon a corporate disclosure, which they may not read, understand, or care about. The name and shame portion of the law was struck down on First Amendment grounds, and the business lobby, the SEC, and the NGO community are eagerly awaiting a decision by the full DC Circuit Court of Appeals.

A disclosure law that does not take into account the true causes for the violence that has killed millions is not the most effective way to have a meaningful impact for the Congolese people. The Democratic Republic of Congo needs outside governments to provide more aid on security sector, criminal justice, education, and judicial reform at the very least. Indeed, the Congolese government is still trying to defeat the rebels that this law was meant to weaken (see here for example). I have strong feelings about the law as a former supply chain professional and an advisory board member of an NGO that operates in eastern DRC.

I am currently working on an article about the defects in disclosure laws that attempt to address human rights impacts, and the conflict minerals rule is one of them. In that context, I was excited to read a recent draft article entitled The Conflict Minerals Experiment by Professor Jeff Schwartz. Although I don't agree with his conclusion that the best way to fix the law is, among other things, to employ a disclose or explain approach and greater transparency (which I also discuss in my article), I do agree that reform and not necessarily repeal is in order. Schwartz’ article is particularly useful because he provides empirical evidence of the relative uselessness of the first round of corporate disclosures. I look forward to citing it in my upcoming piece. The abstract is below:

In Section 1502 of Dodd-Frank, Congress instructed the SEC to draft rules that would require public companies to report annually on whether their products contain certain Congolese minerals. This unprecedented legislation and the SEC rulemaking that followed have inspired an impassioned and ongoing debate between those who view these efforts as a costly blunder and those who view them as a measured response to human-rights abuses committed by the armed groups that control many mines in the Congo. 

This Article for the first time brings empirical evidence to bear on this controversy. I present data on the inaugural disclosures that companies submitted to the SEC. Based on a quantitative and qualitative analysis of these submissions, I argue that Congress’s hope of supply-chain transparency goes unfulfilled, but amendments to the rules could yield useful information without increasing compliance costs. The SEC filings expose key loopholes in the regulatory structure and illustrate the importance of fledgling institutional initiatives that trace and verify corporate supply chains. This Article’s proposal would eliminate the loopholes and refocus the transparency mandate on disclosure of the supply-chain information that has come to exist thanks to these institutional efforts.

 

New York Times Reports Chinese Government Delayed Report to Help Alibaba's IPO

There’s a very interesting sentence in a New York Times story today about the Chinese company Alibaba.  China’s State Administration for Industry and Commerce has released a report criticizing illegal practices on Alibaba’s shopping web sites. Here’s the sentence that I as a securities lawyer found most interesting:

“The agency said that it had presented the findings to unidentified top Alibaba executives in a July 17 meeting at the company’s headquarters . . . , but that it had kept the results confidential at the time so as ‘not to affect Alibaba’s preparations for a stock market listing.’”

Alibaba made an initial public offering in the United States in September. If the story’s accurate, it means: (1) a Chinese government regulator deliberately withheld a government report so a Chinese company could sell its stock to U.S. investors at a higher price; (2) the Chinese company, knowing the Chinese regulator was going to issue an unfavorable report, intentionally withheld that information from offerees.

New Article Highlight: The (Un)Enforcement of Corporate Officers' Duties

New reading recommendation:  The (Un)Enforcement of Corporate Officers' Duties, by Megan Shaner at Univ. of Oklahoma COL, published in UC Davis Law Review, November 2015.

Abstract:  

Over the past few decades, officers have arguably become some of the most important individuals in the corporation. From the implosions of Enron and WorldCom, to the success of companies like Apple and Microsoft, to the Wall Street crisis that sunk the world into near global recession, corporate officers have played a role in each of these storylines and countless (albeit lesser known) others. In spite of the well-publicized scandals, officers continue to be given wide latitude to carry out their role of managing the day-to-day operations of their companies. The primary constraint on this power under state corporate law is the imposition of fiduciary obligations. Fiduciary duties thus play a vital role in checking the considerable power and authority of officers. Fiduciary duties will only affect officer behavior, however, if there is an effective enforcement scheme that holds officers accountable. This Article discusses how the development of corporate doctrine, coupled with the dynamic in today’s corporate management has created impediments and disincentives for the enforcement of officer fiduciary duties. In light of the problematic state of the current enforcement scheme, this Article evaluates possible changes that would alleviate deterrents in the enforcement process. This Article concludes that in order to regulate officer behavior with fiduciary duties, there must be a collective correction to the enforcement mechanisms in place for internal enforcers beginning with reevaluating stockholder derivative litigation burdens.

This is a great article for the arguments advanced and careful observations made.  It also provides such a thorough and useful discussion of officers that I plan to add it to a seminar reading list.  Professor Shaner's article also earned the top prize at the 2014 George Washington University C-LEAF Junior Faculty Workshop.

-Anne Tucker

 

Megan Shaner at the University of Oklahoma College of Law first workshoped this paper at George Washington's CLEAF Junior Faculty Workshop last spring.  

Cunningham on Corporate Leadership: A Few Additional Thoughts

Lawrence Cunningham has written an interesting piece for the Wall Street Journal, The Secret Sauce of Corporate Leadership: Splitting the CEO and chairman jobs is beside the point. What’s needed is a skeptical No. 2.

Cunningham argues that measures to split the role of board chair and CEO largely miss the point because such a move, and similar moves, don't clearly lead to the desired goal.  He explains:

Research on the effects of splitting the chief and chairman roles shows that results can depend on where the split takes place: It tends to improve performance at struggling companies—but it impairs prosperous firms. Yet exact effects vary depending on the circumstances, such as whether the switch happened with the appointment of a new CEO or with the demotion of an incumbent.

The movement to split the two roles is part of corporate America’s tendency to address problems with procedural remedies such as expanding board size, adding independent directors, adopting a new code of ethics, updating firm compliance programs, and appointing a monitor to oversee it all. While such steps get attention and can improve an organization’s health, the informal norms that define a corporate culture are more powerful, and Bank of America is right to examine itself in the light of basic principles.

There is a better way to foster excellence in chief executives: Appoint a noncombative but skeptical partner as second in command. This model has been the secret sauce in outstanding corporate cultures at dozens of America’s best companies.

I have a few thoughts to add to this.  First, I agree that whether to allow a single person to hold the chair and CEO position is case dependent. I am inclined to defer to the board of directors on that decision, but if enough shareholders want the positions separate (or combined), more power to them.  

Second, I think there is a bigger issue at play here in corporate (and other group) decision making. That is, as a general matter, rules and policies should be made based on the desired goals and the long-term plans, and not based on an individual.  Thus, deciding to never allow a combined CEO and chair position because we don't want a particular person to hold the role is silly.  Just don't let that person have both roles.  Any time we create rules designed to punish (or benefit) a particular person, we often create unintended consequences that punish or benefit others in ways that were not contemplated.  

Finally, Cunningham is certainly correct when he says, "Effective corporate leaders also stress that a strong culture matters because it translates into economic gain."  That said, sometimes its seems some boards (and other entities and institutions seeking leaders) believe a strong culture can be built overnight.  Tweaking rules and policies can sometimes help, but trying to rush that culture sometimes simply ensures mediocrity.  Just ask the New York Jets. 

In Memory of Meowth (1998-2015): Choice of Entity for Veterinary Medical Practices

As some of you know, my beloved cat, Meowth (yes, named after the Pokemon character) has been battling squamous cell carcinoma.  Today, he went on to the everlasting life beyond this Earth.  This post is dedicated to his memory.  Here he is, meowing with me and my daughter a bit over a week ago.

One of the things that we have been blessed with over the years--in Massachusetts and here in Knoxville--is great veterinary medical care.  Since The University of Tennessee's College of Veterinary Medicine (CoVM) is located on the West (agricultural) campus in Knoxville, it is a stone's throw from the College of Law, where I teach.  We have been assisted in various ways, including with Meowth, by veterinarians and veterinary technicians from the CoVM.   The CoVM also boast a veterinary social work program, and we were helped in Meowth's end-of-life care by one of the veterinary social workers in the CoVM program.  Many of the local veterinarians were trained at our CoVM.  We have worked with several private practice groups in Knoxville.

All this interaction with veterinarians has made me wonder how private veterinary medical practice groups are organized, from a legal entity point of view.  (Yeah, I know.  I am a true law nerd.  I admit that.)  My impression (although many practice groups are not very transparent about their form of legal organization) is that many of these practice groups are professional corporations (PCs) or professional limited liability companies (PLLCs).  I suppose this makes sense to me.  

But it reminds me of a question commonly asked by astute Business Associations students: "Why do professionals form professional business entities, given that the owners of limited liability entities already enjoy protection from liability for the obligations of the entity?"  I am sure many of you have been asked this same question.  If not, you soon may be.

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Law Review Submission Season - Spring 2015

PrawfsBlawg has posted its Submission Angsting thread, which prompted me to write this post to ask our readers (including my co-bloggers) two questions:

1. In your opinion, what is the ideal date to submit a spring law review article?
2. When deciding between offers, how do you evaluate specialty law reviews?

Ideal Submission Date. When I first started as a professor, I heard that March 1 was the date most people thought was the best for spring submissions. The ideal date seems to be moving earlier and earlier, and I have heard February 1 or February 15 mentioned with increasing frequency. Some might suggest not worrying about the submission date -- just submit when your article when it is ready. While I agree that you should wait to submit an article until it is ready (whenever "ready" is...), I have had colleagues who seemed to seriously under-place articles because they submitted at a poor time. Admittedly, most of these professors submitted well outside of the traditional windows.

Evaluating Specialty Law Reviews. The question about how to evaluate specialty law reviews reoccurs every time I submit an article. The conventional wisdom is - find out how your P&T committee values those journals and follow their lead. That is good advice, though I imagine some readers would like to hear how the market, in general, values specialty law reviews. Personally, I have published in a number of specialty law reviews -- for two main reasons -- (1) readership (e.g., I used to see the Delaware Journal of Corporate Law on my judge's desk regularly) and (2) name recognition (the Harvard Business Law Review is probably going to go much further with many readers (and my P&T committee) than many flagship law reviews). I've heard formulas to rank specialty journals like -- take ~25 spots [the PrawfsBlawg post in the update below says +25 to +50] off the publishing school's rank if it is a specialty journal (this doesn't work well when a top journal in your area is published by a low-ranked school) OR the top 10% or so specialty journals in your area are roughly equal to a 31-100 ranked flagship journal; and you should take a top-30 flagship journal over virtually any specialty journal. I know different schools will treat the question of specialty journals differently, and ideally we wouldn't have to play this game (because the articles all end up on WestLaw), but I am truly interested in the different approaches.

Update: On the second question I found this helpful post on PrawfsBlawg from 2011, but I am still interested in other thoughts. 

Feel free to share thoughts in the comments, or e-mail me directly. 

Four Lessons I Learned Teaching an Online Law Class

For the last three years, I have been teaching my Accounting for Lawyers course as a distance education course. It’s only available to students at my law school, but everything except the final exam is online; there are no in-person classes. I think it’s worked well, better than the in-person accounting class I used to teach, but that’s a topic for another day. Today, I want to talk about four things I’ve learned teaching the course.

1. Law students are not used to “learning as they go.”

The typical law school class involves a single end-of-semester exam, and law students get used to pulling things together by cramming at the end of the semester. Almost all of my students read the daily assignments, but many of them, even some of the most conscientious students, really haven’t actively wrestled with the material.

I usually teach by the problem method, and I use books with a large number of problems. I strongly urge students to answer those problems before class. Almost all of my students read the problems before class; many of them think about the problems before class; but it’s clear that few of them have thoroughly worked their way through the problems .

In my online course, assignments are due every week. Students must learn the material as they go, or they won’t be able to do the assignments. Cramming at the end is not an option. They learn in the first couple of weeks that the shallower daily preparation that works in many law school classes won’t work in Accounting. As their study habits change, they learn more, but it requires a real adjustment on their parts.

2. Regular practice and feedback is important.

The educational literature stresses the value of regular practice and feedback (or even regular practice without feedback). I use the problem method in all of my classes because of that. It forces students to apply the materials on a daily basis, with in-class feedback from me. Seeing how much more students learn in my Accounting course, with its regular assignments and feedback, just reinforces that point.

3. If there’s an ambiguity in anything, at least one student will find it.

I didn’t really learn this lesson teaching the online course. It’s obvious every time I grade an exam. No matter how good the casebook, no matter how careful I am in class, some students will manage to misinterpret something. Law students are experts at finding ambiguity. This shouldn’t surprise us; it’s one of the things we teach them to do. The problem is often not due to a failure to read or listen, but a single-minded focus on some isolated statement taken out of context.

In a course like Accounting that has weekly assignments, I don’t have to wait until the final exam to see those misunderstandings, and I can correct them before they do too much damage. But seeing misunderstandings like this on a weekly basis has also made me much more careful in my other classes, more aware of possible ambiguities in the readings and what I say. I would rather over-explain than risk a semester-long misunderstanding.

4. Oral communication is better than written communication, especially for criticism.

In an online course, I’m forced to communicate with my students almost exclusively in writing. Writing, unlike direct, oral communication, is very bad at conveying nuance or sentiment. That difference is especially important when my communication is primarily critical, correcting  and evaluating student work.

Students, like most of us (including me), are sensitive to criticism. And, unless one is very careful, they tend to see critical comments as more negative and personal than they are intended to be. As I’m not a particularly careful person when it comes to criticism or anything else (the word “blunderbuss” is relevant), this is problematic.

In person, my true intent comes through more easily. I recently heard, second-hand, a comment from a student who had taken Accounting and was now in one of my in-person classes. He reportedly said, “I thought Professor Bradford was really mean after Accounting, but I like him in this course.”

ICYMI: Tweets From the Week (Jan. 25, 2015)

"The aim of the precautionary principle...is to prevent decision makers from putting society as a whole...at risk" http://t.co/jcscjY5JIb

— Stefan Padfield (@ProfPadfield) January 25, 2015

Henry G. Manne, RIP, David Henderson | EconLog | Library of Economics and Liberty http://t.co/27sLpCxsaA

— Carlo Stagnaro (@CarloStagnaro) January 18, 2015

"split 'corporate America' into 'main street businesses' and 'crony capitalist big business'" http://t.co/meDNiw1F1t

— Stefan Padfield (@ProfPadfield) January 20, 2015

College grads are "Well-Prepared in Their Own Eyes" http://t.co/yccYsoZUzJ but employers are "much less optimistic" http://t.co/yf3bv8fPYK

— Stefan Padfield (@ProfPadfield) January 20, 2015

ICYMI: Updated link: "Proxy Access Punt: Top 5 Things People Are Asking" http://t.co/LtmJTMfpCz

— Stefan Padfield (@ProfPadfield) January 25, 2015

Circuit Split Over Section 10(b) Claims for Failures to Disclose

The Second Circuit just split from the Ninth in Stratte-Mcclure v. Stanley, 2015 U.S. App. LEXIS 428 (2d Cir. N.Y. Jan. 12, 2015) regarding whether a company violates Section 10(b) - and is subject to private lawsuits - for failure to disclose required information.  The holding would be well-positioned for a Supreme Court grant except that it was not outcome determinative, functionally insulating the decision from Supreme Court review.  But this is definitely a split to watch in the future.

[More under the jump]

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Social Enterprise Resources Updated - January 2015

I recently updated my research chart entitled Corporate Forms of Social Enterprise: Comparing the State Statutes. Always open to suggestions on how to improve the chart.

As the number of corporation-based social enterprise state statutes has grown, the chart has become a bit unwieldy. Previous versions of the chart went state by state, detailing the differences from the Model statute. I think the new format (a short summary chart with details in the footnotes) is better for comparing/contrasting the state statutes, but is still far from perfect. For example, some of the abbreviations used in the summary chart require going to the footnotes for explanation, but it is difficult to remedy that and keep the summary chart short.  

Also, here is a link to the latest report of Delaware Public Benefit Corporations ("PBCs"). [This is my first time linking to an outside Excel sheet, but it worked for me by saving to my Desktop and then opening.]  The number of Delaware PBCs has grown to 234 entities. This is still tiny in comparison to the more than 1 million total entities in Delaware, but it is still early.

Disruption in Dublin

I have just returned from Dublin, which may be one of my new favorite cities. For the fifth year in a row, I have had the pleasure of participating as a mentor in the LawWithoutWalls (“LWOW”) program run by University of Miami with sponsorship from the Eversheds law firm. LWOW describes itself as follows:

LawWithoutWalls, devised and led by Michele DeStefano, is a part-virtual, global, multi-disciplinary collaboratory that focuses on tackling the cutting edge issues at the intersection of law, business, technology, and innovation.  LawWithoutWalls mission is to accelerate innovation in legal education and practice at the same time.  We collaborate with 30 law and business schools and over 450 academics, students, technologists, venture capitalists, entrepreneurs, business professionals, and lawyers from around the world. We seek to change how today’s lawyers approach their practice and how tomorrow’s lawyers are educated and, in so doing, sharpen the skills needed to meet the challenges posed by the economic pressures, technologization, and globalization of the international legal market. We seek to create the future of law, today. Utilizing a blend of virtual and in-person techniques, LawWithoutWalls offers six initiatives: LWOW Student Offerings,LWOW Live, LWOW INC., and LWOW Xed.  

 I first joined the program as a practitioner mentor and have now served as an academic mentor for two years. Each team has students from law or business school who develop a project of worth addressing a problem in legal education or the legal profession. Mentors include an academic, a practitioner, an entrepreneur, and an LWOW alum.

In the LWOW Live version, the students and mentors meet for the first time in a foreign city (hence the trip to Dublin) and then never see each other in person again until the Conposium, a Shark-Tank like competition in April at the University of Miami, where they present their solution to a venture capitalist, academic, and practitioner in front of a live and virtual audience.

Over the period of a few months the students and mentors, who are all in different cities, work together and meet virtually. Students also attend mandatory weekly thought leader sessions. Past topics have included developments in legal practice around the world and the necessity of a business plan. For many law students, this brings what they learned in Professional Responsibility and Business Associations classes to life. At the Dublin kickoff, audience members watched actual live pitches to venture capitalists from three startups, learned about emotional intelligence and networking from internationally-renowned experts, and started brainstorming on mini projects of worth.

This year, I am coaching a virtual LWOW Compliance team working on a problem submitted by the Ethics Resource Center. My students attend school in London and Hamburg but hail from India and Singapore. My co-mentors include attorneys from Dentons and Holland and Knight. The winner of the LWOW Compliance competition will present their solution to the Ethics Resource Center in front of hundreds of compliance officers. In past years, I have had students in LWOW Live from Brazil, Israel, China, the US, South Africa, and Spain and mentees who served as in-house counsel or who were themselves start-up entrepreneurs or investors. Representatives from the firms that are disrupting the legal profession such as Legal Zoom serve as mentors to teams as well. In the past students have read books by Richard Susskind, who provides a somewhat pessimistic view of the future of the legal profession, but a view that students and mentors should hear.

As I sat through the conference, I remembered some of the takeaways from the AALS sessions in Washington in early January. The theme of that conference was “Legal Education at the Crossroads.” Speakers explained that firms and clients are telling the schools that they need graduates with skills and experience in project management, technology, international exposure, business acumen, emotional intelligence, leadership, and working in teams. Law schools on average don’t stress those skills but LWOW does. Just today, LWOW’s team members were described as "lawyers with solutions." I agree and I’m proud to be involved in shaping those solutions.

 

Dark Pools

One week after the SEC levied the largest dark pool trading violation fine against USB, a group of nine banks (including Fidelity, JP Morgan, BlackRock, etc.) introduced a new dark pool platform, an independent venture called Luminex Trading & Analytics.  Dark trading pools are linked to the role of high frequency trading and the notion that certain buyers and sellers should not jump the queue and shouldn't be the first to buy or sell in the face of a large order. The financial backers of Luminex were quoted in a Bloomberg article describing it as a platform "where the original purpose of dark pools, letting investors buy and sell shares without showing their hand to others, will go on without interference."

The announcement raises public scrutiny about dark pools, but among financial circles (like those at ZeroHedge, it is being touted as a smart self-regulatory move by the major mutual funds to prevent the money leach to HFT's, which some seeing as the beginning of the end for HFTs. 

If you are looking for more resources on dark pools and HFTs-- there are two brand new SSRN postings on the subject:

• Chris Brummer's Disruptive Technology and Securities Regulation
• Andreas M. Fleckner, Regulating Trading Practices

-Anne Tucker

A Sports Reminder From Jay Bilas About Human Nature in Law and Regulation

I was watching the Michigan State-Iowa basketball game a couple weeks ago, and commentator Jay Bilas noted his view (which he has stated previously) that the lane violation rule is wrong. I am teaching Sports Law and an Energy Law Seminar this semester, so (naturally) I linked his comments to a broader framework. 

So start, here's the current rule.  Basketball for dummies explains: 

Lane violation: This rule applies to both offense and defense. When a player attempts a free throw, none of the players lined up along the free throw lane may enter the lane until the ball leaves the shooter's hands. If a defensive player jumps into the lane early, the shooter receives another shot if his shot misses. An offensive player entering the lane too early nullifies the shot if it is made.

Bilas argues that a defensive lane violation should result in the ball being awarded to shooter's team instead of another attempt at the free throw for the shooter.  His rationale is, "The advantage to be gained going in early is on the rebound, not the shot. Give the ball to the non-violating team." This is probably right, though a player might enter the lane early to distract the shooter, too.  I suppose one could award a reshot for a lane violation if the ball is not live (e.g., the violation occurs on the first freethrow of a two-shot foul), and award the ball to the shooter's team on a missed live ball.  

I think there is some merit to Bilas's argument, but I think there's a practical reason the rule remains as it is: the penalty is not too harsh, making it something referees are willing to call.  A favorite quote of mine comes from Ben Franklin, who once warned, "Laws too gentle are seldom obeyed; too severe, seldom executed."   

Here, I think Bilas is probably right on the penalty-incentive link, but the rule he proposes may prove too severe for lane violations to be called as willingly as they are today.  In addition, practically speaking, if the shooter makes the free throw anyway, the shooter's team would still need to get the ball after a lane violation, if the punishment is really about discincentivizing cheating for a rebound.  This could be the rule, and it might be right, too, but that would make the penalty even more severe, making referees even less likely to make the call. (You could, I suppose, give the shooter's team a choice -- the the point or the ball -- but that gets messy.)  

I used the Ben Franklin quote in my article from a few years back, Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability after Deepwater Horizon, which was  published in the William & Mary Environmental Law and Policy Review (available here). In the article, I argued that increased criminal liability for energy company employees was not likely to be any more effective in preventing disasters like the blowout of BP oil well in the Gulf of Mexico because the likelihood of actually sending people to jail is highly unlikely.

I still believe this is true in a many contexts.  It's not to say we should not have harsh penalties for certain behaviors, but we need to be sure the laws or rules are more than justifiable.  We also need to be sure they will be executed in a manner that the laws or rules serve the actual purpose for which they were designed.  

To be clear, we also need to be sure that the penalties are not so gentle that no one will follow the rule.  In the energy and business sector, I am of the mind that we regularly err on both sides -- some rules are too gentle and others too severe.  Sports can be that way, too, though we often don't even know the penalty for certain acts like, say, allegedly deflating a few footballs.  

As for lane violations, though, I think the rule has the balance right, even if there is a justification for a harsher rule.  

Reflecting on MLK and Legal Education

Today, unlike most Mondays during the school year, I will not be in the classroom.  The University of Tennessee is closed in celebration of the life of Martin Luther King, Jr., our nation's iconic non-violent civil rights leader.  Today also is the day that my daughter is in transit back to her college in New York for her last semester as an undergraduate.  It seemed only fitting, honoring both occasions, to go out on Friday night with my daughter and my husband to see the movie Selma.

Despite its historical inaccuracies (which have been played out in the public media, e.g., here), the movie is a successful one.  Among other things, it spoke to me of the amazing amount that one man can accomplish in a mere 39 years with focus, action, and perseverance.  I admittedly felt a bit lazy and ineffectual by comparison.

Selma also reminded me, however, of the near daily opportunities that King had to speak out on matters of public importance.  I wondered if there was anything in his teachings that would speak directly to me today.  Specifically, I wondered if I could find something he'd said that helped to guide me as a business law professor in the current business law or legal education environment.

Of course, King spoke out against  Jim Crow laws, which provided for legal segregation of the races in both businesses and education.  But I was looking for something a bit more personal.  Then, I found this quotation:  "The function of education . . . is to teach one to think intensively and to think critically. . . .  Intelligence plus character--that is the goal of true education."  

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Why Don't More Law Schools Teach Courses on Investment Companies and Investment Advisers?

Every U.S. law school, or at least every law school I’m aware of, offers a securities regulation course. But those courses usually focus on the Securities Act of 1933 and the Securities Exchange Act of 1934. A typical securities regulation course covers the definition of security, materiality, the registration of securities offerings under the Securities Act, and liability issues under both the Securities Act and the Exchange Act. If the professor is ambitious, those courses may also cover the regulation of securities markets and broker-dealers.

Almost none of those basic securities regulation courses spends any significant time on the 1940 Acts—the Investment Company Act and the Investment Advisers Act. It’s not because those two statutes are unimportant. A good proportion of American investment is through mutual funds and other regulated investment companies, not to mention hedge funds which depend upon Investment Company Act exemptions. And the investment advisory business is booming. When I attend gatherings of securities lawyers, I’m always amazed at how many of the lawyers present are dealing with issues under the 1940 Acts.

The lack of coverage of the 1940 Acts in the basic securities law course would be acceptable if law schools offered separate, stand-alone courses dealing with those issues, but many of them do not. I began teaching a course on the 1940 Acts in 1997. (I subsequently expanded the course to include a segment on the regulation of brokers.) At that time, you could count the number of law schools offering 1940 Act courses on one hand. Since then, more law schools have begun to offer such courses, but many law schools still do not.

Why are law schools not offering such an important business law course? One problem may be staffing. Many schools, including my own, have only one securities law professor. That person often also has to teach Business Associations, Mergers and Acquisitions, and other such courses, leaving no time for a second securities course. I have been able to offer my course only by rotating it with Mergers and Acquisitions on a biennial basis.

The lack of 1940 Act courses may also be due to the backgrounds of people teaching securities law. Some (certainly not all) securities law professors come from the litigation side of practice. Securities litigation centers on the 1933 and 1934 Acts. Litigation is a less important part of practice under the 1940 Acts, so many securities litigators aren’t exposed to it much.

A third problem is a lack of teaching materials. There isn’t much available on the 1940 Acts. I was lucky when I began teaching the course to discover a set of materials put together by Larry Barnett at Widener University. Those materials, supplemented with my own handouts and problems, have worked well. Unfortunately, Larry just retired and will no longer be updating his materials, so I’m not sure what I’m going to do now. I suspect more people would teach the course if more books were available, but there’s a chicken-and-egg problem. The major publishers aren’t interested in offering materials for a course that few schools teach.

Whatever the reason, the lack of such courses is a serious deficiency at any school preparing students for a securities law practice.

I'm interested to hear from commenters: are there any other courses law schools aren't teaching that are crucial to business law practice?

ICYMI: Tweets From the Week (Jan. 18, 2015)

ICYMI: "Piketty Shreds Marginal Productivity as Neoclassical Justification for Supersized Pay" http://t.co/H99ZIYfng8

— Stefan Padfield (@ProfPadfield) January 11, 2015

"conflict of interest ... comes with allowing directors to adopt bylaws that insulate their own behavior" http://t.co/UjiFtgKDiF #corpgov

— Stefan Padfield (@ProfPadfield) January 12, 2015

“Directors were not aware of the problems ... the audit revealed b/c they aren’t involved in day-to-day operations.” https://t.co/ppmHWhCdun

— Stefan Padfield (@ProfPadfield) January 12, 2015

"Few seats at the boardroom table for women" http://t.co/QcJxjFmSvY #corpgov

— Stefan Padfield (@ProfPadfield) January 13, 2015

Risk factors, non-GAAP financials & trend analysis expected to attract SEC scrutiny during filing season http://t.co/z97f5gdmmk

— FEI Daily (@dailyfei) January 15, 2015

Discovery as Part of the Genius of American Corporate Law

In their new article, Litigation Discovery and Corporate Governance: The Missing Story About the ‘Genius of American Corporate Law,’ Érica Gorga and Michael Halberstam argue that the U.S.’s unique, liberal discovery standards in private civil litigation have had an important role in shaping the content of corporate law.

They make a number of interesting claims in the paper, including that civil discovery provides detailed data for courts and regulators to use when creating legal standards, and that the omnipresent threat of civil discovery forces corporate managers to run their companies with more care: they must engage in extensive internal monitoring and recordkeeping in order to protect themselves should a dispute arise.  Additionally, the internal process of having attorneys and other experts review documents in anticipation of litigation – even if the documents are never turned over to the plaintiffs – generates information that assists managers, in their monitoring roles, and assists gatekeepers – attorneys, experts, etc – in understanding both the specific firm targeted and the industry in general.  Gorga and Halberstam also argue that the standards for adequacy of corporate internal investigations – which themselves play a growing role in corporate governance – are informed by the standards set by civil discovery in litigation.  Finally, the authors argue US Style corporate governance and securities laws cannot be easily exported to legal systems that do not have civil discovery, because civil discovery is a necessary part of the US’s ex post enforcement mechanism.

I found the paper very interesting, and I agree that discovery is critical to a regime that depends on private ex post litigation to enforce legal rules.  That said, I think the authors do not give sufficient weight to the argument that corporate managers – aware of civil discovery – are incentivized to keep records to the bare minimum necessary to establish that they met their obligations.  Board meeting minutes, for example, are often extremely sparse, describing the basic agenda and topics covered, but giving no sense of the color and tenor of the discussion.  High level corporate officers have been known to refuse to use email at all for fear of generating incriminating electronic trails.  There are limits to managers’ ability to protect themselves this way – modern business often requires electronic communication, and god knows every litigator has, at one point or another, dug up the incriminating email trail that finishes with someone saying “DELETE THIS.”  But the point remains that the possibility of discovery can be just as much of an incentive for managers to create misleadingly exculpatory paper trails as to engage in careful monitoring.

An Effective Professor: Students' Views

Every semester, in an attempt to learn my students' names and a bit about them, I ask my students to fill out a student information form with a few questions. This semester I added the question: "What do you think makes a professor effective?"

The vast majority of the responses fell into one of the four categories below (listed in order, from most to least responses):

1. Real world experience/real world examples
2. Fairness in grading 
3. Clarity in teaching 
4. Approachability and accessibility 

I am teaching over 100 total students (undergraduate and MBA) this semester, and nearly every student mentioned something that would fall into at least one of those four categories.

Perhaps these responses do not surprise readers, and they were not incredibly surprising to me. The ordering, however, was a bit surprising, and I am not sure I would have expected to see "approachability" in the responses as much as I did. In any event, the responses were helpful in confirming that my time "staying current," meeting with local attorneys/business people, and consulting is well spent - at least in the eyes of my students. 

Is there anything in the students' responses that is surprising to readers? Is there anything missing from the list? (There were plenty of other answers but most of the repeated answers fell into one of the four categories.)