Business Law Prof Blog

What's in a Title?

Perhaps this post would have been timelier before the spring submission cycle, but hopefully it will be helpful in framing title options for pieces being developed this summer.  One of the many benefits of co-authorship is learning substantive and procedural knowledge from your collaborators.  On a recent article, I worked with three economists who have different skill sets, perspectives, and discipline standards.  When we were trying to finalize our title, we came up with several different categories or types of article titles—a framework that I will utilize again in the future and which I am sharing with you today.  We selected the “themed” based title for our article, Institutional Investing When Shareholders Are Not Supreme, and a play on words, Institutional Investors’ Appetite for Alternatives, for a shorter piece appearing on Columbia Blue Sky Blog.

 Title Framework:

SOBER: Institutional Investing after Constituency Statutes

QUESTION:  Does Changing Shareholder Value Maximization Standards Change Institutional Investors’ Behavior?

CONTRAST:  Institutional Investors Behavior Before and After Constituency Statutes

PLAY ON WORDS:  Appetite for Alternatives:  Institutional Investors’ Behavior in the Fact of Shareholder Value Maximization Pressures

FORWARD THINKING:  What Does Institutional Investors Behavior after Constituency Statutes Tell Us Regarding Benefit Corporations?

HISTORICAL:  The Changing Landscape of Directorial Duties: Constituency States to Alternative Purpose Firms

SLATE/OP-ED:  Who’s Afraid of Alternative Purpose Firms?

THEME:  Agency Investing When Shareholders Are Not Supreme

For those interested and perhaps to put the title options in perspective, here is a little background on our article, Institutional Investing When Shareholders Are Not Supreme.  In an earlier BLPB post, I linked to our short piece appearing in Columbia Blue Sky Blog.  Our article examines institutional investors’ response to corporate director duty changes embodied in constituency statutes and links our findings to current questions of institutional investors’ potential acceptance of alternative business entities. Our paper surveys the 30+ year literature debate on directors’ duties to maximize shareholder value, a case law analysis of constituency statute litigation, and an empirical study (utilizing a difference-in-differences approach) of institutional investors’ divestment of stock held in companies incorporated in constituency statute jurisdictions.  We first verified that courts enforced constituency statutes, or in other words, that constituency statutes represented at least a small change to directors’ legal duties. In our empirical section, we found no statistically significant departure of institutional investors after the passage of constituency statutes, focusing specifically on institutions with high fiduciary duties. If institutional investors had fled constituency statute investments, which are subject to lower director duties changes than with say benefit corporations, then there would be grounds to think that institutional investors would not invest in alternative purpose firms.  Finding no such negative reaction to constituency statutes does not conclusively indicate institutional investor’s acceptance of alternative purposes firms, especially given the greater deviation from shareholder value maximization by requiring (rather than permitting) directors to consider nonshareholder interests codified in benefit corporation statutes.  It does suggest, however, some latitude for institutional investors to consider alternative purpose firm investments without running afoul of fiduciary duties.  If I were explaining the results to a student, I would say that our study could have produced strong evidence shutting the door on this possibility, but instead the findings leave the door open. This paper is valuable in the absence of direct information on the question, and will certainly give way to findings utilizing empirical data directly on point with publicly-traded benefit corporations and/or B Corporations.

-Anne Tucker

Tennessee . . . . The Business Law State? Yay For Us!

OK.  So, Tennessee is not Delaware.  But the Tennessee legislature and Supreme Court have been busy bees this spring on business law matters.   Here's the brief report.

In the last week of the legislative term, the Tennessee Senate and House adopted the For-Profit Benefit Corporation Act, about which I earlier blogged here, here, and here.  Although I remain skeptical of the legislation, it looks like the governor will sign the bill.  So, we will have benefit corporations in Tennessee.  We'll see where things go from there . . . .

The Tennessee legislature also passed a technical corrections bill for the Tennessee Business Corporation Act.  The bill was drafted by the Tennessee Bar Association's Business Entity Study Committee (on which I serve and to which I have referred in the past), a joint project of the Tennessee Bar Association's Business Law Section and Tax Law Section.  The governor has already signed this bill into law.

Separately, in a bit of a stealth move (!), the Tennessee Supreme Court recently announced the establishment of a business court, an institution many other jurisdictions already have.  The court is being introduced as a pilot project in Davidson County (where Nashville resides)--but only, as I understand it, to iron the kinks out before introducing the court on a permanent basis.  Interestingly, the Tennessee Bar Association Business Law Section Executive Council was not informed about the new court project until its public announcement in the middle of March.  Although we found that a bit odd, the "radio silence" is apparently attributable to the excitement of the Tennessee Supreme Court to get the project started effective as of May 1 and the deemed lack of need for a study on the subject before proceeding.  Regardless, I think it's safe to say that the bar welcomes the introduction of a court that specializes in business law cases as a matter of principle.  Again, we'll see where it goes from here.

A few reflections on all this follow.

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Shareholder Activists Can Add Value and Still Be Wrong

Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014.  This year, though, despite some activist victories, boards are standing their grounds with more success.  

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don't see activist shareholder as an inherently bad thing.  I do, however, think  it's bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.  

As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism: 

Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.

I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances.  I don't, however, think buybacks or dividends are inherently incorrect, either.  Whether the idea comes from an activist shareholder or the board doesn't really matter to me.  The board just needs to assess the idea and decide how to proceed.  

[Please click below to read more.]

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Columbia Blue Sky Blog: Institutional Investors’ Appetite for Alternatives

The following guest blog post on my recent article,  Institutional Investing When Shareholders Are Not Supreme, is available at Columbia's Blue Sky Blog discussing institutional investors' attitudes towards alternative business forms and similar issues raised by Etsy's IPO.

-Anne Tucker

Interesting New Book on Bitcoin and Other Digital Currency

Many of you have probably heard of bitcoin, the private digital currency that some mainstream merchants are now accepting. (Rand Paul recently became the first presidential candidate to accept donations in bitcoin.)

Bitcoin was developed by a software programmer who used the pseudonym Satoshi Nakamoto. It is built on cryptography software known as the blockchain, which both issues the currency and authenticates transactions using it.

If you haven’t heard of bitcoin or you don’t know much about it, I strongly recommend an interesting, informative new book : The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order, by Paul Vigna and Michael J. Casey.

Vigna and Casey are reporters for the Wall Street Journal. I think they're a little too optimistic about the future of digital currency, but their book is an excellent non-technical introduction to the bitcoin phenomenon and the blockchain software that underlies it. The book isn’t limited to bitcoin; Vigna and Casey talk about other digital currency. They also discuss other potential applications for the blockchain software, such as gambling, self-enforcing “smart” contracts, and currency exchange.

The book’s discussion of regulatory issues is limited. If you’re looking for a discussion of the legal issues, I suggest you look elsewhere. But the book is a very good introduction to digital currency and how it works.

ICYMI: Tweets From the Week (April 26, 2015)

business ethics codes: "some..research..suggests.. instrumental impacts..other studies..no discernible effect" 37 U. Haw. L. Rev. 1 #corpgov

— Stefan Padfield (@ProfPadfield) April 20, 2015

"Etsy...is a B Corp...[but] was...careful to discuss community obligations as a long term benefit to the corporation" http://t.co/zmvgrYqjUy

— Stefan Padfield (@ProfPadfield) April 20, 2015

"judicial scolding does not necessarily hurt the misbehaving company’s reputation" http://t.co/8q01rtrquv #corpgov

— Stefan Padfield (@ProfPadfield) April 21, 2015

RT @nminow: "Why Can’t We Reform C.E.O. Pay? - The New Yorker" http://t.co/FhVxYC4Lp0 #ceopay #corpgov

— Stefan Padfield (@ProfPadfield) April 21, 2015

"asset managers and banks ... have assumed the role of stewardship over shareholder voting rights" http://t.co/9kOmu3pkcm #corpgov

— Stefan Padfield (@ProfPadfield) April 24, 2015

Bain Capital's Social Impact Fund

The New York Times DealB%k recently reported that Deval Patrick, former governor of Massachusetts, will join Bain Capital to head a new social impact fund.

These types of social impact funds seem to becoming more and more common. Social impact funds, however, vary greatly. Some social impact funds appear to be primarily focused on profits (while simply avoiding some "sin stocks"), others focus on serious social enterprises, and others fall somewhere in-between.  

Advice for Law Review Editors

I recently finished my law review submission season, placing two articles: The Social Enterprise Law Market at Maryland Law Review (on jurisdictional competition and social enterprise entity forms) and An Early Report on Benefit Reports at West Virginia Law Review (on data collected last summer on statutory reporting compliance by benefit corporations).

Below, I share a few words of advice for my new law review editors and any law review editor readers. I share this advice acknowledging that I disregarded much of it when I was an editor on my school’s law review. Also, as mentioned below, I fully recognize and appreciate the work law review editors put into our articles.   

Consider Blind Review. I still haven’t heard a good argument against law reviews moving to blind review of articles. A very few, maybe two, of the top-ranked journals appear to have made the move, but the vast majority have not. 

Consider Peer Review. I understand, a bit better, the pushback against a traditional peer-review system, but consider involving your faculty in the process more heavily and consider obtaining outside faculty reviewers (as some of the elite journals are already doing). 

Consider Exclusive Submission Windows. A few journals are doing this, and it seems to be a smart move for many journals and authors. The editors have many fewer articles to review -- from authors who are serious about their journal -- and the authors get the assurance that their articles are receiving more attention in the review.

Respond. Typically, 40-50% of the journals I submit to never respond. Some of those journals are starting to get reputations for never responding. While we realize that law students have plenty on their plate, divide and conquer with your editorial team and try to respond (at least to the expedites). Even a form response, saying that the journal is full or expects a certain delay reviewing articles, is appreciated. 

Express Excitement. When extending an offer, show that you appreciated and are excited about the article. Both Maryland and West Virginia did this with my articles, and I chose them over some similarly ranked journals that sent boilerplate acceptance e-mails.

Call. Extending an offer to publish over the phone is often much more personal and effective than an e-mail offer.

Provide an Editing Schedule. Providing an editing schedule early in the process can be helpful.

Edit Lightly, if at All, on Style. I violated this rule repeatedly when I was an editor, but I now see that edits that appear to be style-based can often change the very precise message that the author is trying to communicate. If a sentence is unclear or poorly written, simply note this in a comment – perhaps with a suggested revision in the comment – rather than rewriting the sentence in the text.

Edit Heavily on Bluebook and Typos/Clear Errors. Editors typically know the Bluebook better than authors, so do not be afraid to edit heavily on Bluebook issues. Also, attempt to catch any typos or other clear errors. Some editors who claim to “respect the author’s voice” do too light of an editing job on Bluebook issues and clear errors. 

Not Every Sentence Needs a Footnote. Be reasonable on whether a sentence actually needs a citation or not.  

Provide Redlines. In the past, a few editors have not provided redlines, which makes it incredibly difficult to check what has been changed. Also, on occasion, editors have not provided complete redlines – They provide redlines, but I found changes that did not show up on the redline, which reduces confidence and slows the process.

Stick to the Editing Schedule. As much as possible, stick to the editing schedule. Authors need to honor the schedule as well. Of course there are emergencies and those are understandable, but editors might want to build in some additional time in the schedule for these unpredictable occurrences. 

Communicate. Much can be forgiven if editors communicate clearly, promptly, and respectfully with the authors. 

Twitter. Post-publication, Twitter can be a great tool to promote the journal’s articles. Many, but definitely not all, journals now have Twitter accounts.   

All of that said, I vividly remember the hard work and long hours of editing – on top of classes and interviews and internships and other responsibilities. We professors appreciate all that law review editors do, and we probably should express our thanks more often.

My co-bloggers and readers likely have additional thoughts – as many are more experienced than I. All are encouraged to share in the comments. 

This Just In From B.U. Law

 

BU LAW TO BECOME FIRST U.S. LAW SCHOOL TO OFFER A MOOC IN COMPLIANCE

Course series will focus on legal risk management for companies doing businesses overseas

(APRIL 23, 2015) -­‐ Boston University School of Law will launch a massive open online course, Legal Risk Management Strategies for Multinational Enterprises, in October, becoming the first U.S. law school to offer a MOOC in the fast-­‐growing field of compliance.  In a partnership with BU’s Digital Learning Initiative, the School of Law will deliver the four-­‐part series on the edX online platform. 

“BU Law is committed to using new technologies to open up our classrooms not only to our students, but to all qualified practitioners with an interest in studying legal topics,” says BU Law Dean Maureen O’Rourke. “I am pleased that our very first MOOC will focus on compliance, and will provide all students, both with and without law degrees, with marketable skills for which there is significant demand in the US and abroad.”

The course will examine the issues that multinational companies face in adhering to the numerous laws and regulations that govern their operations. Students will be introduced to new tools for managing risk in the global marketplace and learn how to identify, analyze and control compliance risks in various commercial and financial contexts.

“I am excited to develop this course and to make it available to a global audience,” says course instructor Babak Boghraty, who teaches Compliance Risks in International Business in BU Law’s Executive LL.M. Program. “The subject matter really lends itself to online learning tools.”

With the introduction of the MOOC, BU Law continues to expand its online learning programs. In 2011, the School launched a first-­‐of-­‐its-­‐kind Executive LL.M. Program in International Business Law, where students learn in a blended format of residential and online courses. In 2012, BU Law began offering an online LL.M. degree in Taxation.

“At BU Law, we are committed to making our superior LL.M. instruction available to experienced practitioners who are unable to attend our traditional, nine-­‐month residential programs,” says BU Law Assistant Dean John Riccardi. “Our launch of this MOOC further demonstrates our commitment to becoming a leader in the field of global compliance and a pioneer in digital learning.”

The course will be offered as part of edX's exclusive professional development course roster for a fee of $950.

Contact:

Ann Comer-­Woods

Communications & Marketing

Phone: 617.353.3097

Email: [email protected]

What counts as scienter?

An ongoing issue in many securities cases concerns the precise state of mind necessary to satisfy the element of scienter in a Section 10(b) violation.  The basic dispute is about whether the defendant must have intended to harm investors, or whether it is sufficient if the defendant simply intended to mislead them.

One would have thought this issue was settled by the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  There, the defendants lied to investors by falsely claiming that they were not engaged in merger negotiations.  The lie was not intended to harm anyone; if anything, the defendants intended to benefit investors by concealing the talks so as not to prejudice a beneficial deal.  The Supreme Court did not weigh in on the definition of scienter per se, but it did emphasize that the defendants’ benign motives would not immunize them from liability.  As the Court put it, “[W]e think that creating an exception to a regulatory scheme founded on a prodisclosure legislative philosophy, because complying with the regulation might be ‘bad for business,’ is a role for Congress, not this Court.”

Similarly, in Nakkhumpun v. Taylor, 2015 U.S. App. LEXIS 5547 (10th Cir. Apr. 7, 2015), the Tenth Circuit rejected a defendant’s argument that his false statements – in that case, false characterizations as to why a corporate asset sale had fallen through – were intended to benefit investors by attracting new deal partners.  The Tenth Circuit held that whatever the defendant’s ultimate motive, Section 10(b) liability would be imposed if he intentionally or recklessly misled investors.

Nonetheless, courts continue to sporadically define Section 10(b) scienter in a more limited manner.

[More under the jump]

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Fall Business Law Conference in Venice

Marco Ventoruzzo (Penn State Law) alerts us to the upcoming international conference for the sixtieth anniversary of the Rivista delle società, which will be held in Venice, on San Giorgio Maggiore, on 13-14 November 2015. The title of the conference is "Rules for the Market and Market for Rules. Corporate Law and the Role of the Legislature." The program and information on how to register (and other logistics) can be found here.  It looks like only an Italian version of the program is available on the website as of the time this is being posted, but I have an English version.  So, please just contact me if you want one.

Marco notes that the conference, organized every ten years by the Rivista, is one of the major events for corporate law scholars and practitioners in Italy (and probably in Europe as a whole). He anticipates well over 300 participants from several European countries, the U.S., and elsewhere. He notes that, as an additional incentive to participate, the venue is probably one of the most spectacular that can be imagined.  San Giorgio is a tiny island in the Venice lagoon, just in front of Saint Mark's Square, that overlooks the entire Venetian waterfront. On the island, inhabited since Roman times, the conference will be hosted in a monastery partially designed by Andrea Palladio in the XVI century.

Hat tip to Marco for this announcement.

The Continuing Job Search for 3Ls

There's good news and no news from me on the 3L job search front.

First, the good news.  One of the talented 3L business law students whom I have been mentoring in the Quest for Employment (Q4E) recently secured a position that is perfect for him.  He is a great fit for the firm and the position, and the firm is lucky to get him.  Yay for our team!

The rest of the news on the Q4E front is same-old, same-old.  Two other terrific 3L business law students who have had career/life changes that have led them to seek employment in new markets better suited to their professional or personal objectives are still on the market.  Of course, this is nothing new in Knoxville and much of the rest of the State of Tennessee, where many law firms cannot really assess their needs until much closer to the bar exam/hiring start date.  And these two promising lawyers-to-be are getting bites at the line.

Haskell earlier wrote a great post here on resumes and interviews, and I earlier wrote a companion post on cover letters.  But what happens after you've sent the cover letter and resume and have not been granted an interview?  Give up on the Q4E with those folks?  No way!  At least, that's not my advice . . . .

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Legal Studies Professor Position - University of Louisiana-Lafayette

Some business schools are still hiring for this coming August. Here is a recent legal studies professor posting by University of Louisiana-Lafayette. University of Louisiana-Lafayette is a special school to me because they made my first tenure track offer, which was quickly followed by an offer from another school that was in a better geographic location for my family. While my decision was definitely the right one for our family, I have only good things to say about University of Louisiana-Lafayette. They ran a professional search process and have a collegial, bright faculty. Also, Lafayette seemed to have a wonderful, unique culture and excellent food.

I have updated my legal studies professor openings list here.

Etsy IPO and the revival of the Shareholder Primacy Debate

Last week the New York Times hosted a debate about the Public Corporation's Duty to Shareholders.  Contributors include corporate law professors Stephen Bainbridge, Tamara Belinfante, Lynn Stout, David Yosifan and Jean Rogers, CEO of Sustainability Accounting Standards Board.

This collection of essays is not only more interesting than anything that I could write, but it is also the type of short, assessable debate that would be a great starting point for discussion in a seminar or corporations class.  

-Anne Tucker

Triggering Compromise in North Dakota: Oil, Taxes, and Planning Ahead

In North Dakota, the state has seen drastically falling revenues due to low oil prices.  Lower revenues makes it more challenging for the communities in that state that are still trying to provide the necessary infrastructure and services that remain a challenge due to the enormous growth over the last several years.  The response from some in the North Dakota legislature? Cut taxes. 

Oil companies always seek lower taxes because they are rational actors.  Lower taxes means higher revenues. This was true with sky high oil prices and is even more true with lower prices. From a company perspective, the position makes sense.  From a legislative perspective, the position should be more nuanced. 

(Please click below to read more.)

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U.S. News Rankings: Underperforming and Overperforming Law Schools

As most of you know, this year's U.S. News rankings of law schools are now available. I'm not a big fan of those rankings. I don't think they're a particularly meaningful way of comparing law schools. They sometimes provide a laugh or two, as when a dean disparages the rankings while pointing to his or her school's rise in the rankings as a sign of successful decanal leadership. But no student should be choosing a law school based on those rankings.

However, the rankings are fun to play with from time to time, and here's one example for your amusement.

Most of the top 100 law schools in the rankings are affiliated with universities that are ranked in the U.S. News rankings of national universities. Everything else being equal, one would expect a law school's ranking to be comparable to that of its university, and many are. Yale is the top-ranked law school (an obvious mistake in this Harvard grad's opinion); its university ranking is number 3. But that's not always the case; many of the law school rankings are significantly different from the rankings of their universities.

I computed a comparison score for each of the top 100 law schools by subtracting its ranking  from the ranking of its university on the U.S. News list of national universities. (Some of the top law schools aren't affiliated with a U.S. News "national university," so they don't get to play.) The higher the number in a positive direction, the better the law school did in comparison to its university. The lower the number, the worse the law school did in comparison to its university. (U.S. News only provides national university rankings down to number 201, so I used 201 for any university below that in the list, with a plus in the comparison score to indicate that the difference is actually greater than that.)

These comparison scores might actually have greater validity than the rankings themselves, because they net out some of the factors, such as geographical differences and name recognition, that bias the underlying rankings. A university and its law school share the same name and they're in the same location.

Here are the ten law schools with the highest comparison rankings (those which are outperforming their university the most):

Georgia State 145+
Nevada-Las Vegas 134+
Houston 130
New Mexico 118
Arizona State 103
George Mason 96
Utah 87
Hawaii 86
Arizona 79
West Virginia 74

Here are the ten law schools with the lowest comparison ranking:

Northeastern -45
Syracuse -29
Yeshiva (Cardozo) -27
Penn State -23
Case Western Reserve -21
Wake Forest -20
Pittsburgh -16
Miami -15
Michigan State -9
Notre Dame -6

(The comparison numbers tend more to the positive because there are so many national universities without law schools.)

Here's a full listing of the comparison scores if you want to look up your school.

As I said, the U.S. News rankings don't mean much, so these comparisons probably don't mean much. I will leave it to others to figure out why these particular schools are so different from their universities. In the interest of full disclosure, the comparison score of Nebraska, where I teach, is 43.

ICYMI: Tweets From the Week (April 19, 2015)

PwC report analyzes trends likely to drive future securities litigation http://t.co/hxZLHQZZHL

— kevinlacroix (@kevinlacroix) April 13, 2015

Special Projects Segment: Opposition to Adopting Crowdfunding Rules: We are discussing possible rulemaking for... http://t.co/j3YqIfLfP0

— TheRacetotheBottom (@RTTBCorpGov) April 13, 2015

New survey paper on M&A contracts by yours truly: http://t.co/kVnciDteTz

— John Coates (@jciv) April 15, 2015

Trinity Wall Street v. Wal-Mart: 3d Circuit puts life back in ordinary business exception http://t.co/VjrI2sktal

— Stephen Bainbridge (@ProfBainbridge) April 14, 2015

"power of the American executive and the American board as due in part to their influence on political ... outcomes" http://t.co/zQ2DBgnyfb

— Stefan Padfield (@ProfPadfield) April 16, 2015

When is a fine not a fine?

It was recently announced that the SEC has reached a settlement in its lawsuit against Freddie Mac executives Richard Syron, Patricia Cook, and Donald Bisenius.  The basic allegation in the case was that these executives violated Section 17 of the Securities Act and Section 10(b) of the Exchange Act by dramatically understating Freddie Mac’s exposure to subprime mortgages.  The executives falsely claimed that Freddie Mac’s portfolio included $2 to $6 billion of subprime loans, when the true figure was closer to $141 billion to $244 billion.  Freddie Mac’s exposure to subprime loans ultimately caused it to experience dramatic losses, thus harming investors.

The SEC ran into difficulty because there is no accepted definition of “subprime.”  The SEC alleged that investors understood the term to refer to certain loans issued with a high likelihood of default, such as loans with high loan to value and debt to income ratios.  The executives, however, claimed that “subprime” was understood by investors only to refer to loans that were designated as subprime by their originators.

The case has now settled, and, under the terms of the settlement, the executives will make payments to a Fair Funds account for the benefit of investors, in the amounts of $250K, $50K, and $10K, respectively. 

Unusually, this is not your classic “no admit, no deny” settlement.  Instead, it appears to be straight up “no admit,” because after the settlement was reached, Bisenius said that "The dismissal of the case today under these terms vindicates me completely."

Perhaps even more unusually, the payments are characterized as neither fines nor disgorgements.  Instead, they are described as “donations.”  Meanwhile, the amounts – coincidentally! – were calculated in proportion to the stock and options granted to the defendants during the (alleged) fraud period.

So what gives?

As far as I can tell, the euphemism is because of who’s paying.  The settlement amounts will be paid by insurance (which itself is paid for by Freddie Mac).  D&O insurance tends to exclude coverage for disgorgement and regulatory fines, see Lawrence J. Trautmana & Kara Altenbaumer-Price, D&O Insurance: A Primer, 1 Am. U. Bus. L. Rev. 337 (2011-12); Jon N. Eisenberg, How Much Protection Do Indemnification and D&O Insurance Provide?, and the SEC has taken the position that contracts to indemnify for Securities Act violations are unenforceable as against public policy.  See 17 C.F.R. §229.512. 

But I guess the SEC doesn't feel too strongly about it, because by characterizing the payments as donations rather than fines or disgorgement, the defendants are able to get the benefit of insurance and avoid paying out of pocket.

Though the SEC's fair funds statute does contemplate that donations may be included in a fund, see 15 U.S.C. § 7246(b), the settlement is an outlier, by SEC standards.  According to Urska Velikonja’s article, Public Compensation for Private Harm: Evidence from the SEC's Fair Fund Distributions, 67 Stan. L. Rev. 331 (2015), executives who pay fines and disgorgement to an SEC fair fund typically pay out of pocket – an important feature, if the SEC is to avoid the criticism that fair fund distributions suffer from the same “circularity” problem that plagues private lawsuits. 

Given all of this, one wonders why the SEC even bothered.  If they thought they had a case, they could have just taken it to trial, risks be damned. And if they had doubts about the merits of the case, they should have simply dropped the matter.

One possibility is that the SEC believed its legal case was too weak for trial but that the reimbursement to investors was worth it – after all, circularity criticisms notwithstanding, not all investors are diversified, and some may have suffered losses that they did not make up in gains elsewhere.  But that's not the motivation here, because the SEC will not establish a new fund to compensate investors for the alleged fraud.  Instead, the defendants' donations will be added to an existing fair fund that was set up for the SEC's earlier case against Freddie Mac, brought in 2007, regarding accounting fraud that took place from 1998 through 2002.  Which apparently means that the SEC will not even pretend to distribute the funds to the investors who were harmed by the more recent misconduct. 

(I suspect this is because the SEC believes it lacks authority to establish a fund consisting solely of donations, with no penalties or disgorgements.)

In any event, $310K is a rather paltry sum if investor compensation was the goal; according to the parallel private lawsuit (dismissed on the pleadings, see Ohio Pub. Emples. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 2014 U.S. Dist. LEXIS 155375 (N.D. Ohio Oct. 31, 2014)), Freddie Mac’s misrepresentation of its subprime exposure resulted in over $6 billion in losses to shareholders.

So the point is, if paid by insurance, the amounts aren’t large enough to deter, and as it stands, they are facially not even intended to compensate.  Instead, the settlement seems an exercise in face-saving – the SEC believed it had a weak legal case (though possibly a strong moral one) but didn’t want to exit the field with nothing at all.  The whole adventure thus raises the question whether face-saving payments are appropriate for regulators to collect (as well as the question whether much face-saving was actually accomplished).

UConn Social Enterprise and Entrepreneurship Conference│ Storrs, CT │ April 23-24, 2015

At the end of next week, I will be at the University of Connecticut School of Business and the Thomas J. Dodd Research Center for their Social Enterprise and Entrepreneurship Conference.

Further information about the conference is available here, a portion of which is reproduced below:

In October 2014, Connecticut joined a growing number of states that empower for-profit corporations to expand their core missions to expressly include human rights, environmental sustainability, and other social objectives. As a new legal class of businesses, these benefit corporations join a growing range of social entrepreneurship and enterprise models that have the potential to have positive social impacts on communities in Connecticut and around the world. Designed to evaluate and enhance this potential, SE2 will feature a critical examination of the various aspects of social entrepreneurship, as well as practical guidance on the challenges and opportunities presented by the newly adopted Connecticut Benefit Corporation Act and other forms of social enterprise.

Presenters at the academic symposium on April 23 are:

• Mystica Alexander, Bentley University
• Norman Bishara, University of Michigan
• Kate Cooney, Yale University
• Lucien Dhooge, Georgia Institute of Technology
• Gwendolyn Gordon, University of Pennsylvania
• Gil Lan, Ryerson University
• Diana Leyden, University of Connecticut
• Haskell Murray, Belmont University
• Inara Scott, Oregon State University

Presenters at the practitioner conference on April 24 are:

• Gregg Haddad, State Representative, Connecticut General Assembly (D-Mansfield)
• Spencer Curry & Kieran Foran, FRESH Farm Aquaponics
• Sophie Faris, Community Development, B-Lab
• James W. McLaughlin, Associate, Murtha Cullina LLP
• Michelle Cote, Managing Director, Connecticut Center for Entrepreneurship and Innovation
• Mike Brady, CEO, Greyston Bakery
• Jeff Brown, Executive Vice President, Newman’s Own Foundation
• Justin Nash, President, Veterans Construction Services, and Founder, Til Duty is Done
• Vishal Patel, CEO & Founder, Happy Life Coffee
• Anselm Doering, President & CEO, EcoLogic Solutions
• Dafna Alsheh, Production Operations Director, Ice Stone
• Tamara Brown, Director of Sustainable Development and Community Engagement, Praxair

Delaware Rapid Arbitration Act

On April 3, Delaware Governor Jack Markell signed the Delaware Rapid Arbitration Act (DRAA) into law. The DRAA becomes effective on May 4, 2015. The DRAA is a different take on the attempted Chancery Arbitration that the Third Circuit ruled unconstitutional in 2013.

Under the DRAA, all parties in the dispute must agree to the arbitration. The DRAA does not use sitting judges to arbitrate, as the Chancery Arbitration attempted to do, but the Delaware Court of Chancery will be “facilitating” the process under the DRAA. Among other things, the Delaware Court of Chancery can assist in appointing an arbitrator for the process, enter final judgments, and determine an arbitrator’s fees. The Delaware Supreme Court can hear appeals of awards. 

The DRAA appears to be encouraging a relatively fast and cost effective dispute resolution process. The process is limited to 180 days – final award to be issued within 120 days of the arbitrator’s appointment and allowable extensions up to an additional 60 days. 

Given the privacy and the apparent time and cost-savings, this may be an attractive alternative dispute resolution process for various businesses. 

For more analysis see:

David J. Berger (Wilson Sonsini Goodrich & Rosati)

Brian Quinn (Boston College)