Friday, April 29, 2022

"We Know Wrongful Trading When We See It" - Some Observations Concerning the Recent Senate Hearing on the Insider Trading Prohibition Act

Earlier this month, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the Insider Trading Prohibition Act (ITPA), which passed the house with bipartisan support in May of last year. Some prominent scholars, like Professor Stephen Bainbridge, have criticized the ITPA as ambiguous in its text and overbroad in its application, while others, like Professor John Coffee, have expressed concern that it does not go far enough (mostly because the bill retains the “personal benefit” requirement for tipper-tippee liability).

My own view is that there are some good, bad, and ugly aspects of the bill. Starting with what’s good about the bill:

  • If made law, the ITPA would end what Professor Jeanne L. Schroeder calls the “jurisprudential scandal that insider trading is largely a common law federal offense” by codifying its elements.
  • The ITPA would bring trading on stolen information that is not acquired by deception (e.g., information acquired by breaking into a file cabinet or hacking a computer) within its scope. Such conduct would not incur Section 10b insider trading liability under the current enforcement regime.
  • The ITPA at least purports (more on this below) to only proscribe “wrongful” trading, or trading on information that is “obtained wrongfully.” Since violations of our insider trading laws incur criminal liability and stiff penalties, I have argued for some time that liability should be limited to conduct that is morally wrongful.
  • The ITPA preserves the “personal benefit” test as a limiting principal on what otherwise would be an ambiguous and potentially overbroad test for when tipping would breach a fiduciary or similar duty of trust and confidence. Traders need (and justice demands) bright lines that will allow them to determine ex ante whether their trading is legal or will incur 20 years of prison time (but more on this below).

Now, turning to what is bad about the bill, I share some concerns raised by Professor Todd Henderson in his testimony before the Senate Committee:

  • Though the ITPA codifies the personal benefit test as a limit on liability, it includes “indirect personal benefit[s]” within its scope. As Henderson points out, “[i]t is possible to describe virtually any human interaction as providing an ‘indirect benefit’ to the participants. Instead, the law should reflect the common sense notion that the source of information either received something tangible and valuable in return or what amounts to a monetary gift to a relative or friend.” The personal benefit test only fulfills its intended function as a limiting principle if it imposes real limits on liability. The test should therefore only be satisfied by objective evidence of self-dealing. If indirect psychological or other benefits that can be found in any voluntary human action can satisfy the test, then it cannot function as a limit on liability.
  • At least some versions of the ITPA include a catchall provision to the definition of wrongfully obtained or used information that would include “a breach of a confidentiality agreement, [or] a breach of contract.” Not only does this challenge the time-honored concept of efficient breach in the law of contracts, but as Professor Andrew Verstein has argued, this provision can open the door to the weaponization of insider trading law through the practice of “strategic tipping.” Professor Henderson raised this concern before the Senate committee, noting that so broad an understanding of wrongful trading is “ripe for abuse, with companies potentially able to prevent individual investors from trading merely by providing them with information whether they want it or not.” The recent examples of Mark Cuban and David Einhorn come to mind.
  • The ITPA would impose criminal liability for “reckless” conduct. As Henderson explained to the Committee, under the ITPA, “anyone who ‘was aware, consciously avoided being aware, or recklessly disregarded’ that the information was wrongfully obtained or communicated can have a case brought against them. The ITPA is silent on the meaning of ‘recklessly disregarded,’ which would appear to rope in innocent traders along with actual wrongdoers.” Moreover, permitting mere recklessness to satisfy the mens rea element of insider trading liability will no doubt have a chilling effect on good-faith transactions based on market rumors that would otherwise be value enhancing for traders, their clients, and the markets. The loss of such trades will diminish market liquidity and reduce price accuracy.
  • Finally, Henderson raised the concern that the ITPA lacks an “exclusivity clause stating that it will be the sole basis for bringing federal insider trading claims.” Henderson explained that “allowing prosecutors to cherry pick their preferred law is no way to provide clear rules for the market.” Professor Karen Woody has written about how prosecutors may be starting to bring insider trading cases under 18 U.S.C. § 1348 to avoid the court-imposed personal benefit test under Exchange Act §10b. Without an exclusivity clause, prosecutors will be free to make the same end run around the personal benefit test imposed by the ITPA.

Finally, the ITPA is straight-up ugly because, while it promises that it will limit insider trading liability (which can be punished by up to 20 years imprisonment) to only “wrongful” conduct, the bill defines the term “wrongful” in a way that suggests the drafters have no intention of delivering on that promise. For example, as noted above, some versions of the bill define any breach of contract as “wrongful,” but this is in clear tension with common sense, common law, and the doctrine of efficient breach.

In addition, though there is ambiguity in the text, current versions of the ITPA appear to embrace SEC Rule 10b5-1’s “awareness” test for when trading on material nonpublic information incurs insider trading liability. Under the awareness test, a corporate insider incurs insider trading liability if she is aware of material nonpublic information while trading for totally unrelated reasons. In other words, liability may be imposed even if the material nonpublic information played no motivational role in the decision to trade. But if the material nonpublic information played no motivational role, then the trading cannot be judged “wrongful” under any common-sense understanding of that term.

For these (and other reasons there is no space to address here), the ITPA leaves too much room for play in its definition of what constitutes “wrongful” trading and tipping to cohere with our common-sense understanding of that term. Former SEC Commission Robert J. Jackson assured the Committee that “we know wrongful trading when we see it.” Presumably Professor Jackson’s implication was that the SEC and DOJ can be trusted to exercise sound discretion in interpreting the play in the statutory language. In response, I offer the following question for Professor Jackson or any reader of the ITPA to consider: Would issuer-licensed insider trading violate the statute? I have defined “issuer licensed insider trading” as occurring where:

(1) the insider submits a written plan to the firm that details the proposed trade(s);

(2) the firm authorizes that plan;

(3) the firm has previously disclosed to the investing public that it will permit its employees to trade on the firm’s material nonpublic information when it is in the interest of the firm to grant such permission; and

(4) the firm discloses ex post all trading profits resulting from the execution of these plans.

I have argued that trading under these conditions is neither morally wrongful nor harmful to markets. If it violates ITPA, what provisions? I hope some readers will share their thoughts on this in the comments below!

April 29, 2022 in Current Affairs, Ethics, Financial Markets, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (1)

Friday, April 8, 2022

Wagner Graduate Research Fellowship at NYU

The NYU Pollack Center invites applications for a Wagner Fellowship for the 2022-2023 academic year.  Thanks to a generous grant of the Leonard Wagner Testamentary Trust, the Center for Law & Business offers a one-year graduate research fellowship to help develop future law academics with an interest in the social control of business institutions and the social responsibility of business.

Requirements:

Applicants must hold a JD or LLM degree and have practiced law for two years. Preference is given to applicants with a research interest in the legal regulation of business and ethics, and to those who have a degree from NYU School of Law. Fellows are expected to make a full-time commitment to their graduate research at the center. Involvement in Pollack Center research ventures is required.

How to Apply:

Applications must be received by May 16th 2022. Applicants must submit the following materials*:

  • Statement describing academic and research interests
  • Proposal for the research project during the fellowship year
  • Curriculum Vitae
  • Law school academic transcripts
  • A letter of recommendation
  • A writing sample, preferably a scholarly paper written in the past two years

*Not all materials are required for every applicant.  Please inquire regarding required materials.

More information is available at the Pollack Center Website. Please direct all materials to Stephen Choi and David Yermack, Directors. We prefer that you first e-mail materials to Anat Carmy-Wiechman at wiechman@mercury.law.nyu.edu, followed by a physical copy mailed to the NYU Center for Law & Business at 139 MacDougal Street, Room 116, New York, NY 10012.

Please direct inquiries to Anat Carmy Wiechman at wiechman@mercury.law.nyu.edu or (212) 992-6173.

April 8, 2022 in Business School, Ethics, Joan Heminway, Jobs, Social Enterprise | Permalink | Comments (0)

Friday, March 25, 2022

Post-pandemic evolution, change management, and the role of in-house counsel

Join me in sunny Miami on April 26 for this in-person conference featuring outside counsel, inhouse practitioners, and academics. 

Panel topics include:

Change Management: The Legal Department of the Future -  More and more, in-house legal departments are employing new hybrid and remote work models, incorporating artificial intelligence and technology in their workflows, and restructuring and absorbing new teams after mergers, acquisitions, and divestitures. This panel discussion will focus on how the in-house legal department can be a champion in leading successful developmental and transformational change by implementing change management best practices to be effective and efficient, remaining client-focused, and being a trusted business advisor.

Remote Work:  Accelerated Adoption and Related Challenges - Which option would you choose: on-site, hybrid, or virtual? We will discuss the pros and cons of remote work arrangements, including the challenges of implementing a remote work policy in Latin America where the legal framework is a complex patchwork of requirements, as well as the strategies for creating culture and building a team in a remote work environment.

Counseling the Board of Directors (the panel I'm on)-  This panel will focus on issues that arise when counseling the board of directors and address important topics, including governance, ethics, fiduciary duties, director liability, best practices (diversity and environmental, social, and governance (ESG)), privileged insurance, and D&O insurance all in the context of private and public companies operating in the United States and Latin America.

Supply Chain: Challenges and Opportunities- Lessons learned from recent disruptions in global supply chains will shape crossborder business in the coming years. Our panel will discuss short- and long-term challenges and opportunities in supply chain management and logistics, as well as practical strategies for using technology, contractual protections, and risk-transfer solutions to overcome future supply-chain challenges.

What Is Your Company’s ESG Score? This panel will discuss the origins of climate change management, sustainability and how to operationalize it at your company, as well as how to transition to a low-carbon economy— including standards and disclosures. Panelists will also discuss the importance of implementing mechanisms to adopt a company’s ESG score as an ethical obligation to company commitments and as a governance imperative.

Click here to register.

If you make it down to Miami, I promise to buy you a mojito or cafecito. And don't worry, hurricane season doesn't start until June. 

 

March 25, 2022 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Lawyering, Marcia Narine Weldon | Permalink | Comments (0)

Tuesday, March 22, 2022

Guttentag's Response to My Post Concerning His Article on Insider Trading as Wasteful Competition

The following comes to us from Professor Mike Guttentag in response to my recent post on his excellent and thought-provoking new article, Avoiding Wasteful Competition: Why Trading on Inside Information Should be Illegal. This is a worhy discussion I look forward to continuing--and I hope others will engage in the comments below. Now, here is Professor Guttentag's response:

As always, I am honored and impressed by the seriousness and respect with which Professor Anderson approaches my work.  I would, however, take exception to the reasons he offers for rejecting my conclusions.

The debate about insider trading over the past five decades has suffered from limited evidence of either benefits or harms. Those who have objected to a strict insider trading prohibition have reasonably asked: what evidence is there that the harms of insider trading justify a broad prohibition?

In my article I believe I have answered that challenge.  First, I explain why there is a significant mismatch between private gains and social gains when trading on inside information. This mismatch arises both because of how inside information is produced (largely as a byproduct of other activities) and how trading on this information generates profits (at the expense of others). I next show how this mismatch between private gains and social gains (perhaps the defining economic feature of insider trading) leads to an unusual problem: the problem of too much or wasteful competition. This is not just a theoretical concern. I offer concrete estimates of the magnitude of the costs of this wasteful competition problem. One very conservative estimate puts the costs of wasteful competition in United States equity markets in the range of tens of billions of dollars a year. The logic is compelling, and the amounts involved substantial: insider trading is a socially wasteful activity that should be outlawed. 

The time has now come for those who would do less than outlaw all trading when in possession of inside information to provide either equally compelling evidence of the benefits of an alternative regime or an explanation as to why my calculations are flawed. I do not believe that Anderson’s critiques meet either of these challenges.  

I will go through Anderson’s critiques one by one. The first concern Anderson raises is that he believes my argument hinges on the claim that all inside information is produced as a byproduct of other activities. Anderson has read my argument as relying on a stronger claim than I think it needs to rely on. I do not aim to refute the vast body of work by the likes of Henry Manne and many, many others on the various costs and benefits of insider trading. These lists of the potential costs and benefits established over the past decades are largely correct. However, there are two problems with these lists. First, these lists have consistently failed to realize the magnitude and importance of the wasteful competition problem created by insider trading (I have addressed the reasons for this oversight elsewhere, Law and Surplus: Opportunities Missed). Second, once the costs of wasteful competition are included in the calculus the appropriate starting point shifts. Given how significant the wasteful competition problem is, we need more than just a list of plausible but hard-to-quantify costs and benefits to rebut the presumption that all trading when in possession of inside information should be outlawed. That is the extent of my claim.

The second point that Anderson raises in his comments is that he does not think I have carried out an adequate “comparative institutional approach to market failure.” In fact, I think I do a fair job in the article of addressing this question, and show, for example, why private ordering is not an effective alternative to legal intervention as a way to address the wasteful competition problem created by insider trading. Moreover, the correct comparison should be between the cost of our muddled and confused current regime and the simple proposal I offer, a proposal, by the way, that is similar to the insider trading prohibition already in place in Europe (albeit with less enforcement capability in Europe). I do not see what institution Anderson thinks could do a better job addressing the problem I have identified than the federal government. As a side note, if we want to minimize the kind of rent-seeking by government officials that Anderson also mentions, then a bright-line such as the one I propose might well be preferable to the murky waters that now surround the insider trading prohibition.

The third point Anderson raises is that he finds my consideration of internal compliance costs lacking.  My response to this observation is: internal compliance costs as compared to what baseline? The current system is a quagmire, whereas the one I propose would be more straightforward to implement. It seems to me that when it comes to minimizing internal compliance costs my proposal is preferable to the status quo.  But even if I am incorrect about the relative costs of internal compliance under different regulatory regimes the larger point remains: discussions of these kinds of second order, difficult-to-quantify cost simply do not offer enough evidence to justify accepting the costs of wasteful competition that a very conservative estimate puts in the range of tens of billions of dollars a year in only one marketplace.

The fourth point Anderson raises is yet another potential cost of my proposal as compared to the status quo. Anderson correctly points out that my rule may be over-inclusive and prevent some individuals from gathering and trading on information for which social gains are equal to or greater than private gains. This is true. However, again, where is the concrete evidence that these costs of over-inclusivity are anything near the magnitude of the quantifiable costs that result from wasteful competition. The evidence in support of a sweeping prohibition remains.

Finally, Anderson raises the specter of criminal punishment. I did not hope, as Anderson suggests, to fully “detach my model from the debate over the morality of insider trading.” I only rejected current efforts to base an insider trading prohibition on fairness concerns. In terms of advancing my own arguments, I felt that as a practical matter the topic of links between solutions to a wasteful competition problem and criminality was too vast to fit in an already long article. For those who are interested, I have begun to further explore these connections elsewhere in work on the relationships between evolutionary psychology and the use of law as a tool to share resources.

The one point I did make in the article relevant to the question of criminal liability for insider trading was to observe that engaging wasteful competition can trigger moral outrage in some circumstances. Such feelings can be observed, for example, when others react to people cutting in line. We have normative reactions to people who pursue their naked self-interest in situations where payoffs through cooperation are greater than those that can be realized through competition by, for example, refusing to honor a queue.  Anderson investigates this analogy by asking about someone who has permission to cut in line.  Presumably, he means to draw a parallel to issuer-sanctioned insider trading wherein firms allow employees to trade on material nonpublic information. The question of whether or how permission to cut in line might be granted is quite complex and is a topic for another day. I only hoped in this article to suggest why there might be a link between my conclusion that avoiding wasteful competition justifies an insider trading prohibition and the choice to criminalize insider trading.

Again, I truly appreciate Anderson’s honest engagement with my work. However, I think he fails to provide a compelling rebuttal. What we need now in the United States is a prohibition on all trading when in possession of inside information.

March 22, 2022 in Corporations, Ethics, Financial Markets, John Anderson, Law and Economics, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, March 18, 2022

Guttentag on Wasteful Competition and Insider Trading Reform

For some time now, the insider trading enforcement regime in the United States has been criticized by market participants, scholars, and jurists alike as lacking clarity, theoretical integrity, and a coherent rationale. One problem is that Congress has never enacted a statute that specifically defines “insider trading.” Instead, the current regime has been cobbled together on an ad hoc basis through the common law and administrative proceedings. As the recent Report of the Bharara Task Force on Insider Trading puts it, the absence of an insider trading statute “has left market participants without sufficient guidance on how to comport themselves, prosecutors and regulators with undue challenges in holding wrongful actors accountable, those accused of misconduct with burdens in defending themselves, and the public with reason to question the fairness and integrity of our securities markets.”

Congress appears to be responding, and a number of bills that would define insider trading and otherwise reform the enforcement regime are receiving bipartisan support. But it would be a mistake to pass new legislation without first taking the time to get clear on the economic and ethical reasons for regulating insider trading. This is particularly true in light of the fact that the general public is clearly ambivalent about whether and why insider trading should be regulated.

Mike Guttentag's new article, Avoiding Wasteful Competition: Why Trading on Inside Information Should Be Illegal, offers an important new (or at least heretofore underappreciated) lens through which the potential costs of insider trading may be identified. For Guttentag, inside information is generally created as a mere byproduct of otherwise productive economic activity. But though it takes no additional effort to create, it has significant economic value for those who can trade on it. The rush to capture this surplus results in “wasteful competition because competition for surplus (or rent-seeking in the terminology economists prefer) is both hard to prevent and inherently wasteful.” Absent comprehensive regulation of insider trading, vast resources would be wasted in efforts by market participants to capture what Guttentag estimates may amount to tens of billions of dollars in potential insider trading profits each year.

Since the problem of wasteful competition arises whenever trading with material nonpublic information is permitted, Guttentag recommends “(1) that federal insider trading legislation should be enacted that prohibits all trading on inside information regardless of whether the information is wrongfully acquired, (2) courts should not require proof that a tipper received a personal benefit to find tippers and tippees culpable, and (3) the mere possession of inside information should be sufficient to trigger a trading prohibition.”

Guttentag’s arguments are original and compelling, but I am not convinced they justify the reforms he proposes. Here are some of my reasons:

  • First, Guttentag’s wasteful competition argument turns on the claim that all inside information is a mere byproduct of otherwise productive activity. But this seems to beg the question against Henry Manne and others who have argued that insider trading as compensation can be an effective incentive for entrepreneurship and innovation at firms. And this incentive can come at a savings to shareholders by reducing the need for other forms of compensation. If the production of inside information is part of the motivation behind innovation, it is not a surplus. Guttentag does address some (though not all) of Manne’s arguments concerning insider trading as compensation, but I would like to see a more complete treatment.
  • Second, even if we are convinced that insider trading drives wasteful rent-seeking, I’m not sure Guttentag has shown that the broad enforcement regime he recommends is the appropriate response. Under the comparative institutional approach to market failure, the proponent of regulation needs to show the regulation would improve matters. Rent-seekers come in all shapes and sizes, and government agencies such as the SEC are by no means immune to the temptation to engage in rent-seeking and rent-selling. Expanded authority would no doubt increase the opportunities and incentives for such wasteful action on the part of the regulators. Guttentag fails to address this concern.
  • Third, Guttentag fails to acknowledge the internal compliance costs his proposed expansion of liability will impose on issuers. I address the significant costs of insider trading compliance in my article, Solving the Paradox of Insider Trading Compliance. I suspect these already significant costs (and incentives to rent-seek from regulators) would only increase under Guttentag’s proposed regime. This concern should be considered as part of a comparative institutional analysis.
  • Fourth, Guttentag’s proposed reform would impose liability for trading while in possession of inside information even if that information played no part in the trading. But trading for reasons unrelated to inside information does not evidence wasteful competition for that information. Guttentag’s rationale cannot therefore justify this rule. He suggests that this mere possession rule can be justified as a prophylactic measure—simplifying enforcement of insider trading that does derive from wasteful competition. Guttentag fails, however, to consider the significant costs (e.g., in terms of [a] liquidity for those who are compensated with equity and [b] the preclusion of otherwise innocent, value-enhancing trades) the broad restriction would impose on the insiders, the issuers, and the market more broadly.
  • Finally, Guttentag considers it a virtue of his wasteful competition model that it does not rely on any controversial claims regarding the ethics of insider trading to justify its regulation. His model imposes liability on those who trade while possessing inside information because it is wasteful—not because it is wrongful. But insider trading liability in the United States has historically carried stiff criminal penalties. Guttentag is comfortable with the idea that these penalties be imposed under his proposed regime as well. This makes me wonder what other criminal sanctions for morally innocent but wasteful behavior this logic might justify. Guttentag seems to anticipate this concern and hedges a bit by suggesting that wasteful behavior may not be morally innocent after all. He notes that, for example, those who engage in wasteful behavior like cutting in line typically elicit “strong feelings of moral disapproval.” First, this may be true, but what about those who ask permission to cut (for some good reason)—and receive that permission? Such persons’ behavior would be just as wasteful, but would probably not receive the same moral disapproval. Second, to the extent Guttentag considers detaching his model from the debate over the morality of insider trading, this line-cutting example pulls him right back in.

Despite these concerns, I am convinced that Guttentag’s new article advances the discussion about why insider trading is (or can be) harmful to markets and society. I recommend it to anyone who wishes to be educated on the subject. Here’s the abstract to Mike’s article:

This article offers a new and compelling reason to make all trading based on inside information illegal.

The value realized by trading on inside information is unusual in two respects. First, inside information is produced at little or no incremental cost and is nevertheless quite valuable. Second, profits made from trading on inside information come largely at the expense of others. When the value of something exceeds the cost to produce it, a wasteful race to be the first to capture the resulting surplus is likely to ensue. Similarly, resources expended solely to take something of value from others are wasted from an overall social welfare perspective. Thus, both at its source and in its use inside information invites wasteful competition. A law prohibiting insider trading is the best way to avoid this wasteful competition.

Previous scholarship misses this obvious conclusion because of its reliance on one of three assumptions. First, wasteful competition is assumed to be a problem that markets can rectify. Second, private ordering solutions are assumed to be available even when market mechanisms fail to address this problem. Third, a wasteful race to acquire and use inside information is viewed as otherwise unavoidable. None of these assumptions is correct.

The findings here have immediate policy implications. First, insider trading legislation should be enacted that bans all insider trading and not just trading based on wrongfully acquired information. Second, there is no reason to require proof that a tipper received a personal benefit to prosecute someone for tipping inside information. Third, the possession and not the use of inside information should be enough to trigger a trading prohibition.

March 18, 2022 in Corporations, Ethics, Financial Markets, John Anderson, Law and Economics, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, February 28, 2022

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing Friday, March 4 12:30-3:30

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing

I'm thrilled to moderate two panels this Friday and one features our rock star BLPB editor, Ben Edwards. 

                                                                     REGISTER HERE

The University of Miami Business Law Review is hosting its 2022 online symposium on Friday, March 4, 2022. The symposium will run from 12:30 PM to 3:30 PM. The symposium will be conducted via Zoom. Attendees can apply to receive CLE credits for attending this event—3.5 CLE credits have been approved by the Florida Bar. 

The symposium will host two sessions with expert panelists discussing the gamification of trading platforms and the growing popularity of aligning investments with personal values.

The panels will be moderated by Professor Marcia Narine Weldon, who is the director of the Transactional Skills Program, Faculty Coordinator of the Business Compliance & Sustainability Concentration, and a Lecturer in Law at the University of Miami School of Law.

Panel 1: Gamification of Trading 

This panel will focus on the role of social media and “gamification” of trading apps/platforms in democratizing investing, and the risks that such technology may influence investor behavior (i.e., increase in trading, higher risk trading strategies like options and margin use, etc.).

Gerri Walsh:

Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA). In this capacity, she is responsible for the development and operations of FINRA’s investor education program. She is also President of the FINRA Investor Education Foundation, where she manages the Foundation’s strategic initiatives to educate and protect investors and to benchmark and foster financial capability for all Americans, especially underserved audiences. Ms. Walsh was the founding executive sponsor of FINRA’s Military Community Employee Resource Group. She serves on the Advisory Council to the Stanford Center on Longevity and represents FINRA on IOSCO’s standing policy committee on retail investor education, the Jump$tart Coalition for Personal Financial Literacy, NASAA’s Senior Investor Advisory Council and the Wharton Pension Research Council.

Prior to joining FINRA in May 2006, Ms. Walsh was Deputy Director of the Securities and Exchange Commission’s Office of Investor Education and Assistance (OIEA) and, before that, Special Counsel to the Director of OIEA. She also served as a senior attorney in the SEC’s Division of Enforcement, investigating and prosecuting violators of the federal securities laws. Before that, she practiced law as an associate with Hogan Lovells in Washington, D.C.

Ari Bargil:

Ari Bargil is an attorney with the Institute for Justice. He joined IJ’s Miami Office in September of 2012, and litigates constitutional cases protecting economic liberty, property rights, school choice, and free speech in both federal and state courts.

In 2019, Ari successfully defended two of Florida’s most popular school choice programs, the McKay Program for Students with Disabilities and the Florida Tax Credit Program, before the Florida Supreme Court. As a direct result of the victory, over 120,000 students in Florida have access to scholarships that empower them to attend the schools of their choice.

Ari also regularly defends property owners battling aggressive zoning regulations and excessive fines in state and federal court nationwide and litigates on behalf of entrepreneurs in cutting-edge First Amendment cases. He was co-counsel in a federal appellate court victory vindicating the right of a Florida dairy creamery to tell the truth on its labels, and he is currently litigating in federal appellate court to secure a holistic health coach’s right to share advice about nutrition with her clients. In 2017, Ari was honored by the Daily Business Review as one of South Florida’s “Most Effective Lawyers.”

In addition to litigation, Ari regularly testifies before state and local legislative bodies and committees on issues ranging from occupational licensing to property rights regulation. Ari has also spearheaded several successful legislative campaigns in Florida, including the effort to legalize the sale of 64-ounce “growlers” by craft breweries and the Florida Legislature’s passage of the Right to Garden Act—a reform which made it unlawful for local governments to ban residential vegetable gardens throughout the state.

Ari’s work has been featured by USA Today, NPR, Fox News, Washington Post, Miami Herald, Dallas Morning News and other national and local publications.

Christine Lazaro:

Christine Lazaro is Director of the Securities Arbitration Clinic at St. John’s University School of Law. She joined the faculty at St. John’s in 2007 as the Clinic’s Supervising Attorney. She is also a faculty advisor for the Corporate and Securities Law Society.

Prior to joining the Securities Arbitration Clinic, Professor Lazaro was an associate at the boutique law firm of Davidson & Grannum, LLP.  At the firm, she represented broker-dealers and individual brokers in disputes with clients in both arbitration and mediation.  She also handled employment law cases and debt collection cases.  Professor Lazaro was the primary attorney in the firm’s area of practice that dealt with advising broker-dealers regarding investment contracts they had with various municipalities and government entities.  Professor Lazaro is also of Counsel to the Law Offices of Brent A. Burns, LLC, where she consults on securities arbitration and regulatory matters.

Professor Lazaro is a member of the New York State and the American Bar Associations, and the Public Investors Arbitration Bar Association (PIABA). Professor Lazaro is a past President of PIABA and is a member of the Board of Directors.  She is also a co-chair of PIABA’S Fiduciary Standards Committee, and is a member of the Executive, Legislation, Securities Law Seminar, and SRO Committees. Additionally, Professor Lazaro is the co-chair of the Securities Disputes Committee in the Dispute Resolution Section of the New York State Bar Association and serves on the FINRA Investor Issues Advisory Committee. 

Panel 2: ESG Investing

The second panel will address the growing popularity of ESG funds among investors that want to align their investments with their personal values, and the questions/concerns that arise with ESG funds, including: 1) explaining what they are; 2) discussing the varying definitions and disclosure issues; 3) exploring if investors really give up better market performance if they invest in funds that align with their values; and 4) asking if the increased interest in ESG funds affect corporate change? 

Thomas Riesenberg:

Mr. Riesenberg is Senior Regulatory Advisor to Ceres, working on climate change issues. He previously worked as an advisor to EY Global’s Office of Public Policy on ESG regulatory issues. Before that he worked as the Director of Legal and Regulatory Policy at The Sustainability Accounting Standards Board pursuant to a secondment from EY. At SASB he worked on a range of US and non-US policy matters for nearly seven years. He served for more than 20 years as counsel to EY, including as the Deputy General Counsel responsible for regulatory matters, primarily involving the SEC and the PCAOB. Previously he served for seven years as an Assistant General Counsel at the U.S. Securities and Exchange Commission where he handled court of appeals and Supreme Court cases involving issues such as insider trading, broker-dealer regulation, and financial fraud. While at the SEC he received the Manuel Cohen Outstanding Younger Lawyer Award for his work on significant enforcement cases. He also worked as a law clerk for a federal district court judge in Washington, D.C., as a litigator on environmental matters at the U.S. Department of Justice, and as an associate at a major Washington, D.C. law firm.

Mr. Riesenberg graduated from the New York University School of Law, where he was a member of the Law Review and a Root-Tilden Scholar (full-tuition scholarship). He received a bachelor’s degree from Oberlin College, where he graduated with honors and was elected to Phi Beta Kappa. He is a former chair of the Law and Accounting Committee of the American Bar Association, former president of the Association of SEC Alumni, former treasurer of the SEC Historical Society, and a current member of the Advisory Board of the BNA Securities Regulation and Law Report. For seven years he was an adjunct professor of securities law at the Georgetown University Law Center. He is an elected member of the American Law Institute. He serves on the boards of several nonprofit organizations, including the D.C. Jewish Community Relations Council and the Washington Tennis & Education Foundation. He is the author of numerous articles on securities law and ESG disclosure issues.

Benjamin Edwards:

Benjamin Edwards joined the faculty of the William S. Boyd School of Law at the University of Nevada, Las Vegas in 2017. In addition to being the Director of the Public Policy Clinic, he researches and writes about business and securities law, corporate governance, arbitration, and consumer protection. Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis.

Max Schatzow:

Max Schatzow is a co-founder and partner of RIA Lawyers LLC—a boutique law firm that focuses almost exclusively on representing investment advisers with legal and regulatory issues. Prior to RIA Lawyers, Max worked at Morgan Lewis representing some of the largest financial institutions in the United States and at another law firm where he represented investment advisers and broker-dealers. Max is a business-minded regulatory lawyer that always tries to put himself in the client’s position. He assists clients in all aspects of forming, registering, owning, and operating an investment adviser. He prides himself in preparing clients and their compliance programs to avert regulatory issues, but also assists clients through examinations and enforcement issues. In addition, Max assists advisers that manage private investment funds. In his little spare time, Max enjoys the Peloton (both stationary and road), golf, craft beer, and spending time with his wife and two children.

February 28, 2022 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law Reviews, Law School, Lawyering, Legislation, Marcia Narine Weldon, Research/Scholarhip, Securities Regulation | Permalink | Comments (0)

Friday, February 18, 2022

Time for a Broad Prophylactic Against Congressional Insider Trading

With a recent poll showing that 76 percent of voters think members of Congress have an "unfair advantage" in stock trades, I argued in my last post that Congress should adopt a broad rule against trading in individual stocks by sitting cogresspersons (and perhaps their spouses, children, and staff). I argued that such a move would go a long way toward restoring the perception that members of Congress are public servants, as opposed to the current perception shared by many voters that they are public parasites. In addition to restoring public confidence in the legislative branch, I argued adopting such a prophylactic against insider trading would also help improve public confidence in the integrity of our securities markets—a goal Congress has touted repeatedly for almost a century.

I have since posted a short paper on SSRN, Time for a Broad Prophylactic against Congressional Insider Trading, that develops these arguments. Part I offers a brief summary of the current state of insider trading laws, with a special focus on their application to Congress. Part II surveys some of the proposed insider trading reform bills under consideration. Part III argues that, given congresspersons’ unique role vis-à-vis securities markets, a broad prophylactic against congressional trading is both justified and needed.

February 18, 2022 in Ethics, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, February 11, 2022

Business and Sports

Between the Winter Olympics and the Superbowl, this weekend is a sports-lover's dream. But it can also be a nightmare for others. Next week in my Business and Human Rights class, we'll discuss the business of sports and the role of business in sports. For some very brief background, under the UN Guiding Principles on Business and Human Rights, the state has a duty to protect human rights but businesses have a responsibility (not a duty) to "respect" human rights, which means they can't make things worse. Businesses should also mitigate negative human rights impacts. I say "should" because the UNGPs aren't binding on businesses and there's a hodgepodge of due diligence and disclosure regimes that often conflict and overlap. But things are changing and with ESG discussions being all the rage and human rights and labor falling under the "S" factor, businesses need to do more. The EU is also finalizing mandatory human rights due diligence rules and interestingly, some powerful investors and companies are on board, likely so there's some level of certainty and harmonization of standards. 

I've blogged in the past about human rights issues in sports, particularly the Olympics and World Cup in Brazil, where hundreds of thousands of people were displaced, FIFA had its own courts, and human rights issues abounded. For more on human rights and megasporting events, see this post about the Russian Olympics. The current Olympics in China and the future World Cup in Qatar have been rife with controversy because of the long-standing human rights abuses in those countries. Some athletes have even called the Winter Olympics the Genocide Olympics.

So whose problem is it? If businesses know that there's almost always some human rights impact with megasporting events and they know sponsorship doesn't really add to the bottom line, should they get out of the sponsorship business all together? Are they complicit or merely (innocent) bystanders?

Here are the questions I've asked my students to consider for class this week. 

  1. My hometown of Miami is vying for a spot to host the 2026 World Cup. What are the obligations of the "state" when it's a city? As the US government begins revising its National Action Plan on Responsible Business Conduct in accordance with the UNGPs, should a city do more than the national government? Should FIFA look at issues such as the effect of the games on the cities beyond revenue that will enrich only a few?
  2. Cities have a human rights obligation to protect their citizens but what responsibility do companies have to make sure they don't exacerbate pre-existing homelessness issues?
  3. Does it matter if the company sponsoring is Nike (directly working with athletes), Coca Cola (providing beverages), or another company that's just an advertiser? Is there a difference in the degree of corporate responsibility (if any)?
  4. Commentators have accused Nike and other companies of using forced labor in China. Is there a conflict with their support of Colin Kaepernick and the Black Lives Matter movement while also participating in events where there are alleged human rights abuses?
  5. What about the issue of human trafficking and megasporting events? It's such a big problem that the NFL has partnered with US Customs and Border Patrol for a public service announcement about it in light of the Superbowl. Are public service announcements enough?
  6. Should athletes boycott events in countries with poor human rights records? How would that affect their sponsorships and their other contractual obligations? A Boston Celtic called for a boycott of the Beijing Olympics, but who's really listening?
  7. How do what athletes say about Black Lives Matter and taking a knee square with participating in events in China? Should athletes, who are businesses, just shut up and dribble? If an athlete/businessman like LeBron James takes on Black Lives Matter does he have an equal obligation to protest against the use of forced labor in China?
  8. FIFA and the International Olympic Committee are corporations that base their human rights policies in part on the UNGPs. They have spoken out against discrimination, human rights, and  racism in sport.  Is it too much or too little? How far should a company like FIFA or the NFL go before they alienate fans by talking about hot button issues?
  9. Should fans boycott events that are known for human rights abuses? How does that affect the livelihood of the workers who depend on that revenue? Would a boycott benefit or hurt those who need the support the most?

I look forward to a lively discussion in class on Wednesday about the respective roles and responsibilities of the state, the companies, and the fans. Will you look at sports any differently after reading this post?  If you have thoughts, please leave a comment or email me at mweldon@law.miami.edu.

 

 

 

February 11, 2022 in Corporations, CSR, Current Affairs, Ethics, Human Rights, International Business, Law School, Marcia Narine Weldon, Sports | Permalink | Comments (0)

Friday, February 4, 2022

Public Servants or Parasites? Why a Broad Prophylactic against Congressional Insider Trading Makes Sense

In 2011, Peter Schweizer published a book, Throw Them All Out, in which he exposed some questionable means by which (according to one study) politicians manage to increase their personal wealth 50% faster than the average American.

According to Schweizer, trading on material nonpublic information appears to be a popular method among congresspersons for achieving outsized returns on their investments. He cites one study finding:

  • The average American investor underperforms the market.
  • The average corporate insider, trading his own company’s stock, beats the market by 7% a year.
  • The average senator beats the market by 12% a year.

Schweitzer’s book was followed by a feature story on the CBS News show, 60 Minutes, highlighting some dubious stock trades by leaders of both political parties. These stories got the public’s attention and spurred Congress to act—adopting the Stop Trading on Congressional Knowledge (STOCK) Act in April of 2012.

The STOCK Act made explicit what many already understood as implicit—that congressional trading based on material nonpublic information acquired by virtue of their position as a public servant was a breach of their fiduciary duties and would therefore violate Section 10b of the Securities Exchange Act of 1934. The Act also expanded disclosure requirements for members of Congress, the executive branch, and their staff members.

But no sooner had the STOCK Act passed than it was quietly overhauled to weaken certain of its key provisions, and, in any event, the Act has not been consistently enforced since its adoption. As a result, public cynicism concerning congressional insider trading has once again snowballed. For example, Speaker Nancy Pelosi's stock trades are monitored by popular Twitter, TikTok, and Reddit accounts with handles like "@NancyTracker," and the search “Pelosi stock trades” hit a record high on Google in January 2022.

Of course, Pelosi is not the only congressperson the public suspects of insider trading. For example, a number of U.S. Senators were scrutinized over suspicious stock trades as the threat of the COVID-19 pandemic emerged in 2020.

So what is to be done? Just as they did in 2011, members of Congress on both sides of the aisle are rushing to get out in front of the issue. A number of congressional insider trading reform bills have garnered bipartisan support. Many of these bills propose the broad prophylactic of proscribing members of congress from trading in individual stocks. Some bills would go so far as proscribing trades by spouses and dependent children as well.

There is precedent for broad prophylactics against insider trading. Consider, for example, Exchange Act Rule 14e-3, which permits civil and criminal liability for trading based on material nonpublic information concerning tender offers, even if there is no accompanying proof of fraud.

Though I have argued for reducing the scope of insider trading liability in some contexts (e.g., where such trading is licensed by the issuer of the stock being traded), I have consistently recognized misappropriation trading (such as when a congressperson misappropriates material nonpublic government information to trade for personal gain) as morally wrong, and as warranting civil and criminal sanctions. And I think extending the scope of liability for congressional insider trading with a broad prophylactic (e.g., proscribing all individual stock trades) is warranted for the following reasons (among others):

  • Congress’s influence over the SEC and DOJ makes aggressive enforcement by those agencies more challenging—and when actions are brought, there will always be the specter of political motivation. The broad prophylactic would simplify enforcement, and thereby mitigate these worries.
  • Given the above concerns, even legitimate stock trades by members of Congress will be the subject of continued public suspicion and cynicism. Such suspicion undermines public confidence in the integrity of the legislative branch--and the markets.
  • Protestations that a broad proscription of individual stock trading would be Un-American because "We're a free-market economy" and “[Members of Congress] should be able to participate in that” are totally unavailing. People voluntarily assume roles that deprive them of rights they would otherwise enjoy all the time (e.g., by joining the military), and public service has always been understood as just such a role.
  • Members of congress should not be (significantly) financially disadvantaged by a rule precluding trades in individual stocks. Given the efficient market hypothesis (roughly, that an individual stock’s price always reflects all currently available public information about that stock), members of congress should not expect their individual stock trades to outperform a similar trade in, say, a mutual fund in any event….unless, that is, they have information that is NOT publicly available.... Diversification is typically the best long-term investment strategy.

The most recent ReacClearPolitics Poll Average shows that Congress currently enjoys the approval of 21% of Americans. If Congress would like to begin improving those numbers, I suggest it adopt one of the proposed insider trading bills proscribing individual stock trading by its members. This might go a long way toward restoring the perception that members of Congress are public servants, as opposed to the current perception shared by many Americans (justified or not) that they are public parasites.

February 4, 2022 in Ethics, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (3)

Friday, December 31, 2021

New Year's Resolution for Lawyers

People rarely keep resolutions, much less ones they don’t make for themselves, but here are some you may want to try.

  1. Post information about the law and current events that lay people can understand on social media. You don’t need to be a TikTok lawyer and dance around, but there’s so much misinformation out there by “influencers” that lawyers almost have a responsibility to correct the record.
  2. Embrace legal tech. Change is scary for most lawyers, but we need to get with the times, and you can start off in areas such as legal research, case management, accounting, billing, document automation and storage, document management, E-discovery, practice management, legal chatbots, automaton of legal workflow, contract management, artificial intelligence, and cloud-based applications. Remember, lawyers have an ethical duty of technological competence.
  3. Learn about legal issues related to the metaverse such as data privacy and IP challenges.
  4. Do a data security audit and ensure you understand where your and your clients’ data is and how it’s being transmitted, stored, and destroyed. Lawyers have access to valuable confidential information and hackers know that. Lawyers also have ethical obligations to safeguard that information. Are you communicating with clients on WhatsApp or text messages? Do you have Siri or Alexa enabled when you’re talking about client matters? You may want to re-think that. Better yet, hire a white hat hacker to assess your vulnerabilities. I'll do a whole separate post on this because this is so critical. 
  5. Speaking of data, get up to speed on data analytics. Your clients use data every day to optimize their business performance. Compliance professionals and in-house lawyers know that this is critical. All lawyers should as well.
  6. Get involved with government affairs. Educate legislators, write comment letters, and publish op-ed pieces so that people making the laws and influencing lawmakers can get the benefit of your analytical skills. Just make sure you’re aware of the local, state, and federal lobbying laws.
  7. Learn something completely new. When you do your CLE requirement, don’t just take courses in your area of expertise. Take a class that has nothing to do with what you do for a living. If you think that NFTs and cryptocurrency are part of a fad waiting to implode, take that course. You’ll either learn something new or prove yourself right.
  8. Re-think how you work. What can you stop, start, and continue doing in your workplace and family life?
  9. Be strategic when thinking about diversity, equity, and inclusion. Lawyers talk about it, but from what I observe in my lawyer coaching practice and the statistics, the reality is much different on the ground and efforts often backfire.
  10. Prioritize your mental health and that of the members on your team. Do you need to look at billable hours requirements? What behavior does your bonus or promotion system incentivize? What else can you do to make sure that people are valued and continually learning? When was the last time you conducted an employee engagement survey and really listened to what you team members are saying? Whether your team is remote or hybrid, what can you do to make people believe they are part of a larger mission? There are so many resources out there. If you do nothing else on this list, please focus on this one. If you want help on how to start, send me an email.

Wishing you a safe, healthy, and happy 2022.

December 31, 2021 in Compliance, Contracts, Corporations, Current Affairs, Ethics, Film, Intellectual Property, Jobs, Law Firms, Lawyering, Legislation, Management, Marcia Narine Weldon, Technology, Wellness | Permalink | Comments (0)

Friday, September 24, 2021

Ten Ethical Traps for Business Lawyers

I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot. 

All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.

Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).  

Discussion topics will include:

  1. Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
  2. What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
  3. What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
  4. What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
  5. What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
  6. With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
  7. What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
  8. What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
  9. When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
  10. What are potential gaps in attorney-client privilege protection when dealing with cross-border issues? 

If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...

Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.

Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.

Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.

Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.

Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.

All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.

September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)

Friday, September 17, 2021

The SEC Can't Have Its Cake and Eat It Too: Some Concerns for Proposed Trading Plan Reforms

The Securities and Exchange Commission’s (SEC) Chairman, Gary Gensler, recently directed the staff to present recommendations to "freshen up" and tighten some provisions in Exchange Act Rule 10b5-1. In response, the SEC’s Investor Advisory Committee proposed new restrictions on the use of 10b5-1(c) trading plans as an affirmative defense against insider trading liability. The proposed changes are designed to address concerns that "some plans are used to engage in opportunistic trading behavior that contravenes the intent behind the rule," and they are consistent with recommendations outlined in the  Promoting Transparent Standards for Corporate Insiders Act that passed the House of Representatives in April 2021.

But any proposed restrictions to trading plans must be considered in light of the broader context of Rule 10b5-1, and the motivation behind the affirmative defense’s adoption.

The courts have interpreted Section 10b of the Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis” of material nonpublic information. This element of intent for insider trading liability can be difficult for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade can often claim that they did not use the information to trade. They may claim, for example, that they only sold stock to pay their child’s college tuition bill, and the material nonpublic information had nothing to do with the trade.

Prior to 2000, the SEC and prosecutors sought to defeat this defense strategy by taking the position that knowing possession of material nonpublic information while trading satisfies the “on the basis of” element of insider trading liability. But when pressed, this strategy met with only mixed results in the courts. In an attempt to settle a circuit split over this “use-versus-possession” issue, the SEC adopted Rule 10b5-1, which defines trading “on the basis of” material nonpublic information for purposes of insider trading liability as trading while “aware” of such information.

The SEC anticipated two problems for its new awareness test: (1) It anticipated concern from the courts that imposing liability on a person who is merely aware of material nonpublic information while trading (without a causal relation between the information and the trade) would exceed the commission’s statutory authority by failing to satisfy the requirement of scienter under the general antifraud provisions of Section 10(b) of the Exchange Act. (2) There was also a concern that the broad awareness test may chill legitimate trading by insiders (e.g., for portfolio diversification), which would negatively impact the value of firm shares as a form of compensation. The 10b5-1 trading plan as an affirmative defense to insider trading liability was designed to mitigate these concerns.

Now, the SEC is considering significant new restrictions on the use of trading plans that include (a) a “cooling off” period of at least four months between plan adoption and trading or modification; (b) a prohibition on overlapping plans; and (c) new disclosure requirements.

In two recent articles, Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform and Undoing a Deal with the Devil: Some Challenges for Congress's Proposed Reform of Insider Trading Plans, I argue that additional restrictions on trading plan use like those being proposed by the SEC risk defeating the very purposes for which the affirmative defense was adopted. For example, new restrictions on 10b5-1(c) trading plans may force courts to conclude that the SEC exceeded its authority with the adoption of its broad 10b5-1(b) awareness test. Moreover, since new restrictions on trading plans will make it more difficult for employees to sell shares issued to them as equity compensation, those shares will be less valuable to employees. Firms will therefore have to offer more shares to employees to achieve the same remunerative effect. This will impose new costs on shareholders. Will the anticipated benefits of the new restrictions offset these costs?

My hope is that the SEC will take these considerations (and others I have raised) into account as it mulls the question of 10b5-1(c) trading plan reform. After all, the Commission cannot have its cake and eat it too!

September 17, 2021 in Ethics, John Anderson, Law and Economics, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, September 3, 2021

Testing Our Intuitions About Insider Trading - Part III

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 and XYZ 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.

September 3, 2021 in Business Associations, Corporations, Ethics, John Anderson, Law and Economics, Philosophy, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, August 20, 2021

Testing Our Intuitions About Insider Trading - Part II

As Congress and the SEC continue to contemplate reforms to the U.S. insider-trading enforcement regime, I suggested in my last post that 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?” To this end, I have 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 last post, I offered a scenario that would result in liability under a parity-of-information regime, but not under the other three. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.

In this post, I offer the following scenario to test our attitudes regarding trading under an equal-access model. An equal-access regime precludes trading by those who have acquired information advantages by virtue of their privileged access to sources that are structurally closed to other market participants (regardless of whether such trading violates a duty of trust and confidence). An equal access model is narrower in scope than the parity-of-information model, but broader than the laissez-faire and fiduciary-fraud models. Consider these facts:

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 (another publicly traded company). The shares of both BIG Corp and XYZ Corp will skyrocket when the deal is announced to the public in seven days. The senior VP asks the CEO and board of Big Corp if, instead of receiving the usual cash bonus that would be his due for leading such a deal, he can purchase shares of XYZ Corp for his personal account in advance of the announcement. The CEO and board approve the VP’s trading—deciding that the BIG Corp shareholders will save money from this arrangement. The VP buys XYZ Corp shares in advance of the announcement and he makes huge profits when the deal is announced.

Was the senior VP’s trading wrong or harmful? If you do not think the senior VP or Big Corp has done anything wrong or harmful in this scenario, then you will probably not favor the equal-access model for insider trading regulation—which would render this conduct illegal. You will likely favor some version of the less restrictive laissez-faire or fiduciary-fraud model instead. My next post will offer a scenario to test our intuitions about the fiduciary-fraud model (the third most restrictive regime).

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. Please share your thoughts in the comments below!

August 20, 2021 in Business Associations, Ethics, John Anderson, Law and Economics, Philosophy, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, August 6, 2021

Kelley School of Business at Indiana University (Bloomington) Hiring

Indiana University has a top-notch Business Law and Ethics department in their business school. I know a number of their professors and they would be fabulous colleagues.

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The Kelley School of Business at Indiana University in Bloomington seeks applications for a tenured/tenure-track position or positions in the Department of Business Law and Ethics, effective fall 2022. The candidate(s) selected will join a well-established department of 28 full- time faculty members who teach a variety of courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. It is anticipated that the position(s) will be at the assistant professor rank, though appointment at a higher rank could occur if a selected candidate’s record so warrants.

To be qualified, a candidate must have a J.D. degree with an excellent academic record and must demonstrate the potential for outstanding teaching and excellent scholarship in law and/or ethics, as well as the ability to contribute positively to a multicultural campus. Qualified applicants with expertise in any area of law and/or ethics will be considered, and we welcome candidates with teaching interests across a broad range of legal and ethical issues in business, as well as research methods or perspectives, that would contribute to the diversity of our department and help usadvance the Kelley School’s equity and inclusion initiatives and programs.

Candidates with appropriate subject-matter expertise and interest would have the opportunity to be involved on the leading edge of a developing interdisciplinary collaboration between the Kelley School of Business and the Kinsey Institute, the premier research institute on human sexuality and relationships and a trusted source for evidence-based information on critical issues in sexuality, gender, and reproduction. Such expertise, however, is not required to be qualified and considered for the position or positions.

Interested candidates should review the application requirements and submit their application materials at https://indiana.peopleadmin.com/postings/11252. Candidates may direct questions to: Professor Josh Perry, Department Chair (joshperr@indiana.edu), or Professor Tim Fort, Search Committee Chair (timfort@indiana.edu), both at Department of Business Law and Ethics, Kelley School of Business, Indiana University, 1309 E. 10th Street, Bloomington, IN 47405.

Application materials received by September 15, 2021 will be assured of consideration. However, the search will continue until the position(s) is/are filled.

Indiana University is an equal employment and affirmative action employer and a provider of ADA services. All qualified applicants will receive consideration for employment without regard to age, ethnicity, color, race, religion, sex, sexual orientation, gender identity or expression, genetic information, marital status, national origin, disability status or protected veteran status.

August 6, 2021 in Business Associations, Business School, Ethics, Haskell Murray, Jobs | Permalink | Comments (0)

Testing Our Intuitions About Insider Trading - Part I

In January of 2020, The Bharara Task Force on Insider Trading released its report recommending that Congress adopt sweeping reforms of our insider trading enforcement regime. And it appears there is at least some momentum building to act on this recommendation. In April of 2021, the House of Representatives passed the Promoting Transparent Standards for Corporate Insiders Act, and in May of 2021, the House passed the Insider Trading Prohibition Act.  I have expressed some concerns about these bills (see, e.g., here and here). But, as I argue in my book, Insider Trading: Law, Ethics, and Reform, I am in complete agreement with the claim that our current insider trading regime is broken and needs to be reformed.

We should not, however, rush to adopt a new insider trading regime without first thoughtfully considering what constitutes insider trading; why it is wrong; who is harmed by it; and the nature and extent of the harm. The answers to these questions have been subject to endless academic debate, but are crucial for determining whether insider trading should be regulated civilly and/or criminally (or not at all), as well as for determining the nature and magnitude of any sanctions to be imposed.

Historically, insider trading regimes around the globe can be grouped (roughly) into four categories (listed from the least to most restrictive): (a) laissez-faire regimes, which permit all trading on information asymmetries, so long as there is no affirmative fraud (actual misrepresentations or concealment); (b) fiduciary-fraud regimes, which recognize a duty to disclose or abstain from trading, but only for those who share a recognized duty of trust and confidence (with either the counterparty to the trade, or with the source of the information, or both); (c) equal-access regimes, which preclude trading by those who have acquired information advantages by virtue of their privileged access to sources that are structurally closed to other market participants (regardless of whether such trading violates a duty of trust and confidence); and (d) parity-of-information regimes, which strive to prohibit all trading on material nonpublic information (regardless of the source).

The following scenario illustrates conduct that would expose the trader to liability under a parity-of-information regime, but not under an equal access, fiduciary-fraud, or laissez-faire regime. As you read through the fact pattern, ask yourself: (1) Is this trading wrong? (2) Who (if anyone) is harmed by it? (3) What is the nature and extent of the harm? (4) Should this trading be regulated (civilly or criminally)? (Please share any answers/thoughts in the comments below!):

A high-school janitor is traveling home from work late at night on a public bus. She looks down and sees a trampled piece of paper. She picks up the paper and reads it. It appears to be someone’s notes from a meeting—though there is nothing to identify the paper’s owner/author. The paper reads as follows:

Meet at HQ of XYZ Corp at 3PM on Jan. 3 to finalize the merger with BIG Corp. Merger to be announced to public on Jan 10. Note: the announcement of merger will send shares of XYZ through the roof, so everyone must maintain strict confidentiality.

The janitor looks up and sees the bus is totally empty. There is no chance of finding the person who dropped the paper. It is January 4. The janitor opens an online brokerage account when she gets home and buys as many shares of XYZ Corp as she can afford. She makes huge profits when the merger is announced on January 10.

If you do not think the janitor has done anything wrong or harmful in this scenario, then you will probably not favor the parity-of-information model for insider trading regulation—which would render this conduct illegal. You will likely favor some version of one of the other insider-trading models instead. My next post will offer a scenario to test our intuitions about the equal-access model (the second-most restrictive regime).

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 answer to this question) the nature and extent to which it should be regulated.

August 6, 2021 in Ethics, Financial Markets, John Anderson, M&A, Securities Regulation, White Collar Crime | Permalink | Comments (2)

Friday, July 23, 2021

Call for Papers – AALS 2022 Discussion Group: “A Very Online Economy”

Professor Martin Edwards (Belmont University College of Law) and I are excited to moderate a discussion group titled, “A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s)—How Should the Law Respond,” at the 2022 American Association of Law Schools Annual Meeting. The discussion group is scheduled to take place (virtually) on Friday, January 7, 2022. We welcome responses to the call for participation (here). Here’s the description:

Emergent forces emanating from social and financial technologies are challenging many underlying assumptions about the workings of markets, the nature of firms, and our social relationship with our economic institutions. The 21st century economy and financial architecture are built on faith and trust in centralized institutions. Perhaps it is not surprising that in 2008, a time where that faith and trust waned, a different architecture called “blockchain” emerged. It promised “trustless” exchange, verifiable intermediation, and “decentralization” of value transfer.

In 2021, the financial architecture and its institutions suffered a broadside from socialmedia-fueled “meme” and “expressive” traders. It may not be a coincidence that many of these traders reached adulthood around 2008, when the crisis called into question whether that real money, those real securities, or that real, fundamental value were really real at all. People are engaging with questions about social values in an increasingly uneasy way. There is a flux not only in the substantive values, but also with what set of institutions people should trust to produce, disseminate, and enforce values.

One question is what role business corporations might play in this moment, which is being worked out most prominently through discussions about environmental and social governance (ESG). Social and financial technologies may be rewriting longstanding assumptions about social and economic institutions. Blockchains challenge our assumptions about the need for centralization, trust, and institutions, while meme or expressive trading and ESG challenge our assumptions about economic value, market processes, and social values.

It promises to be a great discussion!

July 23, 2021 in Corporations, Current Affairs, Ethics, Financial Markets, John Anderson, Law and Economics, Securities Regulation, Web/Tech | Permalink | Comments (0)

Monday, July 19, 2021

Since the Pandemic is Still with Us . . .

 . . . I figure it is still OK to publish a link to the SSRN posting of my co-authored article from the 2020 Business Law Prof Blog symposium, Connecting the Threads.  Published earlier in the spring, this piece, entitled Business Law and Lawyering in the Wake of COVID-19, was written with two of my students: Anne Crisp (who will start her 3L year in about a month) and Gray Martin (who graduated in May and will take the bar exam next week).  My March 30, 2021 post on business interruption insurance came from this article.  The SSRN abstract is included below.

The public arrival of COVID-19 (the novel coronavirus 2019) in the United States in early 2020 brought with it many social, political, and economic dislocations and pressures. These changes and stresses included and fostered adjustments in business law and the work of business lawyers. This article draws attention to these COVID-19 transformations as a socio-legal reflection on business lawyering, the provision of legal services in business settings, and professional responsibility in business law practice. While business law practitioners, like other lawyers, may have been ill-prepared for pandemic lawyering, we have seen them rise to the occasion to provide valuable services, gain and refresh knowledge and skills, and evolve their business operations. These changes have brought with them various professional responsibility and ethical challenges, all of which are ongoing at the time this is being written.

No doubt both the changes to business lawyering and the lessons learned from the many substantive, practical, and ethical challenges that have arisen in the wake of COVID-19 will survive the pandemic in some form. This offers some comfort. While the thought of another systemic global crisis is unappealing at best, what we have experienced and learned will no doubt be useful in maneuvering and surviving through whatever the future may bring.

This article came to be because I agreed to take on additional research assistants after summer jobs were scuttled for many students in the spring of 2020.  I shared the germ of an idea with Anne and Gray.  They took that idea and ran with it, adding important new concepts and support.  The writing collaboration naturally followed.  They co-presented the article with me at the symposium back in October.  Working with them throughout was so joyful and fun--a true pandemic silver lining.

July 19, 2021 in Contracts, Corporate Governance, Current Affairs, Ethics, Joan Heminway, Law Firms, Lawyering | Permalink | Comments (0)

Tuesday, July 6, 2021

Social Enterprise Centers

In 2008, my university (Belmont University) was supposedly the first to offer a social entrepreneurship major. Since then, not only have the schools offering majors in social entrepreneurships grown, but many schools have created centers, institutes, or programs dedicated to the area. Below I try to gather these social enterprise centers in universities. The vast majority are in business schools, some are collaborative across campus, and a few are located in other schools such as law, social work, or design. A few have a specifically religious take on business and social good. Happy to update this list with any centers I missed. 

Lewis Institute at Babson https://www.babson.edu/academics/centers-and-institutes/the-lewis-institute/about/# 

Christian Collective for Social Innovation at Baylor https://www.baylor.edu/externalaffairs/compassion/index.php?id=976437

Center for Social Innovation at Boston College https://www.bc.edu/content/bc-web/schools/ssw/sites/center-for-social-innovation/about.html

Watt Family Innovation Center at Clemson https://www.clemson.edu/centers-institutes/watt/

Center for the Integration of Faith and Work at Dayton https://udayton.edu/business/experiential_learning/centers/cifw/index.php

CASE i3 at Duke https://sites.duke.edu/casei3/

Social Innovation Collaboratory at Fordham https://www.fordham.edu/info/23746/social_innovation_collaboratory

Social Enterprise & Nonprofit Clinic at Georgetown  https://www.law.georgetown.edu/experiential-learning/clinics/social-enterprise-and-nonprofit-clinic/

and Beeck Center for Social Impact and Innovation at Georgetown https://beeckcenter.georgetown.edu

Global Social Entrepreneurship Institute at Indiana https://kelley.iu.edu/faculty-research/centers-institutes/international-business/programs-initiatives/global-social-entrepreneurship-institute.html

Business + Impact at Michigan https://businessimpact.umich.edu

Social Enterprise Institute at Northeastern https://www.northeastern.edu/sei/

Center for Ethics and Religious Values in Business at Notre Dame https://cerv-mendoza.nd.edu

Skoll Centre for Social Entrepreneurship at Oxford https://www.sbs.ox.ac.uk/research/centres-and-initiatives/skoll-centre-social-entrepreneurship

Wharton Social Impact Iniviative at Penn https://socialimpact.wharton.upenn.edu/

and Center for Social Impact Strategy at Penn https://csis.upenn.edu

Faith and Work Initiative at Princeton https://faithandwork.princeton.edu/about-us

Center for Faithful Business at Seattle Pacific https://cfb.spu.edu

Center for Social Innovation at Stanford https://www.gsb.stanford.edu/faculty-research/centers-initiatives/csi

Social Innovation Initiative at Texas https://www.mccombs.utexas.edu/Centers/Social-Innovation-Initiative

Taylor Center for Social Innovation and Design Thinking at Tulane https://taylor.tulane.edu/about/

Social Innovation Cube at UNC https://campusy.unc.edu/cube/

Social Innovation at the Wond’ry at Vanderbilt https://www.vanderbilt.edu/thewondry/programs/social-innovation/

Program for Leadership and Character at Wake Foresthttps://leadershipandcharacter.wfu.edu/#

Program on Social Enterprise at Yale https://som.yale.edu/faculty-research/our-centers/program-social-enterprise/programs

 

 

July 6, 2021 in Business School, CSR, Entrepreneurship, Ethics, Haskell Murray, Law School, Religion, Social Enterprise, Teaching | Permalink | Comments (0)

Tuesday, June 8, 2021

Reforming Meritocracy

Recently, I finished two similar books on problems with extreme meritocracy in the United States: The Tyranny of Merit by Harvard philosophy professor Michael Sandel and The Meritocracy Trap by Yale law professor Daniel Markovits. Law schools and entry level legal jobs tend to be intensely meritocratic. The more competitive entry level legal jobs rely very heavily on school rank and student class rank. Once in a private firm, billable hours seem to be the main metric for bonuses and making partner.

Sandel describes at least three problems with meritocracy: (1) people are not competing on an even playing field in the US "meritocracy" (e.g., children of top 1% in income are 77x more likely to attend an Ivy League school than children of bottom 20%); (2) even if there were an even playing field, natural talents that fit community preferences would lead to wild inequality in a pure meritocracy and those natural advantages are not “earned,” (3) a strict meritocracy leads to excessive hubris among the “winners” and shame among the “losers” who believe they deserve their place in society. 

Markovits hits a lot of the same notes, but pays more attention to how the elite “exploit themselves” trying to keep themselves and their children in the shrinking upper class. While the $50,000/year competitive preschools Markovits describes are mostly limited to NYC and Silicon Valley now, the expenditures on the education and extracurriculars of children of the wealthy seems to be increasing exponentially everywhere. He also notes the lengthening work hours for the “elite” and the increasing percentage of wealth tied to labor. For example, Markovits points out that the ABA assumed that lawyers would bill 1300 hours a year in 1962 (and 1400 in 1977). As legal readers know, many firms now require 2000+ billable hours a year (which means working 2500+ hours in most cases).

Both Sandel and Markovits do a thorough job explaining the problems of meritocracy, but are fairly brief on proposed solutions. Sandel thinks meritocracy could be made more fair through elite schools eliminating SAT/ACT requirements (that tend to track family income), engaging in more aggressive class-based affirmative action, and using a lottery to admit baseline qualified students. He thinks the last suggestion would reduce the hubris of those admitted to elite schools, and acknowledge an element of luck in their selection. Sandel also suggests more government expenditures on training and retraining programs, as most economically advanced countries spend a much higher percentage of GDP on these programs (0.1% vs. 0.5% to 1.0%). He also suggests using the tax system to reward “productive labor” by, for example, “lower[ing] or even eliminat[ing] payroll taxes and rais[ing] revenue instead by taxing consumption, wealth, and financial transactions.” (218).

Markovits proposes that private schools should lose their tax-exempt status if at least half of their students do not come from the bottom two-thirds of the income distribution. Markovits also suggests promoting more mid-skill production; by, for example, reducing regulation to allow more work to be done by nurse practitioners (rather than doctors) and legal technicians (rather than lawyers.) He suggests uncapping payroll tax (so that the wealthy pay more of their share), introducing wage subsidies for middle class jobs, and raising the minimum wage.

As Ivy League professors, I think they overestimate the role of their schools in shaping the rest of the country, though they may be right about their influence among certain segments of the wealthy. And while their solutions are rather thin, I think they raise issues with meritocracy worth addressing.  As Henri Nouwen acknowledged more than 50 years ago in his book Reaching Out, “people are in growing degree exposed to the contagious disease of loneliness in a world in which a competitive individualism [ a/k/a "meritocracy"] tries to reconcile itself with a culture that speaks about togetherness, unity, and community as the ideals to strive for.”

June 8, 2021 in Books, Ethics, Haskell Murray, Law School, Lawyering, Management | Permalink | Comments (0)