Friday, October 2, 2020

Sex, Lies, and M&A- Part II

No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post.  Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.

Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:

Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.

Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.

Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:

  1. Merger between Cotiviti and Verscend Technologies:

Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.

  1. Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:

To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.


(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.


(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.

Here are just a few questions:

  1. What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
  2. What happens of the company handbook or policies do not define "sexual misconduct"?
  3. How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks,  the employee handbook? None of the samples define the term.
  4. What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
  5. Have the target companies used the best knowledge qualifiers to protect themselves?
  6. How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
  7. What about those in the succession plan who may not be in the officer or executives ranks?

Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.

I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at

Take care and stay safe.

October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)

Wednesday, September 30, 2020

Professor Wilmarth’s Taming the Megabanks

This Friday, Professor Art Wilmarth’s new book, Taming the Megabanks: Why We Need a New Glass-Steagall Act (Cambridge University Press), will be released.  Wilmarth recently published an overview of his work on Duke Law School’s FinReg Blog, a paragraph of which is below: 

Taming the Megabanks contends that we must adopt a new Glass-Steagall Act to separate banks from securities markets. A new Glass-Steagall Act would restore financial stability and ensure that our financial system serves Main Street business firms and consumers instead of Wall Street speculators. Universal banks would be broken up and would no longer dominate our financial system. Shadow banks would shrink substantially because they could no longer fund their activities by offering short-term financial instruments that function as substitutes for deposits. A more decentralized and competitive financial system would provide better services to commerce, industry, and society. 

I’m really looking forward to receiving my copy, purchased for a very reasonable $34.95!  I’ve read many of Wilmarth’s articles, and I’ve always learned a lot from each one.  A LOT!

September 30, 2020 in Books, Colleen Baker | Permalink | Comments (1)

Monday, September 28, 2020

Teaching Through the Pandemic - Part VIII: A Three-Ring Circus

BLPB(CircusPhoto)Photo Credit: Pixabay

With almost six weeks of hybrid Business Associations classes now under my belt (and many more to go), I wanted to share a bit more about my experience teaching in the hybrid classroom.  This follows and builds on my post from the beginning of the semester offering initial impressions (based on my Professional MBA teaching experience).  As I noted in that post, technology can differ from classroom to classroom.  As a result, my observations here (which are based on a hybrid course with an in-class projection system featuring a camera  and document camera and an online component hosted on Zoom), may not hold in other teaching environments.  Hopefully, however, some of what I have to say here may be useful to some of you . . . .

Teaching a hybrid course is a bit like managing a three-ring circus.  Ring #1 is your in-class student population, #2 is your online students population, and #3 is your technology.  It is a lot to pay attention to.  I find it more than a bit exhausting.

I have 63 students in total in Business Associations this fall.  That is a bit low but within a normal range for that course in the fall semester.  Six of the students are "synchronous online only"; the remaining 57 rotate into and out of class--roughly half attending in person Mondays and every other Friday and the remainder attending in person on Wednesday and alternate Fridays.  I have a "producer" teaching assistant who participates online to (1) monitor the chat for me, (2) encourage student camera usage and microphone muting, and (3) help handle breakout room monitoring.  She also has helped to identify issues with sound--in particular when online folks are having trouble hearing their me or in-person colleagues.

My biggest gaffs so far include the following:

  • Clicking on "Leave Meeting" instead of closing the chat box as I was about to begin class and, as a result, kicking all of my online students out of class;
  • "Pinning" (highlighting) the video footage of the wrong student named Morgan for projection on the in-class screen (thinking I had called on her--but there are two women named Morgan in the class) and not realizing the mistake because the video of the other Morgan was so dark; and
  • Calling for tech help when the in-room camera was not capturing/showing video (my Zoom square was black--showing no video), when, in fact, the issue was that my Zoom video had defaulted to the document camera (which was not then deployed).

Notwithstanding these issues, based on the first writing assignment in the course and questions during my office hours, students in the course are learning!  Business Associations is hard to learn (and teach) in a traditional classroom environment.  The hybrid classroom is not ideal for many reasons--including without limitation the fractured attention span created by the three-ring-circus.  I truly feared that the combined experience of teaching Business Associations in a hybrid environment would be overwhelming for students.  But by speaking loudly, repeating student questions and comments, reaching out visually to students in both environments as directly as possible, and keeping technology usage simple and targeted, I seem to be communicating relevant information effectively, and as a group, we seem to be staying engaged with each other.  Fingers crossed all of that continues . . . .

I would be missing an important aspect of all of this if I did not mention my biggest pandemic teaching silver lining so far: feeling the love of my students--seeing them come to class in person, complying with numerous restrictions on their lives. and hearing from them in a positive way.  The number of students who have reached out in genuine ways to thank me for working hard on their behalf to produce class has been so gratifying.  This past week, I even had a student from last year reach out to check in on me.  The patience, flexibility, and compassion of my students has been remarkable.

So, I am surviving, and even striving to thrive.  It is like learning how to teach all over again some days.  But the students make it all worthwhile. 🧡


September 28, 2020 in Business Associations, Joan Heminway, Teaching, Technology | Permalink | Comments (0)

Saturday, September 26, 2020

Goodbye Iroquois Brands

The SEC made its long-awaited revisions to Rule 14a-8, which dramatically increase the dollar investment requirements, add a new prohibition on allowing shareholders to aggregate their holdings to meet those requirements, prohibit shareholder representatives from advancing proposals on behalf of more than one shareholder per meeting, and raise the resubmission thresholds, among other things.  In practical effect, these rules make it much more difficult for retail shareholders – who are unlikely to hold $15K or $25K of a single company’s stock in their portfolio – to advance proposals.  And, as Yaron Nili and Kobi Kastiel have documented, retail shareholders (and specific retail shareholders at that) have been the driving force behind a large number of proposals.  They find that – despite critics’ claims that these “gadflies” are advancing a personal agenda – their proposals frequently win majority support.  Thus, important corporate governance innovations have been driven, in part, by proposals advanced by retail investors.

Retail investors are not the only ones who advance proposals, though; pension funds do, as well.  That’s where the Department of Labor comes in.  As I previously blogged, the DoL has proposed new rules that would sharply limit ERISA plans’ ability to participate in corporate governance; assuming the rule goes into effect, that would knock out another source of proposals (and voting support for them). 

So who’s left?

ESG/sustainability-focused funds sometimes advance proposals, and that’s a growing field.  We know, however, that funds’ commitments to ESG – and their involvement in governance – varies tremendously, and so only a handful of funds may be participating in this space.

That leaves unusually wealthy/concentrated retail investors, and public pension funds, which are not subject to ERISA.

What about ordinary mutual funds?  Up until now, ordinary mutual funds never advance proposals, though they will vote in favor of them.  Nili and Kastiel argue that funds’ operate under various conflicts that make them uncomfortable taking the lead.  As I previously blogged, these funds actually supported the new restrictions (and even more draconian changes to the resubmission rules that were not enacted); this is because, I believe, they are not only subject to public scrutiny as to how they cast their votes, but they are also on the receiving end of proposals, and would like to relieve that pressure.  And when it comes to the Big Three and other large managers, it’s not as though they need a proposal to get management’s attention; they’re more than capable of quietly demanding operating changes if they want them.  Proposals are more likely to be a vehicle for shareholders who do not have that kind of influence individually.

Thus, one of the immediate effects of the rule change may be to take mutual funds out of the spotlight; their governance interventions (or lack thereof) will become immediately less transparent to investors and the public, and less easy to monitor.  Which is ironic, considering the Commission’s expressed concern about funds that sell a false narrative about their sustainability efforts.

Another irony is that many proposals seeks disclosure of more sustainability information – precisely the information the SEC has refused to require be disclosed because, the Commissioners have argued, relevant information varies from company to company.  Proposals are used to obtain company-specific information, and now that avenue will be narrowed, if not entirely closed.

I suspect, though, that ESG activists are a creative bunch, and we will see new proponents entering the space.  In a crowded ESG field, for example, some funds may find that advancing proposals can burnish their public reputations and attract new investment.  One possibility would be to proceed the way the proxy access project did, by advancing proposed bylaws that would lower the investment threshold at each company on a case-by-case basis.  Big Three opposition would be a serious stumbling block, but considering how much BlackRock and State Street, in particular, tried to hide their support for the new restrictions behind the Investment Company Institute, they might be persuaded to support at least limited, expanded access at specific companies.

September 26, 2020 in Ann Lipton | Permalink | Comments (0)

Thursday, September 24, 2020

FINRA Proposal to Update Expungement Rules

FINRA recently filed a rule proposal with the SEC to alter, yet again, it's rules for facilitating the deletion of customer complaint information from the Central Registration Depository database.  The proposal will likely do some good, but doesn't seem to meaningfully increase the likelihood that this adversarial process will reliably surface relevant information.  Still, FINRA contends that the changes aim to "place an arbitrator or panel in a better position to determine whether to recommend expungement of customer dispute information, and thereby help ensure the accuracy of the customer dispute information contained in the CRD system and displayed through BrokerCheck."  The raft of proposed changes effectively concede that for years the current system has not ensured that arbitrators were well-situated to decide these expungement claims.

For the most part, the proposal codifies existing guidance, adds some time limits, and aims to address other known issues.  For example, a broker would not be able to request expungement if "more than six years have elapsed since the date that the customer complaint was initially reported to the CRD system" or more than two years after the close of an arbitration filing.  The proposal also bars "straight-in" expungement requests against customers--something that only rarely occurs.  Although it doesn't seem to set out the form of notice a broker must use to tell a customer they will be calling them a liar in an expungement hearing, it does require the broker to give the panel a copy of the notice sent to the customer.  

Notably, the proposal also tackles the current lopsided selection effect for arbitrators who grant expungements.  The new proposal just gives the parties in a straight-in expungement request three random arbitrators. This is how the proposal describes the change, "to minimize the potential for party influence in the arbitrator selection process, the proposed rule change would require NLSS randomly to select the three public chairpersons from the Special Arbitrator Roster to decide an expungement request filed by an associated person."  This is a meaningful improvement from the current system which allows only named parties to rank and strike arbitrators--likely skewing the selection process in favor of the most reliable rubber stamps.

Collectively, the proposed changes seem likely to do some good.  Yet they all seem to mostly nibble around the edges of the problem.  The proposal doesn't solve the major incentive mismatch.  Customers have no real reason to burn their resources (likely already depleted because of an investment loss) to oppose an expungement request.  The customers have nothing to gain.  They have no real reason to make sure that a panel receives a complete briefing on the relevant facts and issues.  In contrast, the broker and respondent (which is often the broker's employer) do have real reasons to want to get the request granted.  The proposed changes may take away some of the thumbs currently on the scales, but they don't seem likely to reliably produce informed decisions by the arbitrators considering these requests.

Assuming this goes into effect, my prediction is that grant rates for expungements probably will not substantially change.  Absent some other factor influencing the process, I doubt customers will participate in much greater percentages than they now do.

September 24, 2020 | Permalink | Comments (0)

Wednesday, September 23, 2020

What Do People Really Think of Insider Trading? Part IV

This is the fourth installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the ethics of insider trading in different factual scenarios.

The survey presented each respondent with five basic insider-trading scenarios. In each scenario, the inside information pertained to the acquisition of a small company by a larger company. Respondents were placed in the shoes of (1) the CEO of the small firm being acquired by the larger firm; (2) a janitorial employee of the small firm; (3) an outside accountant hired to audit the small firm; (4) the friend of a middle manager of the small firm who learns the inside information at a holiday party; and (5) a stranger who overhears the material nonpublic information in an elevator. The survey instrument randomly directed respondents down multiple question paths for each of these scenarios. I will summarize just some of the results for the CEO scenario in this post, but see here for the complete results.

When asked whether it would be ethical for the CEO of the smaller company to trade in her own company’s shares based on material nonpublic information of the imminent acquisition, 37% said yes. That number increased to 50%, however, when respondents were asked if it would be ethical for the CEO to trade in the larger, acquiring company based on the same information. The 13-point difference may be explained by the fact that the CEO's trading in her own company implicates both the classical and misappropriation prohibitions for insider trading under our current enforcement regime, while trading in the other firm's shares would only implicate the misappropriation theory. Under the classical theory, the harm of insider trading is said to stem from a breach by the insider of a duty to disclose to her company's current or prospective shareholders on the other side of the trade (so this theory would not apply to the trade in the other, large company's shares). Under the misappropriation theory, the harm of insider trading is located in a breach of duty to the source of the information (so in both scenarios the source is the same). The difference in responses therefore suggests there are some respondents whose intuitions align with either the classical theory or the misappropriation theory, but not both.  If all respondents found the classical and misappropriation theories equally compelling, we would not expect a difference.

After providing their initial answers to these scenario-based questions, respondents were then presented with a short piece of propaganda about insider trading. They were offered a statement suggesting either that insider trading has positive, negative, or neutral consequences for markets. The propaganda had a surprising impact. For instance, respondents were much more willing (by a margin of 9%) to condone the CEO’s trading in his own company’s shares (46%) after having been presented with the short propaganda piece. These results suggest that the public’s ethical views concerning even the most straightforward insider-trading scenarios under our current enforcement regime are neither clear nor firm.

(Modified on 9/24/20 at 11:30 am CST)

September 23, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, September 21, 2020

Teaching Through the Pandemic - Part VII: Technology Experiments

As we continue to move through the Fall 2020 semester in "pandemic mode" (whatever that may be for you), the investments of colleagues in their teaching continues to amaze me.  The number of teaching webinars and conference panels has been truly awesome, starting in the spring and continuing through the present.  Social media posts on Facebook and Twitter offer individualized tips and the opportunity for innovators to build from them and post their responsive comments and additional advice.  My friend Jessica Erickson (Richmond Law) wrote an excellent series of Prawfsblog posts at the end of the summer, the last of which can be found here (with links to the earlier posts in the series).  Law faculties (including my own) are checking in with each other on challenges and victories on a regular basis.  Although the experiences of others may be different, I have felt supported (and very much like I am part of a team) the whole way along.

Among the more stimulating--and daunting--parts of pandemic teaching presentations and conversations are those relating to the introduction of new teaching technologies.  We have all dealt with this part of COVID-19 teaching in some respects and in our own ways.  Some of us are more comfortable with technology than others.  There's Zoom and the like, of course, but then there also are routers, and cameras, and lighting, and more.  (I had never heard of a "ring light,", for example, until the COVID-19 pandemic was in full force.)  I have been impressed by the extent to which colleagues not only have found technological solutions to some of the novel teaching issues that have arisen during the pandemic, but also have been willing to promote these solutions to colleagues and educate them on their use.

Over the weekend.  I became aware that my UT Law colleague Glenn Reynolds had written a short piece on his use of a relatively simple three-camera system he has constructed (in his pool house!) to improve the production quality of his online classes.  He is teaching exclusively online this semester.  The piece, TIRED OF LOOKING GRAY AND BORING ONLINE? A SIMPLE 3-CAMERA TV STUDIO/CLASSROOM FOR LIVELY ONLINE TEACHING, is posted on SSRN here.  The exceedingly short abstract is as follows:

Tired of the dreary webcam-look in my online classroom, I created a fairly simple and reasonably inexpensive three-camera studio using real video cameras for online teaching. This paper outlines how it was done, and provides suggestions for simpler, cheaper alternatives that are still far superior to traditional webcam approaches.

Glenn includes photographs in his brief treatment to better illustrate the camera functionality and his own working view, which I found really helpful.  He also is very specific about the human resources he consulted, the equipment he has chosen to use (and why), and the expenses associated with doing what he has done.  I share it here for your consideration.  The more we can share our victories--as well as our challenges--with each other, the easier it will be for us all to survive (and even thrive) in our teaching through the pandemic.

September 21, 2020 in Joan Heminway, Teaching, Technology | Permalink | Comments (0)

LSU Law is Hiring!

Thanks to friend of the BLPB Christina Sautter for sending along the following hiring announcement:

LOUISIANA STATE UNIVERSITY, PAUL M. HEBERT LAW CENTER seeks to hire a tenure-track faculty member in commercial law, including, but not limited to, bankruptcy. Applicants should have a J.D. from an ABA-accredited law school, superior academic credentials and publications or promise of productivity in legal scholarship, as well as a commitment to outstanding teaching.  

We additionally seek to hire a full-time faculty member with security of position to direct the Immigration Law Clinic as part of LSU Law’s Experiential Education Program. The Immigration Law Clinic is a fully in-house, one-semester, 5 credit clinic in which students represent non-citizens in their defensive proceedings before the Executive Office of Immigration Review (EOIR) and affirmative applications with U.S. Citizenship and Immigration Services (USCIS) Applicants must have a J.D. from an ABA-accredited law school, superior academic credentials, substantial experience in Immigration practice and be admitted and in good standing in a U.S. jurisdiction. Prior clinical teaching experience and fluency in Spanish is preferred. We may consider applications from persons who specialize in other areas as additional needs arise. 

We also seek to hire a full-time Assistant Professor of Professional Practice to teach legal analysis and writing. A successful candidate will teach the fundamentals of legal reasoning and writing by way of predictive and objective memoranda in the fall semester and advance those skills by teaching persuasive writing of an appellate brief and appellate oral advocacy in the spring semester. The legal writing faculty collaboratively develop the course materials that are used across the 1L curriculum. Applicants must have a J.D. from an ABA-accredited law school, superior academic credentials, and should have at least two to three years of post-J.D. experience in a position or positions requiring substantial legal writing. 

The Paul M. Hebert Law Center of LSU is an Equal Opportunity/Equal Access Employer and is committed to building a culturally diverse faculty. We particularly welcome and encourage applications from female and minority candidates.         

Applications should include a letter of application, resume, references, and teaching evaluations (if available) to:  

Christina M. Sautter 
Chair, Faculty Appointments and Adjuncts Committee 
c/o Pam Hancock (or by email to
Paul M. Hebert Law Center 
Louisiana State University 
1 East Campus Drive 
Baton Rouge, Louisiana 70803-0106

September 21, 2020 in Joan Heminway, Jobs, Law School | Permalink | Comments (0)

Saturday, September 19, 2020

New Book | Predatory Lending and the Destruction of the African-American Dream

Cheryl Wade and Janis Sarra have a new book out entitled, Predatory Lending and the Destruction of the African-American Dream.  It's available to order now.  My copy is on the way and I'm looking forward to getting into it.  The authors describe the book this way:

Since the Great Recession of 2008, the racial wealth gap between black and white Americans has continued to widen. In Predatory Lending and the Destruction of the African-American Dream, Janis Sarra and Cheryl Wade detail the reasons for this failure by analyzing the economic exploitation of African Americans, with a focus on predatory practices in the home mortgage context. They also examine the failure of reform and litigation efforts ostensibly aimed at addressing this form of racial discrimination. This research, augmented by first-hand narratives, provides invaluable insight into the racial wealth gap by vividly illustrating the predation that targets African-American consumers and examining the intentionally obfuscating settlement terms of cases brought by the U.S. Department of Justice, states attorneys, and municipalities. The authors conclude by offering structural, systemic changes to address predatory practices. This important work should be read by anyone seeking to understand racial inequality in the United States.

Predatory lending in the home mortgage market has been in the news before.  I recall this Times article detailing some allegations that Wells Fargo and other lenders steered African-American borrowers into subprime loans when white applicants with similar credit profiles were offered better rates and prime loans. These kinds of lending practices would undoubtedly contribute to the enormous wealth gap between black and white Americans. 

September 19, 2020 | Permalink | Comments (0)

Friday, September 18, 2020

Where Were The Gatekeepers Pt 2- Social Media's Social Dilemma

Two weeks ago, I wrote about the role of compliance officers and general counsel working for Big Pharma in Where Were the Gatekeepers- Part 1. As a former compliance officer and deputy general counsel, I wondered how and if those in-house sentinels were raising alarm bells about safety concerns related to rushing a COVID-19 vaccine to the public. Now that I’ve watched the Netflix documentary “The Social Dilemma,” I’m wondering the same thing about the lawyers and compliance professionals working for the social media companies.

The documentary features some of the engineers and executives behind the massive success of Google, Facebook, Pinterest, Twitter, YouTube and other platforms. Tristan Harris, a former Google design ethicist, is the star of the documentary and the main whistleblower. He raised concerns to 60 Minutes in 2017 and millions have watched his TED Talk.  He also testified before Congress in 2019 about how social media companies use algorithms and artificial intelligence to manipulate behavior. Human rights organizations have accused social media platforms of facilitating human rights abuses. Facebook and others have paid billions in fines for privacy violations.  Advertisers boycotted over Facebook and hate speech. But nothing has slowed their growth.

The documentary explicitly links the rising rate of youth depression, suicide, and risk taking behavior to social media’s disproportionate influence. Most of my friends who have watched it have already decreased their screen time or at least have become more conscious of it. Maybe they are taking a cue from those who work for these companies but don’t allow their young children to have any screen time. Hmmm … 

I’ve watched the documentary twice. Here are some of the more memorable quotes:

If you’re not paying for the product, then you’re the product.”

“They sell certainty that someone will see your advertisement.” 

“It’s not our data that’s being sold. They are building models to predict our actions based on the click, what emotions trigger you, what videos you will watch.” 

“Algorithms are opinions embedded in code.”

”It’s the gradual, slight, imperceptible change in our own behavior and perception that is the product.”

“Social media is a drug.”

”There are only two industries that call their customers ‘users’: illegal drugs and software.”

”Social media is a marketplace that trades exclusively in human futures.”

”The very meaning of culture is manipulation.”

“Social media isn’t a tool waiting to be used. It has its own goals, and it has its own means of pursuing them.”

“These services are killing people and causing people to kill themselves.”

“When you go to Google and type in “climate change is,” you will get a different result based on where you live … that’s a function of … the particular things Google knows about your interests.”

“It’s 2.7 billion Truman Show. Each person has their own reality, their own facts.” 

“It worries me that an algorithm I worked on is increasing polarization in society.”

“Fake news on Twitter spreads six times faster than real news.”

“People have no idea what is true and now it’s a matter of life and death.”

“Social media amplifies exponential gossip and exponential hearsay to the point that we don’t know what’s true no matter what issue we care about.”

“If you want to control the operation of a country, there’s never been a better tool than Facebook.”

"The Russians didn't hack Facebook. What they did was use the tools Facebook created for legitimate advertisers and legitimate users, and they applied it to a nefarious purpose." 

“What [am I] most worried about? In the short term horizon? Civil War.”

“How do you wake up from the matrix when you don’t know you’re in the matrix”?

“You could shut down the service and destroy . . . $20 billion in shareholder value and get sued, but you can’t in practice put the genie back in the model.”

“We need to accept that it’s ok for companies to be focused on making money but  it’s not ok when there’s no regulation, no rules, and no competition and companies are acting as de facto governments and then saying ‘we can regulate ourselves.’ “

“There’s no fiscal reason for these companies to change.”

This brings me back to the beginning of my post. We’ve heard from former investors, engineers, and algorithm magicians from these companies, but where were and are the gatekeepers? What were they doing to sound the alarm?  But maybe I’m asking the wrong question. As Ann Lipton’s provocative post on Doyle, Watson, and the Purpose of the Corporation notes, “Are you looking at things from outside the corporation, in terms of structuring our overall legal and societal institutions?  Or are you looking at things from inside the corporation, in terms of how corporate managers should understand their jobs and their own roles?”

If you’re a board member or C-Suite executive of a social media company, you have to ask yourself, what if hate speech, fake news, polarization, and addiction to your product are actually profitable? What if perpetuating rumors that maximize shareholder value is the right decision? Why would you change a business model that works for the shareholders even if it doesn’t work for the rest of society? If social media is like a drug, it’s up to parents to instill the right values in their children. I get it. But what about the lawyers and the people in charge of establishing, promoting, and maintaining an ethical culture? To be clear, I don’t mean in any way to impugn the integrity of lawyers and compliance professionals who work for social media companies. I have met several at business and human rights events and privacy conferences who take the power of the tech industry very seriously and advocate for change.

The social media companies have a dilemma. Compliance officers talk about “tone at the top,” “mood in the middle,” and the “buzz at the bottom.” Everyone in the organization has to believe in the ethical mandate as laid out and modeled by leadership. Indeed, CEOs typically sign off on warm, fuzzy statements about ethical behavior in the beginning of the Code of Conduct. I’ve drafted quite a few and looked at hundreds more.  Notably, Facebook’s Code of Conduct, updated just a few weeks ago, has no statement of principle from CEO Mark Zuckerberg and seems very lawyerlike. Perhaps there’s a more robust version that employees can access where Zuckerberg extols company values. Twitter’s code is slightly better and touches more on ethical culture. Google’s Code states, “Our products, features, and services should make Google more useful for all our users. We have many different types of users, from individuals to large businesses, but one guiding principle: “Is what we are offering useful?”’ My question is “useful” to whom? I use Google several times a day, but now I have to worry about what Google chooses to show me. What's my personal algorithm? I’ve been off of Facebook and Instagram since January 2020 and I have no plans to go back.

Fifty years ago, Milton Friedman uttered the famous statement, “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The social media companies have written the rules of the game. There is no competition. Now that the “Social Dilemma” is out, there really isn’t any more deception or fraud.

Do the social media companies actually have a social responsibility to do better? In 2012,  Facebook’s S-1 proclaimed that the company’s mission was to “make the world more open and connected.” Facebook’s current Sustainability Page claims that, “At Facebook, our mission is to give people the power to build community and bring the world closer together.” Why is it, then that in 2020, people seem more disconnected than ever even though they are tethered to their devices while awake and have them in reach while asleep? Facebook’s sustainability strategy appears to be centered around climate change and supply chain issues, important to be sure. But is it doing all that it can for the sustainability of society? Does it have to? I have no answer for that. All I can say is that you should watch the documentary and judge for yourself.

September 18, 2020 in Ann Lipton, Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Family, Film, Human Rights, Lawyering, Management, Marcia Narine Weldon, Psychology, Shareholders, Television | Permalink | Comments (0)

Thursday, September 17, 2020

Doyle, Watson, and the Purpose of the Corporation

Sherlock Holmes aficionados distinguish between literary criticism that is “Watsonian” in perspective, and criticism that is “Doylist.”  As any fan knows, the stories were written by Arthur Conan Doyle as a first-person narrative; they purport to be the work of John Watson, who is recounting the exploits of his brilliant friend and sometime-roommate, Sherlock Holmes.  Fans who analyze the stories, then, have a choice: They can take an “outsider” perspective and discuss them as works of fiction authored by the real-life person Arthur Conan Doyle, or they can take an “in-universe” perspective and discuss them as the actual literary product of John Watson, unreliable narrator.  Depending on which viewpoint you adopt, you may end up in strikingly different conversations.  For example, a Doylist might look at inconsistencies in how Watson’s wife is described throughout the series, and attribute them to the multi-year period over which the stories were published; a Watsonian might argue that Watson was covering for a gay relationship with Holmes and couldn’t keep his lies straight.  Neither viewpoint is incorrect, but the two fans are talking past each other; in order to communicate, they have to define the relevant playing field.

That’s how I feel about a lot of the conversations currently surrounding corporate purpose, especially the ones you see in popular media. 

We’ve had a lot of soul-searching recently about whether corporations should be run to benefit society overall, or whether they should be run to benefit their shareholders alone.  But that conversation is incoherent unless you first clarify your perspective.  Are you looking at things from outside the corporation, in terms of structuring our overall legal and societal institutions?  Or are you looking at things from inside the corporation, in terms of how corporate managers should understand their jobs and their own roles?

From a societal, or Doylist, perspective, I don’t think there’s any dispute that corporations exist to serve the community as a whole.  We charter corporations, we create rules for their operation, we develop infrastructure to facilitate investing, all because we believe that on balance, corporations are (or can be) a net good.  They are an efficient way of doing business, which means they contribute to innovation and economic development, provide necessary (or even just enjoyable) goods and services, generate wealth not only for investors, but also for workers and governments (through tax payments).  They can provide outlets for creativity and generally contribute to human flourishing.  That is the social purpose of a corporation.

But corporations harness and coordinate labor and capital on a potentially global scale, and thus are very powerful tools.  Any form of power can be misused.  Corporations might exploit and injure workers, or consumers, or the environment, perhaps to the point where the benefits are not worth the costs.  Thus, we need to arrange our societal institutions to minimize these harms, and maximize the benefits.

Corporate purpose debates are not about those principles – on which, I suspect, everyone agrees.  The debate about corporate purpose is a debate about method.  If we agree that corporations exist to benefit society, and if we agree that we need some kind of legal and/or market structure to ensure this occurs, what does that structure look like?

And this is when we switch to the Watsonian perspective, from within the corporation itself.  And here, the question is, is it better that corporate managers understand themselves to be servants of society, and manage the corporation to effectuate that purpose?  Or is it better if managers understand themselves to be serving investors, while other societal institutions – regulation, contract law, and the like – protect the rest of society?

This is a point I’ve made repeatedly, most recently in Beyond Internal and External, but also in Not Everything is About Investors, and I’m hardly the first to do so.  For example, though Henry Hansmann’s & Reinier Kraakman’s essay, The End of History for Corporate Law, has received its share of ribbing for being a bit premature, it lays out this framework very neatly, while arguing that society overall benefits if managers focus on investors, while we reserve other types of regulation to protect non-investor constituencies. 

Unless these premises are understood by everyone in the conversation, it devolves into the same incoherence one would expect from a Doylist discussing Watson’s marriages with a Watsonian.  So, for example, the New York Times recently published a retrospective on Milton Friedman, with soundbites from assorted businesspeople and academics.  You will, I’m sure, be shocked to learn that every business person included argues that corporations should be run to benefit all stakeholders.

Now, there’s a certain banality to this exercise – what CEO is going to say “screw my customers, I’m all about the stock price”? – but more importantly, there is no dispute that corporations should operate to benefit all stakeholders; the issue is how do we make that happen. One method – and only one method – is to rely on managerial largesse to distribute surplus to shareholders and stakeholders alike. (We’ll call this the “Martin Lipton” method*)  But there are other mechanisms to constrain corporate behavior besides managerial largesse, and it’s impossible to talk about the merits of such largesse without acknowledging those mechanisms and discussing how they function.  The question, properly framed, isn’t whether CEOs should consciously operate their companies to serve society, but what are the options we have for making sure they do so, and which mechanisms are more effective than others, and why?  If CEO altruism is one of our options, is it better or worse than other possibilities, and if we are going to rely on altruism, what institutions do we need to generate that altruism and channel it appropriately?

Which is why I find the NYT piece so frustrating, because it’s got the Doylists and the Watsonians all mixed together as though they’re talking about the same thing.  Many of the academics are Doylistically describing the types of societal structures we need to corral corporate power and ensure that capitalism benefits everyone.  Meanwhile, Starbucks’s Howard Schultz, Home Depot’s Ken Langone, J&J’s Alex Gorsky, and BlackRock’s Larry Fink, among others, take the Watsonian view, which is to say, they argue what all businesspeople argue: CEOs should run the company with a view toward serving shareholders because you cannot serve shareholders without serving the rest of society.  From Watson’s perspective, if the CEO is focused on maximizing profits, s/he will make good products that consumers want to buy, and create good jobs that attract high-quality employees, which satisfies Doyle’s desire for a better society overall. 

But by focusing on the Watsionian viewpoint and eliding the Doylist challenge of the academics, these businesspeople avoid any test of the very specific factual claim that undergirds their argument: that the interests of shareholders and the interests of other stakeholders are aligned.  And in order for that to be true – that shareholders cannot profit unless the rest of society benefits – nonshareholder constituencies must be sufficiently powerful Doylistically to extract a price for corporate malfeasance.  They must have, in Galbraith’s words, countervailing power, from labor unions, a strong regulatory system, consumer advocacy groups, and so forth. 

That line of thinking yields two possibilities: We can maximize the benefits provided by corporations, and minimize their harms, by strengthening these countervailing institutions, or we can do it by weakening corporations. The latter, for example, was long the goal of antitrust law, and it’s why there’s so much advocacy around limiting corporate political donations.

Which brings me to Jens Dammann and Horst Eidenmueller, who have written a pair of papers that arguing that co-determination (whereby employees, as well as shareholders, get to vote for corporate directors) may not strengthen corporate functioning but instead weaken it, by creating a type of separation of powers within the corporate form, and that itself may be net beneficial to society.  I made a similar point in Beyond Internal and External, where I argued that the regulatory system shapes shareholders to have divergent preferences in a manner akin to the separation of powers.  The separation of powers has two Watsonian functions.  The first is that it encourages a variety of incentives and goals among corporate managers, which encourages a broader perspective in corporate decisionmaking.  The second is that it impedes any kind of corporate action in the first place, by making it more difficult for corporations to reach a consensus.  In that vein, certain kinds of corporate governance reforms – elimination of dual-class stock, separating chair and CEO roles, and so forth – seem less about ensuring good (profit-maximizing) governance than creating friction in governance, because by impeding the corporation’s ability to act, we necessarily strengthen other constituencies. 

Okay, yeah, so just imagine I have a pithy conclusion here.  Whatever, it’s a blog post.

*no relation

September 17, 2020 in Ann Lipton | Permalink | Comments (13)

Wednesday, September 16, 2020

Wyoming Approves Special Purpose Depository Institution Charter for Kraken

This news story in the Cowboy State Daily, Kraken: World's First Digital Bank to Open in Wyoming, came to my attention this afternoon.  Wyoming granted Kraken a Special Purpose Depository Institutions Charter, a type of state bank charter enacted into Wyoming law in 2019.  The Kraken blog notes that "From paying bills and receiving salaries in cryptocurrency to incorporating digital assets into investment and trading portfolios, Kraken Financial will enable Kraken clients in the U.S. to bank seamlessly between digital assets and national currencies."  Its "vision is to become the world’s trusted bridge between the crypto economy of the future and today’s existing financial ecosystem."      

Not surprisingly, the banking law academic in me has lots of questions, and I'll look forward to sharing some with BLPB readers when I've had more time to learn about this development.   

As a side note, in July 2020, the Office of the Comptroller of Currency (OCC) announced that "federally chartered banks and thrifts may provide custody services for crypto assets."  The OCC charters national banks, and individual states grant state bank charters.     


September 16, 2020 | Permalink | Comments (0)

Tuesday, September 15, 2020

What Do People Really Think of Insider Trading? Part III

This is the third installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the morality of insider trading.

The survey asked participants (1) whether they would trade on inside information if it came into their possession; (2) whether they believe that insider trading is morally wrong; and (3) whether they believe that insider trading should be illegal. The following table offers a demographic breakdown of the results.


Would you trade based on inside info?

Is insider trading morally wrong?

Should insider trading be illegal?




















































Native Am.





















Trading Status















As expected, a majority of respondents (63%) view insider trading as immoral and 66% think it should be illegal. These numbers are relatively close—at the margin of error for the poll. But the story is more complex when considered in light of responses concerning trading preferences. 18% of respondents said insider trading is immoral but also said they would trade on it—reflecting some cognitive dissonance or a lack of moral clarity. 10% said insider trading is not immoral but also said they would not trade on it--call them cautious abstainers.

We attempted to use these figures to get a clearer sense of respondents’ “true” moral attitudes regarding insider trading. If we take the number who said it is immoral and subtract out those who’s moral clarity is weak, we get 44.2% who have a clear sense that insider trading is wrong. If we take those who would not trade on inside information and subtract those who abstain only out of caution (e.g., fear of prosecution), we get 44.6% who abstain on moral grounds. It is interesting that these two numbers are so close, and this consistency tracks across most demographic subgroups. The numbers suggest that there is a core group of respondents (~44%) who have moral clarity that insider trading is wrong, and who would not trade on inside information for that reason.

The data therefore offers some evidence that the “true” percentage of respondents who believe that insider trading is immoral is probably less than 62%, and could be as low as 44%. See here for a more complete discussion of these and other findings from our survey.

The next installment of this post will share survey responses to a number of scenario-based questions.

September 15, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, September 14, 2020

Monday Haiku - Lawyers as Leaders

Lawyers as leaders.
Reputation is sacred.
So, guard it closely.

In my new role as Interim Director of UT Law's Institute for Professional Leadership (IPL, for short), I have made a commitment to sit in on the classes in the Institute's curriculum.  One of them, Lawyers as Leaders, is the flagship course--the course that catalyzed the establishment of the IPL.  This semester, it is being hosted on Zoom.

In that course this afternoon, the students wrestled with attorney misconduct--and how to punish it.  During the first hour of the two-hour session, they spent time in breakout rooms discussing three cases that involved different lapses of professional responsibility rules (and, in some cases, criminal law rules).  They were asked to report out/comment on several things about those cases, including the propriety and relative severity of the penalties imposed on the respective transgressor attorneys.  During the second hour of class, the students had the opportunity to listen to one of the three offenders tell his story and share what he learned about leadership through his misconduct.  They also were invited to ask him questions.

The story that the students heard was the one involved in this case.  But they heard about the facts in a way that the Tennessee Supreme Court could not possibly convey them.  And they heard about the personal family tragedy that intersected with the case. 

The class was a very moving experience for me--even though I have heard the story told before.  I can only hope that the learning done by the students was as powerful as the teaching.  The haiku that introduces this post only covers the top line; there is so much more richness there that can only be appreciated by hearing the story in person.  I found myself wishing that I had been afforded the opportunity to learn about professional responsibility and leadership in a similarly compelling way during my law school career.  I am grateful for the opportunity to lead this program.

September 14, 2020 in Ethics, Joan Heminway, Lawyering | Permalink | Comments (2)

Sunday, September 13, 2020

Sept 15 Deadline - Call for Submissions: AALS Section on Financial Institutions and Consumer Financial Protection

Dear BLPB readers:

The AALS Section on Financial Institutions and Consumer Financial Protection invites submissions of no more than five pages for the 2021 annual meeting. Selected speakers would present on Tuesday, January 5, from 1:15 to 2:30 pm ET.  The submission can be the abstract and/or introduction from a longer paper, and it should relate to the following session description:

After the 2008 financial crisis, Congress overhauled financial regulation. The Dodd-Frank Act of 2010 created a new consumer protection agency, limited bank investment, imposed new capital and liquidity requirements, created an umbrella financial council, and reworked derivatives oversight, among many significant pieces. This session will explore ideas about what the next sweeping financial legislation should entail.

Please send your anonymized materials by September 15, 2020, to Joseph Graham, Please also indicate (a) whether you are tenured, pre-tenure, or other; (b) how far along the full article is, and (c) optionally, any other information that might benefit the committee in selecting a diverse panel of speakers.

On behalf of the Section on Financial Institutions and Consumer Financial Protection

Chair: Rory Van Loo (Boston University)

Chair-Elect: Pat McCoy (Boston College)

Executive Committee Members:

Hilary Allen (American University)

Felix Chang (University of Cincinnati)

Gina-Gail Fletcher (Duke University)

Kathryn Judge (Columbia University)

Michael Malloy (University of the Pacific)

Christopher Odinet (University of Iowa)

Paolo Saguato (George Mason University)

Jennifer Taub (Western New England University)

Andrew Tuch (Washington University)

David Zaring (University of Pennsylvania)


September 13, 2020 in Call for Papers, Colleen Baker | Permalink | Comments (0)

Guest Blog: ULC's work on Coercive Labor Practices in Supply Chains, Part 5

Welcome to the final guest blog discussing the work of the ULC study committee that focuses on coercive labor practices.  In previous blogs I have discussed other frameworks the study committee is considering, including disclosure-based regimes and frameworks that are centered on procurement.  In this final blog, I will examine what some consider the next frontier for combating coercive labor practices in supply chains: mandatory human rights due diligence.   

More after the jump …

Continue reading

September 13, 2020 | Permalink | Comments (0)

Saturday, September 12, 2020

Everybody wants the next thing to be just like the first

I write briefly to call attention to the opinion in SEB Investment Mgmt v. Align Tech., 2020 U.S. Dist. LEXIS 164661 (N.D. Cal. Sept. 9, 2020), partially dismissing a 10(b) action against Align Technology, the manufacturer of Invisalign teeth-straightening products.  Plaintiffs alleged, among other things, that the company’s financial projections were false for failing to consider what would happen when its patents expired and competitors entered the space.  The court rejected this claim on the ground that the projections were protected by the PSLRA’s safe harbor, which insulates forward-looking statements if they are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”  15 U.S.C. § 78u-5.  According to the PSLRA’s legislative history, “boilerplate warnings will not suffice.... The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected.”  Thus, in the Align case:

The Court agrees with Defendants that the statement was accompanied by adequate warnings. Defendants explain that, at the beginning of the investor call, Align’s representative stated:

As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align’s future events, product outlook and the expected financial results for the third quarter of 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We’ve posted historical financial statements, including the corresponding reconciliations and our second quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

The warning, in turn, thus explicitly incorporated risks identified in written filings with the SEC, specifically with respect to “competition, promotions, and decreased ASP.” …

Defendants are correct that substantially similar disclaimers have repeatedly been held by the Court to be a sufficient “meaningful cautionary statement” for purposes of the PSLRA Safe Harbor. For example, in In re Fusion-io, Inc. Securities Litigation, the Court found sufficient a disclosure at the beginning of an earnings call “that forward-looking statements were predictions based on current expectations and assumptions, that these expectations and assumptions involved risks and uncertainties, and [that] referred listeners to Fusion’s registration statements and reports filed with the SEC.” No. 13-CV-05368-LHK, 2015 WL 661869, at *13 (N.D. Cal. Feb. 12, 2015). Similarly, in McGovney v. Aerohive Networks, Inc., the Court found sufficient a disclaimer at the beginning of a call “that the call would contain ‘forward-looking statements’ that involve a ‘number of risks and uncertainties,’ and that investors should reference the ‘Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our recent annual report on Form 10-K and quarterly report on Form 10-Q.’“ McGovney v. Aerohive Networks, Inc., 367 F. Supp. 3d 1038, 1061 (N.D. Cal. 2019).

Moreover, these cautionary statements are virtually identical to language approved by the Ninth Circuit as “meaningful cautionary language” for purposes of the PSLRA Safe Harbor. See, e.g., Police Ret. Sys. v. Intuitive Surgical, Inc., 759 F.3d at 1059-60 (approving cautionary language in earnings call warning that comments may contain forward-looking statements, that such statements may differ based on “certain risks and uncertainties,” and referring listeners to “the company’s [SEC] filings”); In re Cutera Sec. Litig., 610 F.3d 1103, 1112 (9th Cir. 2010) (approving cautionary language at beginning of earnings call that remarks contained forward-looking statements “concerning future financial performance and guidance,” and that “Cutera’s ability to continue increasing sales performance worldwide could cause variance in the results.”) (internal quotation marks omitted).

Plaintiff’s arguments to the contrary are unpersuasive. For example, Plaintiff argues that these warnings were “boilerplate risk disclosures” that were thus too generic. Opp’n at 17. However, as explained above, this Court as well as the Ninth Circuit has found substantially similar disclosures to be adequate cautionary statements.

See, these warnings are exactly like the warnings of every other company for past 10 years; therefore they’re not generic!

(Yes, apparently the defendants made reference to the SEC filings, which may have had more detail, but the court seemed entirely unconcerned with the contents of those filings.)

Suffice to say, when warnings for “risks and uncertainties” and that “[a]ctual results may vary significantly” are held not to be boilerplate, we really have given up on the concept of “meaningful cautionary statements” altogether.  Which really goes to show that there’s something very incongruous about relying on precedent to determine whether a risk warning passes muster under the PSLRA in the first place.  These warnings are supposed to be tailored to each company’s circumstances; that one company’s warning, concerning particular statements at a particular time, satisfied the PSLRA, should have little relevance to the sufficiency of the warnings of a completely different company, facing different risks, and often operating in an entirely different industry.

In fact, I previously blogged about a paper that purports to show that judges, and the SEC, reward longer, more generic warnings, which only encourages companies to copy the warnings of their industry peers.

To be fair, the SEC has been trying to improve the situation.  In its latest amendments to Regulation S-K, the SEC is now requiring that a summary of risk factors be provided if the full list is particularly lengthy, and that issuers group their risk factors by topic, with generally-applicable risk factors to be included in a “General Risk Factors” category.  So, I guess we’ll see whether that makes a difference, either to issuers or to regulators.

September 12, 2020 in Ann Lipton | Permalink | Comments (1)

Thursday, September 10, 2020

The Rough Landscape for Financial Advice

Earlier today, The Institute for the Fiduciary Standard held a panel on financial advice.  I served as the moderator for three fantastic panelists, Donald Langevoort, James Cox, and Ann Lipton.  As part of my role, I opened the panel with a summary of the current landscape for financial advice.  Hopefully this helps others who are trying to understand the current state of play:

In the past, American retirements had often been supported by three different sources of retirement income: an employer-sponsored, defined-benefit pension; social security; and personal savings.  Today, few Americans have all three sources of support.  Employers have largely shifted to offering defined-contribution retirement plans, allowing participants to contribute a portion of their salary to a 401k plan or similar plan, which the employer may or may not also make some contributions to.  At the same time, Americans, on the whole, generally lack financial sophistication, and often struggle to navigate our increasingly complex financial landscape.  In short, Americans need access to competent, trustworthy advice to make decisions.


Sadly, far too many Americans struggle to access high-quality and trustworthy financial advice.  Our fragmented regulatory system makes this even harder.  A person holding themselves out as a financial adviser might actually be a stockbroker, a registered investment adviser, an insurance salesperson, something else entirely, or some combination of the forgoing!  Unsurprisingly, investors often do not understand the system.  One survey found that about half of investors over the age of sixty either didn’t understand how they paid for financial advice or mistakenly assumed that financial advisers work for free.  And you can’t blame them.  It’s dizzyingly complex with a mixture of different federal and state laws coming into play.


A variety of reforms have been implemented, struck down, and proposed.  I’ll attempt to sketch the current state of play by breaking the persons giving financial advice into categories.


Let’s start with stockbrokers.  The broker-dealer industry is primarily regulated by the FINRA, the Financial Industry Regulatory Authority.  It’s a self-regulatory organization sitting somewhere in between a trade group and part of the federal government.  Although funded by member dues, its rules are approved by the Securities and Exchange Commission.  FINRA had long required brokers to give advice that was “suitable” for investors.  These brokers receive transaction-based compensation.  In essence, they collect commissions for selling financial products.  This creates a rather obvious conflict of interest to sell the product which pays the most—so long as it remains suitable.


Earlier this year, the SEC supplanted the suitability standard with Regulation Best Interest, which requires stockbrokers to “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker. . . ahead of the interest of the retail customer.”  If you’re not quite sure what that means, you’re not alone.


Let’s turn to the second category of persons giving financial advice. Registered Investment Advisers have long owed a fiduciary duty under the Advisers Act.  The duty was recognized by the Supreme Court a famous case called Capital Gains


These fiduciaries generally do not sell products on commission and are paid for their advice.  Historically, the fiduciary duty owed by Advisers has been understood as requiring them to put their clients’ interests first. 


When it issued regulation best interest, the SEC also issued a new interpretation of an advisers duty of loyalty.  Now, the SEC says that “the duty of loyalty requires that an adviser not subordinate its clients’ interests to its own.”  If you’re not quite sure what that means, you’re not alone.


The SEC also issued a new regulation calling for brokers and advisers to distribute a short customer relationship summary describing their duties.  Early testing revealed that many ordinary humans struggled to understand the system even after receiving the SEC's template.


Adding to the confusion, insurance salespeople also give financial advice and sell complex financial products.  The states have historically regulated their sales practices, but their duties have not been as clear.  In 2016, the Department of Labor issued a Fiduciary Rulemaking under the Employee Retirement Income Security Act, which would have affected all three categories of advice-givers. In short, the rulemaking would have applied a tough fiduciary standard to advice about assets held within retirement accounts.  It would have also applied to insurance sales.  In a case filed by Eugene Scalia, the Fifth Circuit struck down Labor’s fiduciary rulemaking.  Later, President Trump appointed Scalia to run the Department of Labor, which recently proposed a new fiduciary rulemaking—largely unwinding the changes and proposing to generally defer to the SEC’s standards. 


But wait, there is more.  Private self-regulatory groups also offer their own standards and certifications.  Investors who struggle to understand this system may simply choose to work with an adviser who holds the right badge or certification.  The largest such group is the CFP Board which certifies financial planners.  In October of 2019, it updated its standards and requires its representatives to act in the best interest of clients, properly disclose conflicts, and to manage conflicts.


As you can see, it’s a complex environment.  We have three panelists here to help talk about these developments and what they mean.  My brief introductions . . . 


September 10, 2020 | Permalink | Comments (0)

Wednesday, September 9, 2020

Professor Odinet on Predatory Fintech and the Politics of Banking

Just today, Professor Christopher Odinet posted Predatory Fintech and the Politics of Banking (forthcoming, Iowa Law Review) to SSRN (here).  It's already been downloaded over 100 times, and I can't wait to read it!  Here's the Abstract:

With American families living on the financial edge and seeking out high cost loans even before COVID-19, the term financial technology or “fintech” has been used like an incantation aimed at remedying everything that’s wrong with America’s financial system. Scholars and supporters from both the public and private sector proclaim that innovations in financial technology will “bank the unbanked” and open new channels to affordable credit. This exuberance for all things tech in finance has led to a quiet yet aggressive deregulatory agenda, including, as of late, a federal assault via rulemaking on the ability of states to police the cost and privilege of extending credit within their borders. This deregulation and the ethos behind it have made space for growth in high cost, predatory lending that reaches across state lines via websites and smart phones and that is aggressively targeting cash-strapped families. These loans are made using a business model whereby funds are funneled through a group of lightly regulated banks in a way designed to take advantage of federal preemption. Fintech companies rent out and profit from the special legal status of these bank partners, which in turn keeps the bank’s involvement in the shadows. Stripping down fintech’s predatory practices and showing them for what they really are, this Article situates fintech in the context of this country’s longstanding dual banking wars, both between states and the federal government and between consumer advocates and banking regulators. And it points the way forward for scholars and regulators willing to shake off fintech’s hypnotic effect. This means, in the short term, using existing regulatory tools to curtail the dangerous lending identified here, including by taking a more expansive view of what it means for a bank to operate safely and soundly under the law. In the long term, it means having a more comprehensive and national discussion about how we regulate household credit in the digital age, specifically through the convening of a Twenty-First Century Commission on Consumer Finance. The Article explains how and why the time is ripe to do both. As the current pandemic wipes out wages and decimates savings, leaving desperate families turning to predatory fintech finance ever more, the need for reform has never been greater.

September 9, 2020 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Tuesday, September 8, 2020

What Do People Really Think of Insider Trading? Part II

This is the second installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on some of our results pertaining to the effect of insider trading on the public’s confidence in the integrity of our capital markets.

It turns out that most Americans believe that insider trading is pervasive. The following table breaks down respondents’ answers to the question, “How common do you think insider trading is?”


Very Common



Very Rare

































Native Am.















Trading Status












Approximately 80% of Americans believe insider trading is common or very common. If insider trading’s perceived pervasiveness undermines market confidence, we would expect that those who actually invest in the stock market would be less likely to believe that insider trading is common or very common. But, in fact, the opposite is true: investors are actually slightly more likely (82.6%) to believe insider trading is pervasive than those who abstain from investing in the stock market (78.4%).

Respondents were also asked the following open-ended question with an opportunity to fill in a response: “If you had done your research and found a company that you liked and wanted to invest in, is there anything that might keep you from buying stock in that company?” Notably, despite knowing that the study was about insider trading, only 0.4% indicated that insider trading in the company would deter them from investing in that company. This suggests that, if awareness of insider trading does undermine market confidence, it is not among the public’s principal concerns.

The study did, however, find some support for the market-confidence theory. For example, consider the responses to the following questions that specifically address the market confidence issue:


 “If you thought that a small number of people were trading on inside information concerning a company you have been researching, would it make you more likely to buy stock in that company, less likely, or make no difference?”




No Difference

More Likely

Δ Less Likely vs. Market






“If you knew insider trading was common in the stock market, would you be more likely to invest, less likely, or would it make no difference?”




No Difference

More Likely

Δ Less Likely vs. Company






While fewer than half of the survey’s participants said that they would be less likely to trade in a given stock (48.2%) or the market generally (43.3%) if they knew insider trading was taking place, these are not trivial numbers. Assuming that some of these respondents who would be less likely to trade do actually abstain from trading for that reason, this offers support for the market confidence justification for the regulation of insider trading. For a full demographic breakdown of the answers to these questions, as well as a table summarizing respondents’ explanations for their responses, see here.

The next installment of this post will explore public perceptions of the morality of insider trading, whether it should be illegal, and what penalties should be imposed.

September 8, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)