The SEC announced an indictment against a financial advisor that got a bunch of public Georgia pension funds to invest in its own affiliated product. Which I guess sounds kind of dodgy - you're obligated to offer advice in the best interests of your client, and yet you're pushing your own investment vehicle. The strange thing about the case, however, is that it isn't about that sort of breach of fiduciary duty. Instead, the SEC, a federal agency, is going after Gray and its principals because they failed to comply with Georgia law. From the SEC's release:
The SEC’s Enforcement Division alleges the investments violated Georgia law in the following ways:
- A Georgia public pension fund’s investment is limited to no more than 20 percent of the capital in an alternative fund. Two of the pension funds’ investments surpassed that limit.
- The law requires at least four other investors in an alternative fund at the time of a Georgia public pension fund’s investment. There were fewer than four other investors in GrayCo Alternative Partners II L.P. at the time of these investments.
- There must be at least $100 million in assets in an alternative fund at the time a Georgia public pension fund invests. GrayCo Alternative Partners II LP has never reached that amount.
Gray knew this was coming, and knew that the SEC wouldn't be taking them to court, but rather before one of its own judges. It had already filed suit alleging that the ALJ program is unconstitutional - and among the many problems with these types of suits, imagine the timing and ripeness challenges presented by litigation premised on "we think the SEC may be bringing administrative proceedings against us in the future."
Still, I think this case is interesting. Shouldn't Georgia be bringing it instead of the SEC?
Lawsky had a tough reputation, and was probably the most challenging state corporate regulator since Spitzer (the Times: " a polarizing four-year tenure that shook up the sleepy world of financial regulation in New York"). And I can say that I knew him when - we were in the same unit at DOJ. But really, I'm awfully impressed that 1. he is leaving to start his own firm, continuing the craze for boutiques that has animated investment bankers, and now, perhaps their former regulators? And 2. this excellent front page from the Village Voice.
Apparently, the new firm will specialize in digital security. Congratulations, Ben!
Here is an announcement that may interest some of our readers:
The Rutgers Center for Corporate Law and Governance, The University of Washington School of Law, and the Business and Human Rights Journal (Cambridge University Press) announce the first Business and Human Rights Junior Scholars Conference, to be held September 18, 2015 at the Rutgers School of Law – Newark in Newark, New Jersey, just outside of New York City. The Conference will pair approximately ten junior scholars writing at the intersection of business and human rights issues with senior scholars in the field. Junior scholars will have an opportunity to present their papers and receive feedback from senior scholars. Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press.
Invited senior scholars include Anita Ramasastry, Nien-he Hsieh, George Brenkert, Tom Donaldson, Denis Arnold, Pat Werhane, and James Gathii. All junior scholars will be tenure-track professors who are either untenured or have been tenured in the past three years. The Conference is interdisciplinary; scholars from all disciplines are invited to apply, including law, business, human rights, and global affairs. The papers must be unpublished at the time of presentation.
To apply, please submit an abstract of no more than 250 words to email@example.com and firstname.lastname@example.org with the subject line Business & Human Rights Conference Proposal. Please include your name, affiliation, contact information, and curriculum vitae.
The deadline for submission is June 15, 2015. Scholars whose submissions are selected for the symposium will be notified no later than July 15, 2015. We encourage early submissions, as selections will be made on a rolling basis.
About the BHRJ
The BHRJ provides an authoritative platform for scholarly debate on all issues concerning the intersection of business and human rights in an open, critical and interdisciplinary manner. It seeks to advance the academic discussion on business and human rights as well as promote concern for human rights in business practice.
BHRJ strives for the broadest possible scope, authorship and readership. Its scope encompasses interface of any type of business enterprise with human rights, environmental rights, labour rights and the collective rights of vulnerable groups. The Editors welcome theoretical, empirical and policy / reform-oriented perspectives and encourage submissions from academics and practitioners in all global regions and all relevant disciplines.
A dialogue beyond academia is fostered as peer-reviewed articles are published alongside shorter ‘Developments in the Field’ items that include policy, legal and regulatory developments, as well as case studies and insight pieces.
I used the word "melee" in the title because it is one of the words I saw journalists use to describe the melee/brawl/shootout/riot/gunfight/gang war that occurred at the Twin Peaks restaurant on I-35 in Waco, Texas. (For those of you non-Texans, Waco is equidistant from Dallas and Austin on I-35.) According to reports, two motorcycle gangs, the Bandidos and the Cossacks, were having a "meeting" there when a fight in the bathroom and/or in the parking lot spread into the restaurant, the patio area, and the parking lot, resulting in the deaths of 9 people and in injuries to 18 more. (Some reports give an account of a coalition meeting with up to five gangs represented.) Around 170 bikers have been arrested. None of the diners, employees, bystanders or police officers were among the injured or killed. A lof ot folks on social media are talking about interesting civil rights and criminal aspects of the case, but there is also a fascinating corporate/contracts aspect to the case.
Twin Peaks is (according to Google maps) a "sports pub with scantily clad waitresses," but more important to this post, a franchise. (Apparently, after doing some research, I've discovered that the word for this type of establishment is "breastaurant." Nice.) According to Entrepreneur.com, in 2014 there were 34 TP restaurants, and 20 were company-owned. Franchises are not cheap ($50k/year) and require a substantial outlay and proof of liquidity ($1.5 million a store net worth and $500k liquidity), but TP franchises seem to have a good reputation online for being a good buy. Until possibly this week.
Last semester, Gordon and I (and Matt Jennejohn and Clark Asay) taught a colloquium on Law & Entrepreneurship. One of our fantastic students wrote her paper on the reputational hits a franchisee takes when a rogue franchisee damages the brand. Examples she gave were mostly of health, safety and labor problems, such as when the franchisee down the street gets bad publicity from having a horribly filthy restaurant. My read of the problem was that the franchisor, particularly when the franchisor owns many of the stores itself, has a strong incentive to monitor all franchisees and contract for control and/or damages to mitigate the possibility of brand-damage. I believe we are seeing this played out in the TP case.
Shortly after the shoot-out (a strangely mild phrase, evoking thoughts of a Six Flags theme park ride), TP revoked the franchise from the Waco establishment, widely publicizing the decision and distancing the brand from the actions of the Waco restaurant management. Why is any of this the fault of TP-Waco? According to Waco police, TP-Waco had been warned about hosting the biker "meetings" and encouraging well-known organized criminal gangs from hanging out there. I have not seen any identification of the owner(s) of TP-Waco and do not know if there are any familial or business connections between the owner(s) and a motorcycle gang, so the incentive of TP-Waco to encourage biker clientele is unclear. In fact, the Waco police contacted TP (national) and advised them of the situation, and TP (national) contacted TP-Waco. According to TP (national), it had no power to physically close TP-Waco on the day of the meeting, cancel the "patio reservation," or change any of its decisions. Its remedy was to revoke the franchise after the fact. Now, TP (national) says it is revising its franchise agreements to give it more power to act earlier -- I would love to see a copy of the new franchise agreement!
Anyway, our student's paper highlighted this very concern. Now, other TP franchisees surely will see lost business as patrons will associate the brand with violence or at least an unsavory biker culture. Not only did something awful happen there, but the management is being painted in the media as being an active participant. TP-Dallas has already sent out a press release trying to mitigate brand-damage, focusing on the fact that no patrons or bystanders were hurt. So, if TP-Dallas loses business, what can it do? I've looked everywhere to see if business interruption insurance covers this, and I can't find an insurance product for this type of loss. However, I have found evidence that franchisees often sue franchisors for a number of things, including "errors and omissions" in the franchise disclosure documents. The disclosure documents aren't public, but the TP website does stress that franchises are only given to a select few candidates who are very qualified. While criminal law types monitor the ongoing investigation, the boring corporate types will monitor the franchise situation!
One way to enact your regulatory agenda is to pass a rule. But another is to commit yourself to some program of regulatory reform as part of a settlement with an outside party. Some congressional Republicans are increasingly worried that this sort of hands-tying is increasingly being resorted to by environmental regulators, hence the introduction of the Sunshine for Regulatory Decrees and Settlements Act of 2015. Financial regulators blow a lot of statutory deadlines, leaving them vulnerable to litigation by an angry NGO, but so far haven't been accused of sue and settle, as far as I know. But perhaps it is only a matter of time. RegBlog has a nice symposium up on sue and settle, here's a taste:
When agencies acquiesce to plaintiffs’ demands, they may give the litigating organizations a potentially outsized influence over the agency’s policies and allocation of resources. ... Dan Walters ... noted that sue-and-settle rarely occurs, “at least in its worst possible form.” Furthermore, he argued that, perhaps counterintuitively, such “settlements add to the democratic character of what is otherwise a very shadowy forum” called rulemaking.... Jamie Conrad, a highly-regarded practitioner with years of experience in Washington, D.C,  takes issue with Walters’ downplaying of sue-and-settle’s potential threats to the legitimacy of the rulemaking process.
Give it a look.
During the previous three academic years (2011-2012 through 2013-2014), the SRP operated a clinic that assisted institutional investors (several public pension funds and a foundation) in moving S&P 500 and Fortune 500 companies towards annual elections. This work contributed to board declassification at about 100 S&P 500 and Fortune 500 companies. With work on the declassification project completed last summer, the clinic has not been operating during the current academic year. This website provides information about the work done by the SRP clinic during its three years of operation; a detailed final report on this work will be issued in 2015.
The clinic has indeed changed a great deal about corporate governance; it was also the target of that paper by Gallagher and Grundfest about whether it had conducted securities fraud in its various proxy campaigns by not discussing research that did not support its position on staggered boards, a paper with less importance, perhaps, if the thing it was complaining about was no longer in existence. I thought the project was interesting, in that it was actually giving students a chance, it seemed to me, to do corporate law in a clinical setting, which is difficult to pull off. But perhaps it was at the natural end of its efforts anyway.
There's a proposal out there, with support from various surprising corners of the political spectrum, to get rid of the NY Fed's place on the FOMC, on account of it being too close to Wall Street, big banks, and so on. I wrote about it for DealBook - do check it out. A taste:
I have my doubts about any legislation that threatens the central bank’s independence, but would evaluate it by looking to three of my pet axioms of financial regulation.
When I apply these axioms, I conclude that the New York Fed should not lose its vote. The short-term benefits are unclear, making the change look like a symbolic effort to shift the long-term focus of the Fed away from Wall Street. But Wall Street is important, and deserves its focus. There’s no reason to believe that the New York Fed will do a better or different job on Wall Street if it loses its automatic vote.
Do let me know what you think, either in the comments or otherwise.....
I blogged last week about Etsy's IPO, but it took me until now to figure out what bothered me about the story. It came to me while I was explaining to a local entrepreneur the difference between a B-Corp and a benefit corporation. A B-Corp can be a for-profit entity, but is certified "to meet rigorous standards of social and environmental performance, accountability, and transparency)" A benefit corporation is a different kind of corporation--one organized not just for profit, but for some other social purpose as well. If you think that entity choice matters--as I do--then the choice to become a benefit corporation is a much stronger statement than just being a B-Corp, because that choice is baked into that organization's constitutive document. It's a more credible commitment, if you will, to social values.
Let me be clear, I'm skeptical of the need for benefit corporations on principle. Unless you're Craigslist or Henry Ford, I think corporate law gives you plenty of flexibility. But if you buy into the presumption that benefit corporations do provide value, they matter as signals to investors and consumers. As I explained to the Athens entrepreneur, currently if you want to show that social enterprise matters to you, you can become a B-Corp. And if you really want to show that it matters, you can become a benefit corporation. But if B Lab requires certified B-Corps to become benefit corporations within 4 years, entities have fewer modes to express their degree of social commitment. And I don't think that's a good thing.
The WSJ has a story today that suggests that indeed it does.I'm not so sure, and I've been looking into the situation. Looking at the plain numbers doesn't account for selection effects - one reason the agency might take a case to an ALJ is because they've already settled it, and it's inexpensive to put the settlement on record before an in-house judge. So we should probably strip settled cases out of the analysis. But there's no question that the SEC is ramping up ALJ enforcement, and that it usually wins there.
Hence the recent spate of arguments that ALJs are unconstitutional. I'll have more to say on that, too, but it's worth remembering the "part of the furniture" theory of constitutional law as a first order reason to conclude that a government program is probably okay. If something has been around forever, and is important, it's probably constitutional. The Supreme Court has probably decided hundreds of cases that began with ALJ proceedings. You can expect it, and other Article III judges, to assume that the institution of the SEC ALJ should survive.
I admit that I don't tear into every paper reverse engineering the USNWR rankings out of principle, but this paper by Robert L. Jones (hat tip: Tax Prof Blog) seemed worth the read. (The paper is a shorter essay updating a longitudinal research paper from two years ago that I missed.) Both papers look at those ever-so-important "academic reputation" scores that show up in the USNWR to make every law school strive to improve its academic reputation. These scores are the result of surveys sent to every law school dean, academic associate dean, chair of appointments and newly tenured faculty member. Each school is rated 1 to 5. If you've ever stepped foot into a law school as a faculty member, you have been in a conversation on how to boost this score. Splashy new hires? Increasing scholarship? Increasing visibility of scholarship? Conferences? And you will inevitably hear someone say that academic reputation scores are "sticky" -- they do not seem to move quickly or substantially, no matter what schools do. This paper answers the "why" of the sticky question and concludes that the scores are not sticky -- they are intentionally deflated. First, here's Jones' graph showing that the average ARS has declined since 1998, with a particular trend since the disruption in the legal market during the financial crisis, despite all the investments schools have made in increasing scholarship and expanded hiring. Moreover, these scores have declined while judge/lawyer reputation scores have increased.
Why this decline then? Jones contends that because of the importance of the rankings and the competition the rankings engender, that voters act strategically by deflating the rankings of competitor schools. The more important the rankings are, then the more strategic the voting. No voter has an incentive to give high reputation scores, but a real incentive to give low ones. Therefore, Jones concludes, the academic reputation scores are worthless. (I could see an argument that if all voters systematically gave lower grades to everyone, then the scores are valid as a ranking, much like a 2.7 grading curve mean. But, we don't know how systematic the strategic ranking is. One could imagine that competitor schools over-punish schools that make large, visible investments in academic quality and ignore schools that are not seen as threats.) I have just begun to foment thoughts on this theory, but if it's true then it calls into question many firmly-held beliefs about expensive practices that are thought to "boost the rankings."
The National Business Law Scholars Conference has extended its CFP through May 8. They've announced two fantastic keynote speakers and a stellar plenary session (including my friend Josh White from UGA's finance department. He is awesome). Here are the details:
PLENARY PANEL - THE EXTRATERRITORIAL APPLICATION OF FEDERAL FINANCIAL MARKETS REGULATIONS
CALL FOR PAPERS (EXTENDED UNTIL MAY 8, 2015)
LOCAL ATTRACTIONS AND INFORMATION
I can't decide if I have post-Ultron depression or if this sequel just isn't that great. My kids and I have "literally" been waiting for this movie since the credits (really) ended after The Avengers. We have watched every movie in the Marvel Cinematic Universe multiple times. We have watched every episode of Agent Carter and Agents of Shield. We've known that Scarlet Witch and Quicksilver were going to be in the movie since the end of Captain America: Winter Soldier. We bought our tickets ahead of time. In 3D. But walking out, I kept asking everyone, "Did you like it? Was it better than The Avengers?" because I was not sure.
There are many spoilers, so the rest is below the fold.
It's an evergreen topic, so perhaps it is worth pointing you to this column by Stephen Davidoff Solomon on the latest shenanigans by boards, this post by Joshua Fershee sort of taking a middle ground on the debate, this paper by Bernard Sharfman, who is in the activist camp, and this from Stephen Bainbridge, who prefers boards. So there you go - a linkfest on boards v. activists with nothing by Martin Lipton or Lucian Bebchuk. Is it comprehensive? Hey, I study regulation, not internal corporate dynamics.
I'm co-organizing a conference in Heidelberg; it's perhaps not something that all of the Glom's readers work on, but for those that do, we'd love to get your proposals:
On 11-12 December 2015, the International Economic Law Interest Groups of the American and European Societies of International Law, together with the Max Planck Institute for Comparative Public Law and International Law, will hold a joint works-in-progress workshop in Heidelberg, Germany. The overarching theme of the workshop is "The Future of Transatlantic Economic Governance in the Age of the BRICS." The deadline for paper proposals is 30 June 2015.
Proposals are encouraged across all areas of international economic law (trade, investment, financial regulation, monetary law, cross-border regulation of MNCs, law and development, etc.) For full details, please consult the Call for Papers in the documents section of the ASIL Interest Group's website:
We look forward to receiving your proposals! The Organizers
Transactional Lawyering and Contractual Innovation
2016 AALS Annual Meeting
New York, NY
In a world of dramatic economic, technological and legal change, there is a need for contractual innovation. Contractual innovation has traditionally been challenging for transactional lawyers due to a number of factors, including stickiness in contract terms, locked-in practices, and structural impediments to better contract design. Transformative technology and stresses on the legal profession, with a focus on reducing costs, may further affect contractual innovation. An early stage technology company, for example, can easily set itself up and generate customized legal forms through online tools that will help the company establish and run its venture with minimal up-front legal costs and little involvement from transactional lawyers. Even in more complex transactions, technology has led to automation of contract design. Panel members for this program will address a number of important questions as to how to encourage innovation by transactional lawyers in the face of these challenges: What role can and should transactional lawyers play in driving contractual innovation? To what extent can innovation in designing contracts provide transactional lawyers with new opportunities for premium work? What impact does the structure of law firms play in shaping the process of contract design and production? What roles do norms and standard practices in dealmaking play in shaping innovation in contract design? Does the process of innovation differ in one area of transactional practice from another, for example mergers and acquisitions versus venture capital financing versus establishing unincorporated entities?
The first part of our program will involve a panel of speakers who will focus their comments on the questions posed above. Panel participants include Professors John Coyle, Kevin Davis and George Triantis.
The Section on Transactional Law and Skills invites submissions from any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper on this topic to submit a 1 or 2-page proposal to the Chair of the Section by August 31, 2015. The Executive Committee will review all submissions and select proposals for presentation as part of our AALS 2016 Section Meeting.
Please direct all submissions and questions to the Chair of the Section, Afra Afsharipour, at the address below:
Professor of Law & Martin Luther King, Jr. Hall Research Scholar
UC Davis School of Law, King Hall
Tel: +1 530 754 0111