A few weeks ago, the faculty here gave a lunchtime discussion of various SCOTUS cases in the 2013OT. As a corporate law professor, there's never a lot to choose from, and this year's skimpy offering was no different. I chose the consolidated cases of Chadbourne & Parke LLP v. Troice; Proskauer Rose LLP v. Troice and Willis of Colorado Inc. v. Troice. (Documents courtesy of Scotusblog.) Though the names do not suggest it, these are the private securities lawsuits stemming from Allen Stanford's Ponzi Scheme. Mr. Stanford is serving 100 years in prison right now and probably doesn't have a lot of extra cash lying around, so investors have chosen to sue these other entities. Because federal securities law is not very amenable to securities fraud lawsuits against aiders and abetters (like these defendants would be), these cases were brought under state law.
Unfortunately, federal securities law, and the Private Securities Litigation Reform Act, is not that easy to bypass. Defendants wanted the case dismissed under the Securities Litigation Uniform Standards Act, which pre-empts class actions in which plaintiffs allege a misrepresentation in connection with the purchase or sale of a "covered security." As you can tell from my quotation marks and boldface, plaintiffs counter that the fraud was not in connection with a "covered security."
What was the fraud? Stanford touted certificates of deposit (CD) accounts that paid 10% (what?) at Stanford International Bank, based in Antigua. Now, CDs at U.S. banks aren't considered securities at all, but the SEC and the DOJ argued that Stanford committed securities fraud in the purchase and sale of a security anyway. However, these charges were dropped in favor of wire fraud, obstruction and money laundering, and he was convicted on those counts.
That being said, no one is arguing that the CDs aren't a "security." But, plaintiffs argue that the CDs aren't a "covered security." A covered security is one that is listed on a regulated national exchange and traded nationally. The CDs are definitely not covered securities. But, SIB represented that the accounts were backed by "safe, liquid investments" and that monies were "invested in a well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies and major international banks." Defendants argue that this is enough to meet the "in connection with" standard -- the monies were supposed to be used to purchase covered securities at some point. (The money was never used to purchase anything, but no one is taking the "phantom securities aren't securities" angle in this post-Madoff era!) In addition, defendants make the argument, and the SEC was using this argument in the Stanford case, that at least one plaintiff sold covered securities to invest in the CDs. If the defendants are right, then the case is dismissed under SLUSA and cannot continue in any court as a class action.
Here is the transcript of the oral arguments on the first day of the term. Other commentators seem to think it was split and that defendants may win. I wasn't there, but the transcript seems to suggest that the justices were very skeptical of the reach of the defendants arguments. Both the "in connection with" argument and the "selling covered securities to purchase the fraud" arguments seem to bring up spectres of ordinary purchases becoming securities fraud fodder. I.e., if I sell stock to buy a house, the seller better not say anything misleading or its securities fraud for you! I hope the plaintiffs win for this and other reasons.
I've got a piece over in DealBook on the advantages of a multi-regulator regime, which can be seen if you squint in just the right way. A taste:
No other country has created such a patchwork of agencies to deal with financial oversight. Henry Paulson, a former Treasury secretary, called for a rationalization of financial regulation before the financial crisis in 2008. You wouldn’t dream up a world where a rule on proprietary trading by banks has to be administered by five agencies, if it is going to work at all.
Nonetheless, even historical accidents have their merits. Cass Sunstein, the former White House regulatory czar, has long argued that group dynamics — whether they involve multiple judges looking at the same issue, or multiple agencies thinking about the same regulation — can moderate the extremes, and, perhaps, reflect the more careful deliberation that a give-and-take among decision makers should produce.
Moreover, if those regulators, in the end, decide to do things differently, we might expect the benefits of experiment, followed by market discipline, as investors flock to those financial institutions subject to the regulations most likely to keep them profitable and solvent.
Go give it a look, and let me know what you think.
For those of you wanting to keep tabs on the soon-to-be-final Volcker Rule, here are some important links. Here is the fact sheet (released today). Here is the board memo accompanying the final rule from yesterday. The full proposed rule as printed in the Federal Register.
In a nutshell, the rule will prohibit "banking entities" from engaging in "proprietary trading" and owning "covered entities." The meat, of course is in the definitions and exceptions. The term "banking entity" is going to basically cover any bank holding company or other insured depository institution operating in the U.S., including affiliates, subsidiaries, parent companies, etc. Nonbank financial companies are exempt from these prohibitions but may be subject to other capital requirements. Proprietary trading activites are prohibited, but market-making, risk-mitigating hedging, underwriting and trades necessary to provide liquidity are exempt. Certain investments in covered entities, hedge funds and private equity funds, are exempt. And the kicker -- executives have to certify that the bank has "taken steps" to comply with the rule, though they don't have to certify actual compliance.
So, will this take away the benefits of being a BHC for Goldman and Morgan Stanley? Maybe, though I read at least one commentator say that should these "too big to fail" entities opt out, regulators could just change the definition of "bank entity" to include "systemically important financial institutions" (SIFIs).
Hard to believe, but the Volcker Rule was proposed in 2011. Here is a great series of posts by friend of the Glom Kim Krawiec on the making of the Volcker Rule.
Finally, if you want a good read on the very profitable road from matching customer trades to proprietary trading, The Partnership: The Making of Goldman Sachs, is a very interesting read.
Though we took the littler Stancil cousins to see Frozen, see below, I also accompanied five sixth-graders to see Hunger Games: Catching Fire over the holiday week. After it was over, the other mom looked at me and said, "Did you know it would be that tense?" Unfortunately, yes. There is a whole internet out there with commentary over whether the middle school set should see these movies or read these books. Go over there and discuss. We've already read the books and now 2 movies down. But, your mileage may vary.
If you aren't on pins and needles worrying about other people's children hiding their faces next to you (like I was), then it's a really enjoyable movie. I don't know what holds the line violence-wise between PG-13 and R, but the violence has to be pretty close to that line. And even though it's not particularly bloody like a war movie or a horror movie, it is very tense. You get the feeling that a lot of violence is happening right outside the camera or right after the camera cuts away. And there's not a lot of guns in this dystopian future, mostly just painful instruments of death.
But enough about that. Does it hew closely to the book? I think so, though I read it two years ago. And, at 2.5 hours, if things are cut out, then there's no way they could be left in. I'm not sure if the final scenes in the arena are exactly the same, but they are very compelling. If the screenplay doesn't match the book, then the screenplay is probably better. The relationship between Katniss and Peeta may be what, if anything, is truncated. I seem to remember in the book that they slowly warmed back to one another and became each other's soulmates during their victors' tour. That gradual dissolve happens fairly quickly. But, most of the sixth grade boys there came to see the Games, not the love story.
If you've not read the books, or read them a few moons ago, know that Katniss and Peeta are the Victors in the previous annual "Hunger Games," a sort of bloody take on Shirley Jackson's The Lottery. Two teenagers from each of 12 Districts of PanEm (a sort of future U.S. post revolutionary attempt) go into the arena and only one comes out alive. The central point of the first book/movie is that Katniss tricks the Games Master into letting her and Peeta both live by staging a Romeo and Juliet-like suicide pact on live TV. The Games Master is now dead, and Katniss has a sword dangling over her head by President Snow. He knows it was an act, but she (who is in love with Gale) and Peeta (who is in love with her) will have to pretend to be madly in love for the rest of their lives. However, Katniss' obvious disdain for the Games has inspired some of the Districts to protest and fight back against the totalitarian Capitol, making Katniss' death more appealing to Snow. So, he announces that the next Hunger Games will feature 24 previous Victors, making Katniss' death very likely. As you might imagine, the Victors, who have been able to live in relative comfort (though with severe PTSD) are not happy about this.
This middle book/movie is the Empire Strikes Back of the trilogy -- there is a lot of action that needs to be squeezed into here, so it is the most fun and most gripping. Much has been written on the web about Katniss' and Peeta's relationship, including this piece that describes Katniss as the usual emotionally unavailable superhero (like Tony Stark/Ironman) and Peeta as the long-suffering girlfriend (like Pepper Potts). That's awesome, but what I thought was interesting is that Katniss' first sacrifice (volunteering to die in place of her sister at the Reaping) is seen as less of a sacrifice as her second one (having to marry her best friend instead of her childhood sweetheart to save her family and Peeta's family). Death is preferable to life without romantic love is a fairly modern, Western ideal I would think. But that tension is only the major one for a brief moment, because it is eclipsed by the new Games, which promises to kill either Peeta or Katniss or both. And, to her credit, Katniss vows to ensure that Peeta survives at all costs.
As others have pointed out, though this series features a strong female character, Katniss, the overarching question is "Who will be my boyfriend?" Katniss is definitely a step up from Twilight's Bella, who was so passive and pasty on the sidelines while her two loves battled each other and then bad vampires. But though Katniss is battling for her life and maybe the future of the citizens Panem, her old beau Gale is making her feel bad for kissing Peeta to survive? (And not for killing human beings to survive?) I guess this is Young Adult fiction, but maybe it could strive to be a little more.
Like many people this holiday weekend, I went to the movies. Twice. One of those times was on Friday, with 5 kids aged 5-12, to see Frozen. Like pretty much everyone else who has seen it, we all loved it. Perhaps all the Disney wonder in the world that skipped over the horrible Planes movie landed on Frozen. It's Tangled, with a bit of Brave, and a whole lot of Wicked.
Anna and Elsa are sisters and daughters of the King of Arendelle, but Elsa has secret powers that enable (or require) her to shoot ice and snow out of her hands. This makes for all kinds of childhood merriment, until Anna is injured and Elsa ordered to not only refrain from ice-making but also avoid contact with her doting little sister. Anna finds that she can't control her powers and so retreats more and more from daily life at the bidding of her parents. Because this is Disney, King and Queen are killed when their ship is caught in a storm, leading the sisters to grieve separately, in the same castle. Over time, Elsa must ascend the throne, opening the palace gates for one day for the coronation. Elsa barely makes it through the coronation without an icy slip, but loses control when Anna giddily announces she is engaged to a prince she just met at the coronation ball. Cold, snow and ice descend on the kingdom as Anna flees to the mountains to live in icy isolation. Anna goes after her sister, with a cute ice-cutter and his reindeer as her guide.
So, you may have seen the trailer with the re-arrangeable snowman, Olaf, and the reindeer, Sven. The movie isn't about that at all. If it were, it would be Free Birds. No, Olaf is the comic relief, but he has an appropriately small-ish role, like the crab in the Little Mermaid or Mu-Shu in Mulan.
Another thing, it's a musical. I full-throated musical. So much so that when Elsa is building her mountain ice castle and belting out "Let it Go," I realized that the plot was Wicked, and Elsa is Elphaba. A little Googling told me that I'm not the first person to think that or even to plan that. The voice of Elsa is Idina Menzel, who originated the role of Elphaba on Broadway, and the song was written especially for her. (The single was recorded by Disney cast member Demi Lovato, but we downloaded the Menzel version.) The song is very much "Defying Gravity" -- embracing what you've been hiding, turning a negative into a positive, eschewing the madding crowd, etc. It's an awesome song. I also dare you not to cry during "Do You Want to Build a Snowman," an anthem for all little sisters everywhere.
But the best thing about the movie is the story. The story of the sister's quest may not be entirely original (very much like Merida's journey in Brave, with a similar ending, and even more like Rapunzel's in Tangled), but it is still very appealing. And of course, no serious Disney love story in the post-Shrek world will have a heroine rescued by a hero, right? We know that. So, either a heroine will rescue a hero or the true love at question will be a different love, like daughter-mother. You don't have to be Sherlock Holmes to suspect that this movie will have a true love twist, but it didn't seem predictable. And in case you are with a five year-old girl who cries at a particular moment (like I was), remember that Disney dead is only mostly dead.
The multibillion dollar fine imposed by the EU for rigging the LIBOR and other rates was doled out not because the rate rigging was deemed a form of market fraud, but because it was collusive, anti-competitive conduct. Indeed, the EU doesn't have a regulator who can police that kind of fraud. Instead it has antitrust, the seminal European worry, and a font of regulation that has quite literally been used to further the European project (dethroning national champions, removing internal trade barriers, defending important European companies, like Airbus, against foreign competitors, you name it). So it's a good thing for Europe that this could be fit within the antitrust rubric.
It gives some lie to the idea that Europe hopes to become the world's regulatory superpower though (see this talk by Moravcsik, or this for an overview of that school of thought). Clearly the continents super powers are not distributed evenly.
One of the things the FSOC is supposed to be is a task force keeping an eye on financial stability. But it is also, to that end, supposed to be a noodge. It keeps threatening to do something about money market funds in an effort to force the SEC to do more, for example. And it has designated two insurance companies and GE Capital as systemically significant because their primary regulators had not done so.
That is why it is kind of interesting that the Chamber of Commerce has urged that the noodge factor be tamped down. Currently the FSOC can just vote to designate a financial institution as systemtically signficant over the objection of their primary regulator. As Reuters reports on the Chamber's proposal:
"If the primary regulator or independent council member does not vote in favor of designating a non-bank financial company for which the council member has industry expertise... then a second vote shall be scheduled within 45 days," the Chamber wrote. "The primary regulator shall issue a report to the FSOC within 30 days of the initial vote explaining its rationale as to why a firm should not be designated."
It's not a dramatic change - it would slow, rather than end, the council's designation role - but it does suggest that regualted industry is worried about what the FSOC is doing. And that is worth noting, because it wasn't clear that the committee would be able to accomplish much at all, considering that it is a jammed together new federal entity, without totally obvious powers to forces its members to do anything (not always - Jake Gersen has a nice article on the entity that characterizes some of its powers to require as a "Mother-May-I" approach - the cite to that is here, and after the jump).
From our friends in New Orleans:
Tulane Law School is currently accepting applications for a two-year position of visiting assistant professor. The position is being supported by the Murphy Institute at Tulane (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy and ethics that draws faculty from the economics, philosophy, history, and political science departments. The position is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation). It is also designed for individuals who plan to apply for tenure-track law school positions during the second year of the professorship. The law school will provide significant informal support for such. The person selected for the position will be expected to participate in scholarly activities at the law school and at the Murphy Institute, including faculty workshops, and will be expected to teach a law school course or seminar in three of the four semesters of the professorship (presumably the last three semesters). The annual salary for the position is $65,000 plus eligibility for benefits. To apply, please send a CV identifying at least three references, a law school transcript, electronic copies of any scholarship completed or in-progress, and a letter explaining your teaching interests and your research agenda to email@example.com. If you have any questions, please contact Adam Feibelman at that same email address. The law school aims to fill this position by March 2014. Tulane is an equal opportunity employer and encourages women and members of minority communities to apply.
So, last night we were introduced to the ACT "World of Work" map at a meeting designed to prepare us for our sophomore daughter preparing herself for college. I can't get past the map. Besides the categories being just plain weird ("working with data" equals "police officer," but "statistician" is working with "ideas and things"), law school applicants are getting some very bad advice. So, law is contained in "community services," located straight out on the "working with people vector." Lawyer is included with social worker, counselor and other helping professions such as nursing and teaching.
Of course, the practice of law is a helping profession, but if your instincts tell you that you would like to work closely with individuals to help them, then law school is a pretty expensive way to do that. Yes, some lawyers do work one-on-one with individual clients to solve daily problems, and there is great satisfaction in those jobs. And, lawyers have the tools to help in ways that social workers can't. But if you go to law school to do that, you may find yourself in a job very far removed from that in order to recoup your investment. A job like this.
Possibly, law careers could be broken down into different groups, some in "working with ideas" (appellate lawyers, transactional lawyers," some in "working with people and ideas" (trial lawyers). And this doesn't even touch on the potential law jobs working with data. But telling high school sophomores that "if you like the idea of helping people, you might think of being a nurse or being a lawyer" might be contributing to disillusionment of law students and lonely first-year associates (and a shortage of nurses).
Longtime readers will know that I have little problem with the revolving door between government and the private sector. Given that regulators of every stripe have, almost in all cases, gone through that door at some point, it seems a little naive to just indict the thing because it is a thing. And there are plenty of reasons to believe it has an upside - but you'll have to read this if you want to find them out.
And now that Tim Geithner, the former Treasury Secretary, has joined a pretty obscure, if legendarily named, private equity firm, I'm declaring victory for the pro-door view. At least in the popular press. Here's a lintany of influencers: Sorkin, Yglesias, Bloomberg. All find Geithner's move unproblematic. And so should you - though you might wonder why you'd take this job instead of becoming chair of the Fed. If being the second most powerful person in Washington is less appetizing than working for not much money in an obscure corner of private equity, perhaps we are going to have to incentivize public service more than the revolving door already does.
Readers, you know I'm not technologically savvy. The first I heard of Snapchat was last week when its 23-year old founder Evan Spiegel rejected a Facebook acquisition offer of almost $3 billion. Snapchat, for you old fogeys out there, allows users to send messages and pictures that disappear after a few minutes. I can see the use in that. Of course, the company has no revenue as of yet. Then came word of a "snapchat sexting scandal." Ah, I thought, some clever computer programmer has found away around the self-destruct feature.
Then I read on.
Montreal police arrested 10 teenage boys Thursday on child-porn charges for passing around pictures of girls ages 13 to 15 in sexual poses or performing sexual acts. The boys allegedly coaxed their female friends into posing for the pictures and sending them using SnapChat.
The girls thought the pictures would vanish within seconds. Instead, the boys found ways to get around the time limit. Those can include taking screen shots of the phone, finding hidden files on the device or taking a picture of the phone with another phone.
That's right. Screen shots, or plain old taking a picture of the screen.
So let's get this straight. No revenue. Supposedly transitory feature easily evaded even by the likes of me. No-revenue or low-revenue businesses getting sky-high valuations (I'm looking at you, Pinterest). It's beginning to look a lot like 1999.
If I was Evan Speigel's mom, I'd be smacking him upside the head right about now.
The $13 billion dollar settlement with JPMorgan over violations made by companies it bought during the financial crisis appears to be all but final. You may think it is a much-awaited example of finally getting tough with financial institutions, but you may also be wondering about the fairness of it all. Were these bankers doing things that are different from other bankers? Why aren't those other bankers paying commensurate fines? Is this like the LIBOR scandal, where many banks were involved but only one, Barclays, paid with the loss of its CEO?
It is like that. But if you want to make peace with this sort of government enforcement, here is how you do so:
- Making an example. These sorts of enforcement actions tend to amount to a form of the original meaning of the term decimation. The idea is that the dramatic punishment of a few will deter the many, which means that those singled out can expect - maybe reasonably, even as they bemoan their bad luck - severity.
- Limited resources. But building a case is difficult, and so the government is wise to concentrate on the famous, given that it cannot hope to enforce against everyone - the Wesley Snipes principle, if you like. JPMorgan is the most famous of the banks, the most in the news, and therefore the most tempting target if your goal is to maximize the impact of a necessarily limited set of enforcement actions.
- Contract misrepresentation damages. Half the settlement is not so much a fine as it is compensation to misled investors. In this sense, part of that big number is very much simply a measure of an expectancy not realized. It is that sort of remedy that you'd think would most likely be paralleled in proceedings, perhaps initiated by private parties, against other banks.
Banking regulation is increasingly being done through private contractors - these days, the OCC will require a bank in trouble to hire a consultant, usually composed of former OCC employees, to set things straight, or expect a bank to come to it with that sort of proposal. There are plenty of worries about conflicts of interest in this practice, while at the same time, bank consulting is a business really growing in value, making, for example, former OCC head Eugene Ludwig, who has founded the consultancy Promontory, dynastically wealthy.
Yesterday, the OCC issued guidance - not a rule, nothing binding, so no lawsuit over this is in the offing - to banks on how they should handle requests from the agency to hire consultants. Here's a nice take on the context, from DealBook. The document is short; and it doesn't really constrain the agency. But it does suggest the values that the agency thinks is important when taking on a consultant.
One is competence - that is, the competence of both the bank and the consultant. From the guidance:
When determining whether to require an independent consultant, the OCC considers, among other factors,
- the severity of the violations or issues, including the impact of the violations on consumers, the bank, or others.
- the criticality of the function requiring remediation.
- confidence in management’s ability to perform or ensure that the necessary actions are taken to identify violations and take corrective action in a timely manner.
- the expertise, staffing, and resources of the bank to perform the necessary actions.
- actions already taken by the bank to address the violations or issues.
- services to be provided by an independent consultant (for example, a full look-back or a validation of the bank’s look-back).
- alternatives to the engagement of an independent consultant.
Another is independence:
When evaluating the independence of a consultant, including whether an actual or potential conflict of interest exists, the bank’s assessments should address, and the OCC considers, among other things, the following factors:
- Scope and volume of other contracts or services provided by the independent consultant to the bank. As part of its submission to the OCC, a bank should disclose all prior work performed by the consultant for the bank for at least the previous three years. This information allows the bank and the OCC to assess the nature of the contracts and whether the consultant has been involved in any work closely related to the engagement under consideration. The information also allows the bank and the OCC to assess whether the number of contracts or services the consultant has had or has with the bank may pose an inherent conflict of interest.
- Specialized expertise of the consultant and availability of other consultants, i.e., whether the bank evaluated other consultants with the requisite expertise and independence.
- Proposed mitigants to address any potential conflict or appearance of conflict. For example, when the proposed consultant already has a contractual relationship with the bank, a mitigant could include the creation or maintenance of effective barriers to the exchange of information by different teams of the proposed consultant with differing responsibilities to the bank. Any proposed mitigant must be well established and documented in the engagement contract as well as in ongoing documentation and practice.
- Any financial relationship, including the amount of fees to be paid, or previously paid to the person or company as a percentage of total revenue of that person or company, and any other financial interest between the bank and the proposed consultant.
- Any business or personal relationship of the consultant, or employees of the consultant, with a member of the board or executive officer of the bank.
- Prior employment of consultant staff by the bank.
- Other relevant facts and circumstances.
It isn't clear whether this marks the onset of new oversight of a new set of gatekeepers in financial regulation, or is meant to head off alterantive forms of regulation coming from elsewhere, notably the state of New York. But it's an important development in compliance, I think.