I don't think it's any real secret that almost every decision by a government to liberalize regulation of gambling activities has a financial aspect.  And, the internet gambling prohibitions in the U.S. have been attempt to keep gambling dollars (and gambling tax dollars) in the U.S. and not see U.S. gamblers funnel dollars to offshore ventures.  (I've posted a lot about this on the Glom, but my research began with this article. 

Now, four years after Congress banned online gambling in a last-minute addition to the Safe Ports Act, legislation is winding its way back to legalize online gambling and let states and the federal government tax the revenue.  Story here.  The 2006 statute attempted to prohibit internet gambling by preventing credit cards, banks and other payment systems from routing any transaction with a gambling provider. 

Stay tuned for arguments for and against from various legislators and groups.  The arguments for legalization will focus on tax revenue and may champion a particular use for those funds (education, health care, etc.)  In addition, there will be the argument of resignation:  you can't prohibit it, so keep it above ground and tax it.  The arguments against will focus on minors, particularly college students, compulsive gambling and money laundering.

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On Tuesday I moderated a program sponsored by the SEC Historical Society featuring presentations of the top papers from NERA Economic Consulting's Finance, Law and Securities Litigation Conference, which program can be accessed here.  All of the presenters discussed some really engaging and timely issues.  One presenter, Dr. Elaine Buckberg, spoke about SEC settlement trends.  In fact, NERA Economic Consulting has developed a proprietary database of settlements in SEC enforcement actions.  The database has some very interesting information, including a list of the top ten SEC settlements, with AIG leading the pack at $800 million.  (The list does not include Goldman, which likely would rank 3rd.) 

The database also confirms what we have all witnessed, that since SOX, the SEC "has imposed unprecedented penalties in its enforcement actions."  Indeed, one report notes that prior to SOX, the largest penalty imposed in an SEC action against a publicly traded company was $10 milliom; since that time, the SEC has imposed such a fine (or higher) against more than a hundred companies.  Importantly, that same report notes that while the SEC has had authority to impose significant fines since 1990, it used that authority "sparingly," with some of the reluctance stemming from concern about the impact of such fines on "already aggrieved shareholders."  However, corporate governance scandals and SOX changed all of that-- especially SOX's Fair Funds provision, which allows penalties to be funneled back to shareholders if disgorgement is obtained.  And in the case of AIG, the disgorgement represented $700 million of the total penalty.

To be sure, another report reveals that while the number of settlement actions increased for the first quarter of 2010, the settlement amounts were relatively modest--averaging about $4.7 million, as compared to $10.8 million in the 2009 fiscal year.  The report also reveals that "the proportion of company settlements that included a monetary payment was the third lowest in any quarter since the passage of SOX."  Depending on your view of settlements and civil penalties, this may be good or bad news.

However, whether or not you think the SEC's heightened activity in this area is a good or bad thing, this data is very interesting, especially as it relates to potential future trends.  Of course, it is not clear if the more recent numbers reflect a one-time dip or even, as the report wonders, a one-time "clearing out" of relatively minor cases.  Indeed, according to another report by NERA Economic Consulting, securities class actions have surged, with most of that surge stemming from credit-crisis related cases.  Hence, if SEC enforcement actions parallels these trends in class actions, then it could be that the first quarter numbers are just the calm before the storm. 

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In between reading about love triangles with vampires and werewolves and petite computer hackers with eidetic memories, U.S. readers have chosen to love a certain nonfiction book called Three Cups of Tea.  You may now the story.  The book is the co-written memoir of Greg Mortenson, who was an average K2 mountain climber who made a rash promise to an isolated village in Pakistan after they nursed him back to health following a near-fatal climbing incident.  Since he made good on that first promise, he has built over 140 schools in Pakistan, and now Afghanistan. 

I actually avoided reading the book for awhile.  I had just come back from Malawi, where my group had made a promise to build a school.  I didn't need to read some popular trade paperback about building schools.  Then one day, I picked it up and I didn't put it down until I finished it.  The whole book rang true for me.  How engaging with families in a developing country makes you come back home and think "For the cost of this Chai with Skim Milk a few times a week, I could send a child to secondary school" or "For the cost of this Cole Haan shoes, I could pay nursing school tuition."  Greg went to a whole different level:  Instead of paying rent, he lived in his car to save money to build his first school.  I was able to use my powers of rationalization to avoid that stark trade-off.  The other thing that rang true was the difficulties in transplanting a U.S. "git r done" attitude to a different culture that thinks in centuries, not nanoseconds.

But unlike other books dominating the booklists, Three Cups of Tea is required reading for U.S. officers in Afghanistan.  Lately, the war in Afghanistan news is all about Greg Mortenson.  NYT article here, Nicholas Kristof op-ed here.  The theory being that money on education, particularly secular education, in Afghanistan will be money well spent if it provides young people opportunities beyond joining the Taliban.

By the way, my husband just returned with our group from Malawi.  Here's a picture of the school under construction.  Below that, a picture of where class is currently held.

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The SEC announced today both the complaint against Citigroup and two of its executive officers and the settlement of that complaint for $75 million.  Here is the complaint.  Apparently, between July and October 2007, Citigroup made statements both in public filings and on investor calls to the effect that their subprime exposure was $13 billion when it was closer to $40 billion, if one includes two categories of assets that Citigroup was not including in that figure.  Citigroup neither admits nor denies that the statements were false, but agrees to pay.  The officers pay $100,00 and $80,000 respectively.

Now, what does this do to the civil litigation?

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Every business law professor should love talking about Facebook.  The formation issues; the business model issues; the privacy issues; the IP issues; the list could go on.  And now, there's a movie!!

The Social Network is due out on October 1 and promises to dramatize the origins of Facebook and the legal struggles over that formation.  For a brief primer of these issues, here's Gordon's post from three years ago.  And not to spoil the ending, but the settlement of the case was as protracted and fraught with drama as any in recent history.

Even with all that real-life fodder, the movie, written by Aaron Sorkin, may not be entirely factual.  The movie is based on a book that is so desperate to catch your attention it has two colon-preceded subtitles, plus the words "sex" and "money":  The Accidental Billionaires:  The Founding of Facebook:  A Tale of Sex, Money, Genuis and Betrayal.  Mark Zuckerberg, founder and CEO, has called the book "fiction," and the movie even departs from the book.  Notably, Zuckerberg does not plan to see the movie, according to Forbes.

That being said, it is written by Aaron Sorkin, so I'll probably love it, just like I loved Sports Night and West Wing.  One piece of dialogue, spoken by a fictional ex-girlfriend of Zuckerberg, seems true Sorkin: 

Listen. You’re going to be successful and rich. But you’re going to go through life thinking that girls don’t like you because you’re a tech geek. And I want you to know, from the bottom of my heart, that that won’t be true. It’ll be because you’re an a**hole."

Sorkin's characters always manage to say the things that we think of saying about six hours after the conversation is over.

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On Tuesday SEC Chairman Mary L. Schapiro announced a new process "making it easier for the public to provide comments as the agency sets out to make rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act."  A kind of pre-comment period comment period, this move "goes well beyond what is legally required and will provide expanded opportunity for public comment and greater transparency and accountability."  Here are links to the many web-forms you can use to make your voice heard.

I wonder the extent to which criticism of Dodd-Frank's Congressional punting/legit delegation (depending on how you see it) to agencies like the SEC is behind this move. I'm no admin type, but it strikes me as a little odd to give the public an outlet to sound off on everything from the definition of "swap" to disclosures regarding mine safety before the SEC has a chance to frame proposed rules.  I supposed ideally it would serve as a way to test the waters before issuing proposed rules.  In practice, it seems to invite every crackpot out there to weigh in, and then obligate the SEC to respond or justify its silence. 

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WestlawNext has been launched. This sort of upgrade to Westlaw is long overdue, but based on watching the orientation video and engaging in some exploration of the product, I am impressed by the ease of use and the new features. I have already fallen in love with folders and notes!

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Yes, we're all addicted to Facebook now, but many Facebookers are not just posting pictures or telling us what they made for dinner -- they are playing games.  And this is the big money-maker now.  So, there are 3 big players, all of which were venture financed:  Playdom, Playfish and Zynga.  (Quick overview:  Zynga is Mafia Wars and FarmVille; Playdom is Tiki Resort; and Playfish is Who Has the Biggest Brain?)  Playfish was recently acquired by Electronic Arts (EA, best known in our house for video games such as "Madden") for at least $300 million, and Disney announced this week that it is acquiring Playdom for $563 million, plus up to $200 million in earnout.  The Disney announcement was huge news not only because Playdom is a two-year-old venture, but also because Disney is about mainstream entertainment.  Are social network games mainstream?

Apparently, yes.  I think this is the brilliance of these games, which are available on Facebook and the like.  They are video games for non-gamers, much in the way that the Wii was a video game console for non-gamers.  Anybody can play, and you don't need to know how to hook up a $200 box to your television.  Or buy multiple $50 controllers.  Yes, there are many people who play their friends over the Internet on their XBox or Wii or who participate in MMORPG (massively multiplayer online role-playing games).  But zillions of people play their friends on these social network games, without even knowing how to use a joystick or nunchuk or whatever.

The amateur aspect also drives the profits.  Yes, they make profits.  Coincidentally, before the Disney-Playdom announcement, the NYT had an article on Zynga on Sunday, called Will Zynga Become the Google of Games?  Zynga makes money, even though its games are free?  Why?  Because it allows gamers to purchase virtual goods with real money if they don't feel like waiting to earn enough virtual currency.  My sense is that real gamers hate this.  I once went to a conference where expert World of Warcraft players were bemoaning the fact that amateurs were buying access to high levels on eBay, ruining their play by letting in these rookies to the high levels.  Well, these rookies are encouraged to buy the pink tractor for $3.50 any time their hearts desire it.

So, Zynga is the last independent social network game.  It's valuation is over $5 billion, making an acquisition unlikely unless by a major player, such as Google.  The Securities Regulation professor in me is chanting "IPO, IPO," but who knows.  Some watchers are worried that Facebook's curtailment of the games' constant bombardment of members' newsfeeds may cut the market way back; this may be the top of the valuation.  We'll see.

Do I play Facebook games?  No.  I tried Typing Maniac, and I was exceptional at it, much better than my friends and family.  But I played so much I think I got carpal tunnel, so I banned myself from it.

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I love to read "Corner Office" in the Sunday NYT Business section, which presents micro-interviews with interesting executives.  On Sunday, Corner Office featured Aaron Levie, who is 25 years old and a co-founder of Box.net.  Box.net is a successful venture capital-funded start-up that provides a web-based platform for companies to store and share documents.

I like to read the answers to question about what the executive looks for in hiring, particularly if there are any nuggest of wisdom we can use in the law firm hiring world.  Two things stood out here.

One, Levie says that he looks for are "energy and persistence. . . in addition to just having a clean résumé where there's nothing crazy going on.  In a business like ours, we have to be super, super competitive."  What does that mean?  I'm not sure.  The "clean résumé" says to me that he looks for a very linear, driven personality.  Someone that goes from high school to college to grad school to being CEO in one swoop without any veering off path.  The résumé that doesn't show you switching colleges or jobs multiple times.  Most people tend to look for people who remind them of themselves, and he is an energetic, persistent person who followed a pretty straight course. 

Unfortunately, I think a lot of folks hiring, even in the law school world, look for the "clean résumé."  Why do I think this is unfortunate?  Because you can't fix a muddy résumé once it's muddy.  You can try to make the most recent part as clean as possible, and maybe over time early stuff can fall off the résumé, but it's tough.  Is the clean résumé a good proxy for energetic and persistent?  Maybe, but one can also grow in energy and persistence over time.

Second, Levie values curiosity as a proxy for "who's going to be energetic and have the right attitude."  He wants to interview people who are curious about his business.  This reminds me of the dreaded law firm interview question "So, do you have any questions for us?"  (Also related to the dreaded law school interview question.)  Yes, great questions would show curiosity.  But, a few obstacles.  One, most law firms have the same business model, so coming up with an authentic question here is difficult.  Second, law firm life is fairly conservative and hierarchical, and there may be a fine line between curious and intermeddling.  Levie may be looking for someone who'll come in and think outside to improve the business model.  Most law firms are not.  And maybe that's a problem.

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Given the passage of Dodd-Frank, the AALS Section on Financial Institutions and Consumer Financial Protection has extended the deadline for its Call for Papers for the January 2011 AALS Annual Meeting to Monday, September 20.  E-mail submissions to agelpern@wcl.american.edu.  Submissions discussing the implications of the new law are welcome.  The full text of the original call is here. 

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Last week, I blogged a little about the Dodd-Frank provision providing bounties for whistleblowers in securities actions.  In the comments, there is some discussion about the pros and cons of these incentives.  John Carney writes at CNBC of an irony here that is close to my heart:  the juxtaposition of the criminal (or SEC civil) prosecution and private securities litigation.

In an earlier article, I pointed out that not only can prosecutors compel witnesses to testify, they can incentivize them by threatening them with prosecution.  None of the Enron cases, for example, would have gotten started without a few plea bargains in exchange for a reduced sentence.  (Remember Andy Fastow?)  Of course, there is nothing on the civil side that gives plaintiffs any sort of similar weapon.  In fact, plaintiffs can't offer potential witnesses anything, much less anything close to a Get Out of Jail Free card.

But now, the SEC can offer witnesses potentially millions of dollars.  So John Carney reminds us that MIlberg Weiss partners went to jail for compensating witnesses. 

So, why would we think that compensating witnesses in private litigation would induce people to lie, but threatening witnesses with jail time or offering them millions of dollars would induce people to tell the truth?

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Last week, when reading the parts of Dodd-Frank that called for the SEC to study whether the standards of care for brokers who gave personalized advice for retail customers were appropriate, I was suspicious that anything would happen.  My colleague Larry Ribstein disagreed with me.  He was right.

Today, the SEC called for comment on duties for broker-dealers as part of its study.  Here is the press release.  Summary: 

,

The Securities and Exchange Commission today published a request for public comment to inform its study of the obligations and standards of care of broker-dealers and investment advisers providing personalized investment advice about securities to retail investors. The study is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which President Obama signed into law on July 21, 2010. As required by the Dodd-Frank Act, the SEC is requesting public input, comments, and data on issues related to the effectiveness of existing standards of care for brokers-dealers and investment advisers, and whether there are gaps, shortcomings, or overlaps in the current legal or regulatory standards.

If you have comments, don't just leave them here -- go there.

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Financial regulation is as important a kind of regulation as any, and the Basel Committee's multinational effort to narrow the definition of the regulatory capital that the banks must hold, and to institute leverage requirements on how much they can loan out above that regulatory capital is, quite possibly, a trillion dollar rule.  It doesn't make the most recent response to comments and timeline for implementation of the proposed rule any more interesting.  I can tell you that this is all being done through an increasingly institutionalized administrative process via a body that has no formal legal authority, and only post hoc endorsements in Dodd-Frank, all I want - it doesn't mean you'll peruse the comments, the response, or the rule with, shall we say, brio.  The Times calls it nothing less than "a preliminary agreement Monday on new standards to reinforce the stability of the global financial system."  That is something we all should read, right?

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Friday afternoon we were babysitter-less, so the big kids and I went to see The Sorceror's Apprentice.  The basic story line is one that is used repeatedly these days:  young man/boy is clueless and out-of-place in real world, finds out he is in reality a special chosen "something," struggles briefly in disbelief or denial, then accepts role with all the responsibility, becomes victorious.  (See, e.g., Harry Potter and the Sorceror's Stone, Percy Jackson and the Lightning Thief, Clash of the Titans, etc.)  Here, our hero David is a physics geek at NYU who has opted out of the social scene after a public humiliation ten years ago, brought about by his first encounter with Balthazar, the sorceror.  Of course, by the end of the movie David will save the day (and the world), with his physics geekiness.  And get the girl.

I thought parts of the movie were really, really cool.  The premise is that Merlin (yes, that Merlin) taught three sorcerors (Balthazar, Horvath and Veronica), but Horvath turned on the other two and joined forces with Merlin's nemesis Morgana.  Balthazar ends a battle with them by encasing Morgana (along with Veronica) in a nesting doll, then Horvath in the next-bigger nesting doll, etc.  After 1000 years, Balthazar has trapped several "Morganians" in the layers of the by-now-quite-large nesting doll.  Horvath escapes and is set on unleashing Morgana in order to wage an end-of-the-world takeover.  I thought the nesting doll thing, with evil villains being unleashed in a series, was really cool.

I also liked the science aspect of it.  Here, what we consider magic is treated as simple physics, plus a little telekinesis, which is a result of sorceror's being able to use parts of their brain that others can't.  (This theme actually isn't completely consistent throughout the movie, but whatever.)  Our good sorceror's apprentice is a scientist.  Our evil sorceror's apprentice is a celebrity magician "entertainer."  And the scientist wins, using everyday science.

What's not to like?  The dialogue.  (O.K., there is a setup of a Star Wars joke that Luke and I saw coming a good two minutes before the punchline.  Lame.)  The unconvincing acting.  Jay Baruchel plays our goofball hero, and he just annoyed me.  He looks like he's squinting, wincing and crying at the same time in almost every scene.  And the pretty girl falls in love with him, but we're not sure why.  Because he's handy around electricity?  Not convinced. 

And finally, it is hard to like the very lame homage to Mickey Mouse's Sorceror's Apprentice from Fantasia.  I have to admit that I did not realize that the story of the Sorceror's Apprentice goes back to a poem by Goethe (yes, that Goethe), which blossomed into a Mickey Mouse short, which blossomed into a segment in Fantasia.  What was really fun to watch in a cartoon translates here into a blissfully short, but not-so-entertaining broom sequence.

But in the end, my eight-year old boy loved it.  Loved it.  He sat on the edge of his seat the entire time.  Talked about it all day.  There you go.

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Tino Cuéllar, back at Stanford after a gig in the White House, recently published a fascinating piece in the Chicago Law Review on national security agency reorganizations - there is DHS, of course, but there's also a New Deal security agency with a history he uncovered.  I did a quick response for Chicago's online co-venture.  Here's a taste, give it a look if you like:

As Cuéllar explains, the Roosevelt administration spent significant capital on the FSA because it believed that the agency could, by defining security expansively, contribute to health, education, and public welfare as well as to domestic and international security.  The modern-day DHS, by reaching so broadly into state, local, and national law enforcement and by integrating immigration, customs, counterterrorism, and drug enforcement, among many other things, also contains more than a whiff of the suggestion of total war.  And total wars are worth fighting only if absolutely necessary.  I think that actual domestic security almost always involves more bureaucratic slicing and dicing than it does consolidation.  And in the same vein, although security and social welfare are linked in grand theory, the best practice, endorsed by most modern bureaucracies under most conditions, is to keep social programs separated from the national defense.

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