May 22, 2015
SEC Villians Of The Week?
Posted by David Zaring

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?

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May 20, 2015
Ben Lawsky's Departure As New York's Financial Services Supervisor
Posted by David Zaring

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!

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May 19, 2015
When Will The SEC Start Doing Sue & Settle?
Posted by David Zaring

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.

 

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May 11, 2015
Ending the (New York) Fed
Posted by David Zaring

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.

The first is that procedural reorganizations almost never matter – an axiom that counsels indifference about the change. The second is that the New York Fed has always been special – an axiom that cuts the other way. And the third, given that Congress comprises legislators who need to be re-elected, is to consider the short-term as well as the long-term functions of the change.

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.....

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May 07, 2015
Does the SEC Always Win Before Its ALJs?
Posted by David Zaring

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.

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April 23, 2015
People Think That Hank Greenberg Could Win The Takings Case Against The Government, But Is It The Day In Court Phenomenon?
Posted by David Zaring

Greenberg is suing the government for treating his firm unconstitutionally differently than other firms bailed out during the financial crisis - he argues, correctly, that AIG got killed, and was used as a vehicle to pay AIG's struggling counterparties out at 100 cents on the dollar.  Whether that's a taking, given 1) that the government couldn't possibly treat everyone identically during the crisis, and 2) that AIG would have failed without the government's intervention, making the measure of damages difficult, is why many people have found the case to be unlikely.  

So now that Greenberg is getting some good rulings, and sympathetic questions from the bench, the received wisdom seems to be that he is doing surprisingly well (though if he wins, an appeal is certain).  I haven't read every transcript, but I do wonder whether the "day in court" effect is at work here.  In appellate cases, I think that oral argument is an excellent predictor of the outcome.  But at trial, with appeal likely, savvy judges often let the side that is going to lose put on plenty of evidence, and do well with motions, so that there can be no allegation of bias, and to minimize things to complain about on appeal.  They get, in other words, their day in court.  I'm not sure if that's what's going on there, but I know that when I was a litigator, I wouldn't want the court to treat long-shot adversaries with contempt, but rather with tolerance.

 

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April 17, 2015
Preet Bharara And The Equitable Nature Of White Collar Crime
Posted by David Zaring

The corporate law community often places high hopes in judges as a mechanism for checking government or (in Delaware) defendant excesses.  They usually go along, sure, but may in dicta indicate displeasure, or give critical speeches, and sometimes, as in the Newman insider trading case, the refusal to accept the Citigroup settlement, the ethics critiques made during the KPMG prosecutions, that displeasure will sprout into an adverse ruling.

It's a pretty interesting, but pretty gauzy, was of thinking about adjudication, maybe Orin Kerr would find it persuasive in the Fourth Amendment context, but in other areas of public law, administrative law, for example, the small community of bench and bar just don't see their roles that way.  It's not, "SEC you've gone too far this time, and so we're cooking up a new reason to reverse you," it's "SEC [or EPA, or whoever], we substantively disagree with this policy, and we're cooking up a procedural reason to reverse it."  Different, in that administrative law is not governed by equity, it is governed by process.

Anyway, my theory about the way white collar works in New York - opaque, clubby, but almost chivalrous - gets what I'm taking as a vote of confidence in James Stewart's nice overview of the fight between the judges and the US Attorney's Office in Manhattan over the pushy, PR-savvy nature of the US Attorney.  The whole column is well worth reading - for one thing, it sounds like a bunch of judges talked to Stewart, which never happens, and there's the requisite, "greatest judges ever! but" from the prosecutors office and "whatta prosecutor! however" from the judges.  But here's an excerpt that illustrates the way that this weird "just do justice" method of handling white collar crime works:

[Former statehouse speaker Sheldon] Silver’s lawyers moved to dismiss his indictment because Mr. Bharara had orchestrated a “media firestorm” that tainted their client’s right to a fair trial. Such motions are considered long shots, but Judge Valerie Caproni of Federal District Court in Manhattan wrote that Mr. Silver had a legitimate argument that the case should be thrown out because Mr. Bharara, “while castigating politicians in Albany for playing fast and loose with the ethical rules that govern their conduct, strayed so close to the edge of the rules governing his own conduct.”

Judge Caproni ultimately sided with the government, so there’s no way of knowing how close she came to tossing the indictment. But the possibility she even seriously considered such a step has set off alarms among some of her fellow judges. Judge Caproni herself acknowledged that dismissing an indictment is a “drastic remedy” that is “rarely used.” She also noted that the motion was not a disciplinary proceeding against Mr. Bharara. That didn’t stop her from spending a good part of the opinion questioning his ethics and chastising him for his public comments about the case.

This is, as they say, developing, and if you think that Bharara may be AG some day, one question is whether he will be able to avoid being blackballed by the bench ... and whether a blackballing would work outside of the white hankie world of white collar crime administration (didn't seem to work out so badly for Rudy Giuliani).

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April 13, 2015
The SEC's 700 Page Long Song Of Itself
Posted by David Zaring

When you join a transnational regulatory network, you have to report to the network that you're acting consistently with its principles, that you have the powers that it expects you to have, and that you're a worthy member of the club.  The SEC just made its case to its peers through a 700 page Q&A that is worth a look, though it exemplifies the differences in the way a lawyer or a social scientist might approach the question "what do you do?"  The SEC is full of lawyers, and so this report includes not so many numbers, but plenty of discussion of regulatory powers, and representative matters that show how those power are exercised.

However there is some aggregate data. For example, the SEC keeps track and categorizes the sorts of cases that it brings. In 2013, the agency was, for example, mostly likely to initiate a securities offering proceeding, which it did 103 times, followed by 68 reporting and disclosure cases, 50 market manipulation cases, and, bringing up the rear, only 44 insider trading cases (the agency was only asked about these categories, the reporting is on page 184 et seq. Did I know this?  More pump and dump proceedings than insider trading cases?  Anyway, it's that sort of thing that will surely have you reading the whole 700 pages, just as I did. 

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March 26, 2015
The Latest Attempt To Slow The Revolving Door At The SEC
Posted by David Zaring

I have argued in a paper that the revolving door seems much less problematic than conventional wisdom would have it.  And Ed DeHaan, Simi Kedia, and their co-authors have found that SEC lawyers who go through the door usually try to show off when at the agency by bringing and winning bigger cases.

But Congressman Stephen Lynch isn't so sure about that door, and has introduced the SEC Revolving Door Restriction Act of 2015 to put some brakes on it.  His press release:

H.R. 1463, the SEC Revolving Door Restriction Act of 2015, amends the Securities Exchange Act of 1934 to prevent former employees of the SEC from seeking employment with companies against which they participated in enforcement actions in the preceding 18 months. H.R. 1463 defines enforcement action as court actions, administrative proceedings, or Commission opinions. Former employees must seek an ethics opinion from the SEC if they are interested in seeking employment within a year of their termination at the SEC with a company that was subject to an SEC enforcement action in which they participated.

I'm actually not too sure what this adds to the typical revolving door restriction.  Federal prosecutors can never work on matters on which they worked while in government service.  And they are barred from representing clients for at least one year.  This lengthens that limitation to 18 months, but at the White House, it's already 2 years for lobbying.  

The agency isn't too excited about this, as they have observed over at Jim Hamilton's World of Securities Regulation:

Delaying staffers’ employment in the private sector would affect a significant number of SEC employees, who have a long tradition of leaving government service to join the defense bar. At the 2015 SEC Speaks conference, when current and former agency staff members were asked by Chair Mary Jo White to stand, at least two thirds of the room took to their feet.

But it doesn't seem to add much to the regs already in place.  Even POGO, the NGO that seems to be behind the introduction of the bill, acknowledges - indeed, it collects data on - previous ethics restrictions: "SEC regulations require former employees to file [ethics] statements if they intend to represent an employer or client before the agency within two years of their SEC employment."  This even gives them the out of a waiver.  But you can look over the text of the bill and let me know if you see anything more than a more specific ban of agency officials working on matters post-employment that they handled pre-termination.

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March 24, 2015
Big Foreign Banks Get Rejected By American Regulators
Posted by David Zaring

One of the things you now have to do if you're a bank with over $50 billion in American assets is to file a resolution plan, or living will, with the authorities - this basically states how you are going to dispose of the company if it becomes insolvent.  After passing all the big American banks through an annual set of stress tests, the regulators have turned their attention abroad:

In their review of the resolution plans from BNP Paribas, HSBC Holdings plc, and The Royal Bank of Scotland Group plc, the agencies noted some improvements from the original plans. However, the agencies have jointly identified specific shortcomings with the 2014 resolution plans that will need to be addressed in the 2015 submissions.

It's annoying enough to be told by some foreign regulator that you aren't sufficiently prepared for a disaster, given that you're home regulator is telling you that you are.  But it must be especially annoying if you are a state-owned bank, which RBS is, to the tune of 66% of its outstanding shares. That's almost a foreign relations issue.  And given that the resolution of international banks like these is one of the most difficult issues facing bank regulators - there has been a failed effort to create a framework going on since Lehman Brothers failed so chaotically - it must be grating to be told to revise the plan:

The agencies will require that the annual plans submitted by these three institutions on or before December 31, 2015, demonstrate that the firms are making significant progress to address all the shortcomings identified in the letters, and are taking actions to improve their resolvability under the U.S. bankruptcy code.  These actions include:

  • Amending the financial contracts entered into by U.S. affiliates to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings to the extent those rights are not addressed by the International Swaps and Derivatives Association 2014 Resolution Stay Protocol;
  • Ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process; and
  • Demonstrating operational capabilities for resolution preparedness, such as the ability to produce reliable information in a timely manner.

Those are actual requirements!  The first one anyway.  The other two could be goalposts that just get moved further away next time.  Anyway, one question in the brave new world of international banking supervision is whether supervision is a tool that home banks are using for competitive advantage against foreign banks.  It will be interesting to see whether this sort of charge is leveled at this sort of action.

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March 05, 2015
Happy Stress Test Day!
Posted by David Zaring

The 31 banks subject to stress tests - to see how their positions would hold up if the economy hypothetically tanked - all passed, good news for them, and especially for Citi, which failed the last one, and vowed not to do so again.  More here, featuring a picture of former law professor/current Fed board member Dan Tarullo, who supervised the test.  And if you're thinking of investing in banks, the Times has a chart of the percentage of money-like assets in the banks' total assets mix.  If you are risk averse, you want to invest in Deutsche Bank or Discover.  But I think leverage is the most powerful force in the world, so hello, Goldman Sachs and Morgan Stanley!

 

 

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February 09, 2015
Suicide By Cop, Filed By A Decent Firm?
Posted by David Zaring

I'll outsource the content to Matt Levine's new email, but you just don't see briefs filed by financial businesses against their regulators like the one Powhatan Capital filed against FERC, abetted by one of Philadelphia's good law firms.

There are sections headed "Dr. Chen’s Trades Were Not 'Wash-like' Or 'Wash-type' -- Whatever The Heck That Means," "The Staff’s Stubborn Reliance On The Unpublished, Non-Precedential Amanat Case Is Just Lame," and "Uttering the Phrase 'Enron' Or 'Death Star' Does Not Magically Transform The Staff’s Investigation." It's like an angry trader's dream of what a legal brief might look like ("This is America"!)

It's really quite amusing - check it out.

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January 29, 2015
SEC ALJ Orders: It's How It Does It's Anti-Bribery Rule
Posted by David Zaring

While defendants are gearing up to make arguments against the constitutionality of the SEC's increasing inclination to use its ALJs, rather than the courts, to serve as the venue for fraud cases, it looks like it has already flipped that way for foreign corrupt practices cases.  Mike Koehler did the counting:

More recently, the SEC has been keen on resolving corporate FCPA enforcement actions in the absence of any judicial scrutiny.  As highlighted in this 2013 SEC Year in Review post, a notable statistic from 2013 is that 50% of SEC corporate enforcement actions were not subjected to one ounce of judicial scrutiny either because the action was resolved via a NPA or through an administrative order.  In 2014, as highlighted in this prior year in review post, of the 7 corporate enforcement actions from 2014, 6 enforcement actions (86%) were administrative actions.  In other words, there was no judicial scrutiny of 86% of SEC FCPA enforcement actions from 2014.

It is interesting to note that the SEC has used administrative actions to resolve 9 corporate enforcement actions since 2013 and in none of these actions have there been related SEC enforcement actions against company employees.

Maybe we are seeing an agency decision to prefer administrative adjudication to, you know, adjudicative adjudication.

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January 27, 2015
The SEC's New Preference For Administrative Proceedings
Posted by David Zaring

Peter Henning has a nice overview of recent claims made against the SEC's growing inclination to take fraud cases before its handful of agency-judges (ALJs), instead of to court.  Why should that be okay?

From a policy perspective, there's reason to worry.  I did some litigation before an administrative tribunal, and it's not that different from in court litigation, with the exception of evidence admissability and objections.  But it could be really quite different.  Hearsay is in theory fine, there's no requirement that you be able to present evidence in person, and the judge works for the agency that is suing you.  It's fair to say that defendants get less process from an ALJ than they would from a federal judge.

But not that much less.  ALJs are required to hold hearings, permit the introduction of rebuttal evidence, the statute that governs them makes what they do ("formal adjudication" in the verbiage of administrative law) pretty similar to a trial.

That matters for the equities, as does the almost absolute discretion that agencies have to prosecute in the way they see fit.  The SEC can drop claims, send scoldy letters, use ALJs, take you to court, or refer you to the criminal lawyers at DOJ with the recommendation that imprisonment could be sought.  Because we wouldn't want judges second guessing the decisions to, say, emphasize insider trading prosecutions over accounting fraud claims, we leave those policy calls to the agency.

Which then begs the question: why now with the constitutional case against the ALJ, a thing that has existed since the end of WWII?  

Well, the SEC hasn't used its ALJs for high profile cases very often, at least until recently.  But the claims against the turn to administrative tribunals aren't getting a lot of love, and I predict that will continue to happen.  Judge Lewis Kaplan, who isn't afraid to savage a government case alleging financial wrongdoing, concluded that he didn't have the power to judge whether an ALJ proceeding violated due process or equal protection standards, given that other, similar cases had been brought in court.  The SEC recently ignored a declaratory relief case filed by an S&P executive when it brought an administrative complaint against her.

Some well-heeled defendants may have been emboldened to bring these cases by the Free Enterprise Fund decision in the Supreme Court, which constrained the number levels of tenured officials that could separate the president from policymakers.  But administrative adjudication is simply too resource intensive and carefully done to be rendered illegal because of its insulation.  The alternative would be to replace ALJs with political hacks, and no one wants that.  So I'm not predicting a lot of luck for the defendants in these cases.

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January 20, 2015
Litigating The Financial Crisis, By Moi
Posted by David Zaring

I've written a paper on the judicial history of the financial crisis, and it's now out in the Virginia Law Review, and up on SSRN.  Here's the abstract:

The government’s response to the financial crisis was dramatic, enormous, and unprecedented, and nothing about it has been overseen by the courts. In our federal system, the courts are supposed to put the policies of presidents and congresses to the test of judicial review, to evaluate decisions by the executive to sanction individuals for wrongdoing, and to resolve disputes between private parties. But during and after the financial crisis, there has been almost none of that sort of judicial review of government, few sanctions on the private sector for conduct during the crisis, especially criminal ones, for the courts to scrutinize, and a private dispute process that, while increasingly active, has resulted in settlements, rather than trials or verdicts. This Article tells the story of the marginal role of courts in the financial crisis, evaluates the costs of that role, and provides suggestions to ensure a real, if not all-encompassing, judicial role during the next economic emergency.

Do give it a download, and let me know what you think.  And thanks in advance for supporting us around here - we do like downloads!

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