Which means a redo of the argument. We'll outsource, via Corporate Counsel, to Cooley:
The D.C. Circuit court of Appeals has granted the petitions of the SEC and Amnesty International for panel rehearing (and the motion of Amnesty to file a supplemental brief) in connection with the conflict minerals case,National Association of Manufacturers, Inc. v. SEC. (The Court also ordered that the petitions filed for rehearing en banc be deferred pending disposition of the petitions for panel rehearing.)
[In prior litigation, the D.C. Circuit,] "specifically citing the NAM conflict minerals case, ... indicated that “[t]o the extent that other cases in this circuit may be read as holding to the contrary and limiting Zauderer to cases in which the government points to an interest in correcting deception, we now overrule them.”
Zauderer applies a lenient standard of review to requirements of disclosure of purely factual information. Looks good for the SEC.
Over at DealBook, I've got a take on MetLife's claim that it will be suing over its designation as a systemically important financial institution. A taste:
Congress gave the government 10 factors to take into account when making a too-big-to-fail designation. This sort of multiple-factor test all but requires regulators to balance values that have different degrees of quantifiability. Some can be counted, like the amount of leverage and off-balance sheet exposure. But others like “the nature, scope, size, scale, concentration, interconnectedness and mix of the activities of the company” have so many moving parts, some of them difficult to quantify, that expressing them mathematically may not be worth the effort. The government has also been given the leeway to consider “any other risk-related factors” that it deems appropriate, a standard that encourages judges to defer to regulators.
Do give it a look!
Eugene Scalia, of the family Scalia, has been the scourge of the SEC with his until recently effective insistence on a cost-benefit analysis to justify the imposition of new major rules on the capital markets. Now he's working for MetLife, the insurance company recently designated as a SIFI (which stands for "dangerously big bank-like institution"), and I guess the argument will be that the designation was arbitrary and capricious, and so inconsistent with the federal standards for administrative procedure, which probably, in Scalia's view, require a quantitative cost-benefit analysis done with meticulous care. Some thoughts:
- Courts often stay out of financial stability inquiries, but, then, they used to defer to the SEC's capital markets expertise, until Eugene Scalia came along. Perhaps Scalia can do something in this really nascent field of disputing SIFI designations. Still, uphill battle.
- If the FSOC somehow lost this case, it could always go global, and ask the Financial Stability Board to designate Met Life as a G-SIFI, which would give foreign regulators the right to persecute the firm's foreign operations, and maybe super-persecute it, if the American regulators could do nothing to control its SIFIness.
- The basic idea, by the way, which is hardly ludicrous, is that insurance companies aren't subject to bank runs, even if they are really big, and that only one of them failed, or was even at risk, during the last financial crisis. Since Met Life isn't in the business of writing unhedged credit default swaps (which is what AIG did, bolstered by its AAA rating and huge balance sheet), why should it have to hold bank-like levels of capital? There's more to that story, but I assume that is part of the story that MetLife will be telling.
HT: Matt Levine
Geoffrey Graber, who is heading up a mortgage fraud task force for DOJ, is motivated by Glengarry Glen Ross, and the results have evinced an ouch from the banking community:
The surge of settlements engineered by Graber in the past year has helped neutralize some of that criticism and rehabilitate a key piece of Holder’s legacy. Still, the settlements have been controversial. Critics such as Roy Smith, a professor at New York University’s Stern School of Business, say prosecutors were driven by “political fever” to extract massive penalties from Wall Street.
“They have to deliver something, so they come up with this,” said Smith, a former Goldman Sachs Group Inc. (GS) partner. “The fact that it’s unfair never really gets considered. The banks have no choice but to hunker down and accept it.”
A bracing corollary to those capture stories, though notice that it's the enforcement officials who win headlines for big settlements, and the bank examiners who are subject to the expose about go along get along.
Steven Davidoff Solomon and I opine on a recent opinion dismissing cases brought by Fannie and Freddie shareholders against the government in DealBook. A taste:
In one Washington court, Maurice R. Greenberg, the former chief executive and major shareholder of A.I.G., is suing the United States government, contending that the tough terms imposed in return for the insurance company’s bailout were unconstitutionally austere.
In another closely watched case in a different Washington court, the shareholders of Fannie Mae and Freddie Mac, led by hedge funds Perry Capital and the Fairholme Fund, lost a similar kind of claim.
Parsing what the United States District Court did in the Fannie and Freddie litigation offers a window into the ways in which the government’s conduct during that crisis might finally be evaluated.
There are three main points to the decision. For one, the court held that the government’s seizure of Fannie’s and Freddie’s profits did not violate the Administrative Procedure Act’s prohibition on “arbitrary and capricious” conduct. It also found that the Housing and Economic Recovery Act barred shareholders of Fannie and Freddie from bringing breach of fiduciary duty suits against the boards of the companies and that the government’s seizure of profits was not an unconstitutional “taking.”
This American Life has a banking supervision story (!) that turns on secret recordings made by a former employee of the New York Fed, Carmen Segarra, and it's pretty good, because it shows how regulators basically do a lot of their regulating of banks through meetings, with no action items after. That's weird, and it's instructive to see how intertwined banking and supervision are. There's a killer meeting after a meeting with Goldman Sachs where Fed employees talk about what happened, and - though we don't know what was left on the cutting room floor - the modesty of the regulatory options being considered is fascinating. Nothing about fines, stopping certain sorts of deals, stern letters, or anything else. The talk is self-congratulation (for having that meeting with Goldman) and "let's not get too judgmental, here, guys."
The takeaway of the story, which is blessedly not an example of the "me mad, banksters bad!" genre, is that this kind of regulation isn't very effective. It clearly hasn't prevented banks from being insanely profitable until recently, in a way that you'd think would get competed away in open markets.
But here's the case for banking regulation:
- Imagine what it would be like if Alcoa and GE had EPA officials on site, occasionally telling them to shut down a product line. That's what bank regulators do, and, more broadly, did with things like the Volcker Rule (with congressional help).
- Since the financial crisis (and that's the time that's relevant here), regulation has made banking less profitable, not more, share prices are down, so are headcounts, etc.
- Regardless of how it looks, regulators that essentially never lose on a regulatory decision - that includes bank supervisors, but also broad swaths of agencies like Justice and DoD - don't experience themselves as cowed by industry. Kind of the opposite, actually. So what you really worry about is the familiarity leading to complacency, not fear. Regulators can fine any bank any number they like. If they want someone fired, they could demand it without repercussion.
The fact that TAL pulled off this story, given that it was centered around an employee who lasted at the Fed for 7 months before being fired, who made secret recordings of her meetings with colleagues (who does that?), who mysteriously and obviously wrongly alleged during her time at the Fed that Goldman Sachs did not have a conflict of interest policy, whose subsequent litigation has gone nowhere, and whose settlement demand was for $7 million (so that's one million per month of working as a bank examiner, I guess), is impressive. But that's the former government defense lawyer in me, your mileage may vary.
Morover, even skeptical I was persuaded that maybe the Fed could do with a more ambitious no-holds-barred discussion among its regulators, at the very least.
Enforcement cases, where the enforcers have total discretion about what to do, don't often motivate dissents from one of those enforcers, but one did recently before the SEC, in a case where a CPA CFO misstated earnings, and agreed to a Rule 102(e) suspension, or, if you like, a "wrist slap." Commissioner Aguillar thought that the CPA role was crucial.
Accountants—especially CPAs—serve as gatekeepers in our securities markets. They play an important role in maintaining investor confidence and fostering fair and efficient markets. When they serve as officers of public companies, they take on an even greater responsibility by virtue of holding a position of public trust.
Aguillar appears to be worried that CPAs are getting pled down into relatively innocent offenses even when there is strong evidence of intentional fraud.
I am concerned that this case is emblematic of a broader trend at the Commission where fraud charges—particularly non-scienter fraud charges—are warranted, but instead are downgraded to books and records and internal control charges. This practice often results in individuals who willingly engaged in fraudulent misconduct retaining their ability to appear and practice before the Commission.
So there you go, a commissioner who is particularly insistent on holding the accounting profession to high standards, and thinks the SEC is too willing to plead down everything. As an empirical matter, it is difficult to know whether the SEC is indeed guilty of Aguillar's charge (though he is, presumably, an expert on the matter). It's hard to know how much conduct is going unprosecuted, and for settleed cases, whether stiffer charges would have been likely to stick.
You'd think that the state that's home to the center of American business would take a Delaware-style light touch approach to overseeing it. But instead, the New York paradigm is to take ambitious politiicans, blend with broadly worded supervisory or anti-fraud statutes like the Martin Act, and come up with stuff that, to my ears, sounds almost every time like it is off-base, at least in the details. So:
- Eliot Spitzer pursued research analysts for the sin of sending cynical emails even though they issued buy recommendations, despite that fact that analysts never issue negative recommendations, and if cynical emails are a crime, law professors are the most guilty people in the world.
- I still don't understand what Maurice Greenberg, risk worrier par excellence, did wrong when he was running AIG. I do know that after he was forced out by Spitzer, the firm went credit default swap crazy.
- Maybe there's something to the "you didn't tell your investors that you changed the way you did risk management for your mortgage program" prosecutions, but you'll note that it is not exactly the same thing as "you misrepresented the price and/or quality of the mortgage products you sold" prosecutions, which the state has not pursued.
- Eric Schneiderman's idea that high frequency trading is "insider trading 2.0" is almost self-evidently false, as it is trading done by outsiders.
- Federal regulators wouldn't touch Ben Lawsky's mighty serious claims that HSBC or BNP Paribas were basically enabling terrorist financing.
- And now Lawsky is going after consultants for having the temerity to share a report criticizing the bank that hired them to review its own anti-money laundering practices with the bank, who pushed back on some, but not all of the conclusions.
The easiest way to understand this is to assume that AGs don't get to be governor (and bank supervisors don't get to be AGs) unless people wear handcuffs, and this is all a Rudy Giuliani approach to white collar wrongdoing by a few people who would like to have Rudy Giuliani's career arc.
But another way to look at it is through the dictum that the life of the law is experience, not logic. The details are awfully unconvincing. But these New York officials have also been arguing:
- Having analysts recommending IPO purchases working for the banks structuring the IPO is dodgy.
- HFT is front-running, and that's dodgy.
- This new vogue for bank consulting is dodgy, particularly if it's just supposed to be a way for former bank regulators to pitch current bank regulators on leniency.
- If we can't understand securitization gobbledegook, we can at least force you to employ a burdensome risk management process to have some faith that you, yourself, understand it.
- And I'm not saying I understand the obsession with terrorism financing or what the head of AIG did wrong.
Their approach is the kind of approach that would put a top banker in jail, or at least on the docket, for the fact that banks presided over a securitization bubble in the run-up to the crisis. It's the "we don't like it, it's fishy, don't overthink it, you're going to pay for it, and you'll do so publicly" approach. It's kind of reminiscent of the saints and sinners theory of Delaware corporate governance. And it's my pet theory defending, a little, what otherwise looks like a lot of posturing.
Steve Davidoff Solomon and I have put together a paper on the litigation between the government and the preferred shareholders of Fannie Mae and Freddie Mac. Do give it a look and let us know what you think. Here's the abstract:
The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.
In the American Journal of International Law, Dick Stewart has an excellent piece on Remedying Disregard In Global Regulatory Governance: Accountability, Participation, and Responsiveness. I've got a commentary on it over at AJIL Unbound. A taste:
It may also be the case that as these bodies weave increasingly elaborate cross-border regulatory webs, they have no choice but to resort to something that looks quite law-like. In financial regulation, I view global administration as a sort of administration that has increasingly adopted stable bedrock principles that would be familiar to any international economic lawyer; indeed, given the importance of the cross-border work done to oversee financial institutions, it would be surprising if a measure of consistently applied rules, reason-giving, and transparency were not adopted. The banks being supervised would certainly find it arbitrary if done differently.
Do give the rest a look.
Over at DealBook, I've got something on the financial regulatory reform that Europeans, in particular, love. Give it a look. And let me know if you agree with this bit:
Can a supervisory college work in lieu of a vibrant global resolution authority regime? The problem with these colleges is not that they are implausible, but that they have not really been tried in a crisis. The best-known supervisory college outside of the European Union was created in 1987 to monitor the Luxembourg-based, but international, Bank of Credit and Commerce International. Rumors of widespread fraud in the management of the bank were plentiful, but the collegiate approach did not mean that these problems were nipped in the bud. Although coordinated supervision led regulators to close many of bank’s branches at once after the bank’s accountant resigned and its insolvency became obvious, it is not clear whether Bank of Credit and Commerce International is a college success story or cautionary tale.
There are other reasons to worry about relying on colleges. The collegiate approach is meant to encourage communication more than action. Colleges operate as peers, convened by the home banking regulator, without the sort of hierarchy of decision-making and direction that leads to coordinated action.
I wanted to finish up my discussion of administrative enforcement by considering alternatives. We often take regulatory enforcement for granted. A securities regulator, for example, naturally will have the power to seek out violations of the securities laws and sanction violations. As is common in administrative law, scholars, courts, and Congress start with the assumption that expertise in the industry is the most important input into the enforcement calculus. If an agency is familiar with an industry, it will make good enforcement choices.
In my forthcoming article in the Minnesota Law Review, I argue that this question is actually much more complex than we usually assume. In particular, prosecutorial discretion has strong generalist aspects that largely do not depend on the regulatory subject matter. Giving enforcement authority to a specialist agency instead of a generalist enforcer (such as the Department of Justice) trades one type of expertise for another. Furthermore, specialists inherently see enforcement actions more narrowly. As a result, we shouldn’t see enforcement by regulatory agencies as inevitable or automatic.
Since it is still in draft form, I’d very much appreciate any and all comments. Thanks again to Erik for the chance to blog this week.
I blogged yesterday about administrative enforcement, an area that lies at the intersection of criminal and administrative law. Among other topics, my scholarship has considered the civil penalty process. In particular, what are the inputs and incentives that shape administrative agency penalties?
A standard model used to describe the penalty process emphasizes economic theories of deterrence. Financial penalties are a mechanism to raise the price for violations either to make misconduct completely unprofitable or, in the alternative, to force violators to internalize the costs of violations. I’ve pointed out one way that this theory may break down – administrative agencies might not focus on deterrence at all. Instead, their penalties may be crafted to achieve retributive ends.
In our recent Harvard Law Review article, For-Profit Public Enforcement, Margaret H. Lemos and I looked at penalties from another perspective: public enforcers may have self-interested reasons to maximize civil penalty recoveries. These incentives are widely recognized in private enforcement. Class action lawyers, for example, operating on a contingency fee basis have straightforward reasons to maximize recoveries.
Perhaps less obviously, public enforcement lawyers can have comparable incentives to impose large penalties. These incentives work most clearly in cases where enforcement agencies keep a portion of the civil penalties imposed. This structure is common in the asset forfeiture process used in connection with many criminal cases and also exists in other state and federal enforcement contexts. Even when penalties are turned over to the general treasury, enforcers may have reputational incentives to maximize penalties. Both agencies as a whole and individuals working in enforcement agencies may seek to build a reputation as an aggressive enforcer for reasons other than deterrence.
Assuming that these claims are right and that civil penalties can be driven by retributive or self-interested goals, is this a problem? Perhaps, perhaps not. Self-interested public enforcement may push enforcers to emphasize financial recoveries over other tools of regulatory control, such as injunctive relief. However, if our default assumption is that administrative agencies underenforce and usually do not impose adequate penalties, the pressure of self-interest may correct this trend to some degree.
The presence of retribution in civil penalties has similarly mixed effects. Of course, if penalties are supposed to be carefully calculated to deter, retributive ends will hamper this goal. On the other end, we now widely recognize the role of norms in shaping compliance behavior. Retributive punishment done well can shape and reinforce industry norms.
Usually thought of as unusually receptive, for a financial regulator, at least, to legislative pressure, the SEC, perhaps in a testament to its recent obsession with insider trading, has done the opposite and filed suit against Congress, subpeonaing a congressman and his aide to see whether the aide disclosed news to a lobby/law firm about health funding that caused a bunch of stock prices to spike ahead of the announcement of the new policy. DOJ is in on the game as well.
Congress is, it appears, displeased:
“What the SEC has done is embark on a remarkable fishing expedition for congressional records -- core legislative records,” [congressional lawyer] Kircher said in a court filing. “The SEC invites the federal judiciary to enforce those administrative subpoenas as against the Legislative Branch of the federal government. This court should decline that invitation.”
The so-called speech and debate clause in the Constitution protects members of Congress and staff from any outside inquiry into legislative business.
It is pretty juicy, and we'll outsource why to corp counsel. I'm just ballparking here, but a conversion between an aide and a lobbyist would seem to be deeply, deeply covered by the speech and debate clause, as unappetizing as it might seem. Here's a note on the clause, and here's the Heritage Foundation, which does these recaps pretty well.
And here's corp counsel:
the DOJ and SEC have sent subpoenas to Rep. David Camp, Chair of the House Ways & Means Committee, and Congressional Staffer Brian Sutter, regarding whether they tipped traders about a change in health care policy in the wake of a long-running investigation. And on Friday, as noted in this WSJ article, the SEC filed a lawsuit in the Southern District of New York seeking to compel the subpoenas. Possible grand jury to follow.
Here’s an excerpt from David Smyth’s blog about the case:
This is fascinating to me for so many reasons, among them: (1) the potential Constitutional cluster we’re about to witness; (2) the real test this poses for the recently passed STOCK Act’s effectiveness; and (3) another example of Mary Jo White’s severe distaste for those who defy Commission subpoenas.
And here’s an excerpt from the latest WSJ article:
“It’s not unheard of for an agency to serve a subpoena to Congress, but for an agency to sue is—if not unprecedented—at least very rare,” said Michael Stern, who was senior counsel to the U.S. House from 1996 to 2004. “It shows that there is a serious conflict; the SEC really wants the information and the House really wants it protected,” he said.
Erik, thank you for that introduction. It is a pleasure to join the Conglomerate for a week. My scholarly interests have recently focused on federal administrative enforcement – enforcement actions by agencies like the SEC, the CFTC, as well as a host of lower profile entities. This is a fascinating area of public law combining two scholarly literatures. Administrative enforcement actions share much in common with criminal cases. They are brought by public entities to vindicate public wrongs. However, the administrative context deeply shapes this type of enforcement. For example, unlike most prosecutor's offices, administrative enforcement bodies tend to be industry-specific.
As a result, administrative enforcement can go wrong in two different ways– the “criminal law” way or the “administrative law” way. Administrative agencies face the challenges of regulatory capture, inadequate or incorrect information, or simply the wrong incentives to engage in appropriate regulatory action. Criminal enforcement, though, often struggles with procedural fairness as well as the difficult task of assigning the correct level of punishment to different forms of misconduct.
Take, for example, this last issue: the fundamental question of penalty levels. Administrative agencies commonly use financial penalties to punish regulatory violations. How should these penalties be set? Which cases require the largest penalties and which only need more modest sanctions?
Criminal law scholars will recognize this question as an inquiry about theories of punishment. Speaking broadly, criminal law considers a couple of approaches. Utilitarian theories of punishment (e.g., deterrence, rehabilitation, incapacitation) seek to punish conduct to produce beneficial social outcomes. Retributive theories emphasize desert – punishment occurs because the violator deserves punishment, not because it produces a social benefit.
So what do federal agencies do? As I argue here, administrative agencies almost uniformly talk about deterrence, but usually engage in retribution. When setting penalty levels, agencies move penalties up or down in response to facts that justify retributive punishment but do not adjust penalties in the way deterrence requires. For instance, building on Gary Becker’s justifiably famous work, Crime and Punishment: An Economic Approach, most deterrence theories emphasize the role of the probability of detection in setting penalty levels. To deter appropriately, penalties need to increase when violations are harder to detect and punish. In practice, though, administrative agencies place little weight on this issue. Instead, agencies are deeply concerned with issues like mens rea, a topic far more central to retributive theories of punishment.
Is this retributive bent in administrative enforcement surprising? Perhaps not. A large literature suggests that most people are intuitively retributive when making punishment choices. In social science experiments, study participants set penalties based on retributive concerns, but do not adjust punishment levels in ways that would be required to deter appropriately. In this way, administrative agencies look like the rest of us. We mostly care about desert even when we talk about deterrence.