It is not too early to start thinking about the 2013 AALS Annual Meeting in New Orleans in January. The Securities Regulation and Financial Institutions & Consumer Financial Services sections have joined forces to put together a Joint Program on the “The Regulation of Financial Market Intermediaries: The Making and Un-Making of Markets” on Friday, January 4th from 2 pm to 5 pm.
The program will give us a chance to look at the intersection of capital markets and financial institution regulation, a sweet spot that was overlooked until the global financial crisis hit. The program will include a panel of scholars who have been looking at this intersection for quite a while, including, Onnig Dombalagian (Tulane), Claire Hill (Minnesota), Tamar Frankel (Boston University), Donald Langevoort (Georgetown), Geoffrey Miller (NYU), David Zaring (Univ. of Pennsylvania – Wharton School of Business), David Min (UC Irvine and author of How Government Guarantees in Housing Finance Promote Stability) and Kimberly Krawiec (Duke) (Moderator).
The program will also include the following four papers picked from a large response to our Call for Papers:
- “The Federal Reserve’s Use of International Swap Lines,” Colleen M. Baker (Notre Dame);
- “Investment Company as Instrument: The Limitations of the Corporate Governance Regulatory Paradigm,” Anita K. Krug (Univ. of Washington); and
- “The Case for Decentralizing Financial Oversight: A Strategy for Overseeing the Derivatives Industry,” Jeffrey Manns (George Washington Univ.).
Saule Omarova (North Carolina) will moderate the call for papers panel.
Call for Papers
AALS Joint Program of the Securities Regulation Section and
Financial Institutions & Consumer Financial Services Section
The Regulation of Financial Market Intermediaries:
The Making and Un-Making of Markets
AALS Annual Meeting, January 4, 2013
The AALS Section on Securities Regulation and the Section of Financial Institutions & Consumer Financial Services are pleased to announce that they are sponsoring a Call for Papers for their joint program on Friday, January 4th at the AALS 2013 Annual Meeting in New Orleans, Louisiana.
The topic of the program and call for papers is “The Regulation of Financial Market Intermediaries: The Making and Un-Making of Markets.” The financial crisis witnessed numerous market failures involving an array of financial market intermediaries, including banks, broker dealers, and various kinds of investment funds (from money market mutual funds to hedge funds). The crisis came at the end of a decades-long transformation of the U.S. financial services sector that blurred the boundaries between banking and securities businesses. During this period a range of new intermediaries emerged and connected individuals and firms seeking financing to investors in capital markets. At the same time, capital markets became increasingly dominated by financial institutions and other institutional investors. Intermediaries devised and “made markets” for new and often highly illiquid and opaque financial instruments. Many of these new markets froze or crashed in the financial crisis. In response, Dodd-Frank and other financial reforms have imposed a grab bag of new rules on financial intermediaries.
Yet the effects of these financial reforms remain unclear. Moreover, policymakers and scholars often disagree about the precise problems that these reforms are meant to address. For example, the SEC’s headline-grabbing suit against Goldman Sachs over the ABACUS transactions focused on conflicts of interest for large financial conglomerates with different stakes in a transaction. Meanwhile, other financial reforms have focused on the opacity of pricing in financial markets or on the solvency or liquidity risk faced by intermediaries.
The tangle of potential market failures has led to a range of policy responses. Often banking and securities scholars seem to look at the same set of market practices through radically different lenses. Banking scholars focus on solvency crises and banking runs and debate the application of prudential rules on the risk-taking, leverage, and liquidity of intermediaries. At the same time, securities scholars emphasize the problems of conflicts of interest and asymmetric information. They then look to the traditional policy tools in their field such as disclosure, fiduciary duties, and corporate governance.
The dearth of dialogue between these two fields creates the risk of confusion in identifying both problems and solutions for financial intermediaries and the markets in which they operate. To move the discussion forward, scholars in both fields may have to move outside their comfort zones. The study of financial institutions cannot be limited to deposit-taking banks. Similarly, securities regulation involves more than securities offerings and litigation, but the regulation of broker-dealers, investment advisers and funds, and the regulation of trading and markets.
Form and length of submission
The submissions committee looks forward to reviewing any papers that address the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Eligible law faculty are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.
The initial review of the papers will be blind. Accordingly the author should submit a cover letter with the paper. However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school. The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes.
Papers may be accepted for publication but must not be published prior to the Annual Meeting.
Deadline and submission method
To be considered, papers must be submitted electronically to Erik Gerding at firstname.lastname@example.org. The deadline for submission is August 10, 2012.
Papers will be selected after review by members of a Committee appointed by the Chairs of the two sections. The authors of the selected papers will be notified by September 30, 2012.
The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.
Full-time faculty members of AALS member law schools are eligible to submit papers. The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools.
Please forward this Call for Papers to any eligible faculty who might be interested.
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 methodical 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 the end of April 2012. Tulane is an equal opportunity employer and encourages women and members of minority communities to apply.
Thanks to Erik Gerding for the opportunity to share some of my ideas on corporate criminal liability, Dodd-Frank, corporate influences on individual behavior and educating today's law students only three months into my new academic career. I appreciate the thoughtful and encouraging emails I received from many of you. I even received a request for an interview from the Wall Street Journal after a reporter read my two blog posts on Dodd-Frank conflicts minerals governance disclosures. We had a lengthy conversation and although I only had one quote, he did link to the Conglomerate posts and for that I am very grateful.
I plan to make this site required reading for my seminar students, and look forward to continuing to learn from you all.
Best wishes for the holiday season and new year.
Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.
Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.
To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.
How can law schools help?
First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.
Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?
Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.
When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.
Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.
This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.
Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?
Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.
If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.
When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.
The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.
The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.
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Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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Massey Energy and Walmart made headlines last week for different reasons. Massey had the worst mining disaster in 40 years, killing 29 employees and entered into a nonprescution agreement with the Department of Justice. The DOJ has stated in the past that these agreements balance the interests of penalizing offending companies, compensating victims and stopping criminal conduct “without the loss of jobs, the loss of pensions, and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it, or were unable to prevent it.”
Massey’s new owner Alpha Natural Resources, has agreed to pay $210 million dollars in fines to the government, compensation to the families of the deceased miners and for safety improvements (the latter may be tax-deductible). The government’s 972-page report concluded that the root cause was Massey’s “systematic, intentional and aggressive efforts” to conceal life threatening safety violations. The company maintained a doctored set of safety records for investigators, intimidated workers who complained of safety issues, warned miners when inspectors were coming (a crime), and had 370 violations. The mine had been shut down 48 times in the previous year and reopened once violations were fixed. 112 miners had had no basic safety training at all. Only one executive has been convicted of destroying documents and obstruction, and investigations on other executives are pending. However, the company itself has escaped prosecution for violations of the Mine Safety and Health Act, conspiracy or obstruction of justice. Perhaps new ownership swayed prosecutors and if Massey had its same owners, things would be different. But is this really justice? The miner’s families receiving the settlement certainly don’t think so.
Walmart announced in its 10-Q that based upon a compliance review and other sources (Dodd-Frank whistleblowers maybe?), it had informed both the SEC and DOJ that it was conducting a worldwide review of its practices to ensure that there were no violations of the Foreign Corrupt Practices Act (“FCPA”). Although no facts have come out in the Walmart case and I have no personal knowledge of the circumstances, let’s assume for the sake of this post that Walmart has a robust compliance program, which takes a risk based approach to training its two million employees in what they need to know (the greeter in Tulsa may not need in-depth training on bribery and corruption but the warehouse manager and office workers in Brazil and China do). Let’s also assume that Walmart can hire the best attorneys, investigators and consultants around, and based on their advice, chose to disclose to the government that they were conducting an internal investigation. Let’s further assume that the incidents are not widespread and may involve a few rogue managers around the world, who have chosen to ignore the training and the policies and a strong tone at the top.
As is common today, let’s also assume that depending on what they find, the company will do what every good “corporate citizen” does to avoid indictment --disclose all factual findings and underlying information of its internal investigation, waive the attorney client privilege and work product protection, fire employees, replace management, possibly cut off payment of legal fees for those under investigation, and actively participate in any government investigations of employees, competitors, agents and vendors.
Should this idealized version of Walmart be treated the same as Massey Energy? (For a great compilation of essays on the potential conflicts between the company and its employees, read Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct, edited by Anthony and Rachel Barkow). Should they both be charged and face trial or should they get deferred or nonprosecution agreements for cooperation? Do these NPAs and DPAs erode our sense of justice or should there be an additional alternative for companies that have done the right thing -- an affirmative defense?
A discussion of the history of corporate criminal liability would be too detailed for this post, but in its most simplistic form, ever since the 1909 case of New York Central & Hudson River Railroad Co v. United States, companies have endured strict liability for the criminal acts of employees who were acting within the scope of their employment and who were motivated in part by an intent to benefit the corporation. As case law has evolved, companies face this liability even if the employee flouted clear rules and mandates and the company has a state of the art compliance program and corporate culture. In reality, no matter how much money, time or effort a company spends to train and inculcate values into its employees, agents and vendors, there is no guarantee that their employees will neither intentionally nor unintentionally violate the law.
The DOJ has reiterated this 1909 standard in its policy documents. And because so few corporations go to trial and instead enter into DPAs or NPAs, we don’t know whether the compliance programs in place would have led to either the potential 400% increase or 95% decrease in fines and penalties under the Federal Sentencing Guidelines because judges aren’t making those determinations. The DPAs are now providing more information about corporate compliance reporting provisions, but again, even if a company already had all of those practices in place, and a rogue group of employees ignored them, the company faces the criminal liability. The Ethical Resource Center is preparing a report in celebration of the 20th Anniversary of the Sentencing Guidelines with recommendations for the U.S. Sentencing Commission, members of Congress, the DOJ and other enforcement agencies. They are excellent and timely, but they do not go far enough.
A Massey Energy should not receive the same treatment as my idealized model corporate citizen Walmart. Instead, I agree with Larry Thompson, formerly of the DOJ and now a general counsel and others who propose an affirmative defense for an effective compliance program- not simply as possible reduction in a fine or a DPA or NPA.
While the ideal standard would require prosecutors to prove that upper management was willfully blind or negligent regarding the conduct, this proposed standard may presume corporate involvement or condonation of wrongful conduct but allow the company to rebut this presumption with a defense.
In the past decade, companies drastically changed their antiharassment programs after the Supreme Court cases of Fargher and Ellerth allowed for an affirmative defense. The UK Bribery Act also allows for an affirmative defense for implementing “adequate procedures” with six principles of bribery prevention. Interestingly, they too are looking at instituting DPAs.
I would limit a proposed affirmative defense to when nonpolicymaking employees have committed misconduct contrary to law, policy or management instructions. If the company adopted or ratified the conduct and/or did not correct it, it could not avail itself of the defense. The company would have to prove by a preponderance of the evidence that: it has implemented a state of the art program approved and overseen by the board or a designated committee; clearly communicated the corporation’s intent to comply with the law and announced employee penalties for prohibited acts; met or exceeded industry standards and norms; is periodically audited and benchmarked by a third party and has made modifications if necessary; has financial incentives for lawful and penalties unlawful behavior; elevated the compliance officer to report directly to the board or a designated committee (a suggestion rejected in the 2010 amendments to the Sentencing Guidelines); has consistently applied anti-retaliation policies for whistleblowers; voluntarily reported wrongdoing to authorities when appropriate; and of course taken into account what the DOJ has required of offending companies and which is now becoming the standard. The court should have to rule on the defense pre-trial.
Instead of serving as vicarious or deputized prosecutors, under this proposed standard, a corporation’s cooperation with prosecutors will be based on factors more within the corporation's control,rather than the catch-22 they currently face where if employees are guilty, there is no defense. And if the employees are guilty, this would not preclude the government from prosecuting them, as they should.
Responsible corporations now spend significant sums on compliance programs and the reward is simply a reduction in a fine for conduct for which it is vicariously liable and which its policies strictly prohibited. A defense will promote earlier detection and remedying of the wrongdoing, reduce government expenditures, provide more assurance to investors and regulators, allow the government to focus on companies that don’t have effective compliance program, and most important provide incentives for companies to invest in more state of the art programs rather than a cosmetic, check the box initiative because the standard would be higher than what is currently Sentencing Guidelines.
Perhaps only a small number of companies may be able to prevail with this defense. Frankly, corporations won’t want to bear the risk of a trial, but they will at least have a better negotiating position with prosecutors. Moreover, companies that try in good faith to do the right thing won’t be lumped into the same categories as those who invest in the least expensive programs that may pass muster or worse, engage in clearly intentional criminal behavior. If companies have the certainty that there is a chance to use a defense, that will invariably lead to stronger programs that can truly detect and prevent criminal behavior.
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I am honored to be a guest blogger, especially since I am brand new to the academy having worked in the private sector for nineteen years as a commercial litigator, HR executive, deputy general counsel and compliance/ethics officer for a Fortune 500 multinational corporation. I will spend the next two years as a visiting assistant professor at the University of Missouri-Kansas City learning to teach (marrying theory and practice) and focusing on scholarship and coursework related to corporate governance, compliance, social responsibility and the future of the legal profession.
Over the next two weeks I plan to write about two Dodd-Frank provisions- conflict minerals and whistleblower; my call for an affirmative defense for a redesigned “effective compliance program” under the Federal Sentencing Guidelines; the ongoing debate about the value of a law school education; in-house counsel as "gatekeepers"; and a book review of Cultivating Conscience: How Good Laws Make Good People by law professor Lynn Stout, which offers an alternative look at the homo economicus model. I look forward to receiving comments that can inform my research and thank Erik Gerding for the opportunity to share my thoughts.
Here is another call for papers sponsored by GW's Center for Law, Economics, and Finance. Submissions can be sent to me at firstname.lastname@example.org. The full text is below.
THE CENTER FOR LAW, ECONOMICS, AND FINANCE (C-LEAF) AT
THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL
Second Annual JUNIOR FACULTY BUSINESS AND FINANCIAL LAW WORKSHOP
AND JUNIOR FACULTY SCHOLARSHIP PRIZES
Sponsored by Schulte Roth & Zabel LLP
CALL FOR PAPERS
The Center for Law, Economics, and Finance (C-LEAF) at The George Washington University Law School is pleased to announce its second annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes. The Workshop and Prizes are sponsored by Schulte Roth & Zabel LLP. The Workshop will be held on February 10-11, 2012 at GW Law School in Washington, DC.
The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty. By providing a forum for the exchange of creative ideas in these areas, C-LEAF also aims to encourage new and innovative scholarship.
Approximately ten papers will be chosen from those submitted for presentation at the Workshop pursuant to this Call for Papers. At the Workshop, one or more senior scholars will comment on each paper, followed by a general discussion of each paper among all participants. The Workshop audience will include invited young scholars, faculty from GW’s Law School and Business School, faculty from other institutions, and invited guests.
At the conclusion of the Workshop, three papers will be selected to receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF. C-LEAF makes no publication commitment, but chosen papers will be featured on its website as part of the C-LEAF Working Paper series.
Junior scholars who have held a full-time academic appointment for less than seven years as of the submission date are cordially invited to submit summaries or drafts of their papers. Although published work is not eligible for submission, submissions may include work that has been accepted for publication. C-LEAF will cover hotel and meal expenses of all selected presenters.
Schulte Roth & Zabel LLP, one of the leading law firms serving the financial services industry and known for its premier practice in the area of private investment funds and private equity M&A, generously sponsors the Junior Faculty Scholarship Workshop and Prizes and provides other financial assistance to C-LEAF.
Those interested in presenting a paper at the Workshop should submit a summary or draft, preferably by e-mail, before October 7, 2011. To facilitate blind review, your name and other identifying information should be redacted from your paper submission. Direct your submission, along with any inquiries related to the Workshop, to: Professor Lisa M. Fairfax; Leroy Sorenson Merrifield Research Professor of Law; George Washington University Law School; 2000 H Street, NW; Washington, DC 20052; email@example.com.
Papers and Junior Faculty Scholarship Prizes will be selected after a blind review by members of the C-LEAF Executive Board. Authors of accepted papers will be notified by November 15, 2011. Please feel free to pass this Call for Papers along to any colleagues who may be interested.
Many thanks go out to the authors and commentators that made the 2010 Conglomerate Junior Scholars Workshop so enjoyable! We think this is one of the best things we do around here at the Glom. We enjoy getting to know the authors early in their careers so we can say "We know them when." And of course, we couldn't have put on a workshop if it hadn't been for our outside commentators: Katie Porter, Larry Garvin, Todd Zywicki, Todd Henderson, Dave Hoffman, Brett McDonnell, Bob Lawless, Larry Ribstein, Miriam Baer, Mike Guttentag, and Kim Krawiec! You guys rock, but you knew that already.
I have been told over the years that many junior scholars find the JSW very intimidating -- this isn't like presenting in a room at Law & Society to 5 of your closest friends or even at AALS to a room full of like-minded people coming in and out. Being in the JSW requires a great sense of self to be able to post a draft of a paper on the world-wide web and then receive very public comments on that paper. And if that wasn't enough, anyone gets to jump in! So, I tip my hat to our authors, who responded very well to expert criticism, some nuanced and some more pointed. This is what being a scholar is about, and I applaud you.
If you're late to the party, you can find the discussions of the four papers that were spotlighted here:
In Leverage, Sanctions, and Deterrence of Accounting Fraud, Urska Velikonja proposes an alternative regime to deter accounting fraud, which she terms “leveraged sanctions” – a civil or regulatory sanction that is threatened against the firm or a group of insiders. The firm (or group) can reduce or avoid these sanctions by divulging information to external enforcers, such as the SEC. The hope is that the threat of sanction will provide the leverage needed to produce cooperation from the firm or group, inducing them to share information about individual wrongdoers with enforcers, who will then sanction the dishonest individuals.
I quite enjoyed the article – Velikonja has carefully researched this topic, and demonstrates an admirable breadth of knowledge and command of the literature. Moreover, though some will no doubt disagree with her contention that increased personal liability will more effectively deter accounting fraud, her arguments on this front held some resonance for me, at least in theory.
Ultimately, however, I was not convinced by Velikonja’s central claim that a shift to a leveraged sanctions regime would substantially reduce accounting fraud, for several reasons. First, at least as it relates to firm-level leverage, I’m not as confident as Velikonja that her proposed regime is such a radical departure from current SEC informal practice.* As Velikonja notes, there are no legal impediments to the use of leveraged sanctions by the SEC, and the SEC already has at its disposal a variety of monetary and non-monetary sanctions with which to threaten firms that withhold cooperation. It would thus be rather surprising if the SEC, in contrast to other enforcers, failed to use the carrots and sticks within its repertoire to induce any desired cooperation.
Second, to the extent that the SEC doesn’t currently use leveraged sanctions to the fullest extent possible, it is worth asking, “why?” Most likely, the SEC -- given a constrained budget, complex political realities, and an informational disadvantage vis-à-vis the firm -- simply does not consider leveraged sanctions the most effective means of deterrence, and with good reason.
There is a tendency within most organizations (which would be exacerbated under Velikonja’s proposal) to push wrongdoing downward to lower-level employees. An explicit direction or delegation from higher-level management is probably unnecessary to accomplish this aim. Instead, it is more likely that firms (meaning senior management) create the incentives for misconduct, and then turn a blind eye to apparent violations.
So long as the misconduct remains undetected by relevant outsiders and is in the firm’s (or management’s) immediate interest, this state of affairs can continue indefinitely. If, however, the misconduct comes to light and the firm or an insider group is pressed to cooperate and turn over the wrongdoers, there are lower-level scapegoats (who, as noted, are not free from blame) at the ready, allowing the firm or group to reap the benefits of cooperation.
Velikonja dismisses this possibility, arguing that external enforcers are able to control such strategic cooperation by independently comparing publicly available information with information provided by the firm. It seems to me that this is highly unlikely, as evidenced by many misreporting and fraud cases.
Corporate misconduct cases, including accounting fraud, are often complex, with many causes and several levels of fault and blame. Most of the time, corporate insiders will be able to “cooperate” by providing non-public information that is incomplete, but largely consistent with the even more incomplete public version of events. After all, if enforcers had the means and desire to piece together the complete version of events from publicly available information, they would hardly need to leverage the firm or insider groups into cooperation. And the more the SEC invests in investigation, the more it eviscerates any efficiency benefits associated with a leveraged sanction regime.
Don Langevoort’s work on the incentives and political realities of enforcers, such as the SEC, is particularly instructive here. Though the times they are a-changin’, the political, economic, and institutional reality has so far been one in which the SEC doesn’t have the luxury for the sort of deep scrutiny and second-guessing of the “official story” contemplated by Valikonja or similar proposals on any grand scale.
Without some hard evidence ex ante, expending resources to investigate deeper in the face of a ready-made story of wrongdoing offered up by the firm or insider group is an unappealing prospect from the standpoint of the SEC. Costly, and with a high risk of turning up little or nothing beyond what was given freely in cooperation, such a move risks embarrassment, and accusations of waste or overzealousness on the part of investigators.
Velikonja’s article is a good one and well worth reading. I trust that this and her other work (of which there is an astonishing amount already) will receive the attention it deserves in the academic community. But I hope that the proposal gains no traction with the SEC or Congress. My prediction for a world of leveraged sanctions is not more deterrence, but less liability for both firms and high-level insiders, with a corresponding increase in blame leveled at lower-level employees.
* Velikonja’s proposal also contemplates the possibility of leveraged sanctions against insider groups, including the audit committee, the entire board, and the top management team. These options are currently not within the SEC’s regulatory arsenal and would require enacting legislation that, as Velikonja recognizes, is not likely to be forthcoming. My analysis regarding scapegoating and SEC incentives is largely the same with respect to these variations on the leveraged sanction proposal.
Among the hallmarks of a really good law review article for me are, first, when an article inspires me to have a storm of fresh thoughts about a given topic and, second, just as I think of an objection I then find that the author deals with the question on the very next page. Urska Velikonja’s piece meets both criteria. This paper is ambitious and engages a difficult subject of securities fraud deterrence. With all the moving parts in the legal system for deterring fraud, it is difficult to write a focused, cogent piece of scholarship and balance the need to be comprehensive without getting pulled in too many directions. Velikonja should be commended for it; she engages a number of the big fish in this particular pond yet manages to add many fresh ideas.
My main wish would be that Velikonja spend more time on the crux of her diagnosis of the problem and her proposal. One key element of Velikonja’s thesis is that individual culprits are under-deterred because management can protect itself by refusing to share information with enforcers (whether the SEC or private plaintiffs) about who was really responsible for an act of accounting fraud. We could spend a lot of time analyzing whether under-deterrence is a problem, but to keep my comments focused, I will assume it is real.
A more focused question is: what causes it? I’d like to read a little more about the scope of this particular problem of information sharing. Is information not being shared with enforcers via the discovery process? My brief and limited experience in practice with SEC enforcement actions suggested that the information requested and provided can be quite comprehensive. What information is being withheld on a systemic basis? The paper briefly touches on the ability of firms to stonewall with broad assertions of attorney-client privilege and work-product (p. 30, citing Sam Buell’s work). This could be fleshed out more, since ultimately information-forcing is a central rationale behind the paper’s proposal of leveraged sanctions.
One means of answering this question of what information is missing would be to speak with prosecutors and practitioners off-the-record to get a nuanced understanding of the games being played and the scope of information that might be missing. It may not be citable empirical research, but might let us know where to look for additional proof. (It might add some valuable practical insights to a fascinating theoretical piece, and help the author’s ideas gain policy traction.)
This same question of “what is the missing information” reappears in the details of the regime Velikonja proposes. Under the proposal, firms could reduce their liability, by cooperating with enforcers (p. 41). I would like to hear more about what would qualify as “cooperation.” To what extent are “internal accounting documents, memoranda, e-mails or other messages, and minutes of meetings” already being provided in discovery? If privilege is the central problem, is waiver of privilege the central part of the solution? There are a host of potential concerns with creating incentives for/coercing a waiver of privilege that recall the debates about the SEC attorney conduct rules several years ago. (For example, would pressure to waive privilege undermine close, trusting lawyer/client relationships and discourage clients from seeking counsel that would otherwise further compliance with the law?)
Velikonja’s proposal also brings to mind the debate seven years ago in the wake of the much-debated Thompson Memo, in which a Deputy Attorney General set forth guidelines for federal prosecutors to weigh cooperation from a corporation in making decisions to prosecute. The literature in the wake of that memo, although dominated by practitioners, has direct bearing on this paper. (As an aside, it would be interesting to re-examine (a) whether the Thompson Memo had any effect on prosecutor behavior, and (b) whether corporate cooperation changed).
Should cooperation be enough to release a firm completely from liability? Velikonja addresses the problem of whether innocent individuals may scapegoated, but I wonder even if the firm provided more information, might we still have under-deterrence of individuals. The probability of a prosecutor bringing a successful case against individuals even with full disclosure from a firm may be quite low for any number of other reasons. Just a few examples: the enforcer might be able to prove all of the elements of a case, just not for any one person. It may also prove harder to get a jury verdict against a person with pictures of kids in her/his wallet than against a corporation with no soul to damn or body to kick. If under-deterrence of individuals is the problem, is lack of cooperation from firms the main cause?
On the other hand, firms may rightly worry about a loose definition of “cooperation” leading to ratcheting by the government. If we are unsure if lack of cooperation is the dominant cause of under-deterrence or if we are concerned with how to define cooperation, the proposal might instead condition a liability release for the firm on a verdict or settlement against individuals. (I assume that the proposal would also have to constrict indemnification for individual settlements if not insurance). The problem with this alternative is that it might create too strong an incentive to scapegoat (a problem, my fellow commentator, Professor Krawiec, has written about). Calibrating the trigger for release of leveraged sanctions seems extremely tricky.
Then there is the question of calibrating the size and nature (civil, criminal) of the leveraged sanction. Would the sanction on the firm be larger than the liability an individual would face? Trying to work out the size of the sanction in more detail may be too much to add to this paper, and Velikonja makes the wise decision to frame the question in terms of comparing alternative solutions rather than talking about optimal deterrence. However, I am not yet convinced that these calibration problems with leveraged sanctions are easier to solve than the calibration problem Velikonja identifies with an alternative solution – namely better design of executive compensation.
Velikonja considers over-deterrence (p. 47), but I’d like to read just a little bit more on this too. Management and employees will still need to exercise judgment in divining the line between “aggressive accounting” and fraud. How careful should they be? Velikonja writes “…there is no social value in aggressive accounting.” (p. 48) To play devil’s advocate, where is the dividing line between aggressive accounting and a valid exercise of discretion among different options to reflect the financial results of the firm more accurately? Courts answer this problem all the time, but the challenge still remains for firms and employees in day-to-day decisions on accounting. Again, better designed compensation, orienting it towards long term firm performance, may be easier to resolve than this question of over-deterrence.
These comments shouldn’t be construed to mean the paper should have focused on executive compensation or some other solution to the problem of accounting fraud. Quite the contrary: this author, her ideas and her proposal are so engaging and stand out so much in a crowded field, that I would like to hear more of her.
In “Leverage, Sanctions, and Deterrence of Accounting Fraud” Professor Velikonja proposes an interesting and novel way to structure the civil liability penalties for firms accused of committing accounting fraud. While reading this thoroughly researched article, I wondered most about the reliability of assumptions about the causes and consequences of accounting fraud upon which Velikonja builds her argument. I am not convinced that we know as much about accounting fraud as Velikonja’s analysis presumes. To be fair to Velikonja, many of my concerns would also apply to recommendations made by other scholars who offer prescriptions as to the optimal liability regime to deter accounting fraud. A more detailed consideration of two of the assumptions made by Velikonja might help to assuage my concerns.
The first assumption I would recommend exploring further is Velikonja’s claim that “managers control the information revealing who was involved in accounting fraud and thus can impede external investigations and sanctions.” Velikonja supports this assertion with citations to Kaytal (2003), Brown (2004), and Buell (2007). In general, relying on a law review article to support an important empirical claim invites skepticism, unless the cited article is specifically aimed at gathering evidence in support of the claim. I would argue that Velikonja’s use of these citations as evidence for an important element of her argument is no exception. My own suspicion is that accounting fraud is “traceable” in ways that other frauds may not be. And, indeed, Arlen and Carney hypothesize that “because Fraud on the Market involves false statements made in a public way by company officials to a market populated by large, well-informed investors, ultimate detection of individual wrongdoers should be relatively certain” (1992, at 701). Perhaps a more precise discussion by Velikonja regarding what kinds of hidden information would be helpful in detecting the ultimate wrongdoers in an accounting fraud would strengthen her claim.
The second assumption Velikonja makes which I believe merits further discussion (perhaps even in a separate paper) is the assumption that the decision to commit accounting fraud is a calculated one. This is an assumption made by many of the legal scholars writing about the optimal liability regime to deter accounting fraud. However, there are a growing number of reasons to be suspicious about the claim that accounting fraud is strongly influenced by economic considerations. Increasingly, the evidence suggests managers “stumble into” committing accounting fraud rather than committing these frauds with premeditation.
One reason to suspect that economic considerations are not paramount in the decision to commit accounting fraud are findings such as those reported in Erickson et al. (2006). Erickson et al. find no connection between the amount of contingent compensation managers receive and how likely managers are to commit fraud. If accounting fraud were a product of planning and forethought, then we would expect to find a relationship between the amount of a manager’s contingent compensation and the propensity to commit accounting fraud. More generally, the evidence connecting economic incentives to the propensity to act unethically is mixed, at best (see Dan Ariely’s research, for example).
Furthermore, it appears to be unlikely that it is ever reasonable for a manager to commit accounting fraud. Dechow et al. (2008) (cited by Velikonja) finds that firms accused by the SEC of manipulating their financial performance have had strong performance prior to the manipulations, and surmises that most manipulations are motivated by managers’ desire to hide a downturn in financial performance. Yet it is hard to imagine when the perceived benefits from issuing a fraudulent disclosure in order to delay the disclosure of such a downturn would approach the substantial costs that might be incurred if the fraud is uncovered. Arlen has concluded upon reviewing the consequences to a firm of having the fraud discovered that committing accounting fraud is rarely in the shareholders best interest (Jennifer Arlen, Public versus Private Enforcement of Securities Fraud, at 27). I would argue a similar conclusion holds for a manager considering the costs and benefits of committing accounting fraud. Among the potential costs to a manager of committing accounting fraud are: the almost certain loss of employment, a substantial reduction in the value of the untoward manager’s human capital, and the possibility of ending up in jail (Karpoff et al. (2008)).
A final example that the propensity to commit accounting fraud may depend on factors other than a manager’s personal cost-benefit analysis comes from an experiment several colleagues and I published titled “Brandeis’ Policeman.” We structured our experiment to replicate many of the salient features of accounting fraud. We then manipulated several different variables to see if they would reduce the propensity to commit our experimental proxy for accounting fraud. We found that a disclosure treatment greatly reduced the extent to which participants in our study were willing to act in an unethical manner. Yet this disclosure treatment was specifically designed not to affect the cost-benefit analysis of study participants. Our finding is consistent with other experimental evidence that willingness to commit unlawful or unethical behavior in a context similar to committing accounting fraud is rarely a function of economic considerations.
Despite my concerns about Velikonja’s foundational assumptions, her article is well-written, thoroughly-researched and well-argued. Moreover, I think Velikonja's idea of reducing civil sanctions on firms accused of committing accounting fraud in exchange for their cooperation with investigators may be useful. I would encourage Velikonja, and other scholars as well, to focus more of their efforts on exploring the interaction between the law and “the nuanced social calculus of theft” (Stephen Dubner & Steven Levitt, NY Times, June 6, 2004, M:64), rather than designing liability regimes based on more simplistic behavioral and operational assumptions.
I would like to offer a big thank you to the Conglomerate and to Christine for inviting me to comment on Urska Velikonja’s interesting and provocative paper, Leveraged Sanctions. Urska revisits the issue of entity liability for accounting fraud and argues that a system of “leveraged sanctions” will correct what she believes is an under-deterrence of accounting fraud among corporate officers. Urska’s scheme is one in which the firm and/or “knowledgeable insiders” suffer less liability provided they report wrongdoing and “cooperate” by aiding in the investigation and sanctioning of culpable corporate officers.
The paper comes at an interesting time. Although financial institutions have been roundly attacked for causing the financial crisis and economic downturn, it is not at all clear (as indicated by Brian Cheffin’s paper up on SSRN here) that accounting fraud and related corporate governance issues remain the problem that they were in the early 2000’s. To the extent the Enron-type scandals were caused by poor gatekeeping and auditor conflicts-of-interest, the Sarbanes-Oxley Act arguably has reduced some of these issues. (Either that, or the capital markets have found ways to correct for fraud, depending on where you fall on the ideological spectrum). So it’s a question – at least for me – whether deterrence of accounting fraud is the order of the day when in fact other issues (properly judging risk, allocating power between shareholders and management, shaping the future of financial regulation) have become so important in contemporary scholarship.
According to the paper, accounting fraud remains important because corporate officers are under-deterred from accounting fraud. Urska bases this opinion on both theory and empirical evidence. First, she theorizes that officers who otherwise might lose their jobs for failure to meet performance goals, and who have the most knowledge about the firm’s financial status, have little incentive to disclose their own malfeasance to either the market or to public enforcers. It seems largely unassailable that: (a) fraud can be a substitute for performance; (b) corporate managers have incentives to commit fraud; and (c) managers who intentionally commit fraud have every reason to cover it up when gatekeepers, shareholders and public enforcers investigate the firm’s financial performance. However, Urska also relies on the two relatively recent empirical studies reported by Jonathan Karpoff et. al in both the Journal of Financial Economics and the Journal of Financial and Quantitative Analysis to come to the conclusion that officers routinely escape detection and liability. I do not think these articles can be said to support this conclusion.
First, Karpoff et al’s papers did not conclude that officers walk away from accounting fraud without penalty. To the contrary, they found that, of those corporations whose frauds were detected, 93% of the top officers either were forced to leave or explicitly fired. A significant number (above 20%) were prosecuted criminally, and even those who escaped prosecution still had to deal with potential SEC fines and penalties, as well as difficulties in securing new jobs. Moreover, as Karpoff et al show, the market reacts to fraud allegations quite badly. Now, there may be an argument that there are many frauds left undetected, but I don’t think these studies establish pervasive underdeterrence. Moreover, the studies cannot and do not capture the intangible costs of securities fraud investigations and prosecutions – the endless meeting with corporate counsel, the resulting distrust both within the firm and between the firm’s management and its Board, the difficult relationships with regulators and the SEC, etc.
Moreover, when corporate managers are prosecuted criminally, we know quite well that in the corporate context, their resulting sentences are likely to be very long. Why? Because in the federal system, the United States Sentencing Guidelines measures criminal culpability in fraud cases in terms of the attempted loss, which for a public corporation can very quickly range in the tens or hundreds of millions of dollars, even when the CEO’s participation in the fraud is relatively slight. As a result, despite the fact that the Guidelines are now advisory, federal judges are now quite accustomed to handing out 15 and 20 year sentences to white collar corporate offenders. Given the media’s reporting on such sentences, it is difficult to conclude that corporate officers who commit fraud are sitting in their offices, laughing at the possibility of going to jail. If the sanction is extremely high, and 20% of the corporate managers investigated for fraud are going to jail, then perhaps something other than rational cost-benefit analysis is propelling them towards fraud. Perhaps, indeed, the problem is that they are boundedly rational and either convince themselves that they aren’t really committing fraud or they irrationally believe they won’t get caught. In sum, psychology tells us that in ambiguous circumstances, we are very talented at rationalizing our actions. Leveraged sanctions will not necessarily cure this problem.
I also had some trouble with the real-world implications of Urska’s proposed liability scheme. Urska contends that her proposal is broader than the one made by Jennifer Arlen and Renier Kraakman in their 1997 NYU article (see SSRN link here), in which they explained that the corporate liability regime that would most optimally control misconduct was a “composite liability” scheme. The composite scheme holds all firms strictly liable for their employees’ conduct, but then imposes an additional penalty on firms that have failed to monitor and report misconduct.
Urska’s “leveraged sanction” scheme is similar, except that she applies it beyond the criminal context (where arguably, the DOJ’s approach on prosecuting business organizations imperfectly tracks the Arlen/Kraakman composite liability scheme) to the civil context, and also applies it beyond firms to “knowledgeable insiders.”
I enjoy reading theoretical papers, but it is not at all clear to me that this proposal “fixes” the under-deterrence problem without imposing other, unintended costs. Chief among them is figuring out which person or persons are “knowledgeable insiders.” Surely, the shareholders of the firm are not likely to be in this group. They have little knowledge of, or rights to participate in, the corporation’s daily affairs. Nor is it clear (and I credit Urska for conceding this in her article) that the Board or Audit Committee would have this knowledge. Independent directors receive information from the corporation’s officers. They might pick out discrepancies and provide a safe space for whistleblower employees to talk, but they also are likely to be in the dark when managers set out intentionally to defraud them. Indeed, the groups that most likely might fall within the “knowledgeable insider” label are attorneys and compliance officers. I can’t imagine too many lawyers or compliance personnel who would willingly work at a firm whose insiders were collectively subject to “leveraged sanctions.” Moreover, I cannot imagine too many corporate managers or employees would want to talk to those persons who were identified as “knowledgeable insiders.” Finally, it is not all that clear to me that there exists some category of “enforcer” who would accurately and intelligently impose an optimal schedule of sanctions. One need not be a total cynic to conclude that enforcers, be they public or private, impose a number of agency costs on the people they are charged with protecting. Although Urska’s paper touches on this problem, I think she can and should do much more here.
In sum, Urska’s paper is interesting and returns us to the perennial topic of how best to reduce wrongdoing within the corporate world – in this case, accounting fraud. Where she could greatly improve her proposal, however, is by providing a far more fine-grained analysis of the institutions she assumes will be implementing such a scheme, and the likely effects her proposal would have on the real-world human beings who populate such firms.
Welcome to the fourth and final week of the Conglomerate Junior Scholars Workshop! Today we will be spotlighting a paper by Urska Velikonja entitled Leverage, Sanctions and Deterrence of Accounting Fraud. Urska just finished a position as an O'Connor Fellow at Arizona State University Sandra Day O'Connor College of Law and is now beginning a clerkship with Judge Stephen F. Williams of the D.C. Circuit Court of Appeals. For this paper, we will turn to expert commentary by our own Erik Gerding and friends of the Glom Miriam Baer, Kim Krawiec andMike Guttentag. And, of course, we welcome discussion and debate from you! Feel free to enter the conversation by commenting on this post or on the post of one of the expert commentators.
Here is the abstract of the paper:
The article argues that firm-level liability for fraud is justified by the need to secure the cooperation of the firm in pursuing individual wrongdoers ex post rather than in controlling top-level officer ex ante. Firm-level liability for fraud has often been criticized. The empirical evidence suggests that firms overpay for fraud liability and overspend on internal compliance mechanisms (which are generally ineffective at preventing fraud). Yet, insiders who commit fraud are rarely sanctioned for their wrongdoing, leading to moral hazard and underdeterrence of individuals. This article argues that two factors explain the failure to sanction managers who commit fraud. . . .(read more here).