Entirely unrelated: Wharton now has a section of the full-time MBAs meet in San Francisco.
SAC Capital is paying a huge fine, but individuals aren't (yet) being charged for the insider trading committed by the firm. How should we evaluate this?
On the one hand, it makes sense to target the company if you believe that it was essentially set up to trade on inside information on behalf of its clients. The regrettable thing, maybe, is that the clients, who presumably flocked to the firm because they knew this, aren't taking haircuts out of the deal. But Cohen, the owner, certainly is. Here's James Stewart:
And given Mr. Cohen’s ownership of the firm, the $1.2 billion fine, as well as a previous $600 million settlement with the S.E.C., will come out of his pocket, rather than public shareholders’. With a fortune estimated at $9 billion, Mr. Cohen will still be a billionaire many times over, but the fine is nonetheless more than a dent in his personal fortune.
This aspect even mollified a critic like Professor Burton. “At least the target is the same as the alleged villain,” he said, referring to Mr. Cohen. “This is almost never the case when you sue and indict a public company.”
SAC Capital didn’t even pay lip service to the idea that it would unconditionally cooperate with the government’s investigation, let alone make a “timely and voluntary disclosure of wrongdoing,” which is another factor in the Justice Department’s guidelines that SAC flouted. “It’s extraordinary that they said publicly they would not cooperate,” Professor Friedman said. “They evidently thought they would get away with it with impunity.”
I don't get too hung up on this stuff - it is insider trading, after all, the constant obsession of the American prosecutor. One doubts that the aggresive policing of it is really making the financial system much safer. But there is something satisfying in sanctioning the vehicle designed to break that weird law hugely for, in fact, doing so.
Tuesday's WSJ had an article on changes in the private secondary market. Long time readers know that I've been interested in this space for quite some time. Here are some nuggets, plus my take:
- Auction volumes are way down, and the number of companies whose shares are available for purchase is, too.
- Post-Facebook IPO, SecondMarket has laid off 40% of its staff
- The other major player, SharesPost, has created a joint venture with Nasdaq OM and will launch Nasdaq Private Market later this year.
- Companies are looking for mutual fund and hedge fund investors that can aggregate individual investors (think Goldman's failed pre-Facebook investment vehicle)
None of this surprises me. (Indeed, here's a little prescience for you) The puzzling thing in the wild west that was the pre-Facebook IPO secondary market was that companies allowed so much trading of their shares--trading that inmost cases required their explicit permission. According to the WSJ, after Facebook's IPO debacle, companies woke up to the risks: "Firms feared online trading could bring in too many investors, lead to speculative swings in share price affecting companies' stock-based incentives for employees, and spread information about privately held companies too widely."
Conspicuously absent from the article is any indication that the loosening of Section 12(g) of the Exchange Act, which requires Exchange Act filings once a corporation reaches 2000 (pre-JOBS, 500) shareholders, has made any difference at all. Look for more on this from me. Eventually.
Over the past few weeks, a handful of attorneys and academics have asked me exactly how specific the specific public benefit purpose(s) required by §362(a) of the DGCL for Delaware public benefit corporations (“PBCs”) must be. Section 362(a) reads, in pertinent part:
- “In the certificate of incorporation, a public benefit corporation shall. . . Identify within its statement of business or purpose . .1 or more specific public benefits to be promoted by the corporation”
Some of the early Delaware PBCs have used the general public benefit language from the benefit corporation’s Model Legislation to describe their specific public benefit purpose(s). (See, e.g., Farmingo, PBC; Ian Martin, PBC; Method Products, PBC; New Leaf Paper, Public Benefit Corporation; and RSF Capital Management, PBC). For those who are unfamiliar, the general public benefit language from the Model Legislation reads:
- “A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
At least one early Delaware PBC has added the following to the general public benefit language:
- “specific public benefit . . .may be further specified from time to time in the Bylaws of the Corporation . . . or a resolution or resolutions of the Board of Directors of the Corporation.” (Socratic Labs, PBC).
- “for the specific public benefit of furthering universal access to the Internet” (Unifi Communications, PBC)
- "giving people access to, and the benefit of, health knowledge that is as complete and unbiased as possible." (Profile Health Systems, PBC)
In my personal opinion, using only the Model Act’s general public benefit purpose as a Delaware PBC’s specific public purpose is a bit risky and possibly conflicts with the drafters' intent. To be clear, I have not yet spoken with the drafters on this issue, and will update this post if I do. However, if the drafters had intended to allow the general public benefit language to suffice, then I think they would have simply followed the lead of the Model Legislation and would have defined and used the term "general public benefit".
Further, the FAQ about Public Benefit Corporations circulated by the drafters contained the following question and answer.
- Q: “Why does the statute require both the identification of a specific benefit or benefits and that the corporation be managed for the best interests of all those materially affected by the corporations conduct?” (emphasis in original)
- A: “….The requirement of a specific public
benefit is intended to provide focus to the directors in managing toward
responsibility and sustainability, and giving investors notice of, and some
control over, specific public purposes the corporation serves.”
That said, the Model Legislation’s general public benefit language
is more specific than “any lawful purpose” and Section 362(a) has no limit
on the number of specific purposes that can be listed, so a Delaware PBC could
conceivably list all of the specific interests the Model Legislation requires
directors to consider and achieve the same lack of focus as listing the Model Legislation’s
general public benefit language.
I have spoken to a few people in the Delaware Secretary of State’s office in an attempt to understand their stance on the specific public benefit issue. The main take-aways from those conversations were:
- they are aware of the controversy surrounding whether the Model Legislation’s general public benefit purpose suffices as a specific public benefit under the statute;
- they are currently accepting the Model Legislation’s general public benefit language as a valid specific public benefit, until it is formally challenged or they are told to do otherwise;
- they will not accept “any lawful purpose” language as a specific public benefit.
Also, for those who are interested, there were 49 public benefit corporations formed in Delaware between the August 1, 2013 effective date and October 16, 2013.
Thanks to Boston attorney Bruce Landay for excellent, in-depth conversation on this topic and for some of the certificates of incorporation cited in this post. As an academic, it is always nice to connect with attorneys who practice in my areas of interest. Thanks to Alicia Plerhoples at Georgetown Law who also provided some of the certificates of incorporation cited in this post.
He loves iCloud, but the past few years of Dropbox haven't been bad, either. So which should he keep?
Here's a smidgen of his pros and cons:
I love the possibilities iCloud thus offers. The ability to seamlessly work on any platform is very attractive. The problem as I see it is that the rest of my world isn't ready for me to embrace iCloud:
- In the classroom, I have to run PowerPoint off the law school network on a PC machine, so I can't simply run a Keynote presentation on my iPad that will show on the class projector. Getting the Keynote Presentation off my iMac or iPad and onto the Windows network as a PowerPoint presentation seems non-trivial.
- Law reviews and book publishers still use MS Word files. If I work in Pages, how much of a hassle will it be going back and forth between Pages and Word, especially when we get to the editing stage and are exchanged versions with tracked changes, comments, etc....
- My coauthors are all MS Word/Windows people (not that there's anything wrong with that).
- The law school network is Windows-based. Getting documents off the network and into Dropbox is easy. Not sure it'll be that easy with iCloud.
I remain on Microsoft because of some sense that that is what the legal scholarship world does, because I had a horrible time converting Word docs to Apple docs and vice versa many years ago, and so gave up resisting, and because at this point, the startup costs of switching seem like they could be burdensome (but with the iPhone, and the iPad, burrowing into my setup, that may change).
But I love Dropbox. So handy! So simple! Though it doesn't do a good job of calling up powerpoints over at the law school, it has made the need to bring in my laptop at work increasingly unecessary. I actually rely on my desktop, for the first time since I started this business!
I don't take full advantage. I swap docs through email, rather than shared folders (and only use the latter for data). But even there, Dropbox is a great backup plan.
My sense of other departments at Wharton, btw, is that social scientists are very likely to be on Macs, but likely to share data and drafts through Dropbox. So take that anecdata for what it is worth.
I don't mind the occasional bailout. For financial institutions, unless you're headed into a depression, they often don't lose the government money; instead you hang onto volatile assets until they mature, and when they mature, volatile instruments become more predictable. And often there isn't an alternative to bailing out an important financial intermediary, either. That doesn't mean you celebrate bank bailouts; the loss of discipline on the banks - that is a terrible thing. But it often ends up being the bitter you have to take with the not so sweet, but not so sour either. They do not have to be massive money losers - just time-to-repayment shifters.
Still, we knew that industrial company bailouts might present their own problems. And Treasury hasn't held onto GM long enough for it to bounce back (nor is it obvious that that would eventually happen):
Treasury would need to get $147.95 on its remaining shares to break even. That’s not going to happen: GM’s stock closed Wednesday at $35.80, up $0.21, or 1 percent. At current trading prices, the government’s remaining stake is worth about $3.6 billion. At current stock prices, taxpayers would lose about $10 billion on the bailout when all the stock is unloaded.
Earlier this month, Treasury reported it sold $570.1 million in General Motors Co. stock in September, as it looks to complete its exit from the Detroit automaker in the coming six months. The Treasury says it has recouped $36 billion of its $49.5 billion bailout in the Detroit automaker. The government began selling off its remaining 101.3 million shares in GM on Sept. 26, as part of its third written trading plan.
It will lose $9 billionish on the deal. It isn't obvious to me that Treasury has interfered overly with the corporate governance of the auto companies once it took them over. But it did insist on the divestment of a ton of auto franchises, may have pressed GM to sell Volts, and, in the end, lost money. That's not exactly a record to celebrate, even if you do conclude that some sort of intervention was necessary.
We've been following the debate between Lucian Bebchuk and Martin Lipton on the value of activist shareholders with interest, and it still seems as if the protagonists see the world very differently. The debate has been occasioned by a paper from Bebchuk and his co-authors arguing, essentially, that activist shareholders increase returns to investors:
We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.
We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis.
In this round, Lipton offers a literature review of the case for the other side, which is motivated by the plausible assumption that activist shareholders tend not to buy and hold:
numerous empirical studies over the years have produced results that conflict with those Prof. Bebchuk espouses. These other studies generally find that activism has a negative effect or no effect on long-term value, particularly when controlling for the skewing impact of a takeover of the target (which generally occurs at a premium regardless of whether the target is the subject of activism).
Some of the studies cited are quite old, and not all of the journals are top-drawer. But others seem quite on point. Perhaps the disputants will next be able to identify some empirical propositions with which they agree, and others with which they do not (other than, you know, sample selection).
On Wednesday, as many now know, the U.S. Securities and Exchange Commission (SEC) released its long-awaited rule proposal release under Title III of the Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama in April 2012. Title III of the JOBS Act, also known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (CROWDFUND) Act, governs securities--a/k/a investment--crowdfunding. Importantly, this part of the JOBS Act allows securities crowdfunding conducted under specified parameters to proceed without registration under the Securities Act of 1933, as amended (1933 Act). As you may recall, I blogged here about the CROWDFUND Act as part of a forum on the JOBS Act shortly after its adoption. Those forum posts outline the key terms and provisions of the CROWDFUND Act and the JOBS Act as a whole.
I appreciate the opportunity given to me by my friends at The Glom to blog a bit about these rules, dubbed "Regulation Crowdfunding." I have spent the past several days digesting them, as time has permitted. No offense meant to the SEC, but I did fall asleep over the rules more than once over the past few days . . . .
My overall assessment is that the rules represent a thoughtful, conservative approach to regulation under what the U.S. Congress handed the SEC, which is (in my opinion) a poorly designed legislative product. Although some have criticized the SEC for taking so long to issue rules that (in many cases) merely repeat what Title III of the JOBS Act says, I have come to the view (reading a bit between the lines) that the SEC has thoughtfully considered what, if anything, it can do to make Title III crowdfunding accessible to investors and issuers while at the same time ensuring as best as possible (especially given the untested nature of a securities crowdfunding market) that the policies underlying our federal securities law are upheld. Signs of deliberation and reflection exist throughout the rule proposal.
For example, in addressing
- whether the amount of crowdfunded securities offered under Title III of the JOBS Act should be aggregated with the amount of securities offered under other 1933 Act registration exemptions for purposes of calculating the offering limits for issuers under Title III and
- whether crowdfunded securities offerings under Title III of the JOBS Act should be integrated with other securities offerings exempt from registration under the 1933 Act for purposes of determining compliance with the overall rules under Title III,
the SEC concludes based on the text of the JOBS Act, read in context, that neither aggregation nor integration of this kind should be applicable in Title III securities crowdfunding. In addition, the SEC offers helpful hints about how to tackle a few sticky issues at the intersection of crowdfunded offerings under Title III and other exempt offerings (e.g., the handling of certain types of concurrent offerings and the treatment of offerings by affiliates and predecessors). The SEC's conclusions seem right to me, but good arguments based on investor and market protection could be made to the contrary.
The SEC takes a similarly reasoned approach to addressing ambiguities in the investor caps provided for in Title III. After acknowledging the related public comments, the SEC divines an intent to broaden, withi--but not beyond--the constraints set out by Congress, the potential for investment in crowdfunded securities offerings. The SEC's rulemaking "fix" is simple and, again, appears to be in accord with the ostensible purpose of Title III. Interestingly, the SEC rule allows issuers, absent knowledge to the contrary, to rely on verification done by crowdfunding intermediaries on investor compliance with the cap.
The proposal release also manifests regulatory caution of other kinds. For instance, the SEC notes comments requesting an increase in the 12-month issuer aggregate offering limit from $1,000,000 (as provided in the CROWDFUND Act) to a higher amount. The SEC identifies this request (and other related queries) and declines to increase the aggregate offering limit through rulemaking. In the release, the SEC states (among other things) that Title III of the JOBS Act:
specifically provides for a maximum aggregate amount of $1 million sold in reliance on the exemption in any 12-month period. The only reference in the statute to changing that amount is the requirement that the Commission update the amount not less frequently than every five years based on the Consumer Price Index. Additionally, statements in the Congressional Record indicate that Congress believed that $1 million was a substantial amount for a small business. We do not believe that Congress intended for us to modify the maximum aggregate amount permitted to be sold under the exemption when promulgating rules to implement the statute.
While perhaps predictable, the SEC's regulatory restraint in this regard is not, apparently, merely a knee-jerk reaction borne of a desire to cabin or eliminate securities crowdfunding.
Although this post touches only on a few substantive provisions of Regulation Crowdfunding relating to issuers and investors, the rule proposal is replete with similar examples of deliberate, narrowly tailored rulemaking. The regulation of funding portals also gets and deserves significant attention in the release. Moreover, the SEC expressly seeks comments on general and specific matters highlighted throughout the release. Given the scope of the legislative exemption and the related rulemaking, there are a number of interesting discernable narratives in the 585-page release. To keep this post short, I will stop here. But if The Conglomerate will indulge me a bit more, I may post a few additional observations as time permits . . . .
I've been watching the various bailout takings suits against the US government with interest. There are two in particular that are proceeding apace. One is a suit by Chrysler and GM auto dealers who lost their franchises, in their view at the behest of the government, in exchange for the bailout of those companies. Those plaintiffs have done well before the Court of Federal Claims, but will have to defend their efforts in an appeal certified to the Federal Circuit next month.
The other is a suit by Starr, Inc., controlled by Hank Greenberg, the former CEO of, and major stockholder in, AIG, againt the government for imposing disproporionate pain on AIG owners vis a vis other financial institutions that received a bailout. That case has also done well before the CFC, and is now in discovery. And David Boies, Greenberg's lawyer, hasn't kidding around about the discovery, either. He has already deposed Hank Paulson and Tim Geithner on what they knew (presumably a lot), about the decision to structure the AIG bailout the way they did, and he noticed a deposition of Ben Bernanke that required the government to use a mandamus appeal to quash it, which it semi-successfully did last week.
It wasn't a thoroughly convincing quashing, though. High ranking officials in office aren't supposed to be deposed, except when there is a showing of extraordinary circumstances, for two reasons. It's disruptive, and it interferes with the deliberative processes of government.
These concerns go away, however, when you leave government. As the Federal Circuit said, "There appears to be no substantial prejudice to Starr in postponing the deposition of Chairman Bernanke, if one occurs, until after he leaves his post. The deadline for discovery should, if necessary, be extended beyond the current close on December 20, 2013, for that purpose."
I'm not sure that Bernanke's deliberative process will actually tell the Starr plaintiffs very much about their case. With takings claims, the focus is on what the government did, and whether that constituted a taking, rather than on why it did it. A deposition might offer some details on whether the government was imposing a cost on particular people that should have been borne ratably by the taxpayers, which is what the takings clause is supposed to protect (Starr would probably like Bernanke to say that the government zeroed out AIG shareholders to punish them for failing to make sure their firm was being operated cautiously, for example). But again, the question is whether, not why.
It does mean, however, that Bernanke can be pretty sure of at least one thing when he leaves the Fed. He'll soon be under oath, testifying about the reasons why the AIG bailout was structured the way it was.
We have today concluded our Ribstein Memorial Symposium here at the University of Illinois College of Law. I can't think of a better way to honor the scholarly and personal legacy of Larry Ribstein, other than a week-long conference. I am grateful to our organizers, presenters and participants.
At the conference, Dean Bruce Smith announced that in conjunction with the Larry E. Ribstein Memorial Fund, our VAP program, before known as the Illinois Academic Fellowship Program, will from yesterday forward be known as the Larry E. Ribstein Academic Fellowship Program. Again, having this successful program bear his name is a perfect tribute. Larry worked very hard with each of our VAPs and on behalf of them. The fund "will support initiatives designed to advance the intellectual life of the College of Law, including a named faculty position, research support, and workshops for junior faculty members, as well as innovations designed to more effectively bridge the worlds of legal theory and legal practice, particularly in the area of business law." If you would like to learn more about the fund, and perhaps contribute to it as a way to honor Larry, you can find more information here.
Announcements after the jump:
This will be an outsource - first, to Steve Davidoff's column on the Company That Would End Fraud On The Market (it is Haliburton, with advice from Wachtell Lipton):
The company has petitioned the Supreme Court to overturn the decision in the Basic case, arguing that its standard should never have been adopted. A group of former commissioners at the Securities and Exchange Commission and law professors represented by the New York law firm Wachtell, Lipton, Rosen & Katz have also taken up the cause. In an amicus brief, the group argues that, in practice, the Basic case has effectively ended the reliance requirement intended by the statute, something that is not justified.
They rely on a forthcoming law review article by an influential professor, Joseph A. Grundfest of Stanford Law School. Professor Grundfest argues that the statute on which most securities fraud is based — Section 10(b) of the Exchange Act — was intended by Congress to mean actual reliance because the statute is similar to another one in the Exchange Act that does specifically state such reliance is required.
Professor Grundfest’s argument is a novel one and is likely to be disputed by the pro-securities litigation forces, but the question probably comes down to whether there are five justices who want to put a stake through the heart of securities fraud cases.
And then, to Jim Hamilton and Allen Ferrell, via Scotusblog, for a recap of the oral argument in Chadbourne and Park v. Troice. Here's Allen:
The specter of Bernie Madoff hovered over oral arguments Monday. This was appropriate to the occasion, as the Court was preoccupied with metaphysics: What does it mean for a misrepresentation to be “in connection with” a purchase or sale? The question that came up repeatedly was essentially, whether the lawyers arguing on both sides “agree that Madoff committed Rule 10b-5 securities fraud when he represented that he was purchasing securities on behalf of investors when in fact he purchased nothing.” According to at least one reading of the plaintiffs’ allegations, Stanford Investment Bank arguably acted like Madoff. The bank falsely represented to investors that they were buying an instrument (certificates of deposit) that were in some sense backed by securities — securities that did not exist (like Madoff’s securities purchases that never happened). The answer to this question is critical because if the answer is yes – Madoff did commit Rule 10b-5 securities fraud – and, yes – the alleged facts here are analogous to the Madoff situation – then it follows that the Securities Litigation Uniform Standards Act (SLUSA) precludes the state actions.
And here's Jim:
Mr. Clement said that the whole point of this fraud was to take a non-covered security and to imbue it with some of the positive qualities of a covered security, the most important of which being liquidity. And if you look at sort of the underlying brochures here that were used to market this, he continued, that is really what this fraud was all about. These CDs were offered as being better than normal CDs because we can get you your money whenever you need it.
With the possiblity of debt ceiling default arising quarterly these days, it is worth thinking through the Article III consequences of prioritizing debt payments over its other obligations. Can Treasury do that without facing a ton of big, fat, lawsuits?
Or, to put it another way, why can't it? As Felix Salmon observes:
[W]hy is Matt Yglesias so convinced that prioritization is impossible? He gives four reasons.
The first is that prioritization is illegal: “Treasury is not authorized to unilaterally decide to pay certain bills and not others”. This is true — but also a bit irrelevant. Treasury is under unambiguous Congressional orders to pay lots of bills — all of them, in fact. If it fails to pay those bills, it will be violating the law as laid down by Congress. Hence the 14th Amendment argument that the president should simply ignore the debt ceiling entirely, if it comes to that. But underneath it all, it’s hard to credit any argument which says “Treasury isn’t allowed to pay its own bonds”. If that’s what Treasury wants to do, then surely it can do so. Besides, who would even have standing to sue?
I can think of some people who would have standing to sue - they would suffer a concrete and particularized injury, caused by the government, and fairly traceable to its actions if Treasury took a dwindling pot of money, and stiffed General Dynamics on contracts due for submarine repair or whatever, while instead paying interest on maturing sovereign debt. But that doesn't mean that they could sue and win; here, I agree with Felix Salmon. The courts have found - unless Congress has provided otherwise in its statutory guidance - that managing lump sum budgets is committed to agency discretion by law. Under the logic of Lincoln v. Vigil, the leading case for this proposition, I accordingly think that lawsuits against Treasury for prioritizing debt repayments would be unlikely to succeed. As the Supreme Court said then: