Over at the business prof blog, Haskell Murray has taken up the mantle of relaying job announcements for law professors in business schools, and he does a nice assessment of the three most recent opportunities to come over the transom. Well worth a look, if you're looking for a job.
By now, the risk that a distressed European nation such as Greece might leave the Eurozone and thereby spark global economic calamity is well known. Regular readers of this blog may even privately relish the prominence of the issue. Not since the days of the gold standard has international monetary policy come so close to being a socially acceptable topic of dinner conversation.
As I noted in my first post, observers rightly perceive the Eurozone sovereign debt crisis to be driven by political and economic forces. But many consequences of a euro breakup would be determined by law, including sources of American (specifically New York) private law.
This is a complex issue. I try to address it more fully in a new article, "Boilerplate Shock," which I've just posted on SSRN.
In brief, and to continue picking on Greece, one key question in the event of a euro breakup would be: would a court recognize an attempt by Greece to convert its euro-denominated debt into its new currency, or would it instead insist that Greece pay in euros, the currency of contract? The answer is important because, as a practical matter, requiring payment in euro would be tantamount to forcing a default.
That's the familiar narrative, anyway. And I agree. But I believe that the ubiquity of boilerplate terms in these bonds—specifically, clauses selecting governing law (usually foreign) and currency of payment (euro)—is likely to make any dispute over redenomination even more damaging than this suggests.
In the article, I argue that the sparse literature on the question of redenominating sovereign bonds overlooks some sources—especially cases interpreting New York contract law and private international law—that, if extended to Eurozone sovereign bonds, could surprise the market and cause serious global repercussions. I argue that the reason for this is not only that the dominant view overlooks what are likely controlling sources of law. It is that standardization of contract terms across the Eurozone sovereign lending market makes the stakes of surprise that much higher.
If Greece's attempt to redenominate its bonds is declared a default, then the fact that the operative terms in Italian, Spanish, Irish, etc. sovereign bonds are the same or similar makes markets likely to demand unsustainable premiums from those countries. Capital and investor flight could be very rapid. We have seen several previews of this movie over the past few years in the Eurozone, and each time official-sector bailout institutions have saved the day. But the European Union/European Central Bank and IMF probably do not have the resources to stop a broad-based bank run of this nature, to say nothing of the political support necessary to attempt it.
Maybe none of that will happen. Nevertheless, the potential for uniform contract terms to create risk not just to individual third parties but to securities markets seems likely to grow at least as fast as those markets. Using Eurozone sovereign bonds as a case study, I introduce the term "boilerplate shock" to describe the potential for standardized contract terms—when they come to govern the entire market for a given security—to transform an isolated default on a single contract into a threat to the market of which it is a part, and, possibly, to the economy in general. My larger objective here is to foster a discussion of the potential for securities law and private-sector securities lawyers to manage (or alternatively, to contribute to) systemic risk.
I've posted an abstract below and will be returning to the subject. I look forward your comments.
Permalink | Comparative Law, Contracts, Economics, Europe, European Union, Finance, Financial Crisis, Financial Institutions, Globalization/Trade, Law & Economics, Legal Scholarship, Securities, SSRN | Comments (0) | TrackBack (0) | Bookmark
Bringing Numbers into Basic and Advanced Business Associations Courses:
How and Why to Teach Accounting, Finance, and Tax
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014). The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeffrey M. Lipshaw, Associate Professor, Suffolk University Law School firstname.lastname@example.org (617-305-1657).
With a hat tip to Corp Counsel, this story about Milton Webster, board member of the Chinese firm AgFeed, who blew the whistle on his company, is really unique. He was a member of the audit committee! He thought that a name brand law firm was more conflicted than solution-oriented! He resigned, and then went to the authorities (or, at least, the paintiffs)! I don't think I've ever heard of a member of the firm's audit committee dropping a dime on the firm he directs. You'll want to read this probe by Francine McKenna, but here's the Bloomberg long read as well.
Before returning to the legal boundaries of monetary policy, I wanted to briefly highlight some interesting contract and regulatory issues lurking just beneath the surface of an unusual Kansas state court order declaring a sperm donor to be the legal father of a child, against the wishes of all persons involved.
In 2009, a Topeka man answered a Craigslist ad soliciting sperm donations. The ad was placed by a lesbian couple, Jennifer Schreiner and Angela Bauer. The man supplied a donation. Schreiner became pregnant and delivered a baby. Schreiner began receiving Kansas welfare benefits for the child. Seeking child support payments, the state sued the sperm donor to establish paternity. The state argued that the donor—who lacks any relationship with the child or the couple (now estranged) beyond supplying the donation—was the child’s legal father, and therefore must pay child support.
This is where the case gets interesting as a matter of private ordering and trade regulation.
Prior to the donation, all persons involved—the donor and both members of the couple—signed a non-paternity agreement in which the donor waived his parental rights and was released from his parental obligations.
Both mothers opposed the state’s campaign to declare the donor the child's legal father.
Nevertheless, the court granted the state’s paternity petition, which means it can now seek to compel the donor to provide child support. The paternity finding also appears to give the donor a good shot at asserting parental rights (though he seems unlikely to try).
Justifying its decision to ignore the wishes of both parents and the donor, the court intoned:
A parent may not terminate parental rights by contract, however, even when the parties have consented.
Well, maybe this case is a morality tale about those who would seek a father for their child on Craigslist. A warning from a heartland state to those who would selfishly try to contract around their sacred parental obligations. A sign that courts place the welfare of the child above all else. Right?
Haha, of course not!
Kansas law makes it easy to conclusively terminate the parental rights and obligations of sperm donors by contract. Care to guess what you need to do, besides sign a contract?
Over at DealBook, I’ve got a piece on the analysis of FOMC transcripts – a cottage industry, now that the Bernanke era version of the committee has released its 2008 (that is, depth of the crisis) records. There’s lots of counting that can be done, including some, in honor of Jay Wexler’s Supreme Court study, on the number of times the FOMC broke into laughter. Easy enough to actually do for the Greenspan FOMC, and so I do it:
For what it is worth, the mood lightened as the chairman aged, although the F.O.M.C. certainly went through turbulent times during both the beginning and the end of Mr. Greenspan’s tenure. Meeting transcribers recorded laughter on a per-transcript-page basis increasing from an average of less than 20 percent from 1988 to 1992 to more than 20 percent from 2001 to 2006. In a few years, we will be able to make comparable statements about the F.O.M.C. when Ben S. Bernanke was the Fed chairman. Mr. Greenspan used wit far more than any other single Fed official (although he spoke far more at F.O.M.C. meetings than the others did) – laughter ensued after something he said 556 times over the course of his tenure.
Do give it a look.
Late last month I posted my colleague Mehrsa Baradaran's thoughts on the US Postal Service moving into banking. She'd written an article on the subject 2 years ago, and the US Postal Service seemed to be warming up to the idea. Since then, Mehrsa has written a NYT op-ed on the subject and, most recently, has a short piece up in the Harvard Law Review Online Forum: It's Time for Postal Banking.
From the introduction:
... government support and even subsidies to enable postal banking in the United States are appropriate and justifiable. First, banking-related subsidies are grounded in historical practice, as demonstrated by government support for credit unions, savings and loans, and student loan associations. Postal banking derives from these longstanding practices, but broadens the scope to include the poor, not just the middle class. Further, state support of banking throughout U.S. history has operated much like a social contract: the state supports the banking system in a variety of ways and, in return, banks serve as credit intermediaries, providing the populace with access to loans and financial services. Thus, subsidies for banking have been justified because they provide a benefit to all citizens. Mainstream banks have met part of their obligation, but a large portion of the population, namely the poor, has been left out. It is time, then, for the government itself to meet the demand for credit.
Go read the whole thing!
The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .
Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.
The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:
For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).
Permalink | Businesses of Note, Crime and Criminal Law, Current Affairs, Economics, Entrepreneurs, Entrepreneurship, Finance, Financial Institutions, Innovation, Internet, Investing, Securities, Technology | Comments (2) | TrackBack (0) | Bookmark
Below you'll see the first of what I suspect will be many interesting posts from guest blogger Greg Shill. Do welcome him.
And here you'll see a neat graphic of the money that the big American banks are agreeing to pay to settle their financial crisis suits; the tl;dr is poor Bank of America! Here's USC's worthy effort to track all the settlements.
Greetings, Glommers! (and hello, Janet and Mario*!)
It’s an honor to join this extremely sharp and thoughtful community of corporate and commercial law scholars for the next two weeks. The Conglomerate has long been one of my favorite law blogs and it’s truly a privilege to walk among these folks for a time (if a bit daunting to follow not just them but Urska Velikonja and her excellent guest posts). Thanks to Gordon, David, and their Glom partners for inviting me to contribute.
By way of biographical introduction, I’m currently a Visiting Assistant Professor at the University of Denver Sturm College of Law, where I teach International Business Transactions and International Commercial Arbitration. Last year, I did a VAP at Hofstra Law School (and taught Bus Orgs and Contracts). I am on the tenure-track market this year.
In the next few weeks, I’ll be exploring a number of issues related to law and global finance. I have a particular interest in currencies and monetary law, or the law governing monetary policy. Two of my current projects (on which more soon) address legal aspects of critical macroeconomic policy questions that have emerged since 2008: U.S. monetary policy and the Eurozone sovereign debt crisis.
Without further ado, I will take a page from Urska and kick off my residency here with a somewhat meta question: should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?
Permalink | Administrative Law, Comparative Law, Economics, European Union, Finance, Financial Crisis, Financial Institutions, Globalization/Trade, Law & Economics, Legal Scholarship | Comments (5) | TrackBack (0) | Bookmark
I have thoroughly enjoyed my brieft stint on The Conglomerate and I look forward to many fun future exchanges. I have a lot more to say about fair funds and securities enforcement, but my time is up. In case you are interested in learning more about the SEC's compensation effort, I have posted my paper "Public Compensation for Private Harm: Evidence from the SEC's Fair Fund Distributions" on SSRN. I welcome any and all comments. Thank you all.
Travel last week kept me from blogging about the death of Mike Dooley (see here for tributes from Steve Bainbridge, Henry Manne and Gordon). I wasn't lucky enough to take a class with Mike while at Virginia Law, but he was a valued supporter of mine and, I know, of many other Virginia grads in academia, both within and outside of corporate law. In every one of our interactions he was generous, warm, and thoughtful, always asking after my family as well as my professional life.
A Virginia gentleman in the finest sense of the word, he will be missed.
One of the most interesting findings in my study of the SEC's fair fund distributions is the surprisingly limited overlap between fair fund distributions and class action settlements. Class actions overwhelmingly compensate investors for accounting fraud (more than 60% of settlements and 90% of settlement dollars). By contrast, a large majority of fair fund distributions by number and by amount compensate investors for misconduct that can best be described as consumer fraud or anticompetitive behavior by financial intermediaries. For example, fair funds have compensated investors for interest rate fixing, undisclosed fees and false advertising, collusive arrangements between broker-dealers and investment advisors, bribing brokers for selling overpriced investment products to municipalities, market timing and late trading, and cherry picking.
Class actions are filed in 65.4% of cases in which the SEC established a fair fund, and settle for non-zero monetary damages in 45.6% of cases (104 of 228). Fair funds without parallel private lawsuits are smaller on average than those with parallel litigation: the mean fair fund without a parallel lawsuit distributed $11.1 million ($2.5 million median), compared with a mean of $60.7 million for all fair funds ($17.0 million median). These fair funds tend to be smaller, predominantly against individual defendants, sanctioning insider trading, market manipulation, and certain broker-dealer and investment advisor violations (e.g., failure to supervise). The common element in these cases is that it is not cost-effective for private litigants to bring a lawsuit.
By contrast, 149 fair fund distributions were accompanied by a parallel class action. Of those, 104 settled for non-zero monetary damages, 31 were dismissed, and the remainder settled for non-monetary relief or are still ongoing.
In cases where investors receive compensation from both, a fair fund and a class action, the average share of total compensation that comes from the fair fund is 41.1% (median 33.4%). (In all other fair fund cases, investors receive all of their compensation from the fair fund.) But the aggregate numbers conceal real diversity in the underlying cases. A parallel class action was filed in 68 of 69 accounting fraud fair funds, and, of those, 59 settled for the aggregate $35.4 billion, while 6 were dismissed and the rest are still ongoing. In comparison, all accounting fraud fair funds combined distributed $6.3 billion.
By contrast, parallel private litigation is less likely to be filed and to prevail in all other categories of securities violations: 79 of 157 such fair funds were accompanied by private litigation and only 45 yielded monetary damages. For example, 2 of 15 insider trading fair funds were accompanied by private litigation, and both class actions were dismissed; 7 of 19 securities offering cases were accompanied by private litigation and 4 prevailed, settling for the aggregate $416 million (whereas fair funds in securities offering cases distributed $1.45 billion).
As the table illustrates, when it comes to enforcement and compensation, there are really two types of securities violations: accounting fraud and everything else. The SEC's contribution to investor compensation is small in accounting fraud cases, 15.5% of aggregate recoveries. By contrast, in all other cases, private litigation fails as a means of compensation. Small potential damages reduce the economic incentive to file a class action for these securities violations. More importantly, filed class actions that do not allege accounting fraud are much more likely to be dismissed, even though the allegations of misconduct are no less serious (as the SEC's enforcement actions indicate). As a result, the SEC's enforcement is now the dominant source of deterrence as well as compensation for securities violations, except for issuer reporting and disclosure violations.
Although the SEC has created 236 fair funds, there is one that hogged all of the attention: the WorldCom fair fund. WorldCom filed for bankruptcy protection soon after it revealed a massive accounting fraud back in 2002. The SEC fined the company $2.25 billion and collected, as an unsecured creditor, $750 million from the bankruptcy estate. It then distributed that amount to harmed shareholders through a fair fund. In effect, WorldCom's unsecured creditors ended up compensating its shareholders, turning bankruptcy priority upside down.
How could this happen? The Bankruptcy Code subordinates shareholders' claims for damages related to securities fraud to claims by the debtor's unsecured creditors. Because bankrupt firms are, by definition, insolvent, the Code effectively precludes equity holders with securities fraud claims from collecting anything from the bankrupt company. As a result, securities class actions against bankrupt companies are ordinarily dismissed. The automatic stay does not preclude the SEC from pursuing an enforcement action agains the bankrupt firm, but stops the SEC from collecting any money judgment. The SEC's claim for civil fine and disgorgement is treated as an unsecured creditor claim and is distributed pro rata, along with other unsecured creditors. However, the Bankruptcy Code does not preclude the SEC from distributing monetary sanctions collected from the bankrupt company to defrauded shareholders. The ultimate result is that unsecured creditors recover less in bankruptcy, while shareholders receive more than they would without the fair fund provision.
This result upset many, in particular since bankruptcy filings are not uncommon among companies subject to enforcement proceedings for securities violations. But as it turns out, WorldCom is the exception, not the rule for fair fund distributions. 31 companies that were primary defendants in my fair funds study filed for bankruptcy within 2 years of the SEC's enforcement action. Of those, 16 were in accounting fraud cases where priority conflicts between creditors and shareholders are particularly likely (others were unregistered offerings of securities, where defrauded investors are the creditors). The SEC imposed a monetary penalty against the company and distributed it to defrauded shareholders through a fair fund in only 2 such cases: WorldCom and Nortel Networks. All other bankrupt companies either paid nothing to settle with the SEC or the SEC did not even initiate an enforcement action against them. Nortel paid $35 million to the SEC 14 months before it filed for bankruptcy. While its payment may have reduced unsecured creditors' ultimate recoveries, it did so far less directly than in WorldCom.
Instead of targeting companies, the SEC targeted individual defendants, auditors and investment banks when the primary defendant was bankrupt. It collected $280 million from individuals and $492 million from secondary defendants, and distributed these amounts to shareholders through a fair fund. While the WorldCom fair fund cast a dark shadow over the SEC's distribution efforts, it is the exception, not the rule. It also demonstrates the relative flexibility of public securities enforcement compared with private securities litigation.