One of the reason that bank capital regulation became an international affair was to ensure a regulatory "level playing field," which would be paired with market access to the US and UK. That is, as long as the rest of the world complied with the Anglo-American vision of capital requirements, access to London and New York would be assured.
But as former law professor and current Fed Board member Daniel Tarullo will testify to Congress today, as those global (call them "BCBS") rules have become more elaborate and comprehensive, some countries have elected to depart from them - only upwards, not downwards. Switzerland is trying to use very, very heightened capital requirements to shrink its universal banks into asset managers. And now the United States is enacting global rules with its own pluses. For example, the liquidity coverage ratio, which requires banks to keep a certain percentage of their assets in cash-like instruments,
is based on a liquidity standard agreed to by the BCBS but is more stringent than the BCBS standard in several areas, including the range of assets that qualify as high-quality liquid assets and the assumed rate of outflows for certain kinds of funding. In addition, the rule's transition period is shorter than that in the BCBS standard.
The Fed is also imposing an extra capital requirement on the largest American banks:
This enhanced supplementary leverage ratio, which will be effective in January 2018, requires U.S. GSIBs [very large banks] to maintain a tier 1 capital buffer of at least 2 percent above the minimum Basel III supplementary leverage ratio of 3 percent, for a total of 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments
And another such requirement based on the amount of risk-based capital,
will strengthen the BCBS framework in two important respects. First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding.
I think of the global efforts in financial regulation as being notable precisely because they created, incredibly informally, some reasonably specific and consistently observed rules that comprise most of the policy action around big bank safety and soundness. The little new trend towards harmonization plus is a bit comparable to the trade law decision to create the WTO for global rules, but to permit regional compacts like NAFTA and the EU to create even freer trade mini-zones. Some find this multi-speed approach to be inefficient and, ultimately, costly to the effort to create a consistent global program. We'll see if the Basel plus approach rachets up bank regulation, or just disunifies it.
The school that go me my start in teaching is advertising for someone to join the BA level B school in business law. Because I think this announcement revises one published earlier, I'll leave it after the jump, for those interested.
The guilty verdict for Virginia ex-governor Bob McDonnell on charges of public corruption is a major headline of today. I've been thinking a lot about corruption for the past few months, so here are a few thoughts:
-Corruption is in the eye of the beholder. My Essay turns on the proximity of time of two donations and legislative action. In the most notable case, a member of the House introduced a bill the day after receiving a $1000 donation. Readers' reactions to the story fall into two distinct camps. One: OMG! I can't believe that! Two: So what? Why does that necessarily mean there's corruption? In answer I say:
-Timing does matter. From the WaPo:
[Prosecutors] backed up his story by using other evidence to weave a strong circumstantial case that an agreement had been reached between the businessman and the first couple based on the close timing of Williams’s gifts and loans and efforts by the McDonnells to assist Williams and his company.
In one instance, McDonnell directed a subordinate to meet with Williams on the same night he returned from a free vacation at his lake house. In another, six minutes after e-mailing Williams about a loan, McDonnell e-mailed an aide about studies Williams wanted conducted on his product at public universities.
-definitions are the name of the game. The Supreme Court's 2014 McCutcheon decision narrowed the definition of corruption to only cases of quid pro quo corruption--cases where there's an actual exchange. The McDonnell defense apparently conceded that there was an exchange, but contested whether the quo in question--events at the governor's mansion, setting up meetings for the donor--counted as "official acts." This is a broad definition.
-Corporations are always going to participate in political life. We expect them to lobby for positions favorable to their firms. See here for a recent WSJ article on disclosure of political spending, with quotations from some sterling law professors, including friends-of-Glom Mike Guttentag and Steve Bainbridge, who quite rightly observes that the risk is that managers spend the corporation's money "on their own preferences, as opposed to what's good for the company."
-So in corporate governance terms the question is how to sort the "good" spending that is for the benefit of the company from the "bad" spending that is driven by idiosyncratic managerial preference and doesn't do the corporation any good. But in political governance terms, the question is how to regulate even "good" corporate spending that we find to be corrupting. I at least don't have a good idea of how to draw that line. The Court says trading donations for access is fine, and so are donations that secure a candidate's gratitude. My hunch is a lot of people might call those corruption. But corporations need to be able to explain to candidates how the government's rules and regulations affect their business. I'm certainly not confident that the average politician knows much of anything about any particular issue.
So where does that leave me? Still wondering about corruption, and eager to get back to corporate and securities law, that's where!
Larry's book on Berkshire Beyond Buffett is due in a month, and we'll be reading it on the Glom. Here's a taste, prepared by Larry, and if you follow the link, you can see a full chapter of the book.
Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.
Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.
Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.
There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.
Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.
The more important—and more difficult—question is the price of autonomy. Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs:
We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.
Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock.
(The above is an excerpt from Chapter 8, Autonomy, from Lawrence Cunningham’s upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free here.)
[To read the full chapter, which can be downloaded for free, click here and hit download]
So, I guess the Illinois law faculty was just waiting for me to leave to start a blog! Congratulations on their new arrival, which promises to be very interesting and informative. The first post I read was definitely link-worthy. My friend and former colleague Rob Kar writes on another Urbana-Champaign development that I am out-of-the-loop regarding: the non-hiring of Steven Salaita. The Salaita affair has drawn a lot of writing from First Amendment/Academic Freedom quarters, but Rob analyzes it from a contract law perspective. Good reading!
Please don't think me a hypocrite, but despite being a proud, dyed-in-the-wool corporate type, I have penned a con law piece. In my defense, I came up on the story honestly, while doing empirical work in securities. And it's just an essay! Hopefully it won't cost me too much in corporate street cred.
Here's the abstract:
The Supreme Court recently held that campaign contributions under $5200 do not create a “cognizable risk of corruption.” It was wrong. This Essay describes a nexus of timely contributions and special-interest legislation. In the most noteworthy case, a CEO made a first-time $1000 donation to a member of Congress. The next day that representative introduced a securities bill tailored to the interests of the CEO’s firm.
Armed with this real-world account of how small-dollar campaign contributions coincided with favorable legislative action, the Essay reads McCutcheon v. Federal Election Commission with a critical eye. In McCutcheon the Supreme Court assumed that small-dollar donations do not pose a risk of corruption, and accordingly struck down aggregate contribution limits on the theory that the base limit of $5200 provides enough of a bulwark against corruption. This Essay suggests otherwise. The fact that the price of corruption is lower than commonly understood has fundamental repercussions for campaign finance law.
Tell me what you think!
Last month when Crumbs, America's first public cupcake company, announced it was closing most of its stores after its stock was delisted by Nasdaq, and it had defaluted on some $14.3 million in financing, many viewed the annoucement as a sign that the cupcake industry bubble had finally burst.
In the past decade, cupcakes appeared as if they were taking over with businesses sprouting up everywhere. Not only had cupcakes come to replace traditional cakes at weddings and birthday parties, but people were willing to stand in ridiculously long lines and pay sometimes as much as $5 for a single cupcake or between $30 and $50 for a dozen. A 2012 story on Georgetown Cupcakes in DC suggested that sometimes the lines could take up to an hour to get through.
Some view the apparent demise of Crumbs as a sign that the cupcake craze was a trend that had finally run its course. Or put differently, an unsustainable business model. In addition to concerns about potential market saturation and over exposure, some indicated that pricing was a problem. Indeed, while cupcakes were touted as an "affordable luxury," some note that at $3.50-$6 each, cupcakes seemed more like an overpriced snack. As this article suggests, these cupcakes were not something middle America could afford. Another problem was low cost of entry--potentially reflected in the many people who thought they could give the cupcake business a try. Still another was diversity--could an industry based on a single food really survive with competitors that offered more than just cupcakes? And then there was the problem of potentially swimming against the health trend. Cupcakes seem like a healthier option than your large slice of cake or pie, but alas as a Forbes article points out "your typical large frosted premium cupcake can have as much as 500 calories," and lots of people eat more than just one.
And even the Crumbs story is not over. Just this week it was annouced that Crumbs would begin reopening it stores because, as the Wall Street Journal notes, a court signed off on a sale of Crumbs to "self-styled turnaround guru Marcus Lemonis and Dippin Dots owner Fischer Enterprises." Apparently, part of the turnaround strategy will be moving away from reliance on just cupcakes and incorporating other desserts.
So while the cupcake bubble has certainly gotten smaller, it may be too soon to tell if we can really call the cupcake craze a bust.
It is that time again! Time for appointments committees, FAR forms, and the AALS hiring conference! If you are going to be on the candidate end of those things this year, or (even better) going to be a candidate next year (or so), then you should definitely make an effort to attend the 2014 Aspiring Law Professors Conference at the Sandra Day O'Connor School of Law at Arizona State University on Saturday, September 27, 2014.
I am being completely honest in saying that this conference has to be the most useful eight hours that you will spend if you are interested in going into law teaching. Whether you are in practice trying to decide whether to wade into academic waters or a VAP or fellow poised to pounce on the hiring conference in October, this conference is well worth your time and plane ticket. (There is no registration fee.) I was honored to be a speaker last year and came away believing that I had never added so much value at any conference before.
What do you get if you go? You get a few presentations and panels, but you also get one-on-one attention in a mock interview and/or mock job talk. Now, I know that at a lot of fellowships/VAP programs, you get mock interviews and mock job talks, but not everyone has that opportunity. And, it's a different feeling when you are having those mock experiences with strangers -- appointments veterans and even deans of other law schools.
So, first let me tell you my agenda. I try to frequent non-animated PG-rated films as much as possible. Why? So they will keep them coming. I like movies that aren't necessarily kids' movies, but are family-friendly. So, we saw The Secret Life of Walter Mitty, Million-Dollar Arm, and now The Hundred-Foot Journey.
Our whole family went, and I have to say we all enjoyed it very much. The movie did make us very, very hungry, and when we left we all had a huge desire to visit the French countryside. So, be warned. The plot is fun: family from Mumbai, India leaves the country after popular restaurant destroyed by political protestors. After stopping for awhile in London, the patriarch leads the family into France and decides to start a restaurant in a picturesque village they find when the brakes on their van malfunction. But, their new restaurant is across the road from a one-star Michelin restaurant, which serves traditional French cuisine. Hilarity ensues. Prejudice and jealousy melts into friendship and affection. And there is Helen Mirren.
Our hero is Hassan, the handsome and brilliantly talented son whose concoctions vault the family restaurant to local fame. Madame Mallory is the owner of the fancy restaurant who tries to hate him. Marguerite is the cute sous chef who also tries to hate him. Neither female succeeds. Try not to think how the plot is a little similar to Ratatouille. Just enjoy the pleasant ride that is a feast for the eyes, but unfortunately not for the tastebuds due to limitations on film. If only the movie could be showed while you enjoyed a great Indian-French fusion meal!
Joe Nocera thinks that the new SEC whistleblower program is a winner, as it is rewarding people who go first to the firm, and only then to the agency, and the promise of a payday.
The Dodd-Frank law has provisions intended to protect whistle-blowers from retaliation, but there are certain aspects of being a whistle-blower that it can’t do anything about. “People started treating me like a leper,” recalls Lloyd. “They would see me coming and turn around and walk in the other direction.” Convinced that the company was laying the groundwork to fire him, he quit in April 2011, a move that cost him both clients and money. (Lloyd has since found employment with another financial institution. For its part, MassMutual says only that “we are pleased to have resolved this matter with the S.E.C.”)
In November 2012, MassMutual agreed to pay a $1.6 million fine; Lloyd’s $400,000 award is 25 percent of that. It was a slap on the wrist, but more important, the company agreed to lift the cap. This will cost MassMutual a lot more, but it will protect the investors who put their money — and their retirement hopes — on MassMutual’s guarantees. Thanks to Lloyd, the company has fixed the defect without a single investor losing a penny.
Could be. The most difficult cases of this kind are those posed by lawyers or compliance officers who go outside their firm, rather than staying within it, when they raise questions. That's something that seems to be happening at Vanguard right now, and Dave McGowan thinks such disclosures should be okay. Disclosing private documents more broadly, he feels, looks more like theft:
a former in-house lawyer who has filed a complaint in NY alleging Vanguard has underpaid federal taxes. Vanguard is reported to accuse the lawyer of breaching confidentiality; the lawyer has asked the SEC to intervene on his side.
Such cases may raise two distinct issues: the report itself, which may fall within exceptions to confidentiality in a Model Rules jurisdiction or under the SEC's rules, and backup for the report in the form of information--such as documents either in hard copy or digital form--the reporting lawyer might take from his or her employment. Even if we assume the report is protected the taking of documents raises distinct issues regarding client property.
I tend to think those issues should be resolved as issues regarding the report are resolved--i.e., taking such information does not violate a duty to a client to the extent the information is reasonably necessary to facilitate a permissible report. In essence the report would create a privilege (in the tort law sense) covering the disclosure to enforcement officials or courts; no privilege would attach if the lawyer put the documents up on the internet or mailed them to a reporter.
The question: to con law or not to con law?
The context: Steve Bainbridge responding to Anne Tucker's post on including a Citizens' United/Hobby Lobby discussion in a BA course (see Anne's reply to Steve here). The question is a timely one for me: Georgia Law started classes this week, and I (the rare bird who rotates casebooks because she is easily bored) am happily back teaching from Steve's casebook, co-authored with Klein & Ramseyer, which I highly recommend. I never hand out a syllabus with assigned readings because invariably we move quicker or slower than I anticipate. I have to cut or add material, and I find that students find such midstream changes unsettling. So I don't tell them where we're going til we get there.
But I do have a "working syllabus" I hash out for myself at the semester's opening and tweak as the classes unfold. As Anne and Steve point out, the semester is ridiculously crowded. In 3 credits I cover partnership, corporations, and LLCs, and I cover the MBCA and Delaware corporate code. It's way too much material (as I told my class Wednesday as part of my "drop this class" introductory speech). My working syllabus has material for each of the 42 50-minute classes I'm allotted, and I agonize over the choices I make in filling each one. This year, for the first time ever, my roughed-out working syllabus includes a day for Citizens United/Hobby Lobby.
Why? Steve makes a terrific case for private law, and I am with him. I love teaching BA for BA's sake. Explaining to students the basic puzzle of ownership versus control, the different ways to run the railroad in terms of choice of entity and the tradeoffs among them? Throw in the importance of private ordering and the ability to read a statute, and I'm in heaven. I'm no public law scholar in sheep's clothing. I'm a true believer, proselytizing for the beauty of business law in what sometimes does feel like a con law desert.
But I have got more doctrinal material than I can possibly cover. Throw in a class where I invite in a practitioner, a class for Bill Chandler to talk about whatever the heck it is he wants to, and a review session, and we're talking precious few classes to cover a lot of material.
So why cede a precious class to public law jibber-jabber? I'm still not sure I will. But the reason came to me on a playground, chatting with an English professor mom. We were commiserating over our lack of preparation for the start of the semester (secret: professors procrastinate, too), and she said, "well, it must be nice to teach a subject so interesting to students. Hobby Lobby, Citizens United." She nodded knowingly.
The comment brought me up short. Nobody things corporations are interestng. At least, no one used to. But now they do. And sure it's for the "wrong" reasons--not for coprorate law reasons, but for reasons that deal with corporations' role in society. And I think that might be enough to devote one class out of my 42. Not for Anne's reason, "to “hook” students who didn’t come to my class with an interest in corporate law." I'm confident I can hook them on the merits. But because, as she also says, "Corporate law also matters to general members of society because corporations wield tremendous power in elections, in lobbying (regulatory capture anyone?), in shaping retirement savings, in religious and reproductive rights debates and setting other cultural norms around issues like corruption, sustainability, living wage, etc." It struck me on the playground that the "legal literacy" reason I give for taking Corporations--it's just something that every lawyer should know--may apply here as well. With Hobby Lobby we might have reached the point where corporate law literacy demands a passing understanding of these two cases.
Maybe not. The CU/Hobby Lobby class may well end up on the cutting room floor. But one last thing: as I get older, it is increasingly less clear to me that my students retain much past the exam. What I want them to get out of the class, ultimately, is a basic knowledge of the relevant codes, of the importance of codes, an ability to read statutes, an understanding of the importance of default rules versus mandatory ones, agency costs, the trade-offs in choice of entity, the business judgment rule, and fiduciary duty. Looked at that way, perhaps one public law class out of 42 isn't too much of a sacrifice in terms of coverage.
This week’s Economist has a column praising my UCLAW colleague Stephen Bainbridge’s and University of Chicago law professor Todd Henderson’s creative proposal, published in the Stanford Law Review, to replace individual directors with professional-services firms acting as Board Service Providers (BSPs). (That article can be accessed here.) The column nicely summarizes the possible impact of such a change:
“Messrs Bainbridge and Henderson argue that this would require only a simple legal change but could revolutionise the stick-in-the-mud world of boards. It would replace today’s nod-and-a-wink arrangements with a market in which rival BSPs compete. It would create a new category of professional director. And it would allow BSPs to exploit economies of scale to recruit the best board members, introduce more rigorous training programmes and develop the best proprietary knowledge. Now, even the most diligent board member can only draw on his or her experience. BSPs would be able to draw on the expertise of hundreds. This would increase the chances that corporate incompetence will be corrected, corporate malfeasance found out and corporate self-dealing, in the form of inflated pay, countermanded.”
The BSP idea is very creative. (Frankly, I am always puzzled by the extent to which academics have trouble appreciating creativity. Perhaps—and I’m speculating here—traits such as creativity are weakly correlated with succeeding in the academic tournament—getting high LSAT scores, writing good law school exams, getting judicial clerkships, and placing law review articles?) I also agree that introducing market competition by enabling firms to compete on performance will likely benefit consumers and shareholders, as well as increase the leverage of the board vis-à-vis executive officers.
That said, I worry about uncontrolled expenditures as BSPs find yet another reason to bill the corporation another $250,000 for yet another “critical project.” My prior experience as general counsel of a corporation (plus my six years of practicing law in a law firm) make me skeptical of the incentives of partners within firms (“Bill, bill, bill!”). I worry about the ratio of the value of services to cost. While we may see a decrease in executive compensation as a result of increased board leverage, are we going to see an increase in the effective compensation (i.e., including billings) of the board? My guess is yes.
I also worry about the audit/gatekeeping function of the Board. After all, we have plenty of experience with auditors being firms, rather than individuals. And the record there doesn’t look so hot. Remember Enron and Arthur Andersen? And remember Ted Eisenberg’s and Jonathan Macey’s empirical study suggesting that Andersen was not an outlier but typical? While gatekeeping theory provides that market gatekeepers, such as investment banks and accounting firms, are incentivized to work hard to prevent malfeasance out of fear that their longstanding reputations will be damaged, the reality is that the reputational informational markets are noisy and manipulable. Moreover, the incentives of the firm’s agent – the functional gatekeeper – may diverge from the incentives of the firm. In other words, large firms may suffer from principal-agent problems, as has often been alleged with David Duncan, the lead audit partner responsible for the Enron account at Andersen. (In prior work, I wrote about the incentives of firms vs. individuals for the audit/gatekeeping function.)
But I suppose Henderson and Bainbridge would respond that still, those reputation markets would work better with firms competing with one another than the status quo—little to no competition with respect to individual directors (for various reasons).
Perhaps there’s room for compromise. If you’ve been following the accounting profession, you know that the PCAOB (the body that regulates the accounting of public companies) in an effort to improve the transparency of audits has proposed to require the disclosure of the name of the engagement partner for the most recent period’s audit. Also, it has been suggested that the engagement partner individually sign the audit report. It should not be surprising that accounting firms uniformly dislike these suggestions. This indicates that they are probably good ideas. Perhaps, then, as a means of dealing with the principal-agent problem within BSPs themselves and to ensure that the incentives of the firm’s agents (the persons who actually sit in board meetings) are more properly aligned, similar measures should be taken.
You'd think that the state that's home to the center of American business would take a Delaware-style light touch approach to overseeing it. But instead, the New York paradigm is to take ambitious politiicans, blend with broadly worded supervisory or anti-fraud statutes like the Martin Act, and come up with stuff that, to my ears, sounds almost every time like it is off-base, at least in the details. So:
- Eliot Spitzer pursued research analysts for the sin of sending cynical emails even though they issued buy recommendations, despite that fact that analysts never issue negative recommendations, and if cynical emails are a crime, law professors are the most guilty people in the world.
- I still don't understand what Maurice Greenberg, risk worrier par excellence, did wrong when he was running AIG. I do know that after he was forced out by Spitzer, the firm went credit default swap crazy.
- Maybe there's something to the "you didn't tell your investors that you changed the way you did risk management for your mortgage program" prosecutions, but you'll note that it is not exactly the same thing as "you misrepresented the price and/or quality of the mortgage products you sold" prosecutions, which the state has not pursued.
- Eric Schneiderman's idea that high frequency trading is "insider trading 2.0" is almost self-evidently false, as it is trading done by outsiders.
- Federal regulators wouldn't touch Ben Lawsky's mighty serious claims that HSBC or BNP Paribas were basically enabling terrorist financing.
- And now Lawsky is going after consultants for having the temerity to share a report criticizing the bank that hired them to review its own anti-money laundering practices with the bank, who pushed back on some, but not all of the conclusions.
The easiest way to understand this is to assume that AGs don't get to be governor (and bank supervisors don't get to be AGs) unless people wear handcuffs, and this is all a Rudy Giuliani approach to white collar wrongdoing by a few people who would like to have Rudy Giuliani's career arc.
But another way to look at it is through the dictum that the life of the law is experience, not logic. The details are awfully unconvincing. But these New York officials have also been arguing:
- Having analysts recommending IPO purchases working for the banks structuring the IPO is dodgy.
- HFT is front-running, and that's dodgy.
- This new vogue for bank consulting is dodgy, particularly if it's just supposed to be a way for former bank regulators to pitch current bank regulators on leniency.
- If we can't understand securitization gobbledegook, we can at least force you to employ a burdensome risk management process to have some faith that you, yourself, understand it.
- And I'm not saying I understand the obsession with terrorism financing or what the head of AIG did wrong.
Their approach is the kind of approach that would put a top banker in jail, or at least on the docket, for the fact that banks presided over a securitization bubble in the run-up to the crisis. It's the "we don't like it, it's fishy, don't overthink it, you're going to pay for it, and you'll do so publicly" approach. It's kind of reminiscent of the saints and sinners theory of Delaware corporate governance. And it's my pet theory defending, a little, what otherwise looks like a lot of posturing.
The blogosphere is filled with chatter about the recent decision Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014), in which the Delaware Supreme Court en banc explicitly endorsed the Garner exception to the attorney-client privilege in a Section 220 books-and-records proceeding. But there been less attention showered on Maritza Munich, the general counsel of Walmart International, who resigned. As the court opinion tells us, Munich tried to stop the bribery scandal that was unfolding at the world’s largest retailer. As summed up nicely by Michael Scher of the FCPA Blog (HT to Stephen Bainbridge):
“As head of international compliance, Munich insisted on an investigation of a ‘campaign of bribery’ in Mexico and the top manager who led it. According to ongoing media reports, the top executives of Wal-Mart blocked the investigation. She then ‘resigned,’ while other executives were promoted.
Munich’s career at Wal-Mart was stolen from her. Instead of incentive pay, a bonus, and a stellar career, she lost out on the recognition, respect and financial security she deserved for doing a [compliance officer’s] job when it mattered most.”
I think it is important to circulate stories of lawyers who take ethical stands against those who hold power over them. Although martyrs and whistleblowers are common subjects of films and books, as I’ve argued in prior work and based on a plethora of research in sociology departments and management schools, such acts of courage and integrity are rare. But they do happen and, when we encounter such an instance, we should take a moment and celebrate that person's courage.
Like Lisa, I participated in this excellent discussion group at the SEALS conference co-organized by Joan Heminway. As I told co-organizer and friend-of-Glom Mike Guttentag, for a week I had a Word document open with the titular question at the top. Participants were supposed to submit a 2-3 page paper before the meeting. I totally lamed out. I kept trying to write, but couldn't come up with anything coherent.
I do have an answer to the question, though: Yes, the public/private divide does make sense. But it's gone, daddy, gone.
As I said at the conference, I think I'm essentially a conservative person: I'm resistant to change. And when I learned the world of securities, it seemed to me that there was this Grand Bargain. If you wanted to go public, you got many benefits, most notably a high degree of liquidity and access to public capital markets. But you had to take the bitter with the sweet: mandatory disclosure and increased liability risks. If you stayed private, your equity was far less liquid, and you couldn't make use of general solicitation. Your capital raising was much more circumscribed. But within those limitations you were free to order the firm more or less as you saw fit. Other substantive areas of law of course constrained private firms--environmental law, labor law, etc.--but in terms of corporate and securities law, they were relatively free. I realize this is a simplification, but in broadstrokes I think it's true.
No more. The Grand Bargain is gone. General solicitation for private firms. Conflict minerals rules. Emerging growth companies. Disclosure of executive pay ratios. Private secondary markets. Dodd-Frank, the JOBS Act, and technology have made a hash out of it. Or at least, the line between public and private is blurred.
This blurring makes me uneasy. I feel like there's a disruption in the natural order of things. But I can't tell if that's my innate conservatism talking, or if there really was something we lost with the Grand Bargain.