August 03, 2015
icon A Review Of A Financial Crisis
Posted by David Zaring

Over at the New Rambler Review (which I'm really enjoying), I've got a review of Philip Wallach's legal history of the financial crisis.  The kick-off offers a riff on the crisis:

The government’s response to the financial crisis was an example of messy policymaking that occasioned a happy ending, although not everyone sees it that way. Some are unsure about the ending – they have decried the very modest meting out of punishment that followed the recovery of the economy. Others are unsure that the policymaking was messy – they are likely to think of the government’s response to the financial crisis as an inevitable manifestation of executive preeminence as the doer of last resort, institutionally capable of acting when courts and legislatures cannot.

But I will take a stable economy over a few prison sentences, especially when it is possible that you can’t have both at the same time. And you won’t convince me that the things government officials did during the crisis – last minute deals, concluded late at night and paired with creative reimaginings of underused statutes and regular resorts to Congress for more legislation – was the mark of the smooth progress of an imperial presidency.

Go over there and read the whole thing!

Permalink | Administrative Law, Finance, Financial Crisis, Financial Institutions | Comments (View) | Bookmark

icon Occupational Licensing
Posted by Gordon Smith

The White House recently released an excellent report on occupational licensing. The purported goal of occupational licensing is to improve the quality of services, but the costs of licenses on workers and consumers can be substantial. As noted in the Executive Summary, "There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines." The report recommends alternative forms of occupational regulation, notably certification, to strike a better balance of costs and benefits. Amen!

The new report follows License to Work, a report by the Institute for Justice on the effects of occupational licensing. Most of these licenses (including law) look like protectionism to me, and I am not sure this new report will significantly change the landscape. The report offers a list of "best practices," but in a world of regulatory capture, it would be nice to see governors and legislatures pressing the issue more forcefully.

Permalink | Entrepreneurship | Comments (View) | Bookmark

July 30, 2015
icon Sean Griffith's Deal Tax Clinic
Posted by David Zaring

Fordham's Sean Griffith is putting his motions where his writing is, and taking positions against "deal tax" shareholder settlements.  If you missed it, here's a bit from the Wall Street Journal story on the approach.

Over the past few months, Mr. Griffith says he has bought a small number of shares in about 30 companies following the announcement of a takeover. When the expected shareholder lawsuits are ultimately settled, he plans to use his standing as a shareholder to formally object.

His first salvo came Monday at a Delaware hearing to approve a settlement of litigation over Riverbed Technology Inc.’s sale. Under terms of the settlement, Riverbed, now owned by private-equity firm Thoma Bravo LLC, would pay plaintiffs’ lawyers a $500,000 fee and provide additional details on the buyout process. Riverbed and its new owners also would get immunity from future litigation stemming from the buyout, which closed in April.

Riverbed and Thoma Bravo declined to comment.

Mr. Griffith, who owns 100 shares of Riverbed, said the agreement would enrich plaintiffs’ lawyers while delivering no real benefits to investors, and he asked a judge to reject it.

Matt Levine thinks it is the lord's work.  Bainbridge approves.  And Alison Frankel is interested.  I approve as well - it's nice to see a law professor doing a research based quasi-clinic, and if Sean gets his law students to help out, he'll be following Lucian Bebchuk's very effective model.


Permalink | Legal Scholarship, M&A | Comments (View) | Bookmark

July 29, 2015
icon Peter Conti-Brown on the Fed's Regional Banks
Posted by David Zaring

My colleague Peter Conti-Brown has an op-ed in the Times today regarding the Fed's crazy regional bank system.  A taste:

Congress should let the Board of Governors appoint and remove the 12 Reserve Bank presidents, as they may do with other employees of the board. The 12 regional Feds would then become branch offices of our central bank, continuing to do research and data analysis, while leaving policy making to Washington.

This plan has several benefits. First, the next time the Fed makes an egregious mistake — like failing to predict the meltdown of the housing market — we would know for certain whom to hold accountable. Second, it would allow the Fed to modernize the distribution of the 12 Reserve Banks. There is strong evidence that the cities for the 12 banks were chosen as much for politics as economics. In 2015, do we really need two regional Feds (Kansas City and St. Louis) in Missouri, but only one (San Francisco) west of Texas?

Everything Peter writes about the Fed is worth reading, and this is no exception.  Give it a look here.

Permalink | Administrative Law, Finance, Financial Institutions | Comments (View) | Bookmark

July 28, 2015
icon Shadow Everything
Posted by David Zaring

I was looking at Dan Scwarcz's lastest paper on Shadow Insurance, which is a thing:

Shadow insurance – defined as life insurers’ reinsurance of policies with captive insurers that are not “authorized” reinsurers and do not maintain a rating from a private rating agency – creates important risks to policyholders, the insurance industry, and potentially even the broader financial system. Although the standard state regulatory safeguards help mitigate some of these risks, they leave other hazards of shadow insurance largely unchecked. Even granting that shadow insurance likely helps reduce the cost of insurance associated with the excessive conservatism of some state reserving rules, the practice ultimately undermines insurance markets by impeding accurate risk assessments and tradeoffs by policyholders, regulators, and other market participants.

It's a nice paper, but it made me think we're at peak shadow.  There's Shadow Banking, Shadow Bankruptcy, and there if a firm called Shadow Financial Systems.

Of course, there may be a real world reason for this - shadow institutions are in theory nimbly entering markets that heavily regulated incumbents can't serve well.  This is the regulation is bad story of the growth of shadow finance.

Permalink | Administrative Law, Finance, Financial Institutions | Comments (View) | Bookmark

July 26, 2015
icon Dodd-Frank at Five
Posted by David Zaring
July 24, 2015
icon Gawker And The Substance Procedure Gambit
Posted by David Zaring

A bit of a Friday digression, but it involves the oversight of a publisher by corporate types, so perhaps you'll allow it.  

After Gawker published a lurid story about a medium-at-best profile media executive, and received a great deal of criticism for doing so, the publisher decided to take the post down, over strong criticism from the firm's editorial director.  That director, and Gawker's editor in chief then resigned, and their stated reason for doing so was that, regardless of the quality of the original story, removing it over the objections of editorial violated the church-state separation between the business side and the writers.

I would describe this sort of argument as a procedure based argument, and I've always been convinced by Lawrence Tribe's criticism of process based theories.  He was thinking about con law, but the point is familiar to many lawyers; it's impossible to defend a process without adopting underlying substantive values.  Indeed, the very existence of those values makes a defense of process totally epiphenomenal.  So you can't be, like: our constitutional system of separation of powers is fantastic because of the way it separates powers.  What if it does so in ways that facilitate racial discrimination?  Or disenfranchises people?  Or results in Stalinist levels of business regulation?  It's impossible to defend a process without reference to the outcomes that it facilitates.

And so that's what I don't quite get about the free speech martyrdoms in the Gawker case.  You don't want to generalize from a sample of one, at least not too much, but in my view saying, as many Gawker editors have, that "this story was a mistake, but being told by management to take it down violates our essential freedoms" is at least somewhat incoherent.  Managerial noninterference is a process, and it's a process only worth having if it produces good outcomes. I'm unconvinced that the story illustrates a good outcome.

Permalink | Constitutional Law | Comments (View) | Bookmark

July 20, 2015
icon Hiring Announcement: Georgia Business School
Posted by David Zaring

A very strong legal studies group, and as you all know, Athens is a paradise.  Announcement after the jump:

more ...

Permalink | Law & Society, Legal Scholarship | Comments (View) | Bookmark

July 17, 2015
icon Family Film Blogging: Minions
Posted by Christine Hurt

Years ago at the dawn of my career, someone advised me that there is no reason to write a negative book review.  If that advice holds for movies, I should stop here.

Minions is not a good movie.  For those who read my posts regularly, you'll know that I have a low bar for family films; I can find the good in almost any children's movie.  Not this one.  As my FB friends read today, my status was "Wednesday we got Paul Blart:  Mall Cop 2 from Redbox and thought it was the worst movie ever, until we saw Minions."  

OK, what is good about the movie?  The new characters.  We all know the Despicable Me minions, though I wasn't quite sure about their names.  The three main minions here are Bob, Stuart and Kevin.  But the new characters are great:  Scarlet Overkill (Sondra Bullock) and her husband, Herb (Jon Hamm).  How can you go wrong there?  Also, our minions hitch a ride with a bad-guy family, the Nelsons, voiced by Michael Keaton and Allison Janney.  OK, surely those four are a good "soup starter" for an excellent film, right?  No.  The producers seemed to spend all their money on voice talent and a good soundtrack (Beatles, the musical Hair, Mellow Yellow, etc.) and forgot to buy a script.

The movie starts out fine as an original story of how the minions came to be and how they got to modern times with Gru.  All of their evil bosses die, starting with T-Rex, and so they are continually looking for new villains.  (I didn't know that the minions were immortal, a fact that would seem important to keep consistent.)  In 1968, our brave trio leaves the minions in the cave where they are hiding out, in search of a new boss.  Their travels take them to 1968 New York City, where there are great visual gags, if you were alive and remember 1968.  Judging from the lack of laughs in our theater, I would say the number was 1.  Still, the movie seems ok.  The minions stumble upon an ad for "Villain-Con," and hitchhike there with the Nelsons.  A joke is set up about how wonderful Orlando is, but it is a pre-Disney swamp.  Again, lost on everyone in the audience.  The scenes with Villain-Con are great, and could have taken up more of the movie.  The minions win the temporary favor of the greatest villain of the time, Scarlet Overkill, and go home with her.  Again, the scenes with Scarlet in her house were great and could have taken up more of the movie.  Instead, the movie got so stupid it's hard to write about here.

Scarlet sends the three out on a quest for Queen Elizabeth II's crown.  If they fail, they will be "blown off the face of the earth."  (Again, if they have lived for tens of thousands of years, this is hard to get interested in.)  From here, things could have gone a right way or a wrong way, and the writers chose the superwrong way.  Let's just say that there's a moment where one of the minions (Stuart, maybe) hypnotizes the Tower of London guards into taking off their clothes and dancing to a minion version of the title song in Hair, the musical.  No one else in the theater knew what song that was or why they were taking their clothes off.  I guarantee you no seven year-old did.

I hate to say it, but the minions are the most boring part of the movie.  They are great for comic relief, but like the Ice Age squirrel or the Madagascar penguins, they don't need a whole movie.  If the movie had centered more on Scarlet or the Nelsons, with the minions alongside, then it would have been better.   And, funny bits that children could understand that don't assume a knowledge of the summer of 1968 would have been better.  My seven year-old, after the movie was over said, "We are never seeing that again."  This from the guy who wanted to keep Paul Blart:  Mall Cop 2 an extra day.

Permalink | Film | Comments (View) | Bookmark

icon It's Still Insider Trading If Your Firm Is Working On The Merger
Posted by David Zaring

There's not too much new in the indictment for insider trading of the former partner of Philly firm Fox Rothchild.  The partner didn't work on the deal, but he overheard a conversation between one who was working on the deal and the legal assistant they shared.  And then he traded so unbelievably transparently you can barely believe that he was a lawyer.  He bought shares in his wife's IRA account, and then he bought shares in his own IRA account.  The next day, the merger was announced, the shares went up 80ish percent, and he instantly sold, making $75 grand.  Which doesn't do his wife any favors, in the end.

The SEC’s complaint filed in federal court in Philadelphia names Sudfeld’s wife, Mary Jo Sudfeld, as a relief defendant for the purpose of recovering insider trading profits in her brokerage account through trades conducted by Sudfeld.  The complaint charges Sudfeld with violating antifraud provisions of the federal securities laws and an SEC antifraud rule.  The SEC seeks a permanent injunction and financial penalties against Sudfeld and return of allegedly ill-gotten gains and prejudgment interest from Sudfeld and Mary Jo Sudfeld.

That is insider trading of the most "please, catch me!" variety.  But maybe this guy hasn't head of the duties of quasi-insiders, and thought he was an accidental tippee.


Permalink | Securities, White Collar Crime | Comments (View) | Bookmark

July 14, 2015
icon Marks & Moss: What Makes a Law Student Succeed or Fail? A Longitudinal Study Correlating Law Student Applicant Data and Law School Outcomes
Posted by Christine Hurt

Alexia Brunet Marks and Scott Moss (my former Marquette colleague) have an interesting paper on SSRN this week that was also profiled on the WSJ Law Blog.  "What Makes a Law Student Succeed or Fail?  A Longitudinal Study Correlating Law Student Applicant Data and Law School Outcomes" should be of interest to anyone either applying to law school or admitting students to law school.  The two authors collected seven or eight years of applicant data from the University of Colorado Law School and Case Western Reserve Law School for 1400 enrolled students and matched the applicant data with resulting law school grades to see which application factors had the most predictive power for law school grades.  I was on an admissions committee with Scott Moss for two years, so I was very interested to see whether this study confirmed or disproved some of our heuristics.

Table 3 sums up the findings.  "Positive Predictors" are LSAT, UGPA, LCM (LSAT College Mean), STEM or EAF (economics, accounting or finance) major, post-college career last 4-9 years, being a teacher, and a rising UGPA if the UGPA is not old.  Though the abstract states that the LSAT underperforms compared to conventional wisdom, I think the actual findings resemble what most of us thought about the LSAT:  it predicts first-year grades, but not necessarily cumulative grades.  UGPA does correlate with long-term grades, but it seems like only somewhat better than the LSAT.  This is surprising to me only because I tend to discount UGPA in the era of grade inflation.  The combination of high LSAT/low UGPA has a negative correlation with grades, confirming a gut feeling I have been spouting off for years.  The variable of have a teaching career being positively correlated with law school grades is intriguing, though it seems to match my experiences with the very small number of ex-teachers I have taught.

I will let others pore over the statistical findings.  The authors do a good job of describing the limitations of their data -- grades, not job placement or satisfaction, are used as a proxy for law school "success."  Only matriculants are in the pool, so these are students who may have been chosen despite low UGPAs or LSATs because of other qualities that may not show up in the data -- in other words the pool is selected to succeed.  And of course, the data cannot code for personal qualities such as ambition and drive.  

What is an interesting thought experiment is whether law schools would have changed any admissions practices if Marks and Moss had proven zero correlation or even a negative correlation between LSAT and law school grades.  Given the oppression of the USNWR rankings, which have worked to put undue emphasis on LSAT scores, then other things would have to change before law schools could throw out the LSAT (including changes at the ABA).  

As an aside, having been in admissions meetings with Scott, the most interesting finding is that a disciplinary or criminal record has a negative predictive value equivalent to over a 7 point drop in LSAT.  This is fascinating to me because the applicants who are admitted with disciplinary or criminal records generally are admitted because the infraction is minor, isolated or both.  In other words, most of those applicants are let in under the assumption that their records do not reflect any cause for concern.  Apparently, admissions committees should be paying more attention to random minor-in-possession records than we thought!  Yikes!

Permalink | Law Schools/Lawyering | Comments (View) | Bookmark

July 13, 2015
icon Cost Benefit Analysis at the SEC
Posted by David Zaring

Over at DealBook, I have a piece up on the state of cost-benefit analysis at the SEC.  Inadequacies in the CBA were how the SEC used to lose all its rulemakings in the D.C. Circuit; its latest rulemaking on clawbacks sets the stage for how seriously the agency takes cost-benefit analysis now, and how much it believes that analysis should be quantified.  A taste:

Throughout the cost-benefit analysis, the agency warns that it is “often difficult to separate the costs and benefits,” and that various effects of the rule are “difficult to predict.”

I suspect the agency thinks it doesn’t need to blow the court of appeals away with some numbers to survive, though of course the S.E.C. can do more cost-benefit analysis in the final rule. It does, however, believe that a lengthy consideration of the costs and benefits of a rule should be part and parcel of any proposal.

For those who think that cost-benefit analysis slows the pace of regulation, this may not be good news. Economists might wish that numbers were being appended to the discussion.

But I am happy enough to see rules without numbers. Justifying rules only with regard to their costs and benefits is pretty routine. As routines develop, it may become difficult for regulators and judges to consider new sorts of costs, and unforeseen benefits contained, for example, by the simple expression of what the rule favors and what it discourages.

Go give it a look!

Permalink | Administrative Law, Securities | Comments (View) | Bookmark

July 08, 2015
icon The Definitive Story On Bank Supervision
Posted by David Zaring

Banco Santander's American sub is in trouble.  Big trouble with the government.  Supervisors think it is undercapitalized, doesn't adequately keep track of its money, and is led badly.  The Wall Street Journal put the story about their concerns on A1.

So, what's next?  A takeover?  A fine?  A lawsuit?

The Federal Reserve issued a stinging lecture to Spanish bank Banco Santander SA,faulting the lender’s U.S. unit for failing to meet regulators’ standards on a range of basic business operations.

Oh.  A lecture.  Well that doesn't...

The Fed didn’t fine the bank but reserved the right to do so later and required the bank to write a series of remedial plans.

So a warning or whatever...

the Fed had already scolded Santander for paying an unauthorized dividend earlier in 2014 without the Fed’s required permission.

[Santander CEO] Ms. Botín spoke for 15 minutes by phone with [Fed Governor] Mr. Tarullo on Nov. 10.

She met with him again in Washington on Dec. 10, when they talked privately for an hour

Oh, and meetings.  Still, there have been resignations and promises to change the whole governance structure of the company.  So these talking-tos must have been absolutely hair-raising.  For drama, you really can beat bank supervision, amiright?

Permalink | Administrative Law, Finance, Financial Institutions | Comments (View) | Bookmark

July 07, 2015
icon Mylan's other securities law problem
Posted by Usha Rodrigues

The front page of today's WSJ featured a story about Mylan NV's failure to disclose a potential conflict of interest transaction with Rodney Piatt, its vice chairman, lead independent director, and compensation-committee chief.  On the surface it looks like a classic conflict, and corporate law students and professors alike know that's a big no-no.  As a director, Piatt has a fiduciary duty to look out for the best interests of Mylan--i.e., to pay the least possible amount.  Of course, if he's on the other side of the transaction, human nature is to try to get the most money possible.  Ergo, conflict.  

The WSJ article suggests that failure to disclose the transaction violates a securities law that requires disclosure of related party transactions.  The company says there was no related party transaction because "The day before Mylan announced plans to build the new headquarters, a company managed and partly owned by Mr. Piatt sold a 7-acre site for $1 to an entity owned by a business partner in Southpointe II, according to property records reviewed by The Wall Street Journal. The partner’s firm sold the same land to Mylan for $2.9 million later the same day."  

Yeah, it sounds fishy to me, too.  But according to Mylan, "Mr. Piatt was not a party to either transaction” and “had no direct or indirect material interest in the transactions.” Clearly they're arguing it doesn't count as a related party transaction because Piatt is not a party.  

OK, maybe.  Maybe.  But Mylan might have another securities law problem: its code of ethics, which specifically covers directors (p. 3).  Codes of ethics tend to be broader in scope than related party transactions. Nobody (but me) ever thinks about them, but Sarbanes-Oxley required that ethics codes be disclosed--along with any waivers the board of directors grants directors and senior officers (For you history buffs, this provision was the result of Andy Fastow's related-party transactions with Enron, all blessed by the board via ethics waivers). 

Mylan's has a lengthy section on conflicts of interest.  From the introduction:

We must avoid personal interests that conflict with the interests of Mylan, or that might influence or appear to influence our judgment or actions in performing our duties. The word “appear” is most important. Even where there is no actual conflict of interest, the appearance of such a conflict is damaging because it can undermine trust among personnel and jeopardize the company’s standing with our customers, regulators, shareholders and others. 

It's not clear what Piatt's relationship is to the business partner in Southpointe II to whom he sold the land for a dollar.  But 

Neither you nor any family member(s) may directly or indirectly participate in any business relationship with Mylan, other than your relationship as a director, officer, employee of Mylan, contractor or agent, unless such an arrangement has been approved by the OGC. Executive officers and directors must also obtain approval from the committee regarding such ar- rangements. Any such arrangement that has not been approved by the OGC or the Committee, as applicable, is a violation of the code and is prohibited. 


Except as provided in this code, you are prohibited from acquiring any interest in a company that competes with Mylan or does business with Mylan, such as a vendor, supplier or customer, without the prior written consent of the OGC. Executive officers and members of the board must also obtain approval of the Committee before acquiring any such interest. 

What's supposed to happen if there is the appearance of a conflict? 

If a situation arises in which there is an actual, apparent or potential conflict of interest, you must disclose the matter to the OGC. If required, the OGC will escalate the matter to the Senior Executive Compliance Committee (committee).

If the committee finds that such conflict is not material and does not appear to be of a nature that it would influence the business decisions of those involved, the committee may grant a waiver in its sole discretion. 

At Piatt's level, any such waiver should be disclosed as an 8-K, about which I know a little something.   I didn't see one in December of 2013. 

It's hard to find cases of where companies don't disclose waivers when they should have--you have to ferret out the nondisclosure first.  It looks like the WSJ might have here.

 Update: I forgot, Section 406 covers only the CEO, CFO, and CAO, so Piatt's waiver wouldn't have needed to be disclosed.  He would still need to get one, arguably.  And since the corporation has adopted a code of ethics that purports to apply to its board, if it is not following the required procedures that information would arguably be material.

The thing that gets me about codes of ethics is that they seem largely like empty corporatespeak.  But they all address conflicts of interest.  Conflicts of interest are the one thing that shareholders really might care about--because they're a sign that corporate insiders are really just out to line their pockets at the company's expense.  But nobody seems to take the codes seriously, and so conflicts often get ignored.  Or that's my hunch--I don't know, because aside form the top three financial officers, waivers don't have to be disclosed!

Permalink | Business Ethics, Securities | Comments (View) | Bookmark

icon Felicidades - Co-Deans at UNM!
Posted by Erik Gerding

Congratulations to my former colleagues Alfred Mathewson and Sergio Pareja, who were named co-deans at the University of New Mexico School of Law, my old home.   They will make a great team.  I saw them work wonderfully together in our tight business law group, earning the respect of faculty, students, staff, bench, and bar.  Both started their careers, decades apart, at Holme, Roberts, and Owen in Denver.  Both are skilled tax lawyers and dedicated teachers.  Alfred and Sergio also have considerable experience in administration.  Alfred stepped into be interim head of UNM’s Africana Studies Program, took an active faculty oversight role in UNM Athletics, and has been active in ABA accreditation.  Sergio has been a campus leader and ran a study abroad program.  Alfred and Sergio served as Associate Dean for Academic Affairs.   


Permalink | Law Schools/Lawyering | Comments (View) | Bookmark

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