January 26, 2015
icon The Silenced Connecticut Sex-Abuse Case
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, and five) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within an organization. The 2012 prosecution of Monsignor Lynn for twelve years of transferring predator priests from parish to parish at the command and for the benefit of the Archdiocese of Philadelphia was defeated by the intracorporate conspiracy doctrine. Moreover, this was not the first time that the Roman Catholic Church had used the doctrine to help its bureaucrats escape liability for suppressing sex abuse cases.

In 1997, employees of the Roman Catholic Church in Connecticut were alleged—very much like Lynn—to have covered up the sexual misconduct of a priest, enabling him to continue to abuse children entrusted to the Church’s care by virtue of his office. When sued for civil conspiracy by the victims, the employees’ defense was that they were acting in the best interest of the corporation.

The Connecticut court found that the test for whether an agent is acting within the scope of his duties “is not the wrongful nature of the conspirators’ action but whether the wrongful conduct was performed within the scope of the conspirators’ official duties.” If the wrongful conduct was performed within the scope of the conspirators’ official duties, the effect of applying the intracorporate conspiracy doctrine is to find that there was no conspiracy. Because covering up the priest’s sex abuse was in the best interest of the corporate organization, the court found that the employees were all acting on behalf of the corporation. The court never reached the issue of whether the employees’ actions rose to the level of a civil conspiracy. Under the intracorporate conspiracy doctrine, it was a tautology that no conspiracy could be possible.

This case is interesting not only because it documents the way that the intracorporate conspiracy doctrine protects enterprises from inquiry into conspiracies, but also because of the subsequent history of its allegations. The full extent of the Bridgeport Diocese’s wrongdoings—if current public knowledge is indeed complete—only came to light in December 2009, twelve years after the 1997 case. It took twelve years, the combined resources of four major newspapers, an act displaying public condemnation of the Roman Catholic Church by members of the state legislature, and finally a decision by the U.S. Supreme Court to release the documents that could have become the basis of the intracorporate conspiracy claim in 1997. There is still no conspiracy suit or any criminal charge against the Diocese. Additional details about the case are available in my article The Intracorporate Conspiracy Trap. The article will be published soon in the Cardozo Law Review, and it is available in draft form here.

Astonishingly, none of the extensive news coverage about the sexual abuse cases in Bridgeport over those additional twelve years has connected these facts to the original 1997 case defeated by application of the intracorporate conspiracy doctrine. If the intracorporate conspiracy doctrine had not provided immunity, the case might have revealed the Diocese’s pattern of wrongdoing long beforehand and in a much more efficient way.

My next blogpost reveals additional dangers from the spread of the intracorporate conspiracy doctrine: frustration with the intracorporate conspiracy doctrine has started to distort other areas of law.

Permalink | Agency Law, Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Employees, Finance, Financial Crisis, Financial Institutions, Law & Economics, Law & Entrepreneurship, Law & Society, Management, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Politics, Popular Culture, Roundtable: Corps/B.A., Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 23, 2015
icon How Safe are SAFEs? (Simple Agreements for Future Equity)
Posted by Christine Hurt

So, after swearing never to look at Above the Law again, I ventured over there to see if David Lat had posted an update on the Faruqi trial and found something relevant and interesting without the Judd Apatow feel of most ATL posts.  Here, "guest conversationalist" Zach Abramowitz intereviews Carolynn Levy, long-time Wilson, Sonsini attorney turned Y Combinator partner.  The interview focuses on Levy's contractual innovation, the safe.  (She says it's not capitalized or acronym-ed so that it will one day be a word as commonplace as "note").  However, a safe is a "simple agreement for future equity."  In other words, a convertible security, which founders and angel investors would use for early rounds of funding.  The advantages to a safe over a convertible note seems to be (1) it avoids clunky California lender licensing regulations (that were amended last year, however) and (2) according to Levy, much faster to negotiate than a note because a safe has neither a maturity date or an interest rate.

So, what is it?  According to the "safe primer," the safe is not debt (because no maturity date or interest rate), but it is an instrument that converts to a subset of preferred stock at the first equity round over a minimum valuation.  If there is no equity round, then the safe does not mature but just stays in place.  If the company fails, then the safe has a liquidation preference for the purchase price/principal.  If there is an acquisition liquidity event, then the safe holder has the option of converting to common or getting the purchase price returned.  

Of course, the stickiest wicket is the conversion rate for an equity round.  At the time the safe is executed, the parties will negotiate for a Valuation Cap and/or a Discount Rate, and depending on whether the parties chose one or the option of both, the holder will receive a subset of preferred stock either based on the Valuation Cap if it is lower than the equity round valuation, the equity round valuation if it's lower than the Valuation Cap, or a discount from the share price of the preferred.  Either way, Levy believes that having only one key term in the safe will create an easy negotiation and a six-page instrument.

I searched SSRN for any scholarly treatment of the safe and found this informative paper, Contractual Innovation in Venture Capital by John Coyle (UNC) and Joseph Green (Gunderson Dettmer).  It explains that the California regulation required lenders in venture capital debt to be licensed unless the notes in question had a maturity of no more than a year, requiring founders and angel lenders to renegotiate every 11 months.  In 2014, that limit was raised to 3 years.  In the meantime, however, Y Combinator produced the safe.

From the ATL interview, it seems that many lawyers are unfamiliar with the new convertible security, and others wondered whether it would be treated for tax purposes as debt or equity.  Zero coupon convertible bond?  Valuation Cap is the face value?  I don't have the asnwer for that, but will stay tuned.

I'm also interested in if this could be used for crowdfunding.

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icon How We Should Have Tried Monsignor Lynn
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, and four) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within a business organization. The same legal analysis applies to religious organizations.

We should have been able to charge Monsignor Lynn and the Archdiocese of Philadelphia that directed his actions to hide the sexual abuse by priests with criminal conspiracy. Instead, Pennsylvania charged Lynn with two things: child endangerment and conspiracy with the priests.

As international news outlets later reported, Lynn could not be guilty of child endangerment because the state’s statute could not apply to an administrative church official who did not directly supervise children.

Lynn could not be guilty of conspiracy with the priests because he did not share their “particular criminal intent.” As the jury understood, Lynn was not trying to help a predator priest get from parish to parish so that “he can continue to enjoy what he likes to do.” Lynn was trying to protect the reputation of his employer, the Archdiocese—if the priests benefitted, that was a side issue.

So why didn’t the prosecution charge Lynn and the Archdiocese with conspiracy? It was the Archdiocese that directly coordinated and profited from Lynn’s actions. The intracorporate conspiracy doctrine, as discussed before, would bar that prosecution. In Pennsylvania, it is “well-settled that a corporation cannot conspire with its subsidiary, its agents, or its employees.”

Finally, considering other options, Lynn could not have been charged with possible crimes such as obstruction of justice. Lynn was too good: Lynn and the Archdiocese were so successful at covering up the sexual abuse and silencing victims, there was no ongoing investigation to obstruct. “Aiding and abetting” the Archdiocese’s cover-up of the sex abuse would have been difficult to pursue (see more here) and is not allowed under RICO in the Third Circuit.

My next blogpost will demonstrate that the Monsignor Lynn case was also part of a pattern by the Roman Catholic Church in America to use the intracorporate conspiracy doctrine to hide the coordinated wrongdoing of its agents to cover-up sexual abuse by priests. Fifteen years before prosecutors attempted to try Monsignor Lynn, the silenced Connecticut sex-abuse case showed the Church how effective this defense could be.

Permalink | Agency Law, Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Current Affairs, Economics, Employees, Financial Crisis, Financial Institutions, Law & Economics, Law & Entrepreneurship, Law & Society, Management, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Politics, Popular Culture, Roundtable: Corps/B.A., Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 22, 2015
icon Sex Abuse, Priests, and Corporate Conspiracy
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, and three) introduced the topic of how the intracorporate conspiracy doctrine prevents the prosecution of coordinated wrongdoing by individuals within organizations. This post illustrates the doctrine’s effect in the context of a specific organization—here a religious one: the Roman Catholic Archdiocese of Philadelphia and the systematic transfer of predator priests. This post is based on my article The Intracorporate Conspiracy Trap to be published soon in the Cardozo Law Review. The article is available in draft form here.

For twelve years, from 1992 to 2004, as Secretary for Clergy, Monsignor William Lynn’s job within the Philadelphia Archdiocese was to supervise priests, including the investigation of sex-abuse claims. In 1994, Monsignor Lynn compiled a list of thirty-five “predator” priests within the archdiocese. He compiled the list from secret church files containing hundreds of child sex-abuse complaints. On the stand, Lynn testified that he hoped that the list would help his superiors to address the growing sex-abuse crisis within the Archdiocese. But for twelve years Lynn merely re-assigned suspected priests, and he hid the abuse within the church. His superiors never acted on the list that Lynn gave them—in fact, they ordered all copies of the list destroyed—and Lynn never contacted outside authorities. As late as 2012, one of the “predator” priests on Lynn’s list was still serving in a parish.

All parties agree that Lynn’s actions in transferring priests who molested children allowed those priests to continue to abuse children, sheltered the priests from potential prosecution, and directly protected the Philadelphia Archdiocese’s reputation.

In fact, Lynn’s actions had been ordered by the archbishop on behalf of the Archdiocese. Lynn reported what he was doing to his superiors, who rewarded Lynn with twelve years of employment and a prominent position within the Archdiocese for doing his job as they saw it. Moreover, the archbishop himself inadvertently revealed the existence of the number thirty-five “predator” priests to the media, and he was the one who ordered all copies of the list to be shredded to keep it from being discovered in legal proceedings.

The instinct here is that this behavior—the transferring of predator priests to cover-up the sexual abuse of children—should have been illegal for Monsignor Lynn to pursue. But the Commonwealth could not prosecute Monsignor Lynn and the Archdiocese for conspiracy. Furthermore, immunity for Lynn’s behavior is now the rule in most state and federal jurisdictions around the country. As described in an earlier blogpost, the intracorporate conspiracy doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy.

My next blogpost will further investigate why this behavior was not illegal under our current system, and how we should have tried Monsignor Lynn.

Permalink | Agency Law, Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Financial Crisis, Financial Institutions, Law & Economics, Law & Entrepreneurship, Law & Society, Legal History, Management, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Politics, Religion, Roundtable: Corps/B.A., Social Responsibility, Torts, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 21, 2015
icon Where are the Prosecutions for Corporate Conspiracy?
Posted by Josephine Sandler Nelson

My first and second blogposts introduced why conspiracy prosecutions are particularly important for reaching the coordinated actions of individuals when the elements of wrong-doing may be delegated among members of the group.

So where are the prosecutions for corporate conspiracy??? The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.), no longer applies to most business organizations and their employees. In fact, business organizations working together with outside agents can form new protected “enterprises.

What’s going on here? In this area and many other parts of the law, we are witnessing the power of the intracorporate conspiracy doctrine. This doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. According to the most recent American Law Reports survey, the doctrine “applies to corporations generally, including religious corporations and municipal corporations and other governmental bodies. The doctrine applies to all levels of corporate employees, including a corporation’s officers and directors and owners who are individuals.” Moreover, it now extends from antitrust throughout tort and criminal law.

What is the practical effect of this doctrine? The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents. Obedience to a principal (up to a point) should be rewarded in agency law. But the law should not immunize an agent who acts in the best interest of her employer to commit wrongdoing. Not only does the intracorporate conspiracy doctrine immunize such wrongdoing, but the more closely that an employer orders and supervises the employee’s illegal acts, the more the employer is protected from prosecution as well.

My next blogpost illustrates how the intracorporate conspiracy doctrine operates to defeat prosecutions for coordinated wrongdoing by agents within an organization. Let’s examine the case of Monsignor Lynn.

Permalink | Agency Law, Business Ethics, Business Organizations, Corporate Governance, Corporate Law, Crime and Criminal Law, Economics, Entrepreneurs, Entrepreneurship, Finance, Financial Crisis, Financial Institutions, Law & Economics, Law & Entrepreneurship, Law & Society, Management, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Politics, Popular Culture, Roundtable: Corps/B.A., Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 20, 2015
icon Family Film Blogging: Paddington
Posted by Christine Hurt

Apparently, people love Paddington, especially critics.  Paddington currently has a 98% rating on Rotten Tomatoes.  What else has a 98% rating?  Not much, really.  Here are the top Rotten Tomatoes movies for 2014, and movies with that high a rating are artsy movies you and I will never see because they won't be in a movie theater near us.  Boyhood is 98% -- a movie that took 12 years to make by Richard Linklater is vying with Paddington for top honors.

Why am I so persnickity?  (British movies make me start speaking like Mary Poppins, especially since Ancestry DNA tells me I'm 69% British, more British than the average British citizen.)  I'm not.  It's a cute movie.  One might even say "twee."  But why it is a critical darling is a little beyond me.  Here is one review on Rogerebert.com -- the movie deftly walks the line between old-fashioned and technical wizardry, with some political pro-immigration overlay.  People love this bear.

I do not dislike bears.  One of my favorite movies (and very few people can say this) is The Country Bears, which has a 30% Rotten Tomatoes score, even with a great soundtrack.  Perhaps I don't get the Paddingtonmania because I never read the original books by Michael Bond.  Either way, I will solidly report that the movie was perfectly enjoyable, but not anywhere near recent children's movies hits, such as Big Hero 6.

The movie begins with some magical realism -- a British explorer travels to Darkest Peru (treated as a separate country here) forty years ago, befriending two "civilized" bears, who learned to speak English and conduct themselves as Englishmen using the explorer's books and other paraphrenalia he left with them.  They eventually came to look after their nephew, until an earthquake destroyed their tree-home.  The aunt put Paddington on a steamship as a stowaway to London to find the explorer and then went to the retirement home for bears outside of Lima.  Paddington sails along and gets to Paddington station (for which he is eventually named), living off jars of marmalade he has brought with him.

Paddington is taken home by the Brown family, fairly reluctantly.  Though his aunt told him that the English will of course welcome orphans with notes around their neck, just as English child evacuees were welcomed in the countryside during WWII.  This, predictably, did not happen when our bear landed at Paddington station.  So, our little bear is fairly sad to hear that the Browns will only host him for one night until suitable arrangements with an orphanage can be made.  And no, the Browns do not seem overly surprised to see a bear in the train station, nor do any other humans seem startled by a talking bear.  "Bear" does seem to be a substitute hear for a type of immigrant:  neighbors complain that a bear has moved in but at least it is just one; there is a complaint that a bear might play "jungle music" into the wee hours; the villain plays on this feeling by hinting "it's never just one bear."  

Of course, this is a happy family movie, so fairly soon the Browns plus Paddington are a happy family.  As the housekeeper notes, the family needed Paddington more than Paddington needed them, evoking every type of stray animal movie one could think of.  The movie could end once this small tension was resolved, but there is a larger plot at work:  an evil villain (Nicole Kidman) wants to literally stuff Paddington and make him part of a collection at a natural history museum.  So, the family must join together with Paddington to save the day.  ( I will say that under scrutiny, the larger plot device makes no sense to me.  The villain's origin story dates back to the explorer's return to London, when no one believed that he met two bears who were civilized and stripped him of respectability.  Yet, in present-day London everyone takes for granted that talking bears would be walking around, clothed and articulate, having tea and marmalade-covered toast.)

Of course, Mr. Brown is the most reluctant to accept Paddington (dragging his heels by 10 or 15 minutes more than the rest).  Mr. Brown is also Lord Grantham from Downton Abbey, or Hugh Bonneville as real people call him.  He has a particularly amusing scene in which he must dress as a cleaning woman.  All in all, we spent an enjoyable holiday Monday at the theater with Paddington.

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icon Corporate Conspiracy Charges for the Financial Crisis
Posted by Josephine Sandler Nelson

In my previous blogpost, I granted the merit of defense counsel’s argument that the actions of discrete individual defendants—when the law is not permitted to consider the coordination of those actions—may not satisfy the elements of a prosecutable crime.

But what is the coordination of individuals for a wrongful common purpose? That’s a conspiracy. And, for exactly the reasons that defense counsel articulates, these types of crimes cannot be reached by other forms of prosecution. The U.S. Supreme Court has recognized that conspiracy is its own animal. “[C]ollective criminal agreement—partnership in crime—presents a greater potential threat to the public than individual delicts.” When we consider the degree of coordination necessary to create the financial crisis, we are not talking about a single-defendant mugging in a back alley—we are talking about at least the multi-defendant sophistication of a bank robbery.

Conspiracy prosecutions for the financial crisis have some other important features. First, the statute of limitations would run from the last action of a member of the group, not the first action as would be typical of other prosecutions. This means that many crimes from the financial crisis could still be prosecuted (answering Judge Rakoff’s concern). Second, until whistle-blower protections are improved to the point that employees with conscientious objections to processes can be heard, traditional conspiracy law provides an affirmative defense to individuals who renounce the group conspiracy. By contrast, the lesson Wall Street seems to have learned from the J.P. Morgan case is not to allow employees to put objections into writing. Third, counter to objections that conspiracy prosecutions may be too similar to vicarious liability, prosecutors would have to prove that each member of the conspiracy did share the same common intent to commit wrongdoing. The employee shaking his head “no” while saying yes would not be a willing participant, but many other bankers were freely motivated by profit at the expense of client interest to cooperate with a bank’s program.

My next blogpost will ask: where are the prosecutions for corporate conspiracy?

Permalink | Agency Law, Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Economics, Entrepreneurs, Entrepreneurship, Financial Crisis, Law & Economics, Law & Entrepreneurship, Law & Society, Management, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Politics, Popular Culture, Roundtable: Corp Fin, Roundtable: Corps/B.A., Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

icon Litigating The Financial Crisis, By Moi
Posted by David Zaring

I've written a paper on the judicial history of the financial crisis, and it's now out in the Virginia Law Review, and up on SSRN.  Here's the abstract:

The government’s response to the financial crisis was dramatic, enormous, and unprecedented, and nothing about it has been overseen by the courts. In our federal system, the courts are supposed to put the policies of presidents and congresses to the test of judicial review, to evaluate decisions by the executive to sanction individuals for wrongdoing, and to resolve disputes between private parties. But during and after the financial crisis, there has been almost none of that sort of judicial review of government, few sanctions on the private sector for conduct during the crisis, especially criminal ones, for the courts to scrutinize, and a private dispute process that, while increasingly active, has resulted in settlements, rather than trials or verdicts. This Article tells the story of the marginal role of courts in the financial crisis, evaluates the costs of that role, and provides suggestions to ensure a real, if not all-encompassing, judicial role during the next economic emergency.

Do give it a download, and let me know what you think.  And thanks in advance for supporting us around here - we do like downloads!

Permalink | Administrative Law, Finance, Financial Crisis, Financial Institutions, Securities, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

icon J.P. Morgan’s Witness and the Holes in Corporate Criminal Law
Posted by Josephine Sandler Nelson

It is a pleasure to be guest-blogging here at The Glom for the next two weeks. My name is Josephine Nelson, and I am an advisor for the Center for Entrepreneurial Studies at Stanford’s business school. Coming from a business school, I focus on practical applications at the intersection of corporate law and criminal law. I am interested in how legal rules affect ethical decisions within business organizations. Many thanks to Dave Zaring, Gordon Smith, and the other members of The Glom for allowing me to share some work that I have been doing. For easy reading, my posts will deliberately be short and cumulative.

In this blogpost, I raise the question of what is broken in our system of rules and enforcement that allows employees within business organizations to escape prosecution for ethical misconduct.

Public frustration with the ability of white-collar criminals to escape prosecution has been boiling over. Judge Rakoff of the S.D.N.Y. penned an unusual public op-ed in which he objected that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Professor Garett’s new book documents that, between 2001 and 2012, the U.S. Department of Justice (DOJ) failed to charge any individuals at all for crimes in sixty-five percent of the 255 cases it prosecuted.

Meanwhile, the typical debate over why white-collar criminals are treated so differently than other criminal suspects misses an important dimension to this problem. Yes, the law should provide more support for whistle-blowers. Yes, we should put more resources towards regulation. But also, white-collar defense counsel makes an excellent point that there were no convictions of bankers in the financial crisis for good reason: Prosecutors have been under public pressure to bring cases against executives, but those executives must have individually committed crimes that rise to the level of a triable case.

And why don’t the actions of executives at Bank of America, Citigroup, and J.P. Morgan meet the definition of triable crimes? Let’s look at Alayne Fleischmann’s experience at J.P. Morgan. Fleischmann is the so-called “$9 Billion Witness,” the woman whose testimony was so incriminating that J.P. Morgan paid one of the largest fines in U.S. history to keep her from talking. Fleischmann, a former quality-control officer, describes a process of intimidation to approve poor-quality loans within the bank that included an “edict against e-mails, the sabotaging of the diligence process,… bullying, [and] written warnings that were ignored.” At one point, the pressure from superiors became so ridiculous that a diligence officer caved to a sales executive to approve a batch of loans while shaking his head “no” even while saying yes.

None of those actions in the workplace sounds good, but are they triable crimes??? The selling of mislabeled securities is a crime, but notice how many steps a single person would have to take to reach that standard. Could a prosecutor prove that a single manager had mislabeled those securities, bundled them together, and resold them? Management at the bank delegated onto other people elements of what would have to be proven for a crime to have taken place. So, although cumulatively a crime took place, it may be true that no single executive at the bank committed a triable crime.

How should the incentives have been different? My next blogpost will suggest the return of a traditional solution to penalizing coordinated crimes: conspiracy prosecutions for the financial crisis.

Permalink | Agency Law, Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Current Affairs, Economics, Entrepreneurs, Entrepreneurship, Finance, Financial Crisis, Financial Institutions, Law & Entrepreneurship, Law & Society, Masters: Dodd-Frank, Masters: Dodd-Frank@1, Masters: Exec Comp, Politics, Popular Culture, Roundtable: Banking, Roundtable: Corp Fin, Roundtable: Corps/B.A., Rules & Standards, Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 19, 2015
icon If You Want a Friend in Washington, Call Silicon Valley
Posted by Usha Rodrigues

As I blogged last month, I've been thinking a lot (by which I mean, writing frantically) about the political economy of securities regulation.  One point I'll make in my hopefully-upcoming article is this: securities deregulation doesn't often occur.  We can cite 2 chief instances: the PSLRA and the JOBS Act.  Both were passed with a divided Congress and executive branch.  And both had the backing of Silicon Valley.

Last year we saw Republicans employ a scorched earth strategy, ramming repeal of a Dodd-Frank provision in must-pass Cromnibus legislation.  With their newfound majority status, those rascally Republicans are at it again, as Christine blogged last week.  What's interesting is that the new legislation includes not only paring back Reg S-K, but also including a grace period for change of status for emerging growth companies and implying disclosure requirements for them. Many technology startups take advantage of at least some EGC benefits when going public, so these particular anti-regulatory measures should prove popular in tech circles.

It may be that these bills won't pass, but based on my current research, I'll hazard that financial institutions are making a shrewd move by aligning themselves with traditionally Democratic Silicon Valley.  Uber is a lot more sympathetic to the masses than UBS. 


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icon Welcome, Guest Blogger Josephine Sandler Nelson!
Posted by David Zaring

Josephine comes to us from gigs at Stanford's and Berkeley's business schools; she writes about corporate crime, among other things - papers here.  Welcome Josephine!

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January 16, 2015
icon Trimming Back Dodd-Frank
Posted by Christine Hurt

Glass-Steagall may have lasted only 65 years, but the actual life of the Volcker Rule may be measured in months, if at all.  Several pieces of legislation entitled "A bill to repeal the Dodd-Frank Act" have been introduced in Congress, but one bill has passed the House that seeks to dampen a handful of its provisions, including the rule requiring banks to get rid of its collateralized debt obligation businesses.  (The Promoting Job Creation and Reducing Small Business Burdens Act, H.R. 37).  However, one legislation tracking site gives the bill a 7% chance of passage.  Also, Elizabeth Warren is on the case.

For us boring Securities Regulation professors, the bill also would give the SEC more marching orders (as if they had finished their original Dodd-Frank marching orders).  Specifically, the Bill requires that the SEC:

Not later than the end of the 180-day period beginning on the date of the enactment of this Act, the Securities and Exchange Commission shall take all such actions to revise regulation S–K (17 CFR 229.10 et seq.)—
(1) to further scale or eliminate requirements of regulation S–K, in order to reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material information to investors;
(2) to eliminate provisions of regulation S–K, 2 required for all issuers, that are duplicative, overlapping, outdated, or unnecessary; and
(3) for which the Commission determines that no further study under section 1003 is necessary to determine the efficacy of such revisions to regulation S–K.
STUDY ON MODERNIZATION AND SIMPLIFICATION OF REGULATION S–K. (a) STUDY.—The Securities and Exchange Commission shall carry out a study of the requirements contained in regulation S–K (17 CFR 229.10 et seq.). Such study shall
(1) determine how best to modernize and simplify such requirements in a manner that reduces the costs and burdens on issuers while still providing all material information;
(2) emphasize a company by company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements while preserving completeness and comparability of information across registrants; and
(3) evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.
REPORT.—Not later than the end of the 360-day period beginning on the date of enactment of this Act, theCommission shall issue a report to the Congress containing—
(1) all findings and determinations made in carrying out the study required under subsection (a)
(2) specific and detailed recommendations on modernizing and simplifying the requirements in regulation S–K in a manner that reduces the costs and burdens on companies while still providing all material information; and (3) specific and detailed recommendations on ways to improve the readability and navigability of disclosure documents and to discourage repetition and the disclosure of immaterial information.
RULEMAKING.—Not later than the end of the 360-day period beginning on the date that the report is issued to the Congress under subsection (c), the Commission shall issue a proposed rule to implement the recommendations of the report issued under subsection (c). 

Wouldn't that be awesome? Why hasn't Congress done that before -- told the SEC to make Regulation S-K easier, clearer, shorter, but still as effective? I can't wait to see what happens.

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January 15, 2015
icon The Harvard Shareholder Rights Project v. Professor Grundfest and Commissioner Gallagher
Posted by Christine Hurt

So, I suppose the Glom should mention one of the weirder but more interesting securities fraud issues around these days.  Joseph Grundfest (Stanford) and SEC Commissioner Daniel Gallagher posted a paper on SSRN entitled "Did Harvard Violate Federal Securities Law?  The Campaign Against Classified Boards of Directors."  One could presume that the authors believe the answer to be "yes," or they would not have taken the time to ask the question.  Here is Jonathan Macey's reply to the question and the paper, and his reply is "no."  There has been more volleying back and forth, so here is the summing up of links at Bainbridge (as of today).  Here is a letter from 34 senior law professors at Top 17 law schools in support of Harvard's Shareholder Rights Project.  I was not asked to sign it, but I would have if asked.

Interestingly, many of us who teach Securities Regulation begin with "Materiality."  If so, then this case fits right in.  The thrust of the argument is that the Shareholder Rights Project (SRP) wrote shareholder's proposals for over 100 firms, proposing that each firm declassify its staggered board of directors.  In this proposals, which must not be over 500 words long, the authors of the proposal cite studies that show that staggered boards depress firm value and only one study that supports an opposite conclusion (staggered boards are good).  And, the proposals fail to cite a recent study supporting staggered boards.  This omission constitutes securities fraud.  The counterargument (besides "what the heck?") is that the exclusion of all relevant studies on either side is immaterial, particularly a very recent study that may not have been posted publicly yet or for a short time.  The proposals may have been subject to counter-argument, but that is not the same thing as false or misleading.

So, if you say "see, e.g." is that better?

Stay tuned.

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icon Family Film Blogging (Oscar Edition): The Imitation Game and Big Eyes
Posted by Christine Hurt

So, Oscar nominations came out this morning, on the heel's of Monday night's Golden Globes.  I'll have to admit, I didn't rush out and see a lot of the holiday season movies because the reviews were not very good on any of them (i,.e., Unbroken) and FB friends were also critical (Annie, Into the Woods).  But I have recently seen some movies that got some Oscar and/or Golden Globes love.

The Imitation Game.  I took my 15 year-old girl to see this, mostly because she's in love with Benedict Cumberbatch.  We were not constrained by knowing anything about Alan Turing.  We sort of knew that he was vaguely good at computers before they existed.  That's all. Many reviews have criticized the story's departure from historical truth, both about specific facts and in the portrayal of Turing's personality.  In the movie, Turing is portrayed as someone possibly on the autism spectrum:  his vegetables can't touch, he can't understand simple social situations (he doesn't understand "Hey, we're all going to lunch" as an invitation from co-workers), he doesn't get simple jokes, he is very rude and literal to those around him, etc.  This style creates a fun character just a notch more intelligent/arrogant/unapologetic than Sherlock Holmes and Sheldon form Big Bank Theory.  But, of course that character doesn't hang together -- if you can't get jokes and puns, you can't do crosswords.  But critics say that character doesn't match Turing's personality, who was vibrant, well-traveled, and quite active in gay society.

None of this matters much to me.  My daughter and I thought the movie was perfectly wonderful, if a little slow at times.  I think the story that is told brings you to one point to ponder, which is important.  If Turing had not prematurely died (the movie says he committed suicide, which may not be conclusive), how else would he have saved our world?  And, if Turing died because of his persecution (and prosecution) for being gay, then our bigotry cost us a great mind and untold human advances.  I think this is an important message, and I'm perfectly fine with narrative choices to get us there.  I also enjoyed A Beautiful Mind, even though it did not tell the entirety of Nash's story and took artistic license with parts of it.  As I heard a biographer say once, "biography is not memoir."  

My only quibble with the movie is that the "story within a story" (Turing is supposedly relating the story to a police detective in one sittnig) doesn't quite work with the flashbacks to boarding school.  Is he thinking the flashbacks while he's tellng the story?  While he was living the story?  Is he telling the detective the flashbacks?  Why would he talk to the detective in a non-chronological way, with flashbacks every 15 minutes?

Big Eyes.  This movie was ignored by the Oscars, but Amy Adams (my favorite) won a Golden Globe for best female actor in a Comedy.  Big Eyes isn't a comedy, just in case you didn't know that.  The movie is another biopic, this time about Margaret Keane, a painter and single mom who marries a would-be painter and real estate agent, Walter Keane.  Walter is supposed to be selling "his" paintings (we find out later they are purchased from the real artist) and Margarets, but ends up taking credit for painting hers, which are more popular.  Margaret's "big eye" depictions of waifs in various settings become a national craze, and the pair can't risk their fans' wrath by revealing the truth.  Margaret eventually is no more than an indentured servant of Walter's, painting all day in a studio so that Walter can sell the paintings to the wealthy and facsimiles of the paintings to the masses.  Even when she finally leaves him, she bargains for her freedom by agreeing to keep painting under his name.  Margaret's plight is made even worse by the fact that the lie prevents her from spending time with her daughter (i.e., she can't paint in front of her daughter), having friends over, or even having conversations with others.  A great chunk of her day is secret.

Like The Imitation Game, there are websites where you can fact-check Big Eyes.  Much of it is true, including the showdown scene at the end.  For this movie, I went with my 13 year-old son, who asked to go, and he really enjoyed it.  The movie is directed by Tim Burton, so there are some cartoon-ish camera angles and scenes, but it doesn't get in the way of the movie.  The actor who plays the fiendish yet charismatic Walter is Christoph Waltz, who himself looks like a Rankin-Bass character (think Snow-Miser meets the magician from Frosty the Snowman).  He is eerily believable as the pathological liar, Walter.  I'm sorry that it didn't get a lot of Oscar love, but I would definitely recommend it.

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icon The Law Student Transfer "Problem"
Posted by Christine Hurt

I saw this week at Tax Prof Blog a link to this article about the high numbers of transfer students that George Washington School of Law is accepting from oher schools, namely American University's Washington College of Law.  American's Associate Dean for Faculty and Academic Affairs has some choice words for this practice, which of course stems from the fact that a law school can bring in additional revenue with transfer students, whose LSAT/gpa's might otherwise have been reportable to ABA/USNews if admitted as 1Ls.  Theoretically, a school could shrink the entering class to maintain good stats, then increase transfers to make up the revenue.

One might criticize the practice as rankings gamesmanship, but Dean Varona seems to say the practice is "predatory" and unethical (he praises GW's new dean as being "ethical," so by reverse implication. . . .).  And, transfers obviously create categories of those who benefit, with those who have their best students skimmed off the top each year.  And, some law schools will be both the poached and the poachers.

So, I've had this debate with several of my professor friends at different schools, both the poaching and the poached.  And, of course, we wouldn't even be having this conversation without the USNews rankings.  (Back in the day, transfers were for fiancees and students with transferred spouses).  Even in today's climate, I think I come down on the side of the poached student.

First, I don't agree that ethical law schools have a duty not to take transfers in large numbers.  This comes close to a "gentlemen's agreement," which are usually nonagreements by nongentlemen.  I think there are enough regulatory monopolies at play here without adding more anti-competitive restrictions.  I also don't think students are being disloyal.  If they have performed especially well and have the opportunity to transfer to a school that has more on-campus interviews, networking possibilities, course offerings, and name recognition, then I say so be it.  I say let the market play out.

But, if we don't like this practice, what (legally) should be done?  (Abolishing the rankings being put aside.)  The NCAA has eligibility requirements that limit transfers, but what's a law school without a football team to do?

Feeder Schools could contract with law students.  Presumably, some of these top students are receiving scholarships from their 1L school.  Could that school require an incoming student to agree that, should the student transfer after 1L year for a non-emergency reason, then the student would have to repay the scholarship?  Would that scare off students or not?

Feeder Schools could make it administratively more difficult.  This seems pretty sneaky, but feeder schools could make their first-year curriculum different than recruiting schools so that transferring is hard.  For example, School A could leave off Con law until the second year.  Then, students transferring would be told that they have to take Con law with the first year students.  It might not stop the transfer, but it might give the student pause. I'm sure someone more creative could create a thornier transfer problem.

The ABA could require reporting of transfer students, whose statistics would be included in the statistics of the incoming class the year they transfer.  This would take away the benefit of shifting part of the X Year incoming class into the X+1 Year 2L class.

The ABA could create standards for the number of transfers as a percentage of the class.  I think this one is baloney, but I can imagine others disagreeing.

Of course, all of these suggestions are anti-student -- they restrict the student's decisionmaking on some very important decisions.

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