February 12, 2015
icon Two Obits: Harvey Goldschmid
Posted by David Zaring
icon Financial Regulation: Reflections and Projections
Posted by Usha Rodrigues

I very pleased to announce an upcoming Georgia Law Review symposium on post-crisis financial regulation.

Financial Regulation: Reflections and Projections 

March 20, 2015

Financial regulation is in a state of flux and the relationship between regulators and firms is constantly evolving. This conference will seek to illuminate where we have been and where we are going.  The recent financial crisis provided the initial impetus for reform, but post-crisis regulation has developed in unanticipated ways.

Dennis Lockhart, the President and CEO of the Federal Reserve Bank Atlanta, will be our opening speaker.  Our keynote speaker will be SEC Commissioner Luis Aguilar, who is a Georgia Law alum!

Here's the website, with more information.  Participants include my fellow Glommer Erik Gerding and many Friends-of-Glom.  I hope to see some Glom readers, as well. Athens is lovely in late March...

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February 10, 2015
icon Mitchell on Cunningham On DPAs
Posted by David Zaring

Deferred Prosecution Agreements have been in vogue since the unwarranted death of Arthur Andersen, and over at Jotwell, Larry Mitchell glosses Larry Cunningham's take on what to do about them.  A taste:

DPAs can be useful, he tells us, but only if prosecutors approach the negotiation and structuring of an agreement as a governance problem. Ever since the 1996 Delaware Caremark decision, Delaware law at least formally has required that its corporations structure governance in a manner that discourages unlawful conduct and that makes it detectable when it occurs. Sarbanes-Oxley supplemented this approach with its own regulations. And who better to understand the governance of any particular corporation than its own board and executives? 

Do give it a look!

Permalink | Blogs and Blawgs, Corporate Governance, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

February 09, 2015
icon Suicide By Cop, Filed By A Decent Firm?
Posted by David Zaring

I'll outsource the content to Matt Levine's new email, but you just don't see briefs filed by financial businesses against their regulators like the one Powhatan Capital filed against FERC, abetted by one of Philadelphia's good law firms.

There are sections headed "Dr. Chen’s Trades Were Not 'Wash-like' Or 'Wash-type' -- Whatever The Heck That Means," "The Staff’s Stubborn Reliance On The Unpublished, Non-Precedential Amanat Case Is Just Lame," and "Uttering the Phrase 'Enron' Or 'Death Star' Does Not Magically Transform The Staff’s Investigation." It's like an angry trader's dream of what a legal brief might look like ("This is America"!)

It's really quite amusing - check it out.

Permalink | Administrative Law, Finance | Comments (View) | TrackBack (0) | Bookmark

February 05, 2015
icon Family Film (TV) Blogging: Agents of Shield
Posted by Christine Hurt

The line between television shows and films as a form has been blurred since HBO started making movies and episodic series.  Watching the Golden Globes, I wondered whether the category "television" was now a catch-all for anything that didn't qualify as a feature film.  (Under Academy Award rules, this means over 40 minutes, shown in a particular format at a "commercial movie theater" for the first time to the public for seven consecutive days in L.A. County).  So, any "movie" that appears for the first time on pay cable, subscription cable, Netflix, Amazon, Hulu, etc. is "made-for-television," and any series appearing on similar outlets is also "television."  ABC's Agents of Shield blurs the lines even further by creating a parallel story line for a television series with a subset of the same characters undergoing a parallel story arc in the Marvel Avengers movies (the "Marvel Cinematic Universe").  Impressively, if you watched the series in real time, the events in Captain America Winter Soldier are experienced by the characters in AOS on television the week the movie is released.  That's fairly impressive.

The series premiered in September 2013, and I have to say that our family just missed it.  But recently it appeared on Netflix, and my 13 year-old and I just finished Season 2.  We agree it was worth the binge-watching!  

The series picks up after the events in the movie The Avengers -- the "Battle of New York" has taken place and the Avenger heroes are well-known and action-figured.  The events of Iron Man 3  have also taken place by the first episode, and references to events in Thor:  The Dark World appear somewhat contemporaneously with the events of that movie.  Of course, as we all know, Phil Coulson died in The Avengers, so we need a backstory to explain how he is very much alive.  This backstory will actually become the building block of the master plot of Season 1.  Unfortunately, none of the Avengers know that he is alive, so we will not see any of the six main Marvel superheroes on the show.  Other characters, Maria Hill, Nick Fury, the Asgaardian who loves Thor, and the guy who turns out to be Hydra, show up later.

The basic premise is that because of his service and death, Phil gets a tricked-out super spy plane and a sports car to use to continue S.H.I.E.L.D. operations.  He has a team that includes FitzSimmons (two genius scientists, Fitz and Simmons), a pilot/operations agent (Melinda May, a zen-like warrior), a loner operations agent (Grant Ward), and eventually a computer hacker (Skye, no last name).  They must learn how to work together as a team, blah, blah, blah.  Together, they fight various battles, including an ongoing conflict with a secret organization called Centipede financed by an evil corporation Cybertek.  Centipede is trying to create an army of super soldiers using the serum made famous in Iron Man 3.  Spoilers below.

more ...

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icon Insider Trading By Dad?
Posted by David Zaring

The latest civil fine has been paid by...well, let's go through the chain of information:

  • Company A buys Company B
  • A law firm is retained to facilitate to the transaction
  • A legal assistant at the firm complains to her boyfriend that the merger is resulting in long hours
  • The boyfriend tells his dad about the deal
  • The dad trades

And then the SEC sues and settles.  So you've got quite a trail here.  Insiders didn't trade or tip, but that is what they misappropriation doctrine is for - it imposes duties not to trade on information that belongs to someone else, in this case, I guess, the duty of law firm employees not to reveal confidential information generated as part of the firm's business.  The legal assistant didn't intend trading to occur, the son didn't trade on the information from her, and so the misappropriation appears to be trading "in breach of a duty of trust and confidence owed to his son."  The father son relationship!  It's too bad the son didn't tell this information to his neighbor, or a guy on the street, because then we could see if the duties stretch that far as well.

Permalink | Securities | Comments (View) | TrackBack (0) | Bookmark

February 03, 2015
icon Admissions by Algorithm?
Posted by Christine Hurt

This morning on NPR, I listened to a short report on how people tend to lose trust in computer algorithms much more quickly than we lose trust in humans.  We compare a world of computer mistakes to a false world of zero human mistakes.  For example, if driverless cars get popular and one causes an accident, trust in driverless cars will plummet, even if driver-ful cars cause more accidents.  The report was merely interesting until Steve Inskeep and Shankar Vedantam used a hypothetical example far closer to home:  law school admissions.

INSKEEP: I wonder if there's another factor that comes into play here because you said one other reason that we trust humans is we presume that humans can learn. Aren't we entering a world in which the algorithms themselves will be learning more and more?
VEDANTAM: In fact, I think we've already entered that world, Steve. Algorithms not only learn, but they learn very well. So one of the things that computers are very good at doing is quickly learning how much weight to attach to the different components of a decision. So if you have students applying to law school, the computer might be able to say, here's how much attention you pay to their grades in college, to their LSAT scores, to their recommendation letters. Now, of course, many of us are comfortable with algorithms making decisions for other people. We just don't like it when algorithms make decisions about us.
INSKEEP: (Laughter) Don't make a decision about my law school application.
VEDANTAM: Precisely. Because we think we're unique and special, how can it possibly be that an algorithm can judge us? 

First, I'm very interested in why Vedantam used this example -- does he know of a law school that uses an admissions algorithm?

Second, if Vedantam does know of a law school that uses an admissions algorithm, I'll bet a lot of money that the algorithm isn't weighting and using factors that we believe will predict a student's future success, whether in law school or in the practice of law. I'm willing to bet that the algorithm judges whether the law students will improve/weaken their class profile of USNEWS purposes.

Finally, I wish we did live in the false world that Inskeep and Vedantam believe we live in -- where admissions committees not only are interested in the "whole file" of a candidate and treat them as unique and special and not as numbers, but also the second-best world that Inskeep and Vedantam are predicting -- where committees use algorithms to predict candidate success in the classroom and beyond based on markers and proxies.  I was talking to a physician friend who serves on the admissions committee of his medical school alma mater.  (Can you imagine a law school having practicing attorneys on admissions?)  He said they were not that interested in grades.  He said they looked for "hungry" and proxies for that.  He said his ideal med school candidate was someone who worked 40 hours a week during undergrad.  That sounds like a good world to me.

Permalink | Law Schools/Lawyering | Comments (View) | TrackBack (0) | Bookmark

icon The Alibaba IPO Lawsuit
Posted by Christine Hurt

Kevin LaCroix has all the information on the first securities fraud lawsuit to be filed against Alibaba regarding its sale of ADS on the NYSE in September.  For securities regulation professors, there are a few nice issues here.

Materiality.  The complaint cites two separate "revelations" that appeared in the U.S. in the WSJ on the same day (January 29).  One article reports that the company announced that it had come to an agreement with China's State Administration for Industry and Commerce to strengthen its websites ability to monitor unlawful activity.  In addition, the article noted that the SAIC had met with Alibaba for the first time in July, two months prior to the IPO.  This meeting was not mentioned in the registration materials.  The other article reported disappointing revenue numbers and a decline in profits.  That day, the share price drops about 7%.  Which revelation caused the drop if we believe that a "market test" determines materiality?  What about the "total mix" test?  Would investors have wanted to know about the sit-down meeting?  Aren't the disappointing numbers most likely non-actionable under a forward-looking safe harbor for any contrary statements in the registration materials?

The Difference Between Section 11 and 12 of the Securities Act and Section 10 of the Securities Exchange Act.  The plaintiffs have only brought suit under Section 10, even though the false statements would be in the registration statement.  Kevin hypothesizes that the plaintiffs can't meet the tracing requirements of the Securities Act, but a commenter also points out that those who purchased at the IPO or shortly thereafter bought at a purchase price lower than the market price now, even with the January 29 price drop, so no damages.

Fee-Shifting Provision.  Alibaba has a fee-shifting provision in its (Grand Caymans) charter.  Will the fee-shifting provision hold up in federal court under the Securities Exchange Act?  Does federal securities law (specifically the PSLRA) pre-empt this provision?  We shall see.

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January 31, 2015
icon Pretend you never went to school
Posted by Usha Rodrigues

President Obama's SOTU address was easy to dismiss as standard-issue liberal class-baiting.  But when within the span of a week I see two eminent right-of-center publications headlining class division in America, maybe it's time to take notice. Thursday's WSJ featured front-page article on How a Two-Tier Economy Is Reshaping the U.S. Marketplace.  Basically, the crisis hit everyone, but since 2009 the rich have been getting richer, and they're spending up a storm at Whole Foods and at "luxury retailers" like Neiman Marcus.  Meanwhile, Target, Macy's, J.C. Penny's, and Sears have seen sales slump. Hmm.  I don't shop at Needles Markup, and have a well-worn Target card.  Workers of the world, unite!

More incisive analysis came from this week's Economist, which described America's new aristocracy.  The thesis is that "today’s rich increasingly pass on to their children an asset that cannot be frittered away in a few nights at a casino. It is far more useful than wealth, and invulnerable to inheritance tax. It is brains." 

This charge hits a lot closer to home, and takes me back to my clerkship days.  My judge had 4 clerks.  Quickly the consensus arose among the other 3 that I was the least impressive clerk--by which they meant that my background made my attainment of an prestigious appellate court clerkship something more to be expected than exclaimed over.  Mind you, my parents were academics who made less money--much less money--than the parents of two of my fellow clerks.  But my compatriots vociferously maintained that my parental background, dappled as it was with 2 PhDs, 1 MD, and several MAs, gave me a serious leg up in this particular game.  In the end, I conceded that they were right. 

Where do I stack up in the new aristocracy?  While we may be slumming it at Target with the rest of the common people, we are a two-degree household.  Our children go to public schools, but they're good public schools and my oldest girl is on the Athens Area Girls Math Team (no, I'm not kidding and yes, it's awesome).  I talk  college all the time with my 7 and 4 year old--largely because we live in a college town and drop-offs and pickups involve passing college kids en route to dorm or class.  Given all these things, I'm pretty sure they will have leg up in the academic game.  

This advantage is a problem if we want a "natural aristocracy" of brains and talent--otherwise America's promise of meritocracy becomes a plutocracy or a cerebrocracy.  The Economist recommends leveling the field by improving childcare and early childhood education, funding schools at the state level, encouraging vouchers, having colleges base admissions decisions solely on academic merit, and disclosure of the return college graduates receive on their degrees.  All of these sound like plausible reforms, with a likelihood of being adopted ranging from "maybe" to "unlikely" to "nil."  But it's sure interesting that it's not just the liberal bastions remarking on the gap between the haves and have-lesses in the United States today.

Also, just in case you haven't heard it, this.

Permalink | Education, Wisdom and Virtue | Comments (View) | TrackBack (0) | Bookmark

January 30, 2015
icon Reminder: LEA CFP
Posted by Usha Rodrigues

Remember, February 1 is the deadline for submitting a proposal to the Law and Entrepreneurship Association.  Details follow:

March 21, 2015
University of Georgia School of Law, Athens GA

 The ninth annual meeting of the Law and Entrepreneurship Association (LEA) will occur on March 21, 2015 in Athens, Georgia.  The LEA is a group of legal scholars interested in the topic of entrepreneurship—broadly construed.  Topics have ranged from crowdfunding to electronic contracting to issues of taxation in startups.

Our annual conference is an intimate gathering where each participant is expected to have read and actively engage with all of the pieces under discussion.  We call for papers and proposals relating to the general topic of entrepreneurship and the law.

Proposals should be comprehensive enough to allow the LEA board to evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the meeting. Works in progress, even those at a relatively early stage, are welcome.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. There is no registration fee, but participants must cover their own costs.

To submit a presentation, email Professor Usha Rodrigues at rodrig@uga.edu with a proposal or paper by February 1, 2015. Please title the email “LEA Submission – {Name}.”  For additional information, please email Professor Usha Rodrigues at rodrig@uga.edu.


LEA Board

Robert Bartlett (UC Berkeley School of Law)
Brian Broughman (Indiana University Maurer School of Law)

Victor Fleischer (San Diego University School of Law)

Michelle Harner (University of Maryland Francis King Carey School of Law)

Christine Hurt (BYU School of Law)

Darian Ibrahim (William & Mary School of Law)

Sean O’Connor (University of Washington School of Law)

Usha Rodrigues (University of Georgia School of Law) (President)

Gordon Smith (BYU School of Law)

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icon The Causation Link Between Securitization and Fraud, Used Car Edition
Posted by Christine Hurt

When I practiced in the mid-1990s, I occasionally worked on projects we called "asset securitizations."  We didn't talk about it to our friends or families, because their eyes would glaze over and then they would pass out from boredom.  Because of our client base, our asset securitizations were generally either used car loans from the finance side of large auto companies or franchise loan securitizations from oil and gas companies.  Only when the financial crisis hit did everyone seem to become conversant in asset-backed securities, and the process of wide-spread securitization of mortgages seemed to be at the root of all the mortgage troubles.

The hypothesis is this, and it has some support:  If lenders held their loans, particularly their mortgages, then they would only make good loans.  By having a market to dump loans into, lenders loosen criteria to make more mortgages.  Ignorant bond holders can't buy enough MBS, so lenders loosen criteria even more to meet demand.  Lenders may even engage in fraud or encourage borrowers to engage in fraud.  The Dodd-Frank Act tries to remedy these ills by having regulation at the lender end and the MBS end.  We'll see if it works.

But the NYT this week tells us the securitization evil has spread to used car loans.  Because I'm pretty sure used car loans have been securitized since at least 1993, I don't see this as news.  However, the article suggests that because of less fun in MBS, those investors now have poured their money into used car loan-backed securities (let's say UCBS).  The article doesn't state it's hypothesis, but suggests this is bad because (1) car buyers are defaulting and losing their vehicles and (2) financial players who package UCBS are getting rich.  But, the article doesn't go so far as to provide evidence that (1) car buyers are defaulting more than usual or (2) that the demand for UCBS has caused lenders to be more unscrupulous than they have been in the past.  

In addition, problems in the MBS market, particularly mortgage defaults, have pretty big negative externalities:  foreclosures, neighborhoods with empty houses, dislocation of families, home prices, etc.  When car borrowers default, the lender takes the car back.  The borrower is out the car payments that were made (the NYT focuses on car buyers who never made any payments, so not particularly left worse off), but the car lot now can resell the car again.  Cars are more liquid than houses, and repossession is quicker and cheaper than foreclosure.  

So, I'm not getting very worried about the used car loan bubble just yet.  If we think that used car loan rates are too high, then that's another concern.  If we think that used car sales people are pressuring or misleading customers, that's another concern.  But I don't think securitization is the problem.

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icon The "Successful" Shake Shack IPO
Posted by Christine Hurt

I've never been to a Shake Shack.  I believe this fast casual restaurant operates in other parts of the U.S. and abroad, but its website has been down all morning.  Why?  Because Shake Shack is having a whiz bang IPO.  After just a few hours on the board (it debuted last night), SHAK is up 132%.

Readers familiar with my scholarship and rants know that, unlike the rest of the world, I don't see that as a successful IPO.  Instead of selling its shares at $21, Shake Shack (the entity) could have issued shares for almost $50.  The difference there was left on the table, just as if you sold your house for $200,000 yesterday and the buyer sold it with no modifications today for $500,000.  I wouldn't think of that house sale as successful, even if it was quick and I thought it was worth only $200,000.  I would be steaming mad.

But the founder of Shake Shack isn't steaming mad because he still owns 21% of the company, and his shares are worth over $50 now.  As he sells into the market (presuming he does it before the price drops), he will get more cash.  But Shake Shack (the entity) doesn't.  It now must grow, expand, wrestle with the challenges of being a public company -- all with the capital it raised at $21/share.

Not to beat a dead horse, but even the author of the Forbes article linked above seems to be unclear about what a successful IPO is.  The author recognizes that Potbelly's share price is now just 2% higher than its IPO price, but "IPO buyers had their chance to exit with profits after the stock popped 120% on its first day of trading."  That is not really a ringing endorsement for the efficiency and substance of capital markets.

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icon The Ethical Slide, Train Tickets, and Helping the Next Generation of Corporate Leaders to Choose Differently
Posted by Josephine Sandler Nelson

It has been a pleasure to guest-blog for the last two weeks here at the Glom. (Previous posts available here: one, two, three, four, five, six, seven, eight, and nine.) This final post will introduce the book that Lynn Stout and I propose writing to give better direction to business people in search of ethical outcomes and to support the teaching of ethics in business schools.

Sometimes bad ethical behavior is simply the result of making obviously poor decisions. Consider the very human case of Jonathan Burrows, the former managing director at Blackrock Assets group. Burrows’s two mansions outside London were worth over $6 million U.S., but he ducked paying a little over $22 U.S. in train fare each way to the City for five years. Perhaps Burrows had calculated that being fined would be less expensive than the inconvenience of complying with the train fare rules. Unluckily, the size of his $67,200 U.S total repayment caught the eye of Britain’s Financial Conduct Authority, which banned Burrows from the country’s financial industry for life. That’s how we know about his story.

But how do small bad ethical choices snowball into large-scale frauds? How do we go from dishonesty about a $22 train ticket to a $22 trillion loss in the financial crisis? We know that, once they cross their thresholds for misconduct, individuals find it easier and easier to justify misconduct that adds up and can become more serious. And we know that there is a problem with the incentive structure within organizations that allows larger crises to happen. How do we reach the next generation of corporate leaders to help them make different decisions?

Business schools still largely fail to teach about ethics and legal duties. In fact, research finds “a negative relationship between the resources schools possess and the presence of a required ethics course.” Moreover, psychological studies demonstrate that the teaching of economics without a strong ethical component contributes to a “culture of greed.” Too often business-school cases, especially about entrepreneurs, venerate the individual who bends or breaks the rules for competitive advantage as long as the profit and loss numbers work out. And we fail to talk enough about the positive aspects of being ethical in the workplace. The situation is so bad that Luigi Zingales of the University of Chicago asks point-blank if business schools incubate criminals.

New business-school accreditation guidelines adopted in April 2013 will put specific pressure on schools to describe how they address business ethics. Because business schools are accredited in staggered five-year cycles, every business school that is a member of the international accreditation agency will have to adopt ethics in its curriculum sometime over the next few years.

We hope that the work outlined in my blogposts, discussed at greater length in my articles, and laid out in our proposed book will be at the forefront of this trend to discuss business ethics and the law. We welcome those reading this blog to be a part of the development of this curriculum for our next generation of business leaders.

Permalink | Business Ethics, Business Organizations, Businesses of Note, Corporate Governance, Corporate Law, Crime and Criminal Law, Economics, Education, Entrepreneurs, Entrepreneurship, Fiduciary Law, Finance, Financial Crisis, Financial Institutions, Law & Economics, Law & Entrepreneurship, Law & Society, Management, Politics, Popular Culture, Social Responsibility, White Collar Crime | Comments (View) | TrackBack (0) | Bookmark

January 29, 2015
icon SEC ALJ Orders: It's How It Does It's Anti-Bribery Rule
Posted by David Zaring

While defendants are gearing up to make arguments against the constitutionality of the SEC's increasing inclination to use its ALJs, rather than the courts, to serve as the venue for fraud cases, it looks like it has already flipped that way for foreign corrupt practices cases.  Mike Koehler did the counting:

More recently, the SEC has been keen on resolving corporate FCPA enforcement actions in the absence of any judicial scrutiny.  As highlighted in this 2013 SEC Year in Review post, a notable statistic from 2013 is that 50% of SEC corporate enforcement actions were not subjected to one ounce of judicial scrutiny either because the action was resolved via a NPA or through an administrative order.  In 2014, as highlighted in this prior year in review post, of the 7 corporate enforcement actions from 2014, 6 enforcement actions (86%) were administrative actions.  In other words, there was no judicial scrutiny of 86% of SEC FCPA enforcement actions from 2014.

It is interesting to note that the SEC has used administrative actions to resolve 9 corporate enforcement actions since 2013 and in none of these actions have there been related SEC enforcement actions against company employees.

Maybe we are seeing an agency decision to prefer administrative adjudication to, you know, adjudicative adjudication.

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

icon Apparently I'm Not The Only One Attached to My 529 Plans
Posted by Christine Hurt

Obama's plan to cut tax benefits for 529 plans has been scrapped.  The uproar must have included other voices louder and more powerful than mine.  

One note:  at least one opinion writer uses the death of the 529 proposal as evidence of the power of the wealthy, who mistakenly believe themselves to be middle class, not to be taxed.  This may be true, but it and other news reports state that 70% of benefits of 529 plans go to families with incomes over $200,000 a year.  However, in the NYT article linked above, it makes clear that this statistic is based on the value of the accounts, not the number of accountholders.  By number, 70% of 529 accounts are owned by families with incomes under $150,000.  So, to say that the affluent are the only ones making use of the accounts is misleading.

Permalink | Education, Taxation | Comments (View) | TrackBack (0) | Bookmark

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