Except for Arizona and Hawaii, the United States ended this calendar's observance of Daylight Saving Time at 2 a.m. local time today. In a fascinating book titled A Time for Every Purpose: Law and the Balance of Life, Harvard University Byrne Professor of Administrative Law Todd D. Rakoff argues that social regulation of time can and should create more room for people to balance time at work with time away from work.

In the article Losing Sleep at the Market: The Daylight-Savings Anomaly, three financial economists document that in international financial markets, the average Friday-to-Monday return on daylight-savings weekends is much lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year. This finding is consistent with psychological research about how changes in sleep patterns have impacts on accidents, anxiety, decision-making, judgment, reaction time, and problem solving. In this article Winter Blues: A SAD Stock Market Cycle, financial economists found that the lack of sunlight during winter months tends to depress stock prices across international markets. More recently, the article This is Your Portfolio on Winter: Seasonal Affective Disorder and Risk Aversion in Financial Decision Making reported that people with SAD (Seasonal Affect Disorder) exhibited financial risk aversion that varied across seasons because of their seasonally changing affect. SAD-sufferers had much stronger preferences for safe choices during winter than non-SAD-sufferers, and SAD-sufferers did not differ from non-SAD-sufferers during summer.

In two articles, The Psychophysiology of Real-Time Financial Risk Processing and Fear and Greed in Financial Markets: An Online Clinical Study, Andrew Lo and co-authors find traders who respond with too little or too much emotion tend to be less profitable than traders with middle of the range types of emotional responses. Another article Endogenous Steroids and Financial Risk Taking on a London Trading Floor documents that traders tend to make more money on days when their testosterone levels are higher than average.

All of the above differing strands of empirical research share in common the finding that emotions play important roles in how people arrive at financial judgments and financial decisions. Of course, even just a moment of introspection is enough for us to realize that we are like other people in making emotional judgments and emotional decisions. In the article Who's Afraid of Law and Emotions?, the Herma Hill Kay Distinguished Professor of Law at Boalt Hall Kathryn Abrams and Southestern law school professor Hila Keren analyze the ambivalent reactions by mainstream legal academics to law and emotions scholarship and conclude that part of the reason for such responses is the persistence of rationalist tendencies within the legal academy. 

I have often heard after making a presentation about emotions in financial markets and regulation the view that emotions could matter in non-financial areas of life and law, but emotions in general and happiness in particular are not what business and business law are and should be about. Such a point of view strikes as being wrong and closed-minded. As economist Andrew J. Oswald cogently observes in the opening paragraphs of his article Happiness and Economic Performance: 

"Economic performance is not intrinsically interesting. No-one is concerned in a genuine sense about the level of gross national product last year or about next year's exchange rate. People have no innate interest in the money supply, inflation, growth, inequality, unemployment, and the rest. The stolid greyness of the business pages of our newspapers seems to mirror the fact that economic numbers matter only indirectly.

The relevance of economic performance is that it may be a means to an end. That end is not the consumption of beefburgers, nor the accumulation of television sets, nor the vanquishing of some high level of interest rates, but rather the enrichment of mankind's feeling of well-being. Economic things matter only in so far as they make people happier."

I will expand in a later post on decisions to measure happiness by an increasing number of governments of countries, states, and cities as diverse as Bhutan, England, Guandong province in China, Maryland, and Somerville in Massachusetts. For now, check out:

Finally, Glom readers may find this five-day free virtual event of interest: The Enlightened Business Summit which takes place this week November 7-11 and is hosted by Chip Conley, the founder of Joie de Vivre, a two-time TED Speaker, and author of the book Peak: How Great Companies Get Their Mojo from Maslow and the forthcoming book Emotional Equations: Simple Truths for Creating Happiness + Success:

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This Fall, several well-known publicly-held firms have announced major changes to its business model, received negative feedback, then abruptly reversed direction.  I'm thinking of the Netflix/Quixster debacle, The H-P aborted spinoff of its PC business, and BofA's retreat from charging a debit card fee.  The reversals seemed as surprising as the original announcements.  Particularly the Netflix announcement, which was not couched in language of examining options, but was an annoucement of a final decision.  Can firms really just change their minds?  Had they not already invested significant amount of time in reorganizing, restructuring, hiring or firing to make the changes happen?  Had they not thought the original change through?  Does the change buyback any good will that was lost?  Or, are shareholders left with wondering what bozos are running this ship?

If you look at the Netflix stock chart (available here, courtesy of Netflix), you'll see that the stock price had been trending downward this summer, but plummeted on September 14, when the company announced a price increase for its DVD/streaming services.  Then, on the 19th, Netflix announced it would split its streaming services and put them into a new company, Qwikster, so that customers who just wanted DVDs or streaming would put for that service only, but customers who wanted both would have to have two separate services.  The price had fallen from $208.71 to $143.75 in five days, and then kept on going.  When Netflix announced that the plan was off on October 10, none of that fall was regained.  Prices fell once more a few days later when Netflix's earnings were announced.

Likewise, the H-P stock price tells a similar story.  The stock price took a huge plunge around August 17, when H-P announced that it would, among other things, spinoff its PC business.  Over the summer, H-P replaced the CEO with Meg Whitman, hardly affecting the flattening price trend.  The stock price did increase two days before and a few days after the death of Steve Jobs, but the October 27 annoucement that H-P would not spinoff its PC business did not significantly move the price, where it stays below the pre-original announcement price.

Some are saying that these quick reversals are the result of social media making customer outrage quick, immediate and amplified.  However, at least for Netflix and H-P, these lead trial balloons seem fairly costly.  Particularly for Netflix, who has all of their customers' emails and could have done a fairly inexpensive survey prior to announcing any drastic change.  As a corporate lawyer, I'm also wondering about securities law problems.  Trial balloons under corporate law probably aren't fraud unless the speaker knows that it is untrue.  However, if a firm isn't internally committed to a plan, but announces it to the media as a decisive plan of action, depending on what happens to the price, this might open the door.

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An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.

This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.

There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film." 

This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.

Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.

Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.

Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality. 

Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.

A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.  

It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.

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I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.

I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.

In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics,  evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.

Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.

My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.

Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired. 

Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.

And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.

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The real question about the Gupta charge is: what took the SEC so long?

• The incidents raised in the complaint - calling Rajnaratam after a P&G board meeting, and calling him after hearing about Warren Buffett's investment in Goldman Sachs, inter alia - aren't new.
• The SEC dismissed its prior, administrative case against Gupta after Judge Jed Rakoff suggested that it violated Gupta's equal protection rights, given that everyone else was getting a criminal indictment, and therefore the broad discovery obligations that such an indictment imposes on the United States (I find this pretty ludicrous, by the way, the idea that being threatened with a fine and a trading ban has constitutional implications for Gupta, given that everyone else is facing bigger fines and jail time ... but it did get the SEC off the schneid, I guess).
• Andrew Ross Sorkin speculated that the SEC didn't have smoking gun phone tap evidence then.
• But the complaint certainly suggests it is willing to go with simple phone record inference now.  When Gupta was a board member at Goldman Sachs, he called Rajnaratnam 16 seconds after hanging up on a board teleconference about Buffett's investment, the complaint alleges.  And Rajnaratnam traded into Goldman Sachs later that day.  Which looks really bad - it would look even worse if they could quote the content of those calls, though, and the complaint doesn't do that.
• Still no quotes from the phone calls that I could see in the complaint, though, and once again, the incidents being charged are the same as they were in the administrative case.
• I'm not seeing the reason for the change of heart, unless there was an issue with getting DOJ to indict back then, but now that they've won against Rajnaratnam, maybe they're feeling braver.  It's quite mysterious.

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First off, thank you to Usha for that cordial welcome and to everyone at the Glom.  I must confess to being a bit star struck, and am most appreciative of this opportunity.

Later today I'll be contributing to a program on Morrison v. NAB (US 2010) and subsequent developments.  In my preparation for this program, I came across a recent SDNY case that seems to have gotten things quite wrong.  Shockingly wrong. 

Morrison, you will recall, concerned the extraterritorial application of Rule 10b-5.  In it, the Supreme Court discarded the Second Circuit's "conduct and effects" test.  Instead, the Court held, Rule 10b-5 only reaches securities that (1) are listed on a U.S. securities exchange, or (2) were actually purchased or sold in the United States.  

In In re Soc Gen Sec Litig, 2010 WL 3910286 (SDNY 2010), a post-Morrison case, Judge Richard Berman held that trades in ADRs (American Depository Receipts) are "predominantly foreign transactions" (a quote from pre-Morrison caselaw) and as such fall outside the reach of Rule 10b-5.  He dismissed the claims of plaintiffs who had purchased ADRs in the United States.  Although the ADRs were purchased over-the-counter, Judge Berman added that the same result might follow even if the ADRs were listed on an American stock exchange.

I'm struggling with what part of "listed on a U.S. securities exchange" or "purchased or sold in the United States" the district court missed.  Although the ADRs are certainly connected to a foreign security traded on a foreign market, for that to factor into consideration would seem to be a return to the conduct / effects test that the Court rejected in Morrison.  

I guess that's what appeals courts are for....  

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Not completely crazy.  The opinion strikes pretty hard at the power of the industry regulator though, because it prevents FINRA from using the court system to enforce its decisions - a critical power enjoyed by every overseer.  The court doesn't identify a workaround either.  So how you feel about the case will depend on how you feel about textualism, where a plausible case can be made that the court is onto something vs. context, which matters when a court deprives a regulator of a power it has been happily relying on for over four decades. 

On the one hand, FINRA has the power to levy "fines," under the Exchange Act.  And you'd think that the power to levy a fine includes the power to enforce such a levy.  Moreover, if you sign a contract, the idea is that you can go to court if the other party fails to perform, and the securities industry essentially has contracted with FINRA to police its bad actors, which it does, inter alia, with fines, and which the bad actor in this case refused to pay.  

To be traditional about it, the administrative law question presented in the FINRA case is whether the statute is ambiguous on that go-to-court question, and whether, even if so, FINRA, a private entity, is entitled to Chevron deference in interpreting a law that permits it to fine members to permit it to go to court to enforce those fines.

FINRA lost the case because the ability to go to court is something that is a big enough regulatory deal that it is usually spelled out in the statute explicitly.  The Exchange Act, for example, has language that permits the SEC to sue explicitly.  It doesn't have that language for FINRA, and the court didn't just rely on negative inference, but less plausibly on other limitations on judicial review in the Exchange Act.  

The court also concluded that FINRA's own rule permiting it to go to court (state court, problematically, given that the exclusive jurisdiction of the Exchange Act lies in federal court), was illegally promulgated without comment (so it ducked the Chevron issue).

This isn't textualy impossible, but it makes FINRA impossible.  You also wouldn't want to set up a regulatory scheme that can't be enforced.  And that is what the Court has done - I'm not sure that FINRA can bring a fine action to the SEC, and then to federal court, don't really know how that would work, and the court didn't suggest any answers.  FINRA must be able to enforce its fines.

What will happen?  I can't imagine it won't go en banc, it is a conservative panel in a pretty liberal appellate court.  Fixing this might require congressional legislation, though the SEC could pass a rule authorizing FINRA to sue (that would be a tricky delegation of an important power).

Anyway, those are my preliminary thoughts on a pretty important case.

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As David notes, one of the fallouts of a negative say on pay vote have been shareholder lawsuits.  The lawsuits allege, among other things, that the negative say on pay vote is an indication not only that the board breached its duty of loyalty, but also that the board should not be given the presumption of the business judgment rule for demand futility purposes--and hence that such suits should be allowed to survive a motion to dismiss.  This semester I am writing an article on the feasibility of these say on pay lawsuits, and hence I was surprised when earlier last week a U.S. District Court in Ohio allowed shareholders say on pay lawsuit against Cincinnati Bell to survive a motion to dismiss in an order that relied on the negative say on pay vote.

Shareholders brought suit against the directors of Cincinnati Bell after 66% of shareholders voted against the 2010 executive compensation at its May 2011 annual meeting.  The order framed the issue in this way, "This civil lawsuit presents the question, among others, whether a shareholder of a public company may sue its directors for breach of the duty of loyalty when the directors grant $4 million dollars in bonuses, on top of $4.5 million dollars in salary and other compensation, to the chief executive officer in the same year the company incurs a $61.3 million dollar decline in net income, a drop in earnings per share from $0.37 to $0.09, a reduction in share price from $3.45 to $2.80, and a negative 18.8% annual shareholder return."  To be sure, with such a framing it seemed pretty clear where the court was headed. . .

In its order, the court stated that shareholders' allegations "raise a plausible claim that the multi-million dollar bonuses approved by the directors in a time of the company's declining financial performance violated Cincinnati Bell's pay-for-performance policy and were not in the best interest of Cincinnati Bell's shareholders.  In so stating, the court specifically noted shareholders' assertions that the negative say on pay vote provides "direct and probative" evidence that the compensation awards were not in the best interests of the shareholders.  This finding is of course precisely what shareholders hoped to achieve with say on pay litigation.  Indeed, each of the lawsuits makes a similar claim that the say on pay vote reflects shareholders' independent assessment that the challenged compensation awards were not in their best interests, and as a result, such negative votes should be used to rebut any presumption that directors' action ofapproving executive compensation awards were in the shareholders' best interests.  Moreover, the suits often rely on corporate disclosure in their proxy statement and other public documents that expresses a commitment to pay for performance to demonstrate that the challenged award conflicts with the company's own pay policies.  The Cincinnati Bell order suggest that relying on corporate disclosure in this way is effective.  In that regard, it also may prompt corporations to alter their disclosure to avoid such reliance.

Importantly for purposes of shareholders being able to get their day in court, the order agrees with shareholders' contention that they were excused from making any presuit demand.  In the court's view, the fact that directors had approved the compensation award, recommended that shareholders approve the award, and suffered a negative shareholder vote, demonstrated that demand would be futile on such directors.    This is interesting.  On the one hand, you can imagine directors contending that they only did what federal law now requires them to do.  Moreover, Dodd-Frank has a provision specifically stating that the say on pay vote is advisory and should not be construed as overruling directors' decisions, or changing or adding additional fiduciary duties for directors, and many commentators have argued that such a provision indicates that say on pay votes should not be used to somehow alter the law in this area, including the law with respect to demand rules.  On the other hand, some commentators have noted that Dodd-Frank does not prevent such votes from being used to support a finding of a fiduciary duty breach.  The Cincinnati Bell court cites this latter commentary.

Of course, just because a suit survives a motion to dismiss does not mean that shareholders will win at trial (see e.g., Disney!).  Then too, Cincinnati Bell is an Ohio corporation--though the court did cite Delaware law in its demand futility discussion.  However, a decision like this certainly prolongs these say on pay lawsuits.  Such a decision also suggests that these say on pay votes may impact, and even change, fiduciary duty law regarding compensation.

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Hamline University School of Law is hosting a symposium in St. Paul, Minnesota on Monday on "Reforming the Secondary Mortgage Markets."  Our own Christine Hurt will be presenting on executive compensation at Freddie Mac and Fannie Mae.  I'll be presenting on regulation of bank investments in mortgage backed securities and the transmission lines between real estate and bank crises.  Other speakers include a number of regular guest bloggers here at the Conglomerate and a number of my other favorite academics working in banking, mortgage markets, and fiancial regulation.  The keynote will be given by Gary Stern, former President of the Federal Reserve Bank of Minneapolis.  For details click here. 

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CorpCounsel is, as always, counting them up, and laying them out:

The 9th Say-on-Pay Lawsuit - and More!

Last week, the 9th company that failed to garner majority support for their say-on-pay was sued - Dex One Corp in a federal district court in North Carolina (here's the complaint). We continue to post pleadings from these cases in CompensationStandards.com's "Say-on-Pay" Practice Area.

But that's not all in the area of lawsuits over pay practices. Last week, Chesapeake Energy's board was sued for allegedly bailing the company's CEO out of financial trouble by awarding him bonuses - as well as buying his personal art collection for $12.1 million and relying only on the CEO's art dealer for determining the value of the art - in a federal district court in Oklahoma. Not sure why, but it doesn't seem like the mass media has caught up with this one. Thanks to Paul Hastings' Mark Poerio for pointing it out!

And then as I blogged last week on CompensationStandards.com's "The Advisors' Blog," arguments where just made in a lawsuit in the Delaware Chancery Court over Goldman Sach's pay practices. If the case survives, it should be interesting - as will the Citigroup case where discovery ended last week and now we're just waiting for a trial date to be set before VC Glasscock...

Here's more:

        Been a Long Time! The 41st Failed Say-on-Pay (Barely)

With the proxy season long over, it's been a long time - 9 weeks - since we've seen a company fail to garner majority support for its say-on-pay. But as Mark Borges reported last week in his blog, Exar has become the 41st company to do so this year.

In this Form 8-K, Exar reports that it was a close vote with the company receiving more "for" votes compared to "against" - but as Mark notes, the Delaware company counted its "abstentions" as "against" votes back when the company filed its proxy statement (see pg. 4) - thus resulting in the receipt of 49% in support. A list of the Form 8-Ks of the "failed" companies is in CompensationStandards.com's "Say-on-Pay" Practice Area.

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After spending forever writing a proxy access rule, the SEC took it to the D.C. Circuit, where it got a serious beating in a not that great opinion.  It looks like the next step is not going to be an appeal, or en banc, but spending forever, again, writing a new proxy access rule.  Here's DealBook:

“I want to be sure that we carefully consider and learn from the court’s objections as we determine the best path forward,” Mary L. Schapiro, the agency’s chairwoman, said in a statement.

Still, the S.E.C. is not ready to scrap the proxy rule altogether.

“I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets,” Ms. Schapiro said. “I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.”

A couple of modest observations.  First, proxy access is Schapiro's baby, so it must have hurt to let it go (I would have thought hard about taking it further, but it could be that DOJ wouldn't let her do it; they think a lot about winnability, and as for that I would have thought that odds of that would be better in the D C Circuit than in the Supreme Court, but when your best shot is an en banc reversal, and you're not in the 9th Circuit, well, your best shot isn't great), but maybe she's serious about redoing the rule.  Second, if she is serious about redoing the rule, she's not going to learn a lot from careful study of the court's opinion, which tried, with no textual basis in the statute, to import a cost-benefit analysis requirement into SEC rulemakings (the SEC arguably met this nonexistent requirement, too, at least if considering the economic impact of a rule is a CBA, but I suppose it could try to do a doubleplusgood CBA next time), and faulted the SEC for not addressing random bits of the record in a totally unpredictable way.

If there is something to be learned by the proxy access rule decision, it's probably this; if you're going to get a serious corporate governance regulation past a deregulatory court, you should make it simple, simple, simple, with fewer weird triggers, and you shouldn't apply it to mutual funds.

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Believe it or not, there is still ongoing litigation over analyst reports clouded by conflicts of interest by former superstar investment banker, now superstar consultant, Frank Quattrone from about a decade ago.  You may remember that the DOJ tried Quattrone twice for allocating hot IPO shares to clients to get investment banking business, then decided not to retry a third time after a settlement was reached.  (Blog post backstory here.)  This week, a district court judge refused to grant the defense a motion for summary judgment in a case alleging 10b-5 liability for knowingly false statements in AOL research reports prepared by analysts Quattrone may have supervised.  (Opinion available at link.)

The case seems really interesting for a number of reasons, not least of which is how long it has lingered in litigation.  First, cases against analysts were generally unsuccessful.  (Jill Fisch and Hilary Sale have a great 2003 paper on the analyst conflict cases, 88 Iowa L. Rev. 1035.)  Second, Quattrone didn't prepare the reports.  He is alleged to have used his power to get the analysts to maintain a rosy view of AOL for his own career purposes, however.  Third, the court refused to grant SJ on loss causation, and seemed to say that this defense required a Daubert hearing.  Nice.

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Over at Truth on the Market, Jay Verret has begun an effort on open source writing, with the DC Circuit's proxy access decision as the subject.  Give it a look and weigh in, if you have a view - he's correct to think that statutory interpretation of the relevant statutes isn't a particularly clarity inducing exercise; one interesting question is whether the SEC has done that clarification by regularly interpreting the statute in a particular way.  Doesn't mean the agency couldn't change the interpretation - that's what Chevron was about, after all (the subject of the Chevron case was polar opposite interpretations of the same Clean Air Act term by the Carter and Reagan EPAs).  But I think it can do some work where pure textualism results in the conclusion that yes, indeed, the statute is ambiguous.  If you stop the analysis there, I think it would be very difficult not to simply defer to the agency.

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The D.C. Circuit's proxy access decision keeps getting attention, see here for a roundup, and here, from Elliott Spitzer.  Seems like an opportune time to add some belated thoughts about the opinion.  It’s worth noting that when the D.C. Circuit rejects big SEC rules, which it does with some frequency these days, it is applying principles of administrative law.  Steve Davidoff has already provided a nice analysis of the case here.  But here’s a smidgen more realpolitik for you:

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In May 2009, the SEC proposed proxy access rules, which would give shareholders the right in specified circumstances to nominate directors on the company's ballot. One of the early challenges to the proposed rules rested on the uncertainly regarding the SEC's authority to require proxy access. In response to this uncertainty, Dodd-Frank (Section 971) amended Section 14(a) of the Securities Exchange of 1934 to authorize the SEC to adopt proxy access rules and to set the terms and conditions of shareholder access. In August 2010, the SEC promulgated the final proxy access regulation, which was quickly challenged in court by the Business Roundtable and the U.S. Chamber of Commerce. Today, the DC Circuit vacated Rule 14a-11.

The opinion is short, and it's an easy read. The Court reviewed the SEC's rulemaking process under the Administrative Procedure Act, and found the process wanting. According to Judge Ginsberg's opinion, "the Commission acted arbitrarily and capriciously for having failed once again — as it did most recently in American Equity Investment Life Insurance Company v. SEC, 613 F.3d 166, 167–68 (D.C. Cir. 2010), and before that in Chamber of Commerce, 412 F.3d at 136 — adequately to assess the economic effects of a new rule."

The Court was concerned that the SEC did not adequately account for the direct costs of the new rule, including the potentially high expenditures that companies would incur in opposing shareholder nominees. The SEC failed to even attempt to quantify these costs, even though historical data on the costs of proxy contests is available. Importantly, the costs of opposing shareholder nominees might not be discretionary or self-serving, as the incumbent directors would feel obliged by their fiduciary duty to oppose unqualified nominees.

The SEC also failed to quantify the benefits of the rule, which include improved corporate performance from the election of dissident directors. The Court concluded that the SEC did not adequately evaluate the empirical evidence on this issue. In the face of "mixed" empirical evidence, the SEC was not entitled to claim benefits from the rule. 

The most interesting part of the opinion is where the Court considered the possibility that union and state pension funds might use Rule 14a-11 for personal gain. The Court: "By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily."

Finally,* the Court challenged the SEC's conclusions about the frequency of shareholder nominations: "the Adopting Release does not address whether and to what extent Rule 14a-11 will take the place of traditional proxy contests."

The Court vacated the rule, and the U.S. Chamber of Commerce is pleased: "We applaud the court’s decision to prevent special interest politics from being injected into the boardroom." Well, at least for now. The opinion is a rather limited indictment of the proxy access proposal, relying on the lack of sufficient justification. The SEC is considering its options. While it might challenge the ruling, I suspect that the agency is more likely to produce a newly justified rule in the near future.     

*The Court also has a section dealing with the application of the rule of investment companies, but I won't summarize that here. 

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