You'd think that the state that's home to the center of American business would take a Delaware-style light touch approach to overseeing it. But instead, the New York paradigm is to take ambitious politiicans, blend with broadly worded supervisory or anti-fraud statutes like the Martin Act, and come up with stuff that, to my ears, sounds almost every time like it is off-base, at least in the details. So:
- Eliot Spitzer pursued research analysts for the sin of sending cynical emails even though they issued buy recommendations, despite that fact that analysts never issue negative recommendations, and if cynical emails are a crime, law professors are the most guilty people in the world.
- I still don't understand what Maurice Greenberg, risk worrier par excellence, did wrong when he was running AIG. I do know that after he was forced out by Spitzer, the firm went credit default swap crazy.
- Maybe there's something to the "you didn't tell your investors that you changed the way you did risk management for your mortgage program" prosecutions, but you'll note that it is not exactly the same thing as "you misrepresented the price and/or quality of the mortgage products you sold" prosecutions, which the state has not pursued.
- Eric Schneiderman's idea that high frequency trading is "insider trading 2.0" is almost self-evidently false, as it is trading done by outsiders.
- Federal regulators wouldn't touch Ben Lawsky's mighty serious claims that HSBC or BNP Paribas were basically enabling terrorist financing.
- And now Lawsky is going after consultants for having the temerity to share a report criticizing the bank that hired them to review its own anti-money laundering practices with the bank, who pushed back on some, but not all of the conclusions.
The easiest way to understand this is to assume that AGs don't get to be governor (and bank supervisors don't get to be AGs) unless people wear handcuffs, and this is all a Rudy Giuliani approach to white collar wrongdoing by a few people who would like to have Rudy Giuliani's career arc.
But another way to look at it is through the dictum that the life of the law is experience, not logic. The details are awfully unconvincing. But these New York officials have also been arguing:
- Having analysts recommending IPO purchases working for the banks structuring the IPO is dodgy.
- HFT is front-running, and that's dodgy.
- This new vogue for bank consulting is dodgy, particularly if it's just supposed to be a way for former bank regulators to pitch current bank regulators on leniency.
- If we can't understand securitization gobbledegook, we can at least force you to employ a burdensome risk management process to have some faith that you, yourself, understand it.
- And I'm not saying I understand the obsession with terrorism financing or what the head of AIG did wrong.
Their approach is the kind of approach that would put a top banker in jail, or at least on the docket, for the fact that banks presided over a securitization bubble in the run-up to the crisis. It's the "we don't like it, it's fishy, don't overthink it, you're going to pay for it, and you'll do so publicly" approach. It's kind of reminiscent of the saints and sinners theory of Delaware corporate governance. And it's my pet theory defending, a little, what otherwise looks like a lot of posturing.
Daniel Gitner got a splashy profile in the Times today in celebration of his recent trial acquiting Rengen Rajnaratnam, and congratulations to him. My theory of white collar/defense lawyer eminence is that often, you don't have to win to be able to market yourself. You were "picked by Martha Stewart," or "represented General Motors during the financial crisis," or "handle pro bono representations for five detainees in Guantanamo." See? It sounds like you're important. You're so good you drew the assignment.
Still, you probably won't get a Times profile when you lose those cases. Gitner won, and drew a reporter who didn't appear to like him much. He forbade his staff to get haircuts during the trial for some uninteresting lucky rabbit foot related reasons, and generally came across as intense but yet very platitudinous.
That right there isn't bad marketing either, though. My lawyer is a pain but leaves no stone unturned; it's practically in the job description. And now Gitner gets to add that he's the only person to win an insider trading case in the Bharara era; he did two things right there. First, he persuaded the jury to absolve his client of the one marginal count the judge didn't dismiss, and second, he got the judge to dismiss the two serious counts. It could be his briefwriting, rather than his bedside manner, that did the trick here - that, at least is what Matt Levine thinks.
Over at DealBook, I've got a look at the low-key rejection of Rajat Gupta's criminal appeal:
Judge Jed Rakoff, who presided over Mr. Gupta’s trial, demanded in another case that the government proffer “cold, hard, solid facts, established either by admissions or by trials” in enforcement proceedings against financial firms. He has called for more prosecutions over the crisis, and expressed a desire to see wrongdoing exposed in court. Other trial judges have also expressed some sympathy for public sanctions expressed through judicial orders.
But powerful and influential appellate judges have indicated less interest in sending this sort of a message. The Court of Appeals for the Second Circuit indicated in another case that it thought that Judge Rakoff had been too insistent on admissions of wrongdoing. And, as the opinion in Mr. Gupta’s appeal suggests, the court seems disinclined to make strong statements about appropriate business conduct when it could do so.
For more, head that way!
In addition to social enterprise, I’m also interested in how foreign corruption affects corporate governance and compliance. One of my current projects involves looking at where these areas intersect.
I was drawn to this topic because the developing world is often where social enterprises can do the most good, but, sadly, the developing world is also where corruption tends to be the most prevalent. Can a social enterprise do business in a country where nearly every public official demands bribes? Most traditional corporations will probably answer that question in the affirmative. A transnational oil and gas firm, for example, ought to have the resources to resist or at least mitigate the compliance challenges presented by corruption. Moreover, some traditional firms will likely approach corruption from a strictly economic perspective. The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials for the purpose of getting business. Firms that violate the statute face stiff monetary and reputational sanctions. But if the risk of detection is low and the potential gains from a corrupt transaction are high, managers could be tempted to go ahead and make a payoff to improve the financial bottom line.
The issue arguably becomes more complex in the case of a social enterprise. Social enterprises seek first and foremost to create a public benefit. Their managers must balance the mission and profit goals of socially oriented investors, employees, and other stakeholders. Accordingly, the question of whether to bribe is not simply a matter of weighing detection probabilities and potential gains. Managers will also need to anticipate, assess, and work through the ancillary effects of corruption—including market distortion, erosion of the rule of law, and negative effects on employee morale—when making decisions.
Perhaps some social-enterprise managers will elect to pay bribes on the theory that they will be serving the greater good by getting their products to those in need. They might conclude that the harms and enforcement risks from bribery are worth the benefit of providing people with, say, healthier sanitation options or cheaper energy. Others, though, will surely resist bribery altogether on moral or social welfare grounds. For these managers, the question becomes whether they can remain in markets with endemic corruption. This is a tough situation. If social enterprises decide to withdraw or otherwise limit their activities in certain markets, the obvious downside is their inability to positively affect citizens in distress. Whether other actors will step in and fill the gaps they leave behind is an open question.
This story about how GM is launching an internal investigation by hiring its defense lawyers to do the investigating isn't that new, but it does remind one that if you go through the revolving door, in addition to raising your salary, you're changing your practice from one involving courtrooms and complaints to one involving conference rooms and the occasional negotiation with a regulator.
In my view, one of the biggest changes in law firm practice over the past 25 years has been the growth of this sort of work at the largest of firms, which used to stay the heck away from criminal practice. That in turn has been facilitated by the emergence of the internal investigation as something that regulators expect to see done, which means that the new work is actually profitable (those investigations involve a lot of billing, defending a criminal case generally does not). And that in turn has made the revolving door revolve more quickly; it used to involve high-ranking political appointees only, now almost any long-serving, mid-level-at-least lawyer in an enforcement agency can prove useful for a law firm.
With a hat tip to Corp Counsel, this story about Milton Webster, board member of the Chinese firm AgFeed, who blew the whistle on his company, is really unique. He was a member of the audit committee! He thought that a name brand law firm was more conflicted than solution-oriented! He resigned, and then went to the authorities (or, at least, the paintiffs)! I don't think I've ever heard of a member of the firm's audit committee dropping a dime on the firm he directs. You'll want to read this probe by Francine McKenna, but here's the Bloomberg long read as well.
I'm guessing many of the readers of this blog also have been known to frequent Above The Law and the New York Times, but where can you go to see the two fonts of wisdom combined?
Right here, that's where! Two questions posed by the Martoma case are: why on earth didn't he give up Steve Cohen instead of going to jail? And why does the federal government spend so much time on insider trading? James Stewart posits that the Feds probably thought he wouldn't survive cross-ex.
[t]he government revealed that Mr. Martoma had altered his transcript to improve his grades, and had used the fabrication to seek prestigious judicial clerkships. He was subsequently expelled from Harvard Law.
That alone wouldn’t have shattered Mr. Martoma’s value to prosecutors. Few cooperating witnesses are Eagle Scouts, especially when they have been participating in what amounts to a criminal conspiracy. However brazen, the Harvard episode might have been portrayed as a serious but youthful transgression by someone overeager to get ahead. Just because someone has done something bad in the past doesn’t mean they’re not telling the truth now.
But how Mr. Martoma handled the Harvard affair, detailed in the confidential report by the law school’s administrative board after what appeared to have been lengthy proceedings, may well have proved devastating to his credibility, and thus to his ability to cut a favorable deal.
And as for the second question, check out David Lat's Martoma by the numbers. You can convict people based on making market bets that went south during the financial crisis - but you can't lose if you go after insider trading. Here's David:
Here are some notable numbers relating to the Mathew Martoma mess:
- The profits made and losses avoided by SAC Capital as a result of Martoma’s insider trading: $275 million.
- The win/loss record of U.S. Attorney Preet Bharara and the S.D.N.Y. in insider-trading cases: 79-0.
- How long the Mathew Martoma trial lasted: 4+ weeks.
- How long the jury deliberated: 15 hours.
- Gender breakdown of the jury: 7 women, 5 men.
- Counts of conviction: 2 counts of securities fraud, 1 count of conspiracy.
- Penalties paid by SAC Capital back in November 2013: $1.2 billion.
- Current or former employees of SAC Capital (including Martoma) who have been convicted of criminal insider-trading charges (whether by guilty plea or trial): 8.
- Number of “A” grades on Mathew Martoma’s fake Harvard Law School transcript: 4 (out of 7 grades).
- Number of D.C. Circuit judges that Martoma got clerkship interviews with: 3.
- Age of Mathew Martoma: 39.
- How many young children Martoma has: 3.
- The length of Martoma’s likely prison sentence (pursuant to the non-binding federal sentencing guidelines): 7-10 years.
Over at the FCPA Professor blog, Mike Koehler has a take on the year the SEC has had with bribery, an increasingly important remit for the agency's enforcement lawyers. The topline - action is slightly up from last year, but down from its peak a couple of years ago. Some intriguing details:
The range of SEC FCPA enforcement actions in 2013 was, on the high end, $153 million in the Total enforcement action, and on the low end, $735,000 in the Ralph Lauren enforcement action. Of the $300 million the SEC collected in 2013 corporate FCPA enforcement actions, approximately $219 million (73%) were in two enforcement actions (Total – $153 million and Weatherford – $66 million).
Two corporate FCPA enforcement actions from 2013 were SEC only (Philips Electronics and Stryker).
Of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement. In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013. The settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected in 2013 corporate FCPA enforcement actions.
In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations (either administrative actions that did not charge any FCPA violations or settled civil complaints that did not charge anti-bribery violations). In other words, approximately 69% of the $300 million the SEC collected in 2013 FCPA enforcement actions was no-charged bribery disgorgement.
After over four years of work, my book Law, Bubbles, and Financial Regulation came out at the end of 2013. You can read a longer description of the book at the Harvard Corporate Governance blog. Blurbs from Liaquat Ahamed, Michael Barr, Margaret Blair, Frank Partnoy, and Nouriel Roubini are on the Routledge’s web site and the book's Amazon page. The introductory chapter is available for free on ssrn.
Look for a Conglomerate book club on the book on the first week of February!
Permalink | Books| Comparative Law| Corporate Law| Economics| Finance| Financial Crisis| Financial Institutions| Law & Economics| Legal History| Legal Scholarship| Securities| White Collar Crime| Wisdom and Virtue | Comments (0) | TrackBack (0) | Bookmark
SAC Capital is paying a huge fine, but individuals aren't (yet) being charged for the insider trading committed by the firm. How should we evaluate this?
On the one hand, it makes sense to target the company if you believe that it was essentially set up to trade on inside information on behalf of its clients. The regrettable thing, maybe, is that the clients, who presumably flocked to the firm because they knew this, aren't taking haircuts out of the deal. But Cohen, the owner, certainly is. Here's James Stewart:
And given Mr. Cohen’s ownership of the firm, the $1.2 billion fine, as well as a previous $600 million settlement with the S.E.C., will come out of his pocket, rather than public shareholders’. With a fortune estimated at $9 billion, Mr. Cohen will still be a billionaire many times over, but the fine is nonetheless more than a dent in his personal fortune.
This aspect even mollified a critic like Professor Burton. “At least the target is the same as the alleged villain,” he said, referring to Mr. Cohen. “This is almost never the case when you sue and indict a public company.”
SAC Capital didn’t even pay lip service to the idea that it would unconditionally cooperate with the government’s investigation, let alone make a “timely and voluntary disclosure of wrongdoing,” which is another factor in the Justice Department’s guidelines that SAC flouted. “It’s extraordinary that they said publicly they would not cooperate,” Professor Friedman said. “They evidently thought they would get away with it with impunity.”
I don't get too hung up on this stuff - it is insider trading, after all, the constant obsession of the American prosecutor. One doubts that the aggresive policing of it is really making the financial system much safer. But there is something satisfying in sanctioning the vehicle designed to break that weird law hugely for, in fact, doing so.
Britain and the United States are increasingly matching one another stride for stride when it comes to supervision of the financial markets. Today, the meme was copying - Britain has announced a qui tam whistleblower program that may work like the one rolled out by the SEC. Earlier this year, it was about improving a flawed model; sick of being subjected to American deferred prosecution agreements, Britain came up with its own DPA scheme - and actually passed a law and went through notice and comment before doing so. And at times in the past, the model has been harmonization through a deal, which was the case for the first Basel capital adequacy accord, which only developed after the US and UK concluded a tentative arrangement on bank reserves that threatened to shut the rest of the world out of those then dominant financial markets.
These different approaches - copying, improving, negotiating - are distinctions that matter; but the consistent transmission of American rules into British financial markets is pretty interesting, given that we used to be talking about how Sarbanes-Oxley had made America distinctively bad, and Britain distinctively attractive, to public issuers.
Over at Dealbook, Brandon Garrett and I take the temperature of the DPA. A taste:
These agreements are a form of regulation — except it is a single company or entity rather than an entire industry that is ordered to adopt structural reforms. Regulatory programs are supposed to receive consultation and careful judicial review, but deferred prosecution agreements usually do not.
The larger picture is similar. The deferred prosecution agreement has not been endorsed by Congress, or vetted by an agency. Moreover, the agreements – settling a case before it can be filed – are designed to avoid even the deferential judicial review that occurs if a company enters a plea deal before a judge.
Britain’s impending adoption of the agreements, on the other hand, exemplifies the cautious embrace offered by good administrative law.
Britain’s proposed program comes with a code governing its use, and a requirementthat a court conclude that the agreement is both “in the interests of justice” and “fair, reasonable, and proportionate.” Moreover, the proposal itself has been opened for comment from the public.
We wish deferred prosecution agreements had been similarly vetted in the United States. Instead, American prosecutors have used agreements in cases of great public importance without any meaningful oversight.
Do give the whole thing a look, and let us know what you think.
Lehman Brothers failed five years ago, and the statute of limitations for most federal crimes is five years, so the restrospectives are full of recountings of the fact that no one important has been prosecuted over what happened. Here's an example, and, look, I'm surprised as well. If you could convict Ken Lay over things his subordinates did and his own "we won't stop trying to save this company and I'm confident we will succeed" statements, it's pretty surprising that not a single banking CEO has faced a similar fate.
But no jail time doesn't mean nothing, and the SEC's decision to reject a settlement over the mutual fund that broke the buck after Lehman failed, basically destroying the whole asset class until the Fed jerry-rigged an insurance scheme to save it, is an example of this. It shows that the government is looking to civil, rather than criminal penalties. It isn't clear to me that those cases are more winnable. But that appears to be the strategy. Along those lines, here's a nice argument that the government has changed some things since the crisis unfolded.
Over at Compliance Week, they've found a gap in the federal government's market surveillance, and they've gone and given it to the world:
This morning, the Daily Intelligencer reports, CNBC's Jim Cramer asked Preet Bharara, the U.S. Attorney for the SDNY, if Snapchat can be used to share insider trading tips without leaving a trail. Bharara's response: "I don't even know what you're talking about."
That's from the brilliantly titled Snapchat: The New Way to Tell Everyone that "Blue Horseshoe Loves Anacott Steel". You'll have to click on the link if you do not recall the reference.
The new policy, however, will make pursuing the big fish draining. For the large cases, it will mean that there are only two possible outcomes: a civil trial with a verdict, or an admission of guilt by the defendant, which will lead to serious follow-on litigation.
It is particularly troubling given that the new S.E.C. chairwoman, Mary Jo White, has said she would like to prioritize securities fraud cases. Those cases are hard enough to win to begin with. They frequently involve large public companies that may balk rather than make an admission and face litigation from plaintiffs’ lawyers who did not discover and bring cases on their own before the S.E.C. action.
One can also assume that making the price of admissions high will make the price of fines correspondingly low.