Wednesday
Jul232014

The Affordable Care Act, the DC Circuit, and the SEC

Yesterday, two circuit courts issued opposite decisions on the Affordable Care Act. The Fourth Circuit held that individuals could obtain subsidies through the federal healthcare site.

The D.C. Circuit, by a vote of 2-1 held the reverse. The D.C. Circuit opinion (Halbig v. Burwell) included on the panel judges Griffith, Edwards and Randolph. Edwards and Randolph are senior judges. The majority, Griffith and Randolph, were appointed by Republican presidents while the dissent, Edwards, was appointed by a Democratic president.

While it is difficult to attribute political leanings to judges (all are motivated by a desire to interpret the law fairly), the reality is, that until recently, the D.C. Circuit was made up of a majority of judges who showed very little deference towards administrative agencies. The SEC was a particularly common recipient of this lack of deference. The D.C. Circuit's decision in Business Roundtable v. SEC, the case that struck down the shareholder access rule, was a particularly egregious case of a lack of deference, and one hard to defend under existing case law.

When the Commission would lose (as in the shareholder access case), appeal to the full court (en banc) was mostly pointless. With a panel already uniting in opposition, the full court was not likely to produce enough votes to overturn the decision. Business Roundtable was not, therefore, appealed (although some argued that it should have been).  

The membership of the D.C. Circuit remained static (except for some retirements) during the current President's first term. He was the first president in memory to obtain no appointments to the D.C. Circuit. That changed, however, during his second term. The President has succeeded in obtaining approval for three judges on the court. There are now 7 non-retired judges appointed by Democratic presidents and four appointed by Republican presidents.  

The result, at least so it seem, is that deference has, to some degree, returned. Thus, the SEC's decision in National Association of Manufacturers v. SEC (the conflict minerals case) was an administrative law victory for the SEC. 

The NAM decision was not, however, a complete victory. The Commission saw a small portion of the rule struck down on questionable first amendment grounds. Unlike past cases, however, the Commission did not just take the shellacking. First, the SEC, showing verve, indicated its intent to implement the rule (staying only the portions held to have violated the first amendment) and denied a motion for a stay. For the statement from CorpFin on the issue, go here

The Commission then went even further. It contested the first amendment decision. In other words, the Agency declined to take 90% of a loaf (the portions of the rule not overturned) and opted for a strategy seeking the whole loaf. The Commission asked to have the case held. See Petition of the SEC for Rehearing or Rehearing En Banc Pending the Decision in American Meat Institute v. United States (May 29, 2014).

What has changed? Two things.  

First,  the constitutional question was already pending before the D.C. Circuit en banc, the issue having been raised in a different case. Second, given the shift in the make up of the court, there is a real chance that the law will shift to a place more in keeping with the SEC's view. If that happens, the Commission will likely ask the panel to alter its constitutional analysis and uphold the rule in its entirety.  

All of this brings us back to the Affordable Care Act. The DOJ has already announced (within hours) that it would take the case en banc in the D.C. Circuit. A victory for the United States (something highly probable) would confirm that, no matter what the individual panels do, the court en banc stands ready to change the reigning philosophy of the court.  

If the United States wins, it should embolden the SEC to appeal cases, to the full court en banc, that it loses where a panel was insufficiently deferential. In other words, the SEC would be in a position to no longer significantly fear legal challenges to rules (at least based on administrative law grounds). A loss like the one in Business Roundtable would no longer go unchallenged.  

Monday
Nov252013

Advising Candidates Entering the Market for Law Faculty

Every law faculty member has, at one time or another, had to sit down with someone interested in the teaching market and explain the criteria used by most law schools in selecting faculty.  Anyone who has participated in the appointments process at a law school knows that random factors always intervene. Moreover, since law schools only typically require a JD (and some not even that), every graduate meets this criteria.  As a result, law schools have to use other factors to reduce down the pool of candidates. 

In providing insight into this often Delphic process, the usual advice is likely to involved recommendations of a judicial clerkship, the publication of a law article (notes in law school for the most part do not count), and perhaps the teaching of a law class.

An empirical article about the market for law faculty titled The Labor Market for New Law Professors and written by two faculty members, Professors Tracey George at Vanderbilt Law School and Albert Yoon at the University of Toronto, provided some statistical analysis that may refine these answers.  The piece examined the factors that went into obtaining a short interview at the AALS conference, a callback interview, and a final offer.  The article used survey data from 2007-2008 and does not account for any shift in hiring market dynamics that have occurred since then.  The article also relied on survey data that was supplemented by "limited biographical information" from other sources. 

The article suggests that stage of career matters.  The optimal time to apply for law teaching is within a decade of graduation.  Judicial clerkships are a plus (not at the screening stage but at the job talk phase) as are published articles.  Notably, as one might suspect, the type of teaching experience matters.  Non-law teaching does not provide a plus in the hiring process.  Moreover, while writing is a plus, the publication needs to be in a top 100 journal. See Id.  ("A top-100 law journal continues to be an important plus: such candidates were 18-20% more likely to have job talks."). 

As the article describes:  

  • Candidates who graduated within the last ten years were 30-37% more likely to receive an offer than those who graduated outside of this window. A judicial clerkship improves the probability of being hired by roughly 9-19% (the effect diminishes sharply once controls are added for rank of law school attended). Prior experience in law teaching increases the probability by 25-27%. (But non-law teaching experience does not improve one’s chances.) An article in a top-100 journal increases the probability by 18%-20%.

Other factors matter in an uneven way.  Increasingly, candidates seem to come to the teaching market with JDs and PhDs. PhDs can help.  As the article notes:  "Non-law doctorates, regardless of subject, are statistically significantly related to the probability of being asked for a call-back". 

With respect to hiring, however, a PhD affects placement. Those with PhDs "who were no more likely to be hired, but conditioned on being hired, more likely to end up at a Tier-1 law school". As the article concluded: 

  • This means that conditioned on being hired, applicants with a PhD are less than half as likely to end up at Tier-3 or Tier-4 schools as applicants without PhDs, but more than twice as likely to end up at a Tier-1 school. In other words, having a PhD may not affect one’s chances of getting a tenure-track job, but appears to have a significant and positive effect on placement. 

Perhaps the most interesting factor is the importance of law school teaching or a fellowship position.  The statistics showed that this group had a 34-35% greater likelihood of obtaining a job talk.  See Id.  ("The largest factor came from professional employment: respondents from a law school teaching or fellowship position were 34-35% more likely to have job talk offers than the baseline group. In pair-wise comparisons, they were also at least 25% more likely to have job talk offers than respondents from any other employment."). 

There are any number of explanations for this "bump."  One is that teaching at a law school provides an indicia of how the candidate will succeed at one of the major tasks on any law faculty.  In short, the information to some degree reduces hiring risk.  More likely, however, the fellowship programs often try to set themselves up as a feeder for teaching positions, likely obtaining higher quality candidates.  To the extent this is true, the programs may provide assistance in the faculty job market, whether assistance in creating a strong record or in preparing for the rigors of the AALS interview process. 

Finally, what everyone also knows, is that the law school attended matters.  Id.  ("As expected, Tier-1 graduates and law teaching fellows fared better than other applicants").

So the advice today?  Mostly the same:  clerk, publish (even if not in the top 100, its important to show a culture of writing), and teach, with the proviso that a fellowship program is a good idea if it has  a strong record for faculty placement.  Finally, if you want a top law school teaching post to an elite law school get a PhD.  

Thursday
May242012

The "Myth" of Glass Steagall

DealBook had a piece criticizing Elizabeth Warren and arguing against the "myth of Glass Steagall." 

Warren apparently sent an email to supporters calling for the reinstatement of Glass Steagall.  The article quoted Warren as arguing that the law “stopped investment banks from gambling away people’s life savings for decades — until Wall Street successfully lobbied to have it repealed in 1999.” 

The quote on its face is hard to criticize.  Prior to the repeal of Glass Steagall, investment banks could gamble in the stock markets all they wanted.  They would not lose deposits since they lacked the authority to accept deposits.  They were mostly gambling with shareholder equity and borrowed funds. 

Commercial banks, on the other hand, accepted deposits but, for the most part, had to stay out of the equity markets.  This effectively reduced the risk profile of commercial banks.  For a piece on the adverse consequences of repealing Glass Steagall, see The "Great Fall": The Consequences of Repealing the Glass-Steagall Act

But somehow the article in DealBook morphed into an allegation that some arguing that repeal of Glass Steagall caused the financial crisis of 2008.  This argument was labeled "pure historical revisionism."  The article went on to "demolish" the "myth" that Glass Steagall caused the financial crisis. 

The only myth, however, that needed demolishing was that there is any significant body of opinion arguing that the repeal of Glass Steagall singularly caused the financial crisis.  A crisis as serious and deep as the one that began in 2008 could only have multiple causes and explanations, with these causes and explanations remaining hotly contested. 

Indeed, the article itself quoted no one who said that the crisis could be traced exclusively to the repeal of Glass Steagall.  Indeed, Warren herself, when asked about the topic, indicated that she did not believe the repeal caused the financial crisis.  Instead, she noted that: 

  • the repeal of the law “had a powerful impact to let the big get bigger.” She also contended that its repeal, brought about by the Gramm-Leach-Bliley Act, “mattered enormously. It is like holding up a sign to regulators to back up.”

In other words, the repeal contributed to the financial crisis in part by allowing the commercial banks to grow in size and by encouraging regulators to take a less active stance in policing the markets.  Both are likely true.

Having set up and dispatched a proverbial straw man, the article switched tact.  It used the conclusion that Glass Steagall did not singularly cause the finanial crisis to then argue that reinstatement was not the "ultimate solution" and any argument to the contrary should be met with skepticism. 

But of course it is a non sequitur to conclude that the non-causality of Glass Steagall ineluctably leads to the conclusion that it ought not to be reinstated.   The argument for reinstatement of Glass Steagall is not premised on the view that it was the singular cause of the financial crisis.  It is premised on the view that a division of functions would reduce risk, reduce size of the entities (and potentially reduce them to a size that could be allowed to fail), and facilitate regulatory oversight.  I would add that it would allow for a class of investment banking firms that were independent of commercial banks and were more dedicated to promoting active capital markets (a topic described in the article cited above). 

On this issue, Warren had the better of the analysis.

Monday
May072012

Diversity and Judicial Law Clerks

We criticize on this Blog the lack of diversity inside the corporate board room.  The latest statistics show that women represent about 12% of directors of public companies; people of color around 6%.  There is another place that could use some substantial improvement in diversity:  law clerks for federal judges. 

Upon graduation, there is nothing more prestigious than clerking for a judge, particularly a federal judge.  Recent graduates work for a year or two as a legal assistant to the judge, doing research and writing draft opinions.  After having spent three years reading opinions in law school, the opportunity to actually craft language that can affect future parties and interpretations is a particularly daunting but exciting experience. 

Judicial clerkships, because of both the skills learned (my legal writing skills improved immeasurably after a year of writing draft opinions and memos) and the competitiveness of the position, are stepping stones for other positions, whether in academia, the government, or prominent firms in the major cities.

Yet as the National Law Journal reports, these coveted positions are mostly foreclosed to people of color.  While there is some balance among the genders, African Americans and Hispanics at the appellate court level garnered around 2% each of these positions.  And guess what?  That percentage is down from 2006 when it was around 3%.  At the district court level, these grounds obtained about 3% of the position, a percentage that mostly held steady since 2006. 

What is the explanation?  You can guess; the lack of qualified candidates, the same explanation always given.  As the NLJ indicated:  "Judges have long said recruiting minority attorneys is difficult." 

In fact, there are qualified candidates.  One suspects, however, that many judges screen on the basis of law school, largely limiting their search to the very top schools. For a table showing the relationship between law schools and judicial clerkships, go here.  The absence of qualified candidates in those circumstances means the absence of qualified candidates at a limited array of schools.  

Law clerks do not have to exactly mirror the percentage within the population as a whole.  But when numbers are this low, there is a problem.  The starting point for any resolution is to have judges comb the application pool for qualified candidates from all law schools, not just a chosen few.  

Saturday
Mar032012

Is the “benefit corporation” part of a race to the top?

Sheppard Mullin’s Corporate & Securities Law Blog has put up a post about California’s new “Benefit Corporation” (here).  A benefit  corporation:

[H]as the purpose of creating “general public benefit.” The term is defined as “a material positive impact on society and the environment ….”

Two things struck me about these new entities.  First:

The directors of a benefit corporation are required by law, in connection with every action or proposed action, to consider the impacts of the action on shareholders, employees, customers, the local and global environment, community and societal considerations and various other factors.

And:

The directors of benefit corporations have the freedom to pursue the creation of general public benefit and any identified specific public benefits without concern that they will be accused of straying from the exclusive goal of creating economic benefits for the shareholders.

It strikes me that in order for these provisions to be effective, the Articles (or bylaws) will need to include some mechanism to deal with conflicts between the various constituents.  Perhaps some sort of express hierarchy of preferences, or a “maximum benefit” formula, or an arbitration provision could do the trick.

Second:

The new law authorizes “benefit enforcement proceedings” by which benefit corporations, either directly or through derivative actions brought by shareholders, may enforce the obligations of the corporation to seek to pursue the general and any identified specific public benefit purpose. The Articles of Incorporation may entitle other specifically named persons to bring these proceedings.”

This seems to be a significant positive addition to previous stakeholder statutes that empowered boards to consider the interests of groups other than shareholders but failed to give those groups any enforcement powers.  My sense is that for these provisions to be effective, the right to sue should be specifically granted to relevant stakeholders in the Articles as permitted.

I’m not saying that I’m convinced that these types of entities will be successful.  There are indeed good reasons to be skeptical of the effectiveness of these types of attempts to free business from the “shackles” of shareholder primacy.

For more related links you can check out Usha Rodrigues’s post on benefit corporations over at The Glom from back in January (here).

Friday
Jan272012

On Scholarship

Thanks to Jay and his colleagues for inviting me to join the conversation.  I've read this blog for a long time, and I am excited to be a part of it.  For my contribution, I'm going to spend a lot of my time talking about and promoting scholarship. 

This morning, I watched an interview of David Segal, the reporter from The New York Times, who has been very critical of legal education.  Although I agreed with some of his points, I was troubled by the fact that he faulted law schools for using tuition dollars to support research and scholarship.  I do admit that the model for legal education should and must evolve and that funding for research and scholarship has to be considered in the process.  With that said, however, I think it's important to remember that research and scholarship improves teaching, the practice of law, and the human experience. 

If high quality writing is meant to be free, I look forward to my free copy of The New York Times tomorrow.  I also hope that Mr. Segal will consider donating his salary to this site.

The New York Times
Tuesday
Dec272011

The Loss of a Titan

There is no question that the opinions expressed on this Blog rarely if ever coincided with the views of Larry Ribstein.  But his opinions and intellect were a big part of the corporate governance debate and added considerable rigor to the analysis.  He will very much be missed.

Tuesday
Dec202011

We heard it from three people, so it must be true

In yesterday’s New York Times, Joe Nocera incisively attacked the persistent falsehood that Fannie Mae and Freddie Mac were “ground zero” for the financial crisis. In “An Inconvenient Truth,” Nocera correctly observed that: “The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.”

In an analysis of the Financial Crisis Inquiry Commission Report, I challenged the blame-Fannie-and-Freddie for the crisis myth, here. As I wrote early in 2011:

Myth 4: The big government-sponsored companies (GSEs), Fannie Mae and Freddie Mac caused the Financial Crisis because the government pushed them to guarantee mortgage loans to poor homeowners as part of their public housing mission. Variations on this are that public housing mission drove bad underwriting by lenders who had to create risky mortgages to fulfill the demand of the GSEs who needed to buy them, as they were desperate to meet housing goals.

Reality 4:  Not exactly. Both the Report and the primary dissenting statement agree that on their own Fannie and Freddie did not cause the financial crisis. They focus blame largely on the so-called “private label” mortgage market. These are bank and non-bank,  brokers, lenders, and securitizers.  Fannie and Freddie did not originate loans; the “exotic” and dangerous loans were designed by and extended to borrowers through the private label channel. While the Report and the Thomas Dissent support the notion that Fannie and Freddie’s business model was flawed, they also agree that affordable housing goals did not either drive Fannie and Freddie to ruin or cause them create the overwhelming demand for predatory, high-risk, mortgages.

So, why is it that the distortions repeated by folks like Peter Wallison have traction with the public?

This phenomenon reminds me of an early scene in F. Scott Fitzgerald’s The Great Gatsby. At the start of the novel, upon reacquainting with her cousin Nick Carraway, Daisy Buchanan inquires whether the rumors of his engagement to a woman out West are true. Even Daisy’s husband Tom chimes in. Nick quickly denies any designs to be wed. However, Daisy brushes off his response and insists that she knows better: “We heard it from three people, so it must be true.”

The statement is funny on its face because Nick is the primary source. Surely, Daisy should recognize that he is more capable, than three gossips, of knowing whether he is or was engaged to be married.  Yet, what is also amusing is that beneath the surface, there is a kind of familiar truth to Daisy’s rejoinder. It resonates, echoing various biases to which many of us succumb. Through exposure to repetition, particularly by a seeming variety of sources, we accept a certain version of reality. Even when faced with credible contradictory evidence, we have a hard time shaking free of the various “truths” we have collected.

So what does this have to do with the financial crisis? The story of the crisis deals with very real people offering fictions, steeped in ideology.  Yet, there is a connection. There is much the falsehoods about the financial crisis, fed on ideology, politics and economic-self-interest have in common with Daisy’s triple-sourced “truth.”  The myths about the causes and responses to financial crisis are repeated by many people. Yet, notwithstanding clear evidence refuting them, even from a number of sources with better information, many of us continue to hold on to them.

[This piece first appeared on The Pareto Commons blog, December 20, 2011].

Wednesday
Dec072011

Katz v. Gerardi: Claim Splitting and the Definition of Purchasers under the Securities Act of 1933

In Katz v. Gerardi, 655 F.3d 1212 (10th Cir. 2011), the Tenth Circuit Court of Appeals affirmed the dismissal of two class action suits dismissing claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 (“Securities Act”).

Jack Katz and Infinity Clark Street Operating (“Infinity”) both contributed property to a real estate investment trust operated by Ernest Gerardi and later by Archstone-Smith Trust (“Archstone”).  Archstone merged with Lehman Brothers.  The merger permitted investors in Archstone to receive cash or shares in a new investment vehicle.  Katz and Infinity filed separate class action suits against both Gerardi and Archstone alleging that they made false disclosures under Sections 11 and 12(a)(2) of the Securities Act of 1933.

Infinity’s complaint was filed in 2007 in the United States District Court for the District of Colorado.  All claims were dismissed except for one alleging breach of contract, which was stayed pending arbitration.  Katz’s complaint was filed in Illinois in 2008 and removed by Archstone to the United States District Court for the District of Colorado.

Once in Colorado, Katz amended his complaint to include Infinity as a plaintiff.  As a result, Infinity was a plaintiff in two separate actions in the same court.   The Colorado District Court subsequently dismissed Infinity from the case concluding that the plaintiff had engaged in claim splitting.

The rule against claim splitting requires a plaintiff to bring all claims against a defendant in a single suit to maximize use of judicial resources.

Infinity argued that claim splitting did not apply because there had been no final judgment in the original action.  The Tenth Circuit found the argument unpersuasive because the test for claim splitting was not whether there was finality of judgment, but whether the first suit would preclude the second suit.  As the court reasoned:

Our precedent cannot be clearer: the test for claim splitting is not whether there is finality of judgment, but whether the first suit, assuming it were final, would preclude the second suit. This makes sense, given that the claim-splitting rule exists to allow district courts to manage their docket and dispense with duplicative litigation.  If the party challenging a second suit on the basis of claim splitting had to wait until the first suit was final, the rule would be meaningless. The second, duplicative suit would forge ahead until the first suit became final, all the while wasting judicial resources.


The court also concluded that Infinity “essentially admit[ed] claim splitting” by adding the same securities claims to the other action filed in Colorado.  Moreover, at oral argument, “Infinity even conceded the securities law claims can be litigated in its other lawsuit.”

The court also affirmed the dismissal of the securities claims brought by Katz.   Section 11 provides a cause of action for false information in a registration statement.  Section 12(a)(2) provides a cause of action against parties who provide prospectuses or communications which include untrue statements of material fact.

Both sections 11 and 12(a)(2) require plaintiffs to show they were the purchaser of securities to have standing.  A seller of a security cannot, therefore, bring an action under these provisions.    The fundamental change doctrine provides an exception to this requirement.  This exists when “the shareholder is faced with the choice of either holding stock in a nonexistent corporation or exchanging his shares for value… [in] mergers.”  As the court described:  “The doctrine enables a shareholder, whose investment has been fundamentally changed, to meet the causation and reliance requirements of the securities laws even though the shareholder has not made an actual purchase or sale of securities.”

Katz received cash for his units because of the merger and, as a result, sold rather than purchased securities.   He nonetheless asserted that he had standing as a purchaser under the fundamental change doctrine.  Concluding that the doctrine applied to claims under the Securities Exchange Act of 1934, the court declined to apply it to claims under the 1933 Act.   Even were the doctrine applicable to such claims, however, the court held that it did not allow plaintiff to be transformed into a seller.

Further, even if we adopted the fundamental change doctrine and applied it to Katz's 1933 Act claims, it is still no help. In a forced sale, he is still a seller, not a purchaser. To find that Katz has standing, we would still have to assume he purchased the "new" A-1 Units, which he never did. In fact, Katz owned the same A-1 Units both before and after the merger was announced. Nothing can convert the sale of his A-1 units for cash into a purchase of shares he never acquired.

Because Infinity was improperly included in claims it did not make in its original suit and because Katz did not have standing to make a claim under the Securities Act of 1933, both cases were dismissed.

The primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Nov022011

Renfro v. Unisys Corporation: An Examination of Fiduciary Responsibility under ERISA

In Renfro v. Unisys Corp., 2011 U.S. App. LEXIS 17208 (3rd Cir. Aug. 19, 2011), members of a 401(k) defined contribution plan (“Plaintiffs”) brought this action against Unisys Corp. (“Unisys”) and Fidelity Management Trust Co. (“Fidelity”) (collectively, “Defendants”), under the Employment Retirement Income Security Act of 1974 (“ERISA”). Plaintiffs alleged that Defendants violated their fiduciary “duties of loyalty and prudence” through the “the selection and maintenance of the mix and range of investment options included in the plan.”  The trial court granted the defendants’ motion to dismiss and the Third Circuit Court of Appeals affirmed.

The Unisys Corporation Savings Plan (the “Plan”) includes a stable value fund, the Unisys Stock Fund, and seventy-one options provided by Fidelity. The seventy-one options are broken into four commingled pools and sixty-seven mutual funds. Mutual funds are subject to a number of reporting requirements and, as a result, management and administrative fees are attached.

Plaintiffs alleged that the attached fees were excessive when compared to other viable investment options. Defendants moved to dismiss the action under Fed. R. Civ. P. 12(b)(6). In considering an ERISA dismissal motion, the court must question “whether [the entity] is a fiduciary with respect to the particular activity in question.” The court evaluated each of the defendants individually.

While Fidelity was the directed trustee of the Plan under 29 U.S.C. § 1102(a)(1), the court held that it had no fiduciary duties relating to the challenged conduct because it was responsible for investing and administrative functions rather than selection of investment options. Fidelity was found not liable as a co-fiduciary, nor was it responsible for restitution.

In evaluating Plaintiffs’ claims against Unisys, the named fiduciary under 29 U.S.C. §1102(a)(1), the court adopted the analysis of other circuits in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), and Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009). Courts “look[] first to the characteristics of the mix and range of options and then evaluate[] the plausibility of claims challenging fund selection against the backdrop of the reasonableness of the mix and range of investment options.” The court specifically assessed the available “risk profiles, investment strategies, and associated fees,” and found the Plan included “a [reasonable] variety of risk and fee profiles.” The court noted that allegations of concealed kickbacks may lead to a different analysis.

Finally, because the court affirmed the order of dismissing the action against Unisys, it refrained from evaluating Unisys’ motion for summary judgment under ERISA’s safe harbor provision, 29 U.S.C. § 1104(c).

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Oct072011

Bank of America, Merrill Lynch, and Salvaging the Financial Markets  

Bank of America has had a tough time over the last few years.  Things arguably started in earnest when it acquired Merrill Lynch back in late 2008.  At the worst of the financial crisis, BofA went through with the acquisition despite the investment banking firm's hemorrhaging losses.  The acquisition engendered huge criticism, law suits by the SEC and NY Attorney General, and a shareholder class action.  Since then things have only gotten worse.  Law suits arising out of the mortgage business have proliferated and share prices are down. 

The NYT had a piece that to some degree revisited the Merrill Lynch acquisition, "Profits but No Joy for Merrill."  The article noted that the business at the investment bank was doing "surprisingly well" and that based upon fees is second only to JP Morgan.  In other words, it was a smart acquisition by BofA.  (This is the case despite the fact that the article states that "[i]n hindsight, many agree that Mr. Moynihan's predecessor, Kenneth D. Lewis paid too much for Merrill Lynch"). 

This piece requires a few observations.  Go back to the Fall of 2008.  The financial markets were in free fall.  Lehman shut down and the interbank market ceased to function.  Merrill Lynch was the next domino expected to fall.  In fact, as its current success shows, Merrill Lynch was not a sick company that needed to be disciplined by the market.  It was a healthy, strong investment bank that was weakened by unusual economic conditions that had not been seen since the Great Depression.  Merrill Lynch suffered from the loss of confidence that rippled through the financial markets and, unlike the commercial banks, it did not have the benefit of the Federal Reserve to bail it.  For anyone who thinks that the market is always right and government intervention is always wrong they should study these circumstances.

The second thing is that BofA was right to buy Merrill.  That seems clear now.  But its more than that.  Had Merrill not been purchased, Treasury probably would have allowed it to fail.  Had Merrill failed, along with Lehman, the depths of the financial crisis would have gotten exponentially worse.  However bad things were and however slow the recovery has been, they would have been far worse had a second investment bank collapesed.  As we noted on this Blog, the acquisition of Merrill presumably prevented its failure and presumably prevented a crises from getting far worse

In that regard, note the leadership that this acquisition took.  The easy thing to have done, given the growing losses at Merrill, would have been to back out.  Sure there would have been lawsuits and fallout.  But those are costs that can be managed.  Instead, the acquisition went through, the financial markets were saved a debilitating shock, and BofA got a profitable business that is today keeping it afloat.  Lewis was able to see the future in a way that, at the time of the acquisition, many could not and he was able to persevere despite enormous criticism. 

As BofA continues to suffer from low share prices and relentless law suits, it is worth keeping in mind that it probably did more than any other business to help the US recover from the financial crisis. 

Thursday
Oct062011

OnLine Law Review Articles and the Evoluation of Legal Scholarship (Part 2)

Law reviews recognize some of these limitations and have, to some degree, fought back.  Probably all of them have a web presence.  Some, however, have gone further and sought to publish a separate Internet journal that presumably publishes articles more quickly.  These pieces presumably go through a cite checking and editing process.  Some appear in Lexis and Westlaw. 

A cursory review of a number of journals, however, reveals that the pieces sought are typically short (sometimes very short), lightly footnoted (often not footnoted at all) and frequently in the nature of an opt ed or opinion piece.  Penn (in PENNumbra) seeks pieces not to exceed 3000 words (with footnotes not to exceed 1250 words) that are either response to articles or "debates".  Michigan, in First Impressions, seeks "opt-ed length pieces".  Columbia publishes "Sidebar," which targets "responses to scholarship that appears in its print edition, and original pieces on current legal issues."  Georgetown calls its online presence Ipsa Loquitur the "blog and online companion" to the Law Journal.  The students are specifically looking for "more informal blog posts as well as formal responses to in-print scholarship, scholarly debates, and case comments."

To the extent these pieces are lightly footnoted and short, they minimize the work that already excessively busy students must do to ensure publication.  On the other hand, to the extent they are essentially extended blog posts, there would likely be numerous online places where they could be published.  The value added of appearing on a law review site (other than the status that comes with the ability to add a prominent law school name to the citation) is unclear. 

A significant exception appears to be the Yale On Line Journal.  Originally called "the Pocket Part," the On Line Journal has a more developed philosophy and seeks "scholarship on recent legal and political developments and responses to scholarship published in the printed pages of The Yale Law Journal."  The pieces seem longer (1500 to 6000 words, not including footnotes) and have more detailed footnotes.  The current piece, The Supreme Court (of Baseball), is online without footnotes but an attached PDF Has 200 of them.  The submission guidelines are here.  In other words, the pieces are more scholarly, are likely published faster, and relate to current developments in the law.

So this leads to the question, what role should online journals play?  There is in the legal community a deep need for short, focused, thoughtful pieces on current developments.  This means something more than opt eds and opinions pieces (not because they aren't valuable but because there are plenty of existing outlets for these sorts of publications) but not as lengthy as traditional law review articles. 

Morever, the need is particularly important for inchoate developments.  Judges and clerks might benefit from analysis of cases on appeal (as we have noted on this Blog, law clerks read blog posts).  Regulators might benefit from analysis as they engage in the rulemaking process.  Imagine all of the provisions in Dodd-Frank that regulators are struggling to understand and implement.  Litigators developing strategies (say on the current spate of law suits arising out of the financial crisis) might benefit from creative theories. 

As an example, the DC Circuit recently struck down the SEC's shareholder access rule, Rule 14a-11. The underlying issues of shareholder access are widely known.  The DC Circuit's opinion, however, was a hybrid.  It turned on administrative law issues, an arcane area that can be very difficult to understand.  This is in part because administrative law contains any number of black letter principles that can be taught but also can be routinely ignored by the cours (with the Supreme Court likely the worst offender). 

So I wrote a short paper on the issues contained in the case, discussing some of the complexities involved in the interrelationship between corporate governance and administrative law, Shareholder Access and the Uneconomic Analysis:  Business Roundtable v. SEC.  The piece was then very quickly published in the online law review at the University of Denver Sturm College of Law after going through a quick editing and cite checking process.  The law review version is here.  The paper was downloaded frequently on SSRN during the first month of publication. 

The piece has the potential to have some long term value.  The DC Circuit's analysis will likely be discussed in the literature for years.  Rapid publication, however, was useful to a number of ongoing developments.  The SEC had to decide whether to seek rehearing or file for certiorari (it ultimately did not).  The SEC also had to decide whether to repropose the rule struck down in the case and, if so, how to deal with the court's criticisms (no public decision there yet). 

This suggests that scholarship is not a dichotomy between blog posts and traditional law reviews.  There is a need for intermediate scholarship, something thorough but short, involving current issues and published quickly.  Such scholarship would be particularly useful to decision makers, particularly when addressing issues or concerns outside of the decision maker's traditional area of expertise.  These pieces can have high influence but short shelf lives.  

For "intermediate" scholarship to become common, there will need to be more online outlets.  The outlets will need to accept pieces that, even though short, are well footnoted.  This may mean a larger law review staff.  Most importantly, however, this type of scholarship will only become common if the academic community sees the value and provides sufficient incentive. 

Thursday
Oct062011

OnLine Law Review Articles and the Evoluation of Legal Scholarship (Part 1)

For most of the history of law teaching, the law review article was generally considered the highest form of legal scholarship, at least among academics.  Moreover, publications in one of the top journals was synonomous with quality.  This was true despite the fact that top law reviews often had a demonstrated bias for taking articles from their own faculty.  Nonetheless, it was the system and it was influential.  Reputation, tenure, and elevation among the hierarchy of law schools often turned upon the number of law review articles and their placement in top journals. 

The digital age has, however, eroded this system, although many are not yet fully aware of this.  While placement in a top journal remains di rigueur for academics, it has become less important to those actually relying on the work.  To the extent the paper is posted on one of the online services such as SSRN, anyone with a browser can find it, whether its in the Harvard or the Alaska Law Review (published by Duke by the way).  Decision makers (judges, legislators, regulators) are less interested in the where of publication and more interested in the what of teh contents (the type and quality of the analysis).

The digital age has also raised another concern with respect to law reviews.  In a digital age, they are slow, glacially slow.  For those articles designed to be written for the ages, the delay between submission and publication is probably not very important, even in the digital age.  The works of a Karl Llewellyn or a Justice Brandeis would likely have the same influence.  But for many scholars, the work will likely have a more immediate and short lived impact.  In those circumstances, a delay in publication matters.

Blogging has provided some competition.  It represents a mechanism in the digital age that allows for rapid analysis in a place that can be easily located.  Blogging can involve extensive discussions of cases or issues that rival those in law reviews.  (This Blog, for example, often has multiple part series on the same case or development).  As a result, blog posts are frequently cited in law review articles and by courts.  Although now a bit dated, take a look at the data in Of Empires, Independents, and Captives: Law Blogging, Law Scholarship, and Law School Rankings

But blogs have disadvantages.  For one thing, life on the Internet is a state of nature that Thomas Hobbes would recognize.  There are fewer rules and accepted conventions.  For another, blog posts do not get the benefit of cite checking and other student provided editing services associated with law reviews.  (This Blog, however, does have a student review process for student posts).

Which brings us to what I describe as "Intermediate Scholarship," something most apparent from online journals.  We'll pick this up in the next post.

Tuesday
Sep272011

Everybody Wants to Rule the World

Possibly my two favorite things are 80s music and Goldman Sachs-related grandiosity. So, a combo is a special treat. We have them together with the BBC-broadcasted-boastings of independent trader Alessio Rastani.  Rastani proudly proclaimed today,

“This is not a time right now for wishful thinking that governments are going to sort things out . .  The governments don’t rule the world, Goldman Sachs rules the world.”

You’ve got to give this guy credit. The bar was pretty high over at Goldman, what with Blankfein doing God’s work and Tourre deeming himself the “fabulous Fab.” The interview is jam-packed with other gems, and it will probably go viral soon, so it’s worth watching.  What about the 80′s music?  Tears for Fears, of course: Everybody Wants to Rule the World.

There is a lot to mourn and to fear in the brief interview with Rastani. The context alone is disturbing — the continued financial crisis that will soon be amplified with the problems in the Eurozone. Perhaps the most troubling is the flat out admission that:

“For most traders we don’t really care about having a fixed economy, having a fixed situation, our job is to make money from it.”

I guess this guy, as an outsider, did not get the memo that the firm was trying to live down the “great vampire squid wrapped around the face of humanity” reputation. Truly, this is the kind of thing that should be wiki-leaked, not shared in the bright lights of a global news network.

This post first appeared on the ParetoCommons on September 26, 2011.

Friday
Sep232011

Influence in the Academy and the Internet

David Bernstein over at the Volokh Conspiracy put up a post a week or so about "advice" given by faculty at top law schools to their mentees entering the teaching market.  The advice ranged from prominently displaying ideological leanings to avoiding actual experience and going onto the job market fresh out of a judicial clerkship.  As the post rightfully noted, all of the advice is in one way or another suspect. 

But what caught our eye in particular was this piece of advice:

  • Don’t bother going into the legal academy unless you can get a job at a top fifteen law school, otherwise you are better off working at a law firm; no one pays attention to what people at lower-ranked law schools have to say, so you will just get frustrated if you wind up at one of them.

David has this observation to make about the comment: "Actually, being a law professor at any law school with a good academic environment is one of the best jobs in the world; people do move up; and people do pay attention to good scholarship emanating from outside the top 15."

It has always been the case that faculty at non-top 15 (or 10 or 20) law schools have exercised important influence, contrary to the comment.  But the comment bears a bit more thought.  First, it is interesting to consider the notion of "influence."  After all, there are multiple constituencies that can be influenced by the academy. 

To the extent that they include only other academics, the top schools tend to be clustered on the coasts.  Most of the top 15 schools are on the east and west coasts.  Of the top 15 law schools, 9 are on the East Coast (Yale, Harvard, Columbia, NYU, Penn, Virginia, Duke, Cornell and Georgetown) and two (Stanford and Berkeley) are on the west cost.  Other than the University of Texas, Michigan and the two schools in Chicago (Chicago and Northwestern), no other geographic areas are represented in that cluster.  As a result, faculty interaction among these schools is relatively easy and could facilitate influence. 

But this is a cramped definition of influence.  Influence can also encompass the bar and assorted decision makers, whether those in the judiciary or those in the legislature (not to mention regulatory agencies). In that context, while a top 15 school or a top 15 journal might provide a small edge, the reality is that smart scholarship and commentary from anywhere will have the potential to influence.  All of this brings me to the Internet.   

The bar and decision makers want things that can help advance whatever process they are undertaking.  In the pre-Internet days, locating appropriate scholarship was harder and probably resulted in a number of expediencies such as an emphasis on the rank of the relevant journal. 

That has changed with the advent of the Internet.  To the extent articles are posted on SSRN, they can be found through free Google searches.  Moreover, Google, unless instructed otherwise, doesn't care whether the article is in a highly ranked or a lower ranked journal.  To the extent, therefore, that scholars can develop a significant Internet presence for their work, anyone with access to the Internet and a search engine can find it. 

In a piece I wrote several years ago (that ought to be updated if I could ever find the time), Of Empires, Independents, and Captives: Law Blogging, Law Scholarship, and Law School Rankings, I noted that, for the most part, faculty at the highest ranked schools were not active bloggers (with a few very notable exceptions).  Many of these faculty have succeeded under the traditional criteria for influence -- teaching at a top school and publishing in top journals.  Those blogging were far more likely to come from the next tier of schools.  This made sense.  Blogging amounted to a work around of the traditional criteria.  Bloggers might not appear in the top journals as often but their Internet presence made it easier to find their work.  

Moreover, there is evidence of the influence of posting on the Internet.  Bloggers are well represented in SSRN.  Blog posts are increasingly appearing in court opinions and in law reviews.  There is evidence that they are read by judicial law clerks.

In other words, the advice that influence is limited to the top 15 law schools is wrong.  But it also reflects the view of a faculty member in a top school who has not yet figured out how the Internet has altered the landscape. 

Thursday
Aug252011

Eyes Wide Open: New York Court of Appeals Upholds Broad Release of Claims in Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V.

In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 2011 NY Slip Op 4720, 1 (N.Y. June 7, 2011), the court upheld the dismissal of Plaintiffs’ complaint alleging fraud, breach of contract, and breach of fiduciary duty arising out of the sale of their interests in Telmex Wireless Ecuador (Telmex México) to defendant América Móvil, holding that the claims were barred by the broad general release signed at the time of the transaction. 

Plaintiffs, two Ecuadorian holding companies, and Telmex México, a Mexican telecommunications holding company, formed Telmex Wireless Ecuador LLC (TWE) to acquire interests in Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel (Conecel), an Ecuadorian telecommunications company.  Plaintiffs received a minority stake in TWE.

In forming TWE, the three companies signed a number of agreements, including the “Agreement Among Members,” which gave Plaintiffs the right, in the event of a rollup of TWE into another entity, to obtain reasonable financial, accounting, and legal information, and to exchange their TWE shares for shares in the new entity.  In addition, the “Put Agreement” gave Plaintiffs the right to sell their TWE shares to TelMex at a floor price during certain windows between March 2002 and March 2006.

In September 2000, Telmex México rolled TWE into a new entity, América Móvil, S.A.B. de C.V. (América Móvil).  Plaintiffs alleged that they then repeatedly requested financial information and reports in order to negotiate a share exchange under the “Agreement Among Members,” but never received this information.  Further, Plaintiffs alleged that América Móvil falsely represented Conecel’s financial position in order to avoid distributing profits.  As a result, Plaintiffs exercised their March 2002 put option and sold 50% of their TWE shares to TelMex.

In July 2003, Plaintiffs agreed to sell the remainder of their TWE shares to Telmex at the floor price.  As part of this agreement, Plaintiffs signed two releases.  The “Members Release” released Telmex from “all manner of actions…past, present, or future” arising out of the agreement or out of ownership of interests in TWE.  The “Master Release” contained similar language, but included a clause excluding releases of claims involving fraud.

In 2008, Plaintiffs brought an action against Defendants in New York Supreme Court alleging fraud, breach of fiduciary duty, and breach of contract arising from Defendants’ failure to provide financial information and negotiate a share exchange in good faith. The trial court denied Defendants’ motion to dismiss on grounds that the action was barred by release.  On appeal, Plaintiffs argued that the “Members Release” did not encompass fraud claims, and that even if it did, it was fraudulently induced.  The Court of Appeals rejected this argument, reasoning that a release may encompass unknown fraud claims and may only be challenged as fraudulently induced if the challenge identifies deception distinct from the subject of the release.  Because Plaintiffs did not allege such a distinct instance of deception, the claim of fraudulent inducement failed.  Finally, the court declined to read the fraud claim exclusion of the “Master Release” into the “Members Release,” holding that it was the latter that governed Plaintiffs’ claims.

The court also rejected Plaintiffs’ arguments that they reasonably relied upon América Móvil’s representations as a fiduciary, concluding that Plaintiffs were sophisticated principals with “eyes wide open” to Defendants’ alleged propensity for fraud, yet failed to protect themselves properly when agreeing to the “Members Release.”

Because the “Members Release” that governed Plaintiffs’ claims was broad enough to encompass fraud, and was not induced by a fraud separate from that alleged in the claims, the court affirmed the Appellate Division’s dismissal of the case under CPLR 3211 [a] [5] (“Motion to dismiss cause of action” on grounds of release) and awarded court costs to Defendants.

The primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Aug242011

CFTC v. Walsh: Fraud and the Financial Benefits of Divorce

In Commodity Futures Trading Comm. v. Walsh, No. 91, (N.Y. June 23, 2011), the court held Janet Schaberg, the ex-spouse of Stephen Walsh, was entitled to keep assets awarded during her divorce, even if those assets turned out to be  proceeds from fraud.  Stephen Walsh and his partner, Paul Greenwood, are currently defendants in a pending case brought by the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”).  The CFTC and SEC allege Walsh and Greenwood defrauded public and private investors of more than $550 million between 1996 and 2009.  There is no evidence that Schaberg had knowledge of Walsh’s activities. 

After 25 years of marriage, Schaberg and Walsh filed for divorce in 2005.  In 2006, Schaberg and Walsh entered into a Stipulation and Settlement Agreement under New York Domestic Relations Law §236(B)(3).  Under the stipulation, Schaberg received ownership of two properties in New York and Florida valued at $6.7 million and relinquished her interest in the couple’s Port Washington, New York home, valued at $7.5 million.  Schaberg also received $5 million held in bank accounts and a distributive award of $12.5 million payable by Walsh in installments through 2020. 

The CFTC and SEC filed their complaints in 2009. In the complaints, the agencies sought disgorgement of proceeds from the fraud against Walsh, Greenwood, and Schaberg.  Schaberg argued her divorce settlement was not subject to disgorgement because she became a “good faith purchaser for the value of the assets” when she entered into her divorce stipulation. 

To determine whether Schaberg’s property was subject to the agencies’ injunctions, the court first considered whether marital property included proceeds of fraud under New York law.  New York state law defined marital property as “all property acquired by either spouse during the marriage but before entering into a separation agreement.” The court concluded that property attained with the proceeds of fraud did constitute marital property and because marital property encompassed all property acquired during the marriage, marital assets could be transferred to an innocent spouse even if illegally acquired. 

The CFTC and SEC argued that the court should recognize an exception based on the public policy of returning stolen property to its rightful owner.  The court rejected this contention noting that money, though acquired through fraud, cannot be earmarked or traced.  Additionally, the court noted public policies favoring finality of business transactions and divorces, which enable ex-spouses to move forward with their lives. 

The court next considered whether Schaberg acted in good faith and paid fair consideration for the property she acquired from the divorce.  The CFTC and SEC argued that Schaberg did not give fair consideration by relinquishing her right to other marital property because it was all created by fraud thus resulting in illusory consideration.  Schaberg argued that she provided fair consideration and became a good faith purchaser.  Debtor and creditor law in New York defined a good faith purchaser as someone who has given fair consideration without knowledge of the fraud.  (Debtor and Creditor Law §278 [1])  To determine whether Schaberg paid fair consideration, the court looked at whether Schaberg relinquished rights to any untainted marital property and non-tangible assets.  The court left the question of fair consideration to the federal courts but did note that Schaberg not only relinquished her interests in the estate owned by the couple but also her right to inherit from Walsh and any claims to maintenance. 

The court concluded Schaberg’s claims to her divorce proceedings prevailed over the victims’ claims for disgorgement because she acted in good faith and had no knowledge of the fraud.  The court also noted New York’s strong public policy for finality of divorce proceedings.

The primary materials for this case may be found on the DU Corporate Governance website. 

Tuesday
Aug232011

New Jersey Court Denies Plaintiffs’ Claims for Tort Damages Arising From Contractual Obligations 

In Scherillo v. Dun & Bradstreet, Inc., 2011 WL 2610134 (D. N.J. June 30, 2011), the court granted the defendant’s motion for summary judgment finding that neither plaintiff can base their claims in tort when the obligations rose out of contractual obligations. In their individual complaints, the plaintiffs claimed that Dun & Bradstreet (“D & B”) negligently misrepresented thoroughly investigating Agape World, Inc. (“Agape”) and failed to reveal that Agape’s CEO had a securities fraud conviction from 1999. Agape purportedly provided high interest bridge loans for large construction projects and claimed to offer a 10% return on investment over a two-month period.

In 2007 and 2008, individual plaintiffs John Scherillo and Richard Racioppi invested more than $1 million in Agape. Each investor was concerned about the validity of the company and sought a risk assessment report from D & B.  The report indicated that there had been no criminal action against Agape’s management.  Relying on the D&B report, each plaintiff continued to invest significant amounts of money in Agape. In 2008, Racioppi and Scherillo were unable to withdraw their investments in Agape. Agape executives informed Racioppi and Scherillo that contracts were being delayed and all funds were frozen. The plaintiffs later found that Agape’s CEO was convicted of securities fraud in 1999, information that was omitted from the D & B report.

In March of 2009, each plaintiff filed a complaint against D & B alleging gross negligence and negligent misrepresentation.  Scherillo sought $75,000 in compensatory damages and $5 million in punitive damages while Racioppi sought $1 million in compensatory damages and $5 million in punitive damages.

On June 30, 2011, the court granted the defendant’s motion for summary judgment, finding that neither plaintiff could base their claims in tort when the obligations arose out of a contractual obligation. Specifically, the court found that “a tort remedy does not arise from a contractual relationship unless the breaching party owes an independent duty imposed by law.”  New Jersey imposed an independent duty only on physicians, attorneys, insurance brokers, and manufacturers. Here, the plaintiff’s contended that D & B assumed the duty to fully and properly disclose information. The plaintiffs, however, admitted in their complaints that this duty arose out of a contractual obligation. The court found that there was no independent duty to fully and properly disclose information. Thus, D & B was not under an independent duty imposed by law and the plaintiff’s claims were actionable only under contract law.  

The primary materials for this case may be found on the DU Corporate Governance website.

Thursday
Aug182011

Book Review: Wang & Steinberg, Insider Trading, 3d Edition

As the SEC struggles in the courts (see Business Roundtable v. SEC and Gupta v. SEC), one area where the Commission has not incurred significant difficulty has been with respect to insider trading cases. 

The Commission continues to bring these cases and win them.  Moreover, recent actions have involved exam like fact patterns.  Some included allegations of a father tipping a son, a chemist in a government agency trading on confidential information, and a husband misappropriating information from a wife.  In one instance, the Commission asserted that the defendant "exploited his romantic relationship for a financial windfall."  In addition to officers and directors, the SEC has brought actions against participants in expert networksportfolio managers at hedge funds, attorneys, analysts and even one former baseball player.

In short, insider trading represents an active and high risk area for those involved in the capital markets.  Moreover, the law is remarkably complex and requires an understanding of such issues as the existence of a duty of trust and confidence, the need for, and violation of, a fiduciary duty, and the status of third parties as temporary insiders.  Moreover, the risk is not only to individuals.  Employers can be liable for insider trading if reckless in allowing the behavior to occur. 

All of this suggests the need for a resource that can explain these requirements in a straightforward and thorough manner.  Insider Trading 3d Edition, Oxford Press, by Professors William K. S. Wang (Hastings) and Marc I. Steinberg (SMU) does exactly that. 

The book contains 15 chapters that examine the basics of insider trading under federal law, the causes of action under state law, and everything in between.  For example, Chapter 7 comprehensively deals with government enforcement.  Chapters 9, 10, and 11 contain clear analyses of Securities Act section 17(a), Rule 14e-3, and mail/wire fraud.  Chapter 13 provides a valuable discussion of compliance programs.

The most complete analysis of the theories of insider trading takes place in Chapter 5, where the book undertakes an extensive discussion of classical insider trading (Dirks v. SEC, 463 US 646 (1983)) and misappropriation (United States v. O'Hagan, 521 US 642 (1997)).  The chapter examines the type of "relationship" necessary to trigger a prohibition on classical insider trading (including the sometimes sticky issue of independent contractors) or to implicate the misappropriation doctrine (including government employees, doctors, and attorneys). 

Chapter 5 discusses whether the personal benefit requirement mandated for classical insider trading also applies in misappropriation cases (pp. 393-94; pp. 469-476) and contains a brief but important discussion of a very difficult issue:  Whether donations of stock to charity while in possession of material non-public information amounts to insider trading (pp. 396-397). 

The book is a must for anyone who wants to avoid insider trading/tipping liability or otherwise wants to understand this  Delphic area of the law.  

Tuesday
Jul192011

Law School, Economics, and the NYT

The NYT had an article that purported to look at the economics of law school (Law School Economics: Ka Ching!).  It is a good subject that deserves debate.  The piece in the NYT, however, did not do justice to the issue.  It mostly focused on New York Law School and its dean, containing a mish mash of points that were not all well defended.  

First, the article notes that "law schools toss off so much cash they are sometimes required to hand over as much as 30 percent of their revenue to universities, to subsidize less profitable fields."  True.  But its not a secret, open or closed.  Its in the open.  It explains why law schools continue to open.  Were they unprofitable and not supportive of the university setting them up (the common model is to have law schools attached to a university), it is hard to understand why new schools would open. 

Having said that, the article starts with this point but then promptly spends most of the text describing NY Law School.  As the article describes:  NY Law School is a "PRIVATE, stand-alone institution located in the TriBeCa neighborhood of downtown Manhattan".  In other words, it is a free standing law school, not part of a larger university, and presumably does not pay the tax to anyone.  So much of what follows is unrelated to this point.

Second, the article suggests that the dean of New York Law School, Richard A. Matasar, is somehow saying one thing but in practice doing something else.  Dean Matasar is supposed to be someone who contends that law school should put students first.  Yet at the same time, he has grown the size of the law school.  The implication is that these two approaches are inconsistent.

While it is true that every student admitted by NY Law School provides an income stream, this does not mean he is working against the interests of students.  In fact, the one statistic not mentioned in the article is that there are thousands of students every year who apply to law school and do not get in, mostly because they have low test scores.  Yet a low test score does not meant that these students will make bad lawyers.  By opening the doors, Dean Matasar arguably gives more students a shot at a career in law, some of whom would probably not matriculate to any other law school. 

Third, the article suggests that there is something wrong with increasing the number of students just when the job market was imploding.  For one thing, those admitted would have at least three years before they hit the job market.  Presumably, as already appears to be the case, the job market would be on the mend. Thus, the article instead notes that, with respect to the 2009 class, "if the experience of recent N.Y.L.S. graduates is an indication, many are in for a lengthy hunt."  But those students graduated during the recession.  While the students graduating in 2012 may have difficulty, it is not likely to be as difficult as those looking for work during the recession. 

In general, articles that point to the relationship between the number of newly created legal positions and the number of graduates usually omit to discuss thos positions that while not entirely legal benefit considerably from a law degree (dean of students at a university; head of HR in a corporation; member of the police force seeking officer status).

Fourth, the article asserts that the explanation for the rise in tuition at law schools is US News.  As the article notes, the "most bizarre" explanation for the increase "comes courtesy of the highly influential US News rankings."  It is true that US News ranks law schools in part based upon the expenditures per student.  But it is something altogether different to suggest that this drives law tuition upward.  There are plenty of reasons that drive of tuition unrelated to US News. 

Take NY Law School.  Perhaps NY Law raised tuition because of US News (rather than say because it is located in a high cost area).  But if ranking in US News was such a driving force, NY Law would likely have not admitted so many additional students (736 students in 2009, a 30% increase, according to the article, something the dean attributed to unexpected yield).  The surge in additional students does not help with US News.  They pay the same tuition and at best leave the per capita expenditures unchanged.  So while they provide additional funds, it does not generally help with the rankings.     

On the other hand, additional students can very much hurt US News rankings.  Unless there is massive hiring to compensate for large increases in the number of students, they hurt the faculty student ratio, another factor in the rankings.  Larger classes also put downward pressure on the median LSAT, the median GPA, and the acceptance rate, statistics that make up 25% of the US News rankings. (I've made no attempt to look at what actually happened in the case lf NY Law). Finally, when the students hit the job market, the hiring statistics are likely to suffer. 

US News does not, therefore, benefit schools that admit large numbers of students.  Quite the reverse.  In other words, what ever upward pressure US News puts on total tuition, it does not put equal pressure on class size.    

There are serious issues to discuss in this area.  Tuition has risen; the number of students are increasing; law jobs are likely harder to obtain.  But the article in the NYT makes too many disparate and often disconnected points in the context of a single law school to really advance the discussion.