ProfessorBainbridge.com

Law Review

Responding to a Scheherazade post, Evan Schaeffer offers this defense of the law review experience:

Once you got over the initial cite-checking hurdle, all of the third year editorial staff, from the editor-in-chief on down, learned skills like these: how to manage large projects to completion, how to take a small budget and use it to accomplish large things, how to manage a distracted staff, each working on a little piece of a giant puzzle. These lessons were in addition to all the good that came from learning about editing and fact-checking (skills often learned the hard way, since even some of the best stuff we accepted for publication had to be substantially rewritten. The authors of the articles, by the way, gladly accepted this "student editing").

I was nodding in agreement until I hit the parenthetical. Early in my career, I had law review editors try rewriting my articles. They never improved the article; to the contrary, they often introduced serious errors of substance or grammar. The higher the law review was ranked, the more serious the problem seemed to be. Once I got tenure, and getting published in a hurry was no longer at issue, I began putting a clause in the publication agreement giving me the right to pull the article from the journal if I disagreed with the editors. I've never had to use it, but I have had to threaten doing it a couple of times. As a result, if you compare my draft articles at ssrn to the finished product, you'll see very few changes.

Turnout and Anger

Stephen Green observes: "Elections are all about turnout, kids. You've got to energize your base, not alienate it." Apropos of which, the Economist ($) explains: "If the election is won by mobilising your base, you do not need to concern yourself with the other side, except to limit its turnout. The priority is to make your supporters more enthusiastic and more angry than your opponents...." Which got me to thinking: Am I angry? Not really. Annoyed would be more like it. In 2000, I was really angry. I wanted my country back from the pointy-heads who thought their Ivy League degrees and trust funds meant they were entitled to tell me how to run my life. Back from people who didn't know what "is" meant. Back from the people who thought that a tax cut meant giving me the government's money. Back from a bunch of skirt-chasing, draft-dodging, non-inhaling (yeah, right) idiots who were stuck in some Summer of Love flashback to their glory days in the 60s when they were so radical and who now deserved to be the Masters of the Universe because they were still so cool. ... Hey, wait a minute .... Maybe I am still angry. ... Whew. Thanks for listening. I feel much better now.

Will Fiscal Conservatives Cost Bush the Election? Can They?

The right side of the blogosphere is once again up in arms over Bush's free-spending ways, with the most recent tiff occasioned by revelations that the Medicare prescription drug entitlement will cost $540 billion over 10 years - over one-third more than as advertised. (Allegations that the administration knew the correct figure last fall aren't helping the Bush administration's credibility deficit any either.) A far less costly budget surprise, but a far more symbolic one for conservatives, came when we learned that Bush planned to seek an increase in the NEA's budget. Andrew Sullivan aptly commented that "the Bushies seem to have lost their political touch to a worrying degree." (Also check out Catallarchy's Art by Fiat post.)

Stephen Green predicted "that if Bush doesn't change his ways, more than a few voters will simply sit on their asses come Election Day." To which James Joyner replied:

I'm not sure how much of a "base" true fiscal conservatives are. Especially when the likely opponents--Kerry? Edwards?--are likely to be even more irresponsible.

The two constituencies that most matter to Bush are people like who put security #1 and the social conservatives. Bush has done a damned good job at keeping both happy. His dad, by contrast, was cutting the defense budget, raising taxes, and appointing milquetoast judges.

Fair enough, but here's my take. Karl Rove supposedly believes that Bush lost the 2000 popular vote because 4 million evangelical voters stayed home. Will those 4 million evangelicals come out this time? James says that Bush has done a good job keeping the evangelical base happy. How? What has he done in a concrete way that will get them fired up? (Some of them doubtless will be motivated by 9/11, but how many?)

Because the right half of blogosphere skews towards libertarians with a preference for small government and limited spending, you can't judge the socially conservative segment of the electorate by the blogosphere. Instead, I turn for data to the op-ed columns of the social conservative leadership. Lately, a lot of those leaders seem pretty unhappy. Check out, for example, Cal Thomas on spending or Phyllis Schlafly on Bush's immigration proposal. Marvin Olasky recently felt compelled to write a column imploring his fellow "Christian conservatives" to "remember that we're better off now than we were four years ago (when Bill Clinton was in office) or than we will be a year from now, if millions of us stay home in November and John Kerry or someone else takes over." Sounds like there's trouble in Paradise to me. [Update: Joe Carter (an actual evangelical) thinks Bush has done plenty of concrete stuff for the base. Check out his list here.]

Let's suppose, however, that Bush gets a fair number of Rove's stay-at-home evangelicals to come out for him in 2004. Will they be off-set by stay-at-home fiscal conservatives? How many fiscal conservatives are there who are (a) mad enough at Bush about his spending ways and (b) insouciant enough about the war on terror to trust a Democrat with national security to stay at home? I don't know the answer to that question - and I doubt whether anybody does at this point. What I do know is that the answer to that question likely will decide the election of 2004.

The Chicago Trib Spring Offensive Kerfuffle

While I was out on sick leave, there was a blogosphere flurry over the Chicago Tribune's story reporting on a planned US spring offensive into Pakistan to clean out Al Qaeda. Dan Drezner tried to figure out whether the leak was intentional or unintentional or an "an unintentional intentional leak," an exercise that sent him reaching for an aspirin. Citizen Smash says the leak was either "either a disinformation campaign, or treason." Personally, this whole thing sounds like a Rumsfeld operation. Anyway, as to the question of whether the Tribune should have reported this story, let me offer a historical footnote. As the invaluable Wikipedia relates, the Tribune in 1942 betrayed national security by disclosing that US Navy experts had broken the Japanese naval code:

Public notice had actually been served that Japanese cryptography was inadequate by the Chicago Tribune, which published a series of stories just after Midway in 1942 directly claiming -- correctly, of course -- that the victory was due in large part to US breaks into Japanese crypto systems (in this case, the JN-25 cypher, though which system(s) had been broken was not mentioned). Fortunately, neither the Japanese nor anyone who might have told them, seem to have noticed either the Tribune or stories based on the Tribune account published in other US papers.

I doubt whether Al Qaeda will be quite so dense. Freedom of the press is a wonderful thing, but it's worth remembering that the Chicago Tribune has a history of abusing the privilege.

Martha Trial: The Fanueil Memo Delay

As Tung Yin reports:

[Martha Stewart's] trial has been delayed because the judge ordered the prosecution to turn over notes of an interview of Douglas Fanueil by Fanueil's attorney. (Apparently, the privilege and work product were waived, though I'm not entirely clear on how that happened.) The notes suggest that Fanueil initially told his attorney that it was Bacanovic, Sam Waksal (CEO of Imclone), or maybe even someone else who gave the order to tell Stewart about Waksal's attempted sale of Imclone stock.

This helps Bacanovic because it's some evidence that someone else, not him, directed Fanueil to give the information to Stewart. However, it appears to hurt Stewart, because it reinforces the idea that she in fact knew about Waksal's attempted sale, which appears to be consistent with the indictment's allegation that she lied when she denied knowing about that attempted sale.

Yes, but.... I think it helps Martha in at least two ways. First, it got the judge annoyed with the prosecution. In turn, that could lead to Martha getting the benefit of the doubt from the judge in future discovery or evidentiary disputes. Second, the document will further reinforce the impression that Fanueil is a lying little skunk who told the government what it wanted to hear rather than the truth.

Ginsburg Pulls a Scalia

James Joyner reports that Justice Ginsburg recently pulled a Scalia:

Ginsburg, speaking to a group of women's rights lawyers, was asked if people's rights were in danger.

"On important issues, like the balance between liberty and security, if the public doesn't care, then the security side is going to overweigh the other," she said.

That would change, Ginsburg said, "if people come forward and say we are proud to live in the USA, a land that has been more free, and we want to keep it that way."

What's interesting to me ... is that Ginsburg seems to be defying the tradition that sitting justices don't speak publically on issues before the Court. She'll certainly be deciding cases on the Patriot Act and similar issues soon. I don't find this problematic--the idea that Justices don't bring their ideology with them to the bench has always been a sham--but it is at least noteworthy, especially given the recent controversies over Justice Scalia's impartiality.

I'd differ with James' views that this sort of thing isn't problematic. If I don't like the Patriot Act, I have a remedy: I can vote for candidates who oppose it. I can write letters to the editor. And so on. If a majority agrees with me, the political process will hold the politicians accountable for having passed it. If Justice Ginsburg and her fellow Supreme Beings strike down the Patriot Act, however, who holds them to account? We have allowed them to be infallible in a way no other actor in our society is by allowing them to be final in a way that no other institution in our society is.

The Immorality of Corporate Reparations

A federal judge has dismissed a class action seeking reparations for slavery from a number of US corporations. Lawsuits seeking reparations from corporations that supposedly benefited from old wrongs - the Holocaust, Japanese internment, World War II POWs, and slavery - have become very popular. And why not? As Kurt Vonnegut once wrote:

"In every big transaction, ... there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on. If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient's blubbering thanks."

Lawyers, experts, consultants, and activists all stand to make a bundle out of such suits. Query, however, why we as a society should encourage it?

Punish the wrongdoers, you say? Sorry, but the corporation's legal personhood is a mere legal fiction. A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation - there is nothing there to be punished.

So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation's treasury, it reduces the value of the residual claim on the corporation's assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong. Retributive justice is legitimate only where the actor to be punished has committed acts to which moral blameworthiness can be assigned. Even if you assume the corporation is still benefiting from alleged wrongdoing that happened decades or even centuries ago, which seems implausible, the modern shareholders are mere holders in due course. It is therefore difficult to see a moral basis punishing them. They have done nothing for which they are blameworthy.

As always in corporate accountability, both efficiency and morality require that punishment be directed solely at those who actually commit wrongdoing. In this context, it would be the directors, officers, or controlling shareholders who actually enslaved people. Since they're long dead, there is nobody left who properly can be punished.

Update: CE Petit writes:

Two additional pieces of irony reinforce his conclusion, whether it's corporations or governments that are the payors.

My ancestors weren't even in this country until this century. Further, going back about 350 years in the gene pool, none of them had anything to do with slavery or the slave trade over in the Old World, either. Thus, if the value of my shares in, say, JP Morgan Chase (neither implying nor stating that I do or do not own such shares) is harmed by forcing the corporation to pay "reparations," I have been harmed twice: Once by the mere fact that I am a current shareholder whose "profit" from 150-year-old conduct is so attenuated by time that it cannot reasonably be attributed to me (as the Perfesser noted), and again because it was legally impossible for me or my ancestors to have any responsibility for slavery. (None of this nonsense about how the Old World bears responsibility for allowing slavery to continue, because that assumes that individual citizens in the Old World had any influence on policy—in other words, it assumes that the forms of government common now were in use at all then.)

Let's pretend for the moment that everything occurred last year, so that time is not an issue. Don't kid yourself about the potential consequences of reparations: successful blackmail would depress the market of all potentially targetted firms. If JP Morgan Chase pays, Citicorp stock will drop to discount possible extortion. So, if I very carefully made sure that my investments were in firms that did not have an obvious connection, the overall drop in market value (particularly if, say, I had invested in exchange-based futures or options) would "tax" me for the blackmail.

He gets it.

Cigar by Mail Ban?

JR Cigars reports:

On December 9th, a provision was added to the CIGARETTE ANTI-COUNTERFEIT BILL (S1177), which would eliminate mail order cigar deliveries. This bill was introduced to stop American Indian Nations from mailing cigarettes from their reservations to customers throughout the country. The theory being, the States were not receiving their share of the Master Settlement, as well as cigarette taxes in each state. Cigars and other tobacco products were never an issue. The senators, however, included a section that expanded the scope of the bill to include “any tobacco product.” This bill will now take away your right to buy cigars in the mail....

Premium cigars are not readily available throughout the country. There are only a few hundred full-line cigar stores in this country equipped to stock this product properly. If you don't have a full-line cigar store in your area, you will not be able to buy premium cigars. You will not be able to buy many specialty brands from small manufacturers at all, as more than half the premium cigars sold in this country are sold through the mail. Unlike cigarettes, which are available in countless thousands of convenience stores, drug stores, supermarkets, and gas stations, properly humidified, handmade cigars are difficult to acquire without access to mail order.

It's a moral outrage! I'm writing my Congressman to ask that the House not include this provision in its version of the bill, in hopes that it can be removed in conference.

How Delaware Maintains its Dominance

In a post the other day on Delaware's dominance of corporation law, I noted:

A recent news headline sums it up pretty well: "Beware Delaware." The article went on to argue that "the Delaware Supreme Court has [recently] issued at least five decisions of great concern to the corporate bar. Each was remarkable not only because it found against directors and in favor of shareholders, but also because it reversed a lower court ruling that went the other way."

One of the potential competitors Delaware must fend off, of course, is the federal government. Every so often there is a threat to create a federal corporation law, which would preempt Delaware's law and, accordingly, end Delaware's profitable dominance of the market for incorporations. In the post-Enron environment, Delaware again faced a risk of federal preemption. A cynic might think that threat explained the string of cases noted above.

If so, we've got another example. Delaware Chancellor William Chandler refused to dismiss a shareholder derivative lawsuit against insiders of eBay Inc. for accepting hot IPO stock offerings from eBay's investment banker, Goldman Sachs Group Inc. Chandler found that Goldman Sachs offered the insiders access to the IPOs so as to secure business from eBay. The WSJ ($) reports that:

In rejecting the motion to dismiss, Judge Chandler said, "No one can seriously argue that this conduct did not place the insider defendants in a position of conflict with their duties to the corporation. One can realistically characterize these IPO allocations as a form of commercial discount or rebate for past or future investment-banking services."

The lawsuit raised "a reasonable inference that the insider directors accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them," Judge Chandler said. They "were not free to accept this consideration from a company, Goldman Sachs, that was doing significant business with eBay and which arguably intended the consideration as an inducement to maintaining the business relationship in the future."

What's interesting about this case is not the legal issues, which are well-settled, but rather their application to this fact pattern. What Goldman Sachs did is called "pay for play." It is an incredibly important phenomenon by which investment banks offer access to hot IPO stocks in return for future business. Everybody knows this goes on, but until recently nobody cared. In the post-Enron era, however, it has become another ill-gotten gain for corporate fatcats. Given a chance to demonstrate Delaware's commitment to good corporate governance, Chancellor Chandler jumped on it. It's the right result, so only a cynic would think that fending off federal preemption had anything to do with Delaware's sudden desire to be a poster child for good corporate governance.

Judge Guts Martha's Defense

CNN Money reports:

Among the limitations placed by Judge Miriam Goldman Cederbaum [on Martha Stewart's defense team] were the inability to say that the home decorating expert was being prosecuted for proclaiming her innocence in the case or for asserting her First Amendment right to free speech.

The defense also is barred from saying that the securities fraud charge Stewart faces is a novel application of securities laws, and from making statements that would tend to show the government's motives in investigating or prosecuting Stewart were improper. The defense also can't say that the fact Stewart and former broker Peter Bacanovic aren't facing criminal insider trading charges means the government doesn't believe they committed such a crime.

In other words, Martha's defense lawyers will not be allowed to tell the jury the truth. The government did not indict Martha for insider trading, because the Justice department didn't think they could get a conviction on such a novel theory. The securities fraud claim against Martha is a novel - and, IMHO, unsupportable - extension of the securities laws. It's an Orwellian ruling that significantly undermines the defense.

Safety Tip of the Day: Charting Doesn't Work

WSJ ($) reports today that Investors Take Cycles for a Spin. Sigh. The Journal article reports a revival of investor interest in charting - the attempt to predict future prices by looking at the past history of stock prices. Charting does NOT work, because securities markets are weak form efficient. The weak form of the Efficient Capital Market Hypothesis posits that all information concerning historical prices is fully reflected in the current price. Put another way, the weak form predicts that price changes in securities are random. Randomness does not mean that the stock market is like throwing darts at a dart board. Stock prices go up on good news and down on bad news. If a company announces a major oil find, all other things being equal, the stock price will go up. Randomness simply means that stock price movements are serially independent: future changes in price are independent of past changes. In other words, investors cannot profit by using past prices to predict future prices. Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy. See Burton G. Malkiel, A Random Walk Down Wall Street 196-204 (1996) (critiquing recent studies purporting to find violations of the weak form hypothesis).

Populist Plutocrats

Andrew Sullivan says John Kerry's "Shrum-populism" is "sad and dumb at the same time." Personally, I am getting very tired of plutocrat populists like Al Gore, John Kerry, and John Edwards (or, for that matter, Ross Perot and Pat Buchanan). As for Gore and Kerry, it's hard to believe people from their privileged backgrounds are really populists down deep. As for all of them, they can afford to be populists. Being zillionaires all, they can afford to pay the high marginal tax rates they propose. Not that they will, of course, since they can also afford to hire tax wizards to shield most of their income. Instead, it is those who are doing fairly well but aren't rich that will bear the burden of paying for all their fancy programs.

Update: Rob the Business Pundit quotes an article from Fortune along the same general lines, from which he concludes:

When people attack business, I often wonder where they think jobs come from. There is an implication by some that business should exist to provide jobs and health care, and that profit is a bad thing because it only benefits the rich. This ignores the fact that the rich have to invest their money somewhere to get a good return, and those investments lead to new companies and a growing economy. The more money the rich have, the more they can invest.

Arrowood Merlot (Sonoma County) 1996

A medium ruby starting to show some brick at the edges. A clean but modest nose of dark stone fruits and violets. The tannins are smooth and melting away. Blackberries and plums; rose petals. Lovely but starting to fade. Drink up. Grade: B

Alan Reynolds on Martha

Alan Reynolds of the Cato Institute writes:

The media keep reporting Mrs. Stewart sold ImClone shares the day before that stock began to fall on news that the Food and Drug Administration had failed to approve the company's cancer drug, Erbitux. In reality, ImClone stock had been slipping long before Martha Stewart's sale on the afternoon of Dec. 27, 2001. After all, the FDA had only until the end of the year to decide one way or the other. It didn't take a financial genius to figure out that every passing day of delay looked more ominous. After closing at $70 on Dec. 14, ImClone fell every day. "Sell the rumor" made sense.

On Dec. 27, more than 7.7 million shares of ImClone were sold -- including the trivial 3,928 shares sold by Martha Stewart. ImClone opened at $63.49 that day and closed at $58.30. The reason the stock fell that day was scarcely news, nor an inside secret. At 3:13 that afternoon, Bloomberg News cited a CNBC report from earlier that day regarding ImClone falling sharply "on concern about whether or not the Food and Drug Administration will approve the company's Erbitux cancer drug." A little before 2:00 that afternoon, Martha Stewart finally sold her shares for $58.43 -- about $14 below the December peak. Far from being early, she was a bit late.

I once spoke about this on the Buchanan-Press show, and Bill Press screamed, "She broke the law." Really? What law was that? He thought she had violated some law against insider trading. But Martha Stewart was never an insider at ImClone, nor is she accused of getting information from an insider. Besides, Congress never enacted any law against insider trading. A fine book on the topic by Stephen Bainbridge notes, "The modern prohibition [of insider trading] is a creature of SEC administrative actions and judicial opinions."

Heh. Go read the whole thing.

Mickey Kaus on John Kerry's PSLRA Vote

Mickey Kaus vilifies John Kerry for his support of the Private Securities Litigation Reform Act:

If none of Kerry's opponents makes a good negative ad against him based on the information in this Jonathan Cohn article, then the Iowans will have won! ... On the stump this week, Kerry portentously attacked special interests and complained that retirement accounts have been "decimated" by the "scandals of Enron and Worldcom," but Cohn makes it clear that an overbroad law that Kerry supported limiting the ability of investors to sue over fraudulent accounting practices contributed to the Enron and Worldcom scandals. The law was backed by a variety of monied special interests and was passed over President Clinton's veto. ... You think there is enough hypocrisy there to work with?

Kaus doesn't even identify the law in question, relying entirely on Cohn's critique. In turn, Cohn relies solely on the opinions of two - just 2 - law professors. Neither Cohn nor Kaus bothered to check the facts. There are several empirical studies of PSLRA readily available at SSRN.com. That research almost uniformly suggests that the PSLRA has not had adverse effects on securities law enforcement, let alone contributing to Enron or WorldCom.

Do the Merits Matter More? Class Actions under the Private Securities Litigation Reform Act by Johnson, Nelson, and Pritchard concludes: "the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits." Should Congress Repeal Securities Class Action Reform? by Adam Pritchard found:

The Private Securities Litigation Reform Act of 1995 was designed to curtail class action law-suits by the plaintiffs bar. In particular, the high-technology industry, accountants, and investment bankers thought that they had been unjustly victimized by class action lawsuits based on little more than declines in a company's stock price. Prior to 1995, the plaintiffs' bar had free rein to use the discovery process to troll for evidence to support its claims. Moreover, the high costs of litigation were a powerful weapon with which to coerce companies to settle claims. The plaintiffs' bar and its allies in Congress have called for a repeal or modification of the PSLRA. This paper evaluates the operation of class action lawsuits before and after the act. The hard evidence does not support repealing the PSLRA. In fact, securities class actions are being filed at a record pace. And although a higher percentage of these lawsuits is being dismissed now than before the act, the ones that survive lead to larger settlements. The PSLRA raised the standard required before plaintiffs' attorneys could drag a defendant company through the expense of discovery. The lawsuits that meet this higher standard are likely to be less frivolous and are consequently worth more in settlement negotiations. The combination of higher settlements and a smaller percentage of such cases getting to trial suggests that the class action lawsuits under the PSLRA are doing a more cost-effective job of deterring corporate fraud. This conclusion is bolstered by the fact that post-PSLRA complaints have more particularized allegations that are more highly correlated with factors related to fraud. In short, the PSLRA is working well, although not as well as intended, and there do not appear to be grounds to either repeal or significantly amend it. A better course for reform would be to change the damages remedy in securities fraud class actions to focus on deterrence.

Did the Private Securities Litigation Reform Act Work? by Michael Perino found:

PSLRA did not work as intended. This article demonstrates that as many or more class actions are filed after the Act as before. High technology issuers remain at significantly greater risk than issuers in other industries. There is statistically significant evidence, however, that suggests that the Act improved overall case quality at least in the circuit that most strictly interprets one of the Act's key provisions, a heightened pleading standard. The data in the article also demonstrate that Congress did not achieve its goal of increasing the filing delay in class actions. Actions are filed as quickly now as they were before passage of the Act. Nonetheless, that too may provide indirect evidence that plaintiff's attorneys are selecting more apparent cases of fraud that require less pre-filing investigation.

In sum, Cohn's claim that "many experts think the law played a critical role in the scandals--partly by insulating auditors and other would-be watchdogs from the threat of lawsuits" is disproven by the empirical evidence. (By the way, since when do two professors count as "many"?) The evidence is clear that the PSLRA has not done much to deter meritorious securities suits, while it has had some success in cutting back on strike suits. Kaus and Cohn owe John Kerry an apology.

Update: Now Kaus says that:

Prof. Bainbridge disagrees, citing some studies that say the lawsuit-limiting bill Kerry supported has resulted in fewer settlements but bigger settlements. But that hardly answers the question, which is whether those who did the fudging at Enron et al. thought they would be held accountable for the particular transgressions they were committing. Big judgments in clear-cut cases of fraud (even if perfectly foreseen) might not deter easily-concealed gray-area fudging.

He still doesn't get it. The PSLRA did NOT significantly reduce the amount of securities litigation. It did force plaintiffs' lawyers to be more careful about screening which suits they bought. The net effect should have been to increase the deterrent effect of securities fraud litigation. Anyway, he still hasn't come up with an iota of real evidence linking Enron to the PSLRA. And, he still doesn't have permalinks on his blog. Case closed.