If Obamacare becomes law and includes a public option, all members of Congress should be required by law to get their health care insurance from the public plan and banned from using any other funding source to pay for their health care.
If Obamacare becomes law and includes a public option, all members of Congress should be required by law to get their health care insurance from the public plan and banned from using any other funding source to pay for their health care.
Securities law bloggers have been spilling virtual ink all week on the Second Circuit's July 22 ruling in Securities and Exchange Commission v. Dorozhko, which permits the SEC to proceed with a fraud case against a computer hacker, even though the hacker had no fiduciary duty to the company whose shares he traded. We feel kinda dumb for not covering the ruling until now, but on the other hand, the week's delay has crystallized the key issue in Dorozhko: Is the Second Circuit abetting SEC overreaching?
"The Second Circuit is permitting the SEC to enforce in territory where they haven't been lawfully permitted before," Dorozhko's lawyer, Charles Ross of Charles A. Ross & Associates, told us Friday. "The opinion flies in the face of 75 years of U.S. Supreme Court precedent."
Normally, we might discount Ross's view as somewhat biased, but he's not alone in questioning the Second Circuit's reasoning. UCLA professor Stephen Bainbridge called the ruling "egregious." Amy Greer of Reed Smith, guest-blogging at Securities Docket, wondered if the appellate court had "[stepped] onto that famous slippery slope." And White Collar Crime Prof Blog founder Peter Henning, writing at The Wall Street Journal's Law Blog, said, "The SEC could well start channeling its insider trading cases into the affirmative misrepresentation category to free itself from having to show a breach of duty by the defendant."
Yale law professor Stephen Carter rises in defense of making a profit:
A specter is haunting America: the specter of profit. We have become fearful that somewhere, somehow, an evil corporation has found a way to make lots of money. ...
Thus, a recent news release from the AFL-CIO began with this evidently alarming fact: "Profits at 10 of the country's largest publicly traded health insurance companies rose 428 percent from 2000 to 2007." Even had the figures been correct -- they weren't -- we are seeing the same circus. Profit is the enemy. America could be made pure, if only profit could be purged.
... High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want. ... To the country, profit is a benefit. Record profit means record taxes paid. But put that aside. When profits are high, firms are able to reinvest, expand and hire. And profits accrue to the benefit of those who own stocks: overwhelmingly, pension funds and mutual funds. In other words, high corporate profits today signal better retirements tomorrow.
Another reason to celebrate profit is the incentive it creates. When profits can be made, entrepreneurs provide more of needed goods and services. Consider an example common to the first-year contracts course in every law school: Suppose that the state of Quinnipiac suffers a devastating hurricane. Power is out over thousands of square miles. An entrepreneur from another state, seeing the problem, buys a few dozen portable generators at $500 each, rents a truck and drives them to Quinnipiac, where he posts them for sale at $2,000 each -- a 300 percent markup.
Based on recent experience, it is likely the media will respond with fury and the attorney general of Quinnipiac will open an investigation into price-gouging. The result? When the next hurricane arrives, the entrepreneur will stay put, and three dozen homeowners who were willing to pay for power will not have it. There will be fewer portable generators in Quinnipiac than there would have been if the seller were left alone.
When political anger over profit reduces the willingness of investors to take risks, the nation suffers.
Of course, Carter's hypothetical Quinnipiac entrepreneur is even more likely to stay put as his marginal tax rate soars ever higher.
Paul Caron has the details on WK-9. Toby is appalled.
This post by Christine Hurt makes a lot of sense to me:
Obama was trying to make an argument that in our current system, if doctors know that a more expensive, but unnecessary treatment is paid for my insurance of Medicare/Medicaid, then that's the treatment option that is suggested. I have no idea if this is true, and I'm not sure of a good way to empirically test it. My own experience is that my doctors are usually very cost-conscious and give me several options, but that's an "N" of 1. So, Obama says, "So if they're looking and -- and you come in and you've got a bad sore throat, or your child has a bad sore throat, or has repeated sore throats, the doctor may look at the reimbursement system and say to himself, "You know what? I make a lot more money if I take this kid's tonsils out." Unstated here is that under the Obama plan, your kid doesn't get his tonsils out.
AAAARRGGGHHH! Someone needs to take the president aside and explain to him that yes, a large portion of the voting, taxpaying public fears medical overcharging. This may be a problem, and if it is, then a new system should not have incentives to overcharge. But another large portion of the public fears undertreatment. Some people lie in bed worrying that they'll get cancer and it will bankrupt their family. Other people lie in bed worrying that they have cancer, but their doctor won't order the right test that will catch it in time. And nationalized health care really scares the second group of people because it conjures up nightmarish scenarios of waiting lists and rationing. If the second group is going to buy in to health care reform, then you have to allay their fears, not confirm them....
What drives fear into my heart is that one of my children will have strep four or five times in one season, missing 8 days of school (and that goes for me, too), but a tonsillectomy is out of the question because the federal government says no.
I'm definitely in the second group.
The Second Circuit’s recent decision in SEC v. Dorozhko (available here), dealt with one of the questions left open by the Supreme Court’s decision in US v. O’Hagan; namely, the liability of persons who steal inside information but have no fiduciary duty to either the source of the information or the issuer of the securities in which the thief trades.
In Dorozhko, an alleged computer hacker supposedly broke into the computer system of a company called IMS Health, Inc., and used the information he learned in doing so used put options to essentially sell the stock short.
I have long argued that the only coherent basis for imposing insider trading liability is protection of property rights in information. From a policy perspective, those who steal information ought to be liable for insider trading.
The trouble is that O’Hagan cannot be read to permit imposition of liability on such persons.
The misappropriation theory's origins are commonly traced to Chief Justice Burger's Chiarella dissent. Burger contended that the way in which the inside trader acquires the nonpublic information on which he trades could itself be a material circumstance that must be disclosed to the market before trading. Accordingly, he argued, "a person who has misappropriated nonpublic information has an absolute duty [to the persons with whom he trades] to disclose that information or to refrain from trading."
In O’Hagan, the court’s majority opinion grounded liability under the misappropriation theory on deception of the source of the information. As the majority interpreted the theory, it addresses the use of "confidential information for securities trading purposes, in breach of a duty owed to the source of the information." Under this theory, the majority explained, "a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information." So defined, the majority held, the misappropriation theory satisfies § 10(b)'s requirement that there be a "deceptive device or contrivance" used "in connection with" a securities transaction.
The Supreme Court thus expressly declined to embrace Chief Justice Burger's argument in Chiarella that the misappropriation theory created a disclosure obligation running to those with whom the misappropriator trades. Instead, it is the failure to disclose one's intentions to the source of the information that constitutes the requisite disclosure violation under the O'Hagan version of the misappropriation theory.
In throwing out the SEC complaint, the District court—correctly, IMHO—held that “[T]he Supreme Court has in a number of opinions carefully established that the essential component of a § 10(b) violation is a breach of a fiduciary duty to disclose or abstain that coincides with a securities transaction.” This ruling is supported not only by the plain text of the relevant Supreme Court decisions, but also the Fifth Circuit’s opinion in Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 389 (5th Cir. 2007) (holding that “the [Supreme] Court . . . has established that a device, such as a scheme, is not ‘deceptive’ unless it involves breach of some duty of candid disclosure”).
Leading commentary on the issue also supports the District Court’s conclusion, as the court explained it its opinion:
The SEC notes that, “While no case has addressed it, at least two academics has [sic] endorsed the theory that a hacker who steals material nonpublic information for the purpose of trading on it, violates Exchange Act § 10(b) and Rule 10b-5.” The SEC then cites Robert A. Prentice, The Internet and Its Challenges for the Future of Insider Trading Regulation, 12 Harv. J.L. & Tech, 263, 296-307 (Winter 1999), and Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement and Prevention § 6:14 (Apr. 2007).
While these articles, among others, proclaim that those who ‘hack and trade’ should be liable under § 10(b), the clear majority of scholarly opinion is that, under existing law, ‘hacking and trading’ is not a violation of § 10(b). Professor Prentice's article is indicative. Professor Prentice's article contains a section entitled “Hackers as Misappropriators,” which makes a strong policy argument for why those who hack should be liable under 10b-5. The section, however, begins by acknowledging that under the current state of the law hackers are not liable. Prentice asks rhetorically, “Hackers who steal inside information and trade on it are essentially thieves. But are they also liable as inside traders? The answer to this question from a traditional point of view is ‘no.’ ” 12 Harv. J.L. & Tech. at 296. Prentice's argument as to liability for hackers, it turns out paragraphs later, stems not from precedent or a close reading of the statute, but from his own conviction as to what the law should be: “I find uncomfortable the received wisdom that someone who obtains inside information via hacking, physical breaking and entering, bribery, extortion, espionage, or similar means is not liable for insider trading.” Id. at 298.
Similarly, a couple of recent law review articles suggest that hackers should be, but are currently not liable under § 10(b) for ‘hacking and trading.’ For example, Kathleen Coles writes in The Dilemma of the Remote Tippee, 41 Gonz. L. Rev. 181, 221 (2005-2006):
“[A] computer hacker who breaches the computer security walls of a large publicly held corporation and extracts nonpublic information may also trade and tip without running afoul of the insider trading rules. The burglar and computer hacker may be liable for the conversion of nonpublic information under other laws, but the insider trading laws themselves appear not to prohibit the burglar or hacker from trading or tipping on the basis of the stolen information. This is because there was no breach of a duty of loyalty to traders under the classic theory or to the source *342 of the information under the misappropriation theory.”
41 Gonz. L. Rev at 221.
Also, Donna M. Nagy writes, in Reframing the Misappropriation Theory of Insider Trading Liability: A Post-O'Hagan Suggestion, 59 Ohio St. L.J. 1223, 1249-57 (1998): “[I]t is doubtful that securities trading by the computer hacker or the ‘mere’ thief would violate Section 10(b) and Rule 10b-5, because neither scenario would involve misappropriation through acts that would constitute affirmative deception.” 59 Ohio St. L.J. at 1255. Nagy is “troubled” by this, and argues that the current “restrictive” misappropriation theory, “will frustrate the prosecution of future cases involving trading on misappropriated information.” Id. at 1227. She illustrates with an example of a “computer hacker who unlawfully gains access to a corporation's internal network and subsequently manages to uncover confidential information.” Id. at 1253. She notes that, “Because the computer hacker was not entrusted with such access, Section 10(b) and Rule 10b-5 would not be violated under O'Hagan 's theory, even though the computer hacker would be trading securities on the basis of material, nonpublic information that had been misappropriated.” Id. To repair the lacuna, Nagy goes on to suggest a new version of the misappropriation theory, that is “premised on the ‘fraud on the investors.’ ” She believes her fraud on the investors approach “is far superior to the ‘fraud on the source’ version [of the misappropriation theory].”
I agree with these commentators that theft of information should be actionable under the insider trading laws, based on the property rights approach discussed above. But O’Hagan implicitly rejected the property rights approach in favor of a fiduciary duty-based approach. As I explained in Insider Trading Regulation: The Path Dependent Choice Between Property Rights And Securities Fraud:
The majority explained that its version of the misappropriation theory addressed the use of ‘confidential information for securities trading purposes, in breach of a duty owed to the source of the information.‘ Accordingly, ‘a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information.‘ Someone thus can be held liable under this version of the misappropriation theory only where one deceived the source of the information by failing to disclose one's intent to trade on the basis of the information disclosed by the source. This requirement follows, the majority opined, from the statutory requirement that there be a ‘deceptive device or contrivance‘ used ‘in connection with‘ a securities transaction. The Supreme Court thus rejected Chief Justice Burger's argument in Chiarella that the misappropriation theory created a disclosure obligation, running to those with whom the misappropriator trades. Instead, failure to disclose one's intentions to the source of the information constitutes the requisite disclosure violation under the O'Hagan version of the misappropriation theory.
The Second Circuit tried to finesse the issue by opining that “what is sufficient is not always what is necessary, and none of the Supreme Court opinions considered by the District Court require a fiduciary relationship as an element of an actionable securities claim under Section 10(b).” But this is, at best, shoddy.
O’Hagan, Dirks, and Chiarella all rest on the proposition that not all nondisclosures are securities fraud. All rest on a fiduciary duty or other relationship of trust and confidence. Indeed, the Second Circuit itself in US v. U.S. v. Chestman, 947 F.2d 551 (2d Cir. 1991), explained that:
… the fiduciary relationship question takes on special importance. This is because a fraud-on-the-source theory of liability extends the focus of Rule 10b-5 beyond the confined sphere of fiduciary/shareholder relations to fiduciary breaches of any sort, a particularly broad expansion of 10b-5 liability if the add-on, a “similar relationship of trust and confidence,” is construed liberally. One concern triggered by this broadened inquiry is that fiduciary duties are circumscribed with some clarity in the context of shareholder relations but lack definition in other contexts. Tethered to the field of shareholder relations, fiduciary obligations arise within a narrow, principled sphere. The existence of fiduciary duties in other common law settings, however, is anything but clear. Our Rule 10b-5 precedents under the misappropriation theory, moreover, provide little guidance with respect to the question of fiduciary breach, because they involved egregious fiduciary breaches arising solely in the context of employer/employee associations. For these reasons we tread cautiously in extending the misappropriation theory to new relationships, lest our efforts to construe Rule 10b-5 lose method and predictability, taking over “the whole corporate universe.”
So much for treading cautiously. After Dorozhko, 10b-5 will take over the corporate universe.
At the WSJ's law blog, Wayne State law professor Peter Henning offers up a post on the recent Cuban and Dorozhko insider trading cases.
In SEC v. Mark Cuban, a district court recently dismissed the SEC’s case against the outspoken owner of the Dallas Mavericks. The SEC had charged Cuban for selling his shares in a tech company before the public announcement of a PIPE (private investment in public equity) deal that drove down the value of his shares. Cuban, who knew about the deal, avoided losing over $750,000 by selling when he did.
But the judge in the case decided Cuban didn’t have a fiduciary duty to the tech company, even though Cuban had been given information that he promised to keep confidential prior to his selling his shares. No fiduciary duty, no insider-trading case. ...
In the Cuban case, the SEC invoked Rule 10b5-2, which defines a “duty of trust and confidence” as arising whenever “a person agrees to maintain information in confidence.” But this didn’t fly, chiefly because such a duty is not a fiduciary duty. Insider trading is not about proving someone’s untrue to his word. Rather, it is fraud based on a deception when one owes a duty to another entity not to trade on nonpublic information. Without the duty there is no fraud.
Henning's reading of the case is not supported by the plain text of the opinion.
At pages 14-15, for example, the Cuban court's opinion states that the court "rejects Cuban’s contention that liability under the misappropriation theory depends on the existence of a preexisting fiduciary or fiduciary-like relationship." Footnote 5 on page 19 likewise states that:
The court disagrees with Cuban’s assertion that, in O’Hagan, “[t]he Court [drew] a clear distinction between fiduciaries and non-fiduciaries because only a fiduciary would have a duty to make this disclosure and therefore can be said to have engaged in a ‘deception’ if he does not disclose or abstain from trading.” Although O’Hagan is written in terms of fiduciaries and fiduciary relationships, duties, and obligations, it is reasonable to infer that this is because O’Hagan was a criminal case that involved the conduct of a fiduciary. ... The Court may simply have intended that its opinion decide the case without injecting dicta to cover other circumstances in which the misappropriation theory could apply. But regardless of the reason, there is no indication in O’Hagan that such a fiduciary or fiduciary-like relationship is necessary——as opposed to merely sufficient——to impose the requisite duty, or iessential element of the misappropriation theory.
In other words, you can have liability under the misappropriation theory without having a fiduciary duty. Indeed, as the court stated at 20: "The court therefore concludes that a duty sufficient to support liability under the misappropriation theory can arise by agreement absent a preexisting fiduciary or fiduciary-like relationship." The court tossed the Cuban case not for the reasons Henning suggests, but rather because the SEC had pled the wrong kind of an agreement:
Where misappropriation theory liability is predicated on an agreement, however, a person must undertake, either expressly or implicitly, both obligations. He must agree to maintain the confidentiality of the information and not to trade on or otherwise use it.
The SEC had pled only the former, so the court tossed the case with leave to replead if the SEC believes it can show the correct agreement. In sum, I don't like it, but the Cuban opinion clearly does not stand for the proposition that "No fiduciary duty, no insider-trading case."
The birthers or the people fixated on whether Trig was really Palin's kid? As far as I'm concerned, it's half dozen of one, six of the other.
Enterprise risk management is the process by which a business organization anticipates, prevents, and responds to uncertainties associated with the organization’s strategic objectives. It is well accepted that systemic risk management failures by major corporations, especially but not limited to financial institutions, was a root cause of the financial crisis of 2008. Boards of directors and corporate managers failed adequately to identify, prevent, prepare for, and respond to the numerous risks the faced the financial system in the years prior to the crisis.
Given that the stock market lost $6.9 trillion in 2008, shareholder losses attributable to absent or poorly implemented risk management programs likely are enormous. Will shareholders be able to recoup some of those losses by suing boards of directors of companies with lax risk management programs? In my article, Caremark and Enterprise Risk Management, 34 J. Corp. L. 967 (2009), I argued that the business judgment rule generally should insulate directors from such claims.
The risks corporations face can be broadly categorized as operational, market, and credit. Operational risk encompasses such concerns as inadequate internal controls, faulty accounting systems, management failure, fraud, and human error. Market risks are those associated with potential changes in firm valuation linked to asset performance. Credit risk is defined as the possibility that a change in the credit quality of a counterparty will affect the firm’s value. All three types of risk played important parts in the financial crisis.
To be sure, some argue that even top risk managers could not have anticipated the financial crisis that struck in 2008. Risks fall into three broad categories: known problems, known unknowns, and unknown unknowns. As the argument goes, the financial crisis was an unknown unknown, which by definition was unpredictable and therefore could not be managed.
In fact, however, there were warning signs of an approaching crisis in the housing market, including rapidly accelerating home prices that had characteristics of a classic asset bubble, which was fueled in large part by easy mortgage terms combined with lax credit standards. It should not have taken a savant to foresee the risks the housing bubble posed for the financial services industry and then the economy as a whole.
Admittedly, evaluating extremely low probability but very high magnitude risks is challenging because the outcomes associated with such risks do not follow a normal distribution. As a result, quantifying the probability and magnitude of such risks poses an extreme problem for risk managers. Yet, as the financial crisis proved, it is simply unacceptable for firms to dismiss such risks as being unmanageable. We must learn how to do better. Having said that, however, I hasten to add that liability to shareholders is an inappropriate tool for incentivizing director to do better.
Just because a firm has the ability to reduce risk does not mean that it should exercise that option. As the firm’s residual claimants, shareholders do not get a return on their investment until all other claims on the corporation have been satisfied. All else equal, shareholders therefore prefer high return projects. Because risk and return are directly proportional, however, implementing that preference necessarily entails choosing risky projects.
Even though conventional finance theory assumes shareholders are risk averse, rational shareholders still will have a high tolerance for risky corporate projects. This is so because the basic corporate law principle of limited liability substantially insulates shareholders from the downside risks of corporate activity. The limited liability doctrine, of course, states that shareholders of a corporation may not be held personally liable for debts incurred or torts committed by the firm. Because shareholders thus do not put their personal assets at jeopardy, other than the amount initially invested, they effectively externalize some portion of the business’ total risk exposure to creditors.
Accordingly, as Chancellor Allen explained in Gagliardi v. Trifoods Int’l, Inc., 683 A.2d 1049 (Del. Ch. 1996), shareholders will want managers and directors to take risk:
Shareholders can diversify the risks of their corporate investments. Thus, it is in their economic interest for the corporation to accept in rank order all positive net present value investment projects available to the corporation, starting with the highest risk adjusted rate of return first. Shareholders don’t want (or shouldn’t rationally want) directors to be risk averse. Shareholders’ investment interests, across the full range of their diversifiable equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm’s cost of capital.
Id. at 1052. In turn, the business judgment rule encourages directors to take appropriate risks by insulating them from the danger of being held liable if such a decision turns out badly. Put simply, it eliminates the possibility that hindsight bias will color judicial review of board decisions.
Shareholder litigation alleging that a board failed adequately to manage risk raises precisely the same concerns as shareholder litigation challenging the riskiness of a board decision. Risk management necessarily overlaps with risk taking because the former entails making choices about how to select the optimal level of risk to maximize firm value. In general, firms have four tools for managing risk: (1) transferring risk to third parties through hedging and insurance, (2) avoiding risk by choosing to refrain from certain business activities, (3) mitigating operational risk through preventive and responsive control measures, and (4) accepting that certain risks are necessary to generate the appropriate level of return. All of these overlap with risk taking. Operational risk management, for example, frequently entails making decisions about whether to engage in risky lines of business and, more generally, determining whether specific risks can be justified on a cost-benefit analysis basis. As a result, it is becoming increasingly difficult to draw a meaningful distinction between the ordinary corporate governance decisions protected by the business judgment rule and risk management. The business judgment rule therefore should protect the latter, just as it does the former.
Given the incomparable definitiveness of Jimi Hendrix's version, I would think it takes an enormous amount of chutzpah for any band to tackle All Along the Watchtower, but I just came across a version by Neil Young, Bruce Springsteen, and the E Street Band that very nearly pulls it off:
But the original is still my favorite:
If the CBO's right, and a core aspect of Obamacare isn't going to save any money over the next 10 years, why not scrap comprehensive reform and start over with something modest designed to help people who can't afford health insurance buy it? Expand health savings plans. Tax credits for persons of modest income who buy insurance. Portability. And leave the rest alone.
Take the ribs out of the refrigerator and transfer from plastic bag to a large, clean cutting board. Use paper towels to mop up any liquid and to wipe off excess rub. Put ribs, concave side down, in a large, disposable aluminum roasting pan and loosely tent with aluminum foil. Put roasting pan on grill, as close to the front as possible.