ProfessorBainbridge.com

Government Motors flopped

The WSJ has the details:

From sport utes to sports cars to soccer-mom vans, every industry segment is thriving—with the notable exception of the alternative-fuel vehicles into which Washington has sunk billions of taxpayer dollars.

Noonan on Phil Mickelson's taxes

Peggy Noonan:

Golf star Phil Mickelson this week complained about taxes—"I happen to be in that zone that has been targeted both federally and by the state"—and suggested he may leave California. Before anyone could jump down his throat, he abjectly apologized: He didn't mean to hurt anyone, he shouldn't have said it, taxes are a "personal" issue. ...

Conservatives and Republicans feel a bit under siege these days because their views are not officially in style. But the Cringe is not the way to deal with it. If you take a stand, take a stand and take the blows. Many people would think that paying more than half your salary in city, state, county and federal taxes is unjust. Mr. Mickelson is not alone.

If he stays in California, Phil will end up working for the government--federal, state, and local--from January 1 into July or August and will keep only what he earns from then to December. Even if that's still millions, spending over half the year working for Barak Obama and Jerry Brown is no one's idea of a good time.

"Government regulation often rules out the options people would otherwise want to pursue that would let them work together more"

President Obama said this in his 2nd inaugural address:

For the American people can no more meet the demands of today's world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we'll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together.

I object to this move, which seems to have become popular with Democrats in the past couple years, of equating "doing things together" with government. To suggest that anyone who'd like to see less heavy-handed government regulation thinks one person can do everything alone is a straw-man argument. It indicates a lack of understanding of how the private-sector economy works and how libertarians or conservatives actually think about economics. The private sector isn't just a bunch of people "acting alone."

via jaltcoh.blogspot.com

Swapping sex for inside information

John Carney has a provocative post about insider trading (pun intended):

Someone has placed a job placement notice on a controversial online classified ads site seeking "beautiful, sophisticated ladies" to seduce businessmen in hopes of "extracting key pieces of information."

Carney goes on to explore the legality of the business under the securities laws:

Tipper-tippee liability has two important elements. First, there must be a disclosure of material, nonpublic information by someone with a fiduciary duty. Second, the person doing the disclosing—the tipper—must expect a personal benefit as a result of the disclosure. In effect, this means that accidental disclosures do not give rise to insider trading liability for either the tipper or the tippee.

Quite correct.

After a detailed review of the relevant law, Carney concludes from his extended analysis that:

The legality of trading on information intentionally extracted from a seduced businessman, in other words, would largely turn on his motivation for revealing the information and the length of the relationship. If he thinks he is just blowing off steam about a business deal to a one-night stand who was going to sleep with him anyway, this entire scheme wouldn't violate any insider trading rules.

What do we think? First, the law is quite clear than an exlicit quid pro quo in which an executive swapped inside information for sex would constitute an illegal tip. Second, "pillow talk" in which information is inadvertently disclosed does not (subject to Carney's correct anlysis of the potential application of Rule 10b5-2).

But, third, there is a tricky precedent out there that Carney does not discuss; namely, SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009), which dealt with a question left open in the U.S. Supreme Court U.S. v. O’Hagan decision--i.e., 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.  

I've got a backgrounder on the case here, in which I explain that:

In Dorozhko, the SEC alleged that a computer hacker broke into a health information company’s computer system and used the stolen information to essentially sell the stock short. The Second Circuit tried to finesse the rules discussed below by treating the case as one involving a misrepresentation rather than insider trading: “we recognize that the SEC’s claim against defendant—a corporate outsider who owed no fiduciary duties to the source of the information—is not based on either of the two generally accepted theories of insider trading.” The problem is that the case makes no sense other than as an insider trading case.

An affirmative misappropriation can be actionable under Section 10(b) and Rule 10b-5 if it is committed in connection with the purchase or sale of a security. In order to find that the hacker committed an affirmative misrepresentation, a court first must find a lie. Calling computer hacking a lie is a rather considerable stretch. At most, the hacker “lies” to a computer network, not a person. Hacking is theft; not fraud.

Even if hacking is fraudulent in the sense of an affirmative misrepresentation, it has to be in connection with a purchase or sale of a security to be insider trading. In SEC v. Zandford, 535 U.S. 813 (2002), the Supreme Court emphasized that “the statute must not be construed so broadly as to convert every common-law fraud that happens to involve securities into a violation of § 10(b).” That case, moreover, involved “a fraudulent scheme [by a stockbroker] in which he made sales of his customer’s securities for his own benefit.” The SEC had taken the position that such conduct violated 10b-5 since the 1940s. In contrast, the district court in Dorozhko “found it ‘noteworthy’ that in the over seventy years since the enactment of the Securities Exchange Act of 1934, ‘no federal court has ever held that those who steal material nonpublic information and then trade on it violate § 10(b),’ even though ‘traditional theft (e.g. breaking into an investment bank and stealing documents) is hardly a new phenomenon, and involves similar elements for purposes of our analysis here.’” Dorozhko, 606 F. Supp. 2d 321, 339 (SDNY 2008). 

In that light, consider Carney's argument that:

What would also work against the "beautiful, sophisticated ladies" in this case is that they have set out to seduce the businessmen in order to obtain the information. This means that, at least on their part, the disclosure is not accidental. They intend for it to occur. It's easy to see a court believing that the businessman in question would understand this intention and so any disclosure would be in search of a personal benefit. 

It might be possible to get around this, however, by training the seductresses well enough so that the businessmen never realize the purpose of the seduction. Obtaining information from a businessman who was unaware that the attentions of a young woman were based on his access to and looseness with insider information, wouldn't give rise to tippee liability. So the company employing the women might retain its freedom to trade on the information.

I think Dorozhko works against Carney here. Theft by seduction likely would be viewed as analogous to theft via hacking.

Anyway, it's an interesting thought experiment. In these politically corret times, however, I don't recommend that law professors use it in class or on an exam. Some hyper-sensitive student doubtless would go running to the dean to complain about your lack of sensitivity to something or other.

How moderate is President Obama?

Over at OTB, Steven Taylor posts on a claim by political scientist Keith Poole that "President Obama is the most ideologically moderate Democratic president in the post-war period ...." Taylor goes on to opine the study suggests "that the notion that Obama is especially liberal (let alone a socialist of some stripe) is an indefensible position to take from an empirical point of view."

This post and the underlying study raised all my hackles about empirical scholarship. Empirical analysis all too often is flawed by GIGO, design errors, selection bias, and a host of other problems. In tis case, for example, trying to map Presidential statements to Congressional votes looks like a process fraught with potential errors. In addition, as the study authors themselves note, Obama's scores are pulled to the right by his foreign policy positions, which almost everyone agrees have been remarkably like those of his predecessor in a surprising number of respects. Guantanamo is still open. Obama's drones are busy killing all over the Islamic world. Throw out his foreign policy scores and on domestic issues Obama doubtless would shift substantially to the left.

And then consider what the second inaugural address tells us. James Fallows opines of "Obama's Startling Second Inaugural" that:

This was the most sustainedly "progressive" statement Barack Obama has made in his decade on the national stage. ... [he]  has won re-election and knows he will never have to run again and hears the clock ticking on his last chance to use the power of the presidency on the causes he cares about.

Or consider Reihan Salam:

I’m glad that I read President Obama’s Inaugural Address in lieu of listening to it live. Back in 2004, after his keynote address to the Democratic National Convention, I wrote an op-ed for the New York Sun arguing that Barack Obama was more left-wing than was commonly understood at the time. Specifically, I made the case that he saw the public sector as the prime vehicle for the values of solidarity and community in American life. And in this most recent speech, the president collapsed the distinction between collective action and government action again and again, very much in keeping with social-democratic thinking.

Obviously, Obama is no socialist. But ask me if I think he's a (surprisingly militaristic) social democrat and you'll get an affirmative answer, which in my book makes him a lot more of a liberal on domestic issues than any other modern Democratic president.

The twelve scariest words in the English language

Barack Obama is from the government, and he is here to help

Strine et al. on derivative suit jurisdiction

Delaware Chancellor Leo Strine, law professor Larry Hammermesh, and practititoner Matthew Jennejohn have posted a very interesting new paper on derivative litigation procedure entitled Putting Stockholders First, Not the First-Filed Complaint:

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Globalize tax reform

My friend and colleague Steven bank has posted a very interesting paper entitled The Globalization of Corporate Tax Reform:

With the growth of multinational corporations and its effect on corporate tax revenues, it is not surprising that international tax reform is a major part of President Obama’s Framework for Business Tax Reform as he begins his second term. Noticeably missing from this and other discussions of the major structural reform proposals, however, is any mention of the influence and importance of international corporate tax reform efforts. Although the concern over corporate tax evasion is especially pronounced in the U.S., the "decentering" of multinational corporations and corporate tax revenues is by no means an exclusively American problem. Around the world, nations are under direct and indirect pressure to reform their corporate tax laws. Both the OECD and the European Commission have recently released descriptions of projects designed to address corporate tax evasion and profits shifting. Not only will this have an effect on U.S. tax laws and on the tax burdens of U.S. multinational corporations regardless of whether the U.S. actually reform its own laws, but it will have an effect on the success of any corporate tax reform initiated in the U.S. This essay, written for a symposium entitled "Tax Advice for the Second Obama Administration," argues that unilateralism is problematic. Any attempt to reform corporate taxation inevitably has to be undertaken in light of the already-existing global effort in this area, rather than proceeding purely as a domestic legislative matter.

And so the GOP swerved

The House is scheduled to vote Wednesday on an increase in the nation's debt limit, a move designed to prevent a first-ever government default.

The vote marks a change in strategy for House Republicans who run the chamber and who remain adamant about reducing government spending but decided not to use the debt limit to trigger a confrontation with President Barack Obama.

via bigstory.ap.org

In yet another Chicken Game with Obama, the House GOP swerved first. Spineless, useless, enablers of runaway debt...

Obama's inaugural address reveals social democratic agenda

Reihan Salam - The Agenda - National Review Online:

I’m glad that I read President Obama’s Inaugural Address in lieu of listening to it live. Back in 2004, after his keynote address to the Democratic National Convention, I wrote an op-ed for the New York Sun arguing that Barack Obama was more left-wing than was commonly understood at the time. Specifically, I made the case that he saw the public sector as the prime vehicle for the values of solidarity and community in American life. And in this most recent speech, the president collapsed the distinction between collective action and government action again and again, very much in keeping with social-democratic thinking.

As Noam Scheiber explains, the president has come to understand — rather late in the game — that his understanding of what solidarity ought to look like is not universally shared

via www.nationalreview.com

A Bit of Sarbanes-Oxley for Universities, Please

The impulse to impose Sarbanes-Oxley on universities is tempting.  Indeed, formal legal mandates on conflicts of interest and the other attributes of good governance might be even more appropriate for universities than for public corporations, as universities lack many of the safeguards of good governance, such as the ability to measure performance through profitability and engaged  shareholders with incentives to monitor performance.

via www.mindingthecampus.com

But ultimately not a good idea.

You'd think this was from the Onion, but sadly not

Class action lawyers have filed suit saying that contrary to its marketing, the popular beverage doesn’t actually “give you wings.” [Reuters, ABA Journal] Meanwhile, the same scientific observation that underlies the lawyers’ action — that pharmacologically, the drinks don’t seem to deliver effects readily distinguishable from those of a strong coffee — is hard to square with the oft-expressed fear that Red Bull et al pose unusual risks to consumers, although the New York Times does seem to manage to keep both ideas in its head at once. [Jacob Sullum]

via overlawyered.com

This is the sort of crap that gives all lawyers a bad name and makes Trial Lawyers, Inc., a stench in the nostrils of God.

Did shareholder empowerment weaken banks and help cause the financial crisis?

I argued that to be the case in Corporate Governance after the Financial Crisis. New research confirms that "banks with empowered shareholders were more likely to be bailed out." Put another way, "shareholder empowerment leads to decisions that make banks weaker and less able to weather the crisis."

Not that i expect the shareholder empowerment crowd to take notice.

Do shareholders benefit from corporate political contributions?

Yes:

A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market. ...

An investor selecting a portfolio according to the percentage of contributions given to the winner in a presidential election would have earned significant abnormal returns of up to 6.6% per year during the first year after an election. Investing in a portfolio formed according to a company’s total contribution would have yielded abnormal annual returns of up to 15.5% for the same observation period.

Which tells me that the people bitching and moaning about corporate political contributions don't really have shareholder intersts at heart .. but rather the interests of the Democratic Party's anti-business left.

Do apolitical investors want corporations to disclose political contributions?

Some but not most:

The Center for Political Accountability released on December 10, 2012 its annual survey of mutual fund support for corporate political disclosure. The analysis, which is available on CPA’s website, reviewed how 40 of the largest mutual fund families voted on shareholder resolutions that asked for disclosure of political spending based on the CPA model.

The review’s key findings include the following:

• In the 2012 proxy season, 40 of the largest mutual fund families supported, on average, 34 percent of the 29 CPA-model shareholder resolutions for corporate political disclosure. They abstained on 12 percent and opposed 54 percent.
• Average mutual fund support in 2012 decreased slightly from 2011′s record 35 percent average support.

The bulk of the support for such disclosure comes not from typical investors but from Democrat-leaning union pensions, state and local government pensions, and academics. Hmmm....