ProfessorBainbridge.com

The SEC is (finally) going after lawyers

Broc Romanek reports that:

In the "Cady Bar the Door" Blog, David Smyth notes recent examples of SEC's Enforcement going after lawyers - just as Director Rob Khuzami promised in a speech last June for defense counsel who engage in "questionable tactics" to gain advantage for their clients involved in SEC investigations. As David mentions in his blog, in his speech, Khuzami noted one hilarious episode in which a witness in investigative testimony - looking for a toe-tapping signal his lawyer had been warned against during a break - "extended [his foot] so far [under the table] that he was almost doing a split."

What's interesting (at least to me) is that SEC still seems to be mostly ignoring transactional lawyers who fail to function as gatekeepers. As I explain in Corporate Lawyers as Gatekeepers (January 6, 2012): 

Did Wal-Mart lawyers violate their Sarbanes-Oxley section 307 duties? Did Wal-Mart violate SOX 404?

As I explain in my book The Complete Guide to Sarbanes-Oxley, section 307 of Sarbanes-Oxley and the SEC rules thereunder require lawyers appearing and practicing before the Securities and Exchange Commission are under a duty to "report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof). If "the counsel or officer does not appropriately respond to the evidence" the attorney "must report the evidence to the audit committee of the board of directors of the issuer or ... to the board of directors."

I mention this because of the NY Times report on the internal investigation at Wal-Mart of corruption at their Mexico subsidiary:

Confronted with evidence of corruption in Mexico, top Wal-Mart executives focused more on damage control than on rooting out wrongdoing.

In one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive. Days later, records show, Wal-Mart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City. Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico — a remarkable choice since the same general counsel was alleged to have authorized bribes.

The general counsel promptly exonerated his fellow Wal-Mart de Mexico executives.

When Wal-Mart’s director of corporate investigations — a former top F.B.I. official — read the general counsel’s report, his appraisal was scathing. “Truly lacking,” he wrote in an e-mail to his boss.

The report was nonetheless accepted by Wal-Mart’s leaders as the last word on the matter.

Here's what inquiring minds want to know: Did the lawyers go to the audit committee? If not, will the SEC go after them?

Looks like there may also be SOX Section 404 issues, as well as major securities fraud issues, since Wal-Mart's internal controls seemingly have problems detecting and preventing corruption:

A confidential investigation, conducted for Wal-Mart in 2003 by Kroll Inc., a leading investigation firm, discovered that Wal-Mart de Mexico had systematically increased its sales by helping favored high-volume customers evade sales taxes.

A draft of Kroll’s report, obtained by The Times, concluded that top Wal-Mart de Mexico executives had failed to enforce their own anticorruption policies, ignored internal audits that raised red flags and even disregarded local press accounts asserting that Wal-Mart de Mexico was “carrying out a tax fraud.” (The company ultimately paid $34.3 million in back taxes.)

Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units. Kroll wrote another report that branded the units “ineffective.” Many employees accused of wrongdoing were not even questioned; some “received a promotion shortly after the suspicions of fraudulent activities had surfaced.”

As I explain in my book The Complete Guide to Sarbanes-Oxley, section 404 of Sarbanes-Oxley management must acknowledge its responsibility for establishing and maintaining a system of internal controls and procedures for financial reporting and an assessment, as of the end of the most recent fiscal year, of the effectiveness of the firm’s internal controls. How could Wal-Mart have provided a positive assessment of their internal controls in light of these problems?

Pileggi on The Moral Aspects of a Lawyer’s Fiduciary Duty

FOTB Francis Pileggi has written an interesting essay entitled The Moral Aspects of a Lawyer’s Fiduciary Duty,in which he discusses the "the religious origins of the foundation for many obligations of a lawyer (and others in a position of trust)." Recommended reading.

Review of Veasey and Di Guglielmo's "Indispensable Counsel: The Chief Legal Officer in the New Reality"

Today's WSJ reviews Indispensable Counsel: The Chief Legal Officer in the New Reality by former Delaware Supreme Court Chief Justice E. Norman Veasey and his associate/frequent co-author Christine T. Di Guglielmo. Over at Amazon, we read that:

Legislation and case law following the relatively recent corporate scandals have increased scrutiny on the ethics and integrity of individuals, and the culture they create, at the highest levels within the corporate structure. The corporate General Counsel (GC) is a key member of that group. This enhanced attention increases the already substantial tensions facing the GC, who must navigate the demands and interests of various corporate stakeholders-including the board of directors, officers (particularly the CEO), stockholders, and employees-while also serving the best interests of the client, which is-and should only be-the corporation itself. 

In light of these heightened expectations on ethics, integrity, and other liability concerns,  Indispensable Counsel: The Chief Legal Officer in the New Reality  examines the key role of the independent, yet business-oriented, chief legal officer.  Indispensable Counsel provides readers with the foundations of corporate representation followed by practical guidelines on how the multiple roles of GC are, or should be, resolved, with best practices as the goal.

The Journal opines that:

With "Indispensable Counsel: The Chief Legal Officer in the New Reality," E. Norman Veasey and Christine T. Di Guglielmo have written a field manual to aid CLOs with their new tasks [occasioned by Sarbanes-Oxley and Dodd-frank]. More important, the authors have illuminated how Congress, primarily through Sarbanes-Oxley, has inserted the long arm of federal law into executive suites and boardrooms to influence private-sector decision making, using the CLO as cat's paw.

BTW, the emphasis on the growing federal role makes Indispensable Counsel a very useful companion to my book Corporate Governance after the Financial Crisis. Indeed, the Journal reports that:

The authors quote Stephen Bainbridge, a UCLA law professor, who writes [in Corporate Governance after the Financial Crisis]: "Are Dodd-Frank's governance provisions quackery, as were Sarbanes-Oxley's? In short, yes. Without exception, the proposals lack strong empirical or theoretical justification." Nonetheless they are now the law of the land.

Anyway, the Journal further reports that:

Judge Veasey and Ms. Di Guglielmo are of course lawyers themselves, and their book is not only a how-to manual but also a sort of inspirational guide. They style the in-house counsel as the conscience of the corporation, implying that lawyers operate on a higher moral plane than the money-grubbers who actually run corporations.

Whether or not lawyers in fact operate on a higher moral plane than other corporate managers, it is clear that in-house lawyers play a critical role as corporate gatekeepers. (For my take on that issue, see Corporate Lawyers as Gatekeepers (January 6, 2012).)

Anyway, kudos to Veasey and Di Guglielmo for this very important new title.

Leo Strine: Rock Star?

I recently compared Leo Strine to the minor prophets of the Bible. Now the Delaware Inc. blog is comparing him to a "rock star":

Leo Strine has become something of a rock start in law circles lately, partly because of his sometimes startling rulings, partly because of the frank language he uses in his opinions. The national spotlight fell on Strine again this month, when The American Lawyer magazine published a lengthy profile of the chancellor, noting his “cultlike following among the ranks of America’s top corporate lawyers.”

...

But, as the article asks, is a chancellor who “shakes things up” really what the corporate world wants from the nation’s top business court? “How will Strine balance corporate America’s desire for comfort with his own penchant for boldness? …  It will be a fascinating story to watch.”

I can top that rejection story

Pierre Schlag has a great post inspired by a recent law review rejection letter he received. Among other amusing points, he notes that:

It’s true they had “carefully considered” my article, but still I sent the article on Monday and I got the rejection on Wednesday.  48 hours–that did not seem like much time for “careful consideration”—particularly given the fact that The Name Law Review got well over 3,000 articles a year.

I totally sympathize. I'm so sick of the smug arrogance of wet-behind-the-ears law students who write those condescending rejection letters.

But I can top that story. During my second year of law school I had an on-campus interview in Charlottesville with a law firm that should probably remain nameless, but won't. I thought my interview with the lawyers from Cadwalader, Wickersham, & Taft's Washington office had gone well. Apparently not.

The next day I went to my mailbox, where I found a rejection letter from Cadwalader with the usual "you're great but we have thousands of people to select from and you just missed the cut" bullshit.

After a moment, it occurred to me that this was a pretty fast rejection. Then I noticed the postmark. It was postmarked the day before from Charlottesville!

The frakers apparently brought the letter with them and dropped in in the mail on their way out of town rather than waiting to get home.

That's a rejection story.

And don't get me started on the Howrey & Simon story....

The Changing World of Shareholder Litigation

Kevin LaCroix has a great post on how the plaintiff's securities/corporate bar is changing in the post-Milberg Weiss era. A must read for corporate law jocks.

"Insider" Trading by the Representative Plaintiff in Shareholder Litigation

If a plaintiff's class action or derivative lawyer tells the representative shareholder material nonpublic information about the status of the litigation, on the basis of which the shareholder then trades in the issuer's stock, there's doubtless some sort of state law violation. As Peter Ladig reports, the Delaware Chancery Court's newly issued guidelines for practicing before it make clear that "litigants who engage in this type of behavior should expect to be subject to "intensive scrutiny" and face a host of possible penalties." (See also Francis Pileggi's summary of the case.)

Ladig further reports that a recent Delaware case imposed sanctions in just such a case:

... in Steinhardt v. Howard-Anderson, ... the court ordered the plaintiffs it had found to have traded while in possession of confidential, nonpublic information to (i) self-report to the Securities Exchange Commission; (ii) disclose their improper trading in any future application to serve as lead plaintiff; and (iii) disgorge any profits made from the trades. The court then dismissed the trading plaintiffs from the case with prejudice and barred them from receiving any recovery from the litigation.

Query, however, whether the trading representative shareholder violated the federal insider trading prohibition. The Supreme Court has consistently made clear that insider trading liability is premised on breach of a duty to disclose rising out of a fiduciary relationship. 

Outside the traditional categories of Rule 10b-5 defendants—insiders, constructive insiders, and their tippees—things become quite complicated. As the Second Circuit observed in United States v. Chestman:

[F]iduciary 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 . . ., 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.[1]

In Chestman, the question was whether the relationship between spouses was fiduciary in nature. In answering that question, the court laid out a general framework for dealing with nontraditional relationships. First, unilaterally entrusting someone with confidential information does not by itself create a fiduciary relationship.[2] This is true even if the disclosure is accompanied by an admonition such as “don’t tell.” Second, familial relationships are not fiduciary in nature without some additional element.

Turning to factors that could justify finding a fiduciary relationship on these facts, the court first identified a list of “inherently fiduciary” associations. "Counted among these hornbook fiduciary relations are those existing between attorney and client, executor and heir, guardian and ward, principal and agent, trustee and trust beneficiary, and senior corporate official and shareholder."

Once one moves beyond this class of “hornbook” fiduciary relationships, the requisite relationship exists solely where one party acts on the other’s behalf and “great trust and confidence” exists between the parties:

A fiduciary relationship involves discretionary authority and dependency: One person depends on another—the fiduciary—to serve his interests. In relying on a fiduciary to act for his benefit, the beneficiary of the relation may entrust the fiduciary with custody over property of one sort or another. Because the fiduciary obtains access to this property to serve the ends of the fiduciary relationship, he becomes duty-bound not to appropriate the property for his own use.

Because the spousal relationship at issue in Chestman did not involve either discretionary authority or dependency of this sort, it was not fiduciary in character.

According to Ladig, the Delaware Chancery Court characterized the relationship between the representative shareholder and the class s/he represents as a fiduciary one:

"Trading by plaintiff-fiduciaries on the basis of information obtained through discovery undermines the integrity of the representative litigation process. Consequently, it is unacceptable for a plaintiff-fiduciary to trade on the basis of nonpublic information obtained through litigation."

In theory, I suppose the representative plaintiff has discretionary authority over the litigation. Also, in theory, I suppose that the other shareholders depend the representative shareholder to serve their interests. In theory, it's therefore hard to quibble with Vice Chancellor Lasker's statement that:

When a stockholder of a Delaware corporation files suit as a representative plaintiff for a class of similarly situated stockholders, the plaintiff voluntarily assumes the role of fiduciary for the class. See Emerald P'rs v. Berlin, 564 A.2d 670, 673 (Del. Ch.1989); Youngman v. Tahmoush, 457 A.2d 376, 379 (Del. Ch.1983). As a fiduciary, the representative plaintiff “owes to those whose cause he advocates a duty of the finest loyalty.” Barbieri v. Swing–N–Slide Corp., 1996 WL 255907, at *5 (Del. Ch. May 7, 1996) (internal quotation marks omitted). [2012 WL 29340 at *8]

In practice, however, the real party in interest in shareholder litigation is the class counsel. It is the class counsell who really runs the show and upon whomn the class members really depend. In practice, the representative shareholder is simply the name on the lawsuit's title. See Bell Atlantic Corp. v. Bolger
2 F.3d 1304, 1309 n.8 (3d Cir 1993):

See Ralph K. Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L.J. 945, 948 (1993) (in derivative actions, “plaintiffs are generally figureheads”); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U.Chi.L.Rev. 1, 3 (1991) (plaintiffs' class and derivative action attorneys “subject to only minimal monitoring by their ostensible ‘clients' who are either dispersed and disorganized (in the case of class litigation) or under the control of hostile forces (in the case of derivative litigation).”); Geoffrey P. Miller, Some Agency Problems in Settlement, 16 J.Legal Stud. 189, 190 (1987) (“the interests of plaintiff and attorney are never perfectly aligned”); John C. Coffee Jr., Understanding The Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Col.L.Rev. 669, 677-78 (1986) (in derivative and class actions client “generally has only a nominal stake in the outcome of litigation” and cannot closely monitor and control plaintiff's attorney's conduct); Daniel R. Fischel & Michael Bradley, The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis, 71 Corn.L.Rev. 261, 271 & n. 26 (1986) (“real party in interest is the attorney”); Deborah L. Rhode, Class Conflicts in Class Actions, 34 Stan.L.Rev. 1183, 1203 (1982) (“as a practical matter, once a class is certified, named plaintiffs generally are neither highly motivated nor well situated to monitor the congruence between counsel's conduct and class preferences”) ....

Which suggests that the representative shareholder's discretionary authority may not rise to the level Chestman requires or that the other shareholders' dependency on the representative plaintiff rises to that level either.

I'm not saying that representative plainitffs ought to be allowed to trade on the basis of nonpublic information about the lawsuit. I'm just saying we don't need to make a federal case out of it. Before we do so there ought to be a meaningful showing under the Chestman standard, rather than just a label casually slapped on the relationship without a realistic examination of the relationship as it exists in the real world.

---

[1] 947 F.2d 551, 567 (2d Cir. 1991) (citations omitted), cert. denied 503 U.S. 1004 (1992).

[2] Repeated disclosures of business secrets, however, could substitute for a factual finding of dependence and influence and, accordingly, sustain a finding that a fiduciary relationship existed in the case at bar. Chestman, 947 F.2d at 569. 

Opportunity for young prospective legal academics

I've been asked to post an announcement about the Federalist Society's Olin-Searle-Smith Fellows in Law program:

The Olin-Searle-Smith Fellows in Law program will offer top young legal thinkers the opportunity to spend a year working full time on writing and developing their scholarship with the goal of entering the legal academy. Up to three fellowships will be offered for the 2012-2013 academic year.

A distinguished group of academics will select the Fellows. Criteria include:

• Dedication to teaching and scholarship
• A J.D. and extremely strong academic qualifications (such as significant clerkship or law review experience)
• Commitment to the rule of law and intellectual diversity in legal academia
• The promise of a distinguished career as a legal scholar and teacher

Stipends will include $50,000 plus benefits. While details will be worked out with the specific host school for the Fellow, in general the Fellow will be provided with an office and will be included in the life of the school. Fellows are not expected to hold other employment during the term of their fellowships.

Go here for more information.

Corporate Lawyers as Gatekeepers--Download Corrected and Post Bumped

If you followed my day in the life post, you know I spent much of it working on an essay for the UCLA School of Law's faculty law journal. At the end of the day, I turned in the essay and also sent it off to SSRN. It's now been posted and is available for downloading here. The abstract follows:

Abstract: Corporate lawyers traditionally viewed themselves — and were viewed by the managers who hired them — as advocates, confidents, and advisors, not as gatekeepers like auditors. 

In fact, however, lawyers often play a reputational intermediary role not dissimilar to that of an auditor. A very high profile general counsel or law firm partner, for example, can give a client in trouble the benefit of the lawyer’s reputation for probity and upstanding ethics.

Usually, of course, counsel play a more behind the scenes role, but it is still a gatekeeping role. Specifically, transactional counsel and in-house lawyers are well positioned to intervene by blocking the effectiveness of a defective registration statement or prevent the consummation of a transaction, to cite but two examples. In many recent financial crises, however, lawyers all too often failed to be effective gatekeepers. In the Sarbanes-Oxley Act of 2002 (SOX), Congress directed the Securities and Exchange Commission to adopt rules of ethics governing lawyers who appear or practice before the Commission. 

As adopted, the post-SOX rules give lawyers what purports to be a very “simple” up-the-ladder reporting obligation. As one proponent explained counsel’s duty: “You report the violation [to top managemkent]. If the violation isn’t addressed properly, then you go to the board of directors].”

Despite SOX’s many strictures in this and other areas, however, a new and even more devastating financial crisis came in 2008 when the subprime mortgage market’s troubles nearly brought the entire banking system to its knees. Once again, questions are being asked about the role lawyers played in this crisis. A reassessment of SOX’s legal ethics rules thus is in order.

This essay is adapted with permission from the author’s book Corporate Governance After the Financial Crisis (Oxford University Press 2012). The first decade of the new millennium was bookended by two major economic crises. The bursting of the dotcom bubble and the extended bear market of 2000 to 2002 prompted Congress to pass the Sarbanes-Oxley Act, which was directed at core aspects of corporate governance. At the end of the decade came the bursting of the housing bubble, followed by a severe credit crunch, and the worst economic downturn in decades. In response, Congress passed the Dodd-Frank Act, which changed vast swathes of financial regulation. Among these changes were a number of significant corporate governance reforms. 

Corporate Governance After the Financial Crisis asks two questions about these changes. First, are they a good idea that will improve corporate governance? Second, what do they tell us about the relative merits of the federal government and the states as sources of corporate governance regulation? Traditionally, corporate law was the province of the states. Today, however, the federal government is increasingly engaged in corporate governance regulation. The changes examined in this work provide a series of case studies in which to explore the question of whether federalization will lead to better outcomes. The author analyzes these changes in the context of corporate governance, executive compensation, corporate fraud and disclosure, shareholder activism, corporate democracy, and declining US capital market competitiveness.

Keywords: , corporate counsel, gatekeeper, legal ethics, professional responsibility, Sarbanes-Oxley

JEL Classifications: K22

Update: Apparently the download wasn't working. It is now. So you can download the article  here.  Or, better yet, just buy the whole book!

Delawyering the Corporation

In what I assume will be the final publication of his long and splendid career, the late Larry Ribstein's paper Delawyering the Corporation has been posted to SSRN:

This article shows how in-house lawyers' role has evolved to address the high cost of legal services and the traditional information asymmetry between lawyers and clients. The first stage of this evolution involved the expanding role of in-house counsel from intermediary between corporate executives and the corporation's outside law firm to the corporation's purchasing agent in a broader market for legal services. The second stage could see legal work distributed among employees with and without legal expertise throughout the corporation. The article also shows how evolving legal information technology could facilitate corporations' full-fledged integration of legal information into business decisions. These developments have potential implications for the corporate and general markets for legal services and for legal education.

Legal filings and free speech

The ABA Journal reports that:

A Minnesota lawyer is facing a possible sanction after she signed a legal memorandum written by her client calling a bankruptcy judge a "Catholic Knight Witch Hunter.”

The document signed by lawyer Rebekah Nett said the courts were "composed of a bunch of ignoramus, bigoted Catholic beasts that carry the sword of the church,” the St. Paul Pioneer Press reports. U.S. Bankruptcy Judge Nancy Dreher has issued an order to show cause why Nett and her client, Naomi Isaacson, shouldn’t each be fined $10,000.

I'm no First Amendment expert, but I can't help wondering why judges justify carving out an exception for themselves when the rest of us have to put up with offensive speech directed our way all the time (you should see of my student evaluations, for example). Perhaps my friend and colleague Eugene Volokh can explain it.

 

Non-lawyer ownership of law firms

Larry Ribstein reports that:

The ABA is considering loosening the bar on non-lawyer ownership of law firms (HT Law Blog).  Here’s the discussion paper.

For those who are thinking that this move is meaningful, forget about it.

He goes on to explain why.

 

"Occupy Wall Street's message for lawyers" is just nuts

Columbia University law prof Katherine Franke launches a jeremiad against Wall Street lawyers:

A scruffy-looking Occupy Wall Street protester takes out a big black magic marker and writes on a tattered piece of cardboard: "Ban 'Naked' Credit Default Swaps." Others hold signs calling for an end to "mortgage-backed securities" and "self-settled asset protection trusts." These demonstrations have a different, and more sophisticated, message than any we've seen before. "Hey, Hey, Ho, Ho — Interest Rate Swap Contracts Have Got To Go!" ...

Behind every credit default swap or short of subprime mortgage-backed assets sit legal counsel sanctioning these practices. The greed that has motivated bankers to sacrifice the public's interests for short-term personal gain has been made possible, in no small part, by the work of lawyers.

The OWS protests should motivate us to consider anew what it means to be a professional lawyer, particularly in a climate where our expertise is being used to provide cover for otherwise unethical financial practices. ...

Implicit in the OWS protests is a condemnation of an approach to lawyering that regards all legal rules simply as the price of misconduct discounted by the probability of enforcement: Skirting too close to, if not over, the limits of law is seen as the cost of doing business, or as my colleagues trained in economics call it, "efficient breach."

I'm not convinced.

To be sure, I agree that lawyers have some gatekeeping functions. Indeed, see my post on Remarks on In House Counsel as Gatekeepers. As I noted therein: When a corporation hires a lawyer, the lawyer represents the corporation and its shareholders, not the managers. This should be self-evident, but the basic lesson of the financial crises has been that corporate lawyers all too easily lose sight of this axiom. To cite just one very prominent example, Enron Bankruptcy Examiner Neal Batson observed that:

One explanation for the attorneys' failure may be that they lost sight of the fact that the corporation was their client. It appears that some of these attorneys considered the officers to be their clients when, in fact, the attorneys owed duties to Enron.

Batson further observed that Enron’s “attorneys saw their role in very narrow terms, as an implementer, not a counselor. That is, rather than conscientiously raising known issues for further analysis by a more senior officer or the Enron Board or refusing to participate in transactions that raised such issues, these lawyers seemed to focus only on how to address a narrow question or simply to implement a decision (or document a transaction).”

It is useful to remind lawyers and law students that they are not just mere scriveners, but also counselors.

Having said all that, however, I doubt very much whether most Wall Street lawyers failed to meet their gatekeeping duties. First, it is hardly proven that credit default swaps or MBS were/are either unethical or illegal. To the contrary, they were/are both ethical and legal devices. See, for example, my post on Credit Default Swaps Under Fire.

Second, credit default swaps and MBS did not cause the financial crisis. The downturn in the housing market did not become a crisis until the problems in the mortgage market moved into the repo market. This is the market in which large institutional investors deposit short-term cash and banks insure those cash by offering collateral -- such as a senior tranche of securities -- in return. The financial crisis of 2008 thus was not a classic depositor run on the market but rather a new type of bank run that took place in the repo market. As Gary Gorton of Yale explained "the repurchase agreement market in the U.S., estimated to be about $12 trillion, larger than the total assets in the U.S. banking system ($10 trillion), became very illiquid during the crisis due to the fear of counterparty default, leaving lenders with illiquid bonds that they did not want, believing that they could not be sold. As a result, there was an increase in repo haircuts (the initial margin), causing massive deleveraging."

This understanding of the financial crisis is critical to assessing Franke's argument. We are witnessing precisely the same sort of repo market problems today but this time due to the Euro zone's sovereign debt crisis. Specifically, we are observing a shift in collateral away from peripheral market debt to core Eurozone bonds and a shortening maturity of repo activity — both of which highlight the increasing levels of risk aversion across the markets. This is resulting in sharply higher borrowing costs in the repo market, which is having a ripple effect causing higher borrowing costs in the markets for commercial paper and interbank lending. All without a MBS in sight.

Third, I don't think lawyers ought to understand their role as that of a "republican' citizen, obliged to act as guardian of public interests even when — indeed especially when — representing private interests." Sometimes the lawyer's duties to the corporate client may require the lawyer to go over the head of management to the board of directors. Sometimes the lawyer's duties may even require the lawyer to withdraw. But the lawyer's duties remain to the organization as client, not the public at large.

The role of a corporate lawyer is to be, In Ron Gilson's tremendously useful term, a "transaction engineer." Successful transactional lawyers build their practice by perceptibly adding value to their clients’ transactions. From this perspective, the education of a transactional lawyer is a matter of learning where the value in a given transaction comes from and how the lawyer might add even more value to the deal.

For the most part, lawyers increase the size of the pie by reducing transaction costs. One way of lowering transaction cost is through regulatory arbitrage. The law frequently provides multiple ways of effecting a given transaction, all of which will have various advantages and disadvantages. By selecting the most advantageous structure for a given transaction, and ensuring that courts and regulators will respect that choice, the transactional lawyer reduces the cost of complying with the law and allows the parties to keep more of their gains.

Which is precisely what most Wall Street lawyers did when helping their clients effect transactions involving things like credit default swaps and MBSs.

Finally, a quibble. The term "efficient breach" does not refer to decisions to violate the law. An "efficient breach" occurs "that when a party to a contract is better off breaching (and paying any damages owing on that account), it ought to do so.  The breach in this case is said to be economically efficient, inasmuch as the breaching party is clearly better off, and the non-breaching party is no worse off relative to whatever it bargained for.  Such an 'efficient breach' is welfare maximizing as between the parties, because the sum of their total welfare is greater than if the breaching party had performed." Basic errors like this call into question the rest of the analysis.

Update: Larry Ribstein has a thoughtful post on the implications for legal education if one is willing to assume, arguendo, that Franke's basic critique holds water.

(How) Can Lawyers Serve Human Dignity

A provocative new article by Rob Vischer asks How Do Lawyers Serve Human Dignity?

The conception of human dignity that prevails within the legal profession is roughly interchangeable with individual autonomy. That is, lawyers serve the cause of dignity by facilitating the client’s autonomy. In this regard, the legal profession’s dignity discourse lacks the nuance and depth that is found in the discourse occurring in other fields, bioethics in particular. As far as it goes, autonomy is a key component of individual dignity, but autonomy does not exhaust the nature or implications of dignity, particularly the narrow conception of autonomy employed widely within the legal profession. The narrowness results, in significant part, from lawyers’ failure to invest in the dialogue necessary to pursue a fully relational sense of client autonomy, rather than a simplistic autonomy of individual self-interest secured through the maximization of legal rights and privileges. In reality, there are multiple layers of human dignity, not all of which are centered on individual autonomy. Whether or not a more authentically relational conception of autonomy can be reclaimed, it is important to articulate how the human orientation toward relationship can help provide substantive content to, and draw professionally relevant implications from, the elusive concept of human dignity.

I found it challenging and thought provoking.