ProfessorBainbridge.com

Comply or explain versus trial lawyers

Comply or explain requirements have been a feature of the UK regulatory regime for quite a while. It's much less widely used in the US, although a few provisions of SOX and Dodd-Frank adopt versions of it.

Comply or explain gives companies flexibility in responding to corporate governance mandates, while ensuring transparency for investors.

One issue with expanding comply or explain in the US is developing clear guidance on what constitutes an adequate explanation. Jim Hamilton reports on developments in the UK regarding that issue.

A more serious issue, however, is the far more rapacious plaintiffs bar/litigation environment in the USA. Companies may choose to comply rather than risk being sued over claims that their explanation is fraudulent or otherwise inadequate, which eviscerates the key advantage of the comply or explain approach to regulation; namely, flexibility.

If we're going to get serious about comly or explain in the US, we're going to need safe harbors to protect the explanation from being subjected to constant frivolous lawsuits of the sort we're seeing with respect to say on pay disclosures.

Liberal Democrats push SEC on conflict mineral disclosure

Jim Hamilton reports:

Urging the SEC to quickly implement the conflict minerals disclosure provisions of the Dodd-Frank Act, Senators Patrick Leahy (D-VT) and Christopher Coons (D-DE) emphasized that the final regulations must require company conflict minerals reports to be filed with the Commission not furnished. In a letter to the SEC, the Senators also advised that the filed reports should contain enough substantive information so that investors can understand what actions a company has taken to make a reasonable country of origin inquiry. Reports that do not clearly list a company's activities, they said, and SEC regulations allowing a category of ``indeterminate’’ would undermine the congressional intent of Section 1502 of Dodd-Frank. The letter was also signed by House Members Jim McDermott (D-WA) (a co-author of Section 1502), Harold Berman (D-CA), Gregory Meeks D-NY), Donald Payne (D-NJ) and Karen Bass (D-CA).

Section 1502 of the Act requires companies that report to the SEC to disclose the measures they use to certify that their products do not contain conflict minerals. Companies also have to track their supply chains back to a mineral's origin. 

I've been writing about the conflict mineral disclosure requirement for a while. 

 In February 2011, I quoted a discussion of the issue by Broc Romanek and opined that:

My guess is that the costs of providing this disclosure are going to vastly exceed the benefits to investors. As such, it is yet another example of how narrow interest groups were able to hijack the legislative process during Dodd-Frank's drafting so as to advance an agenda wholly distinct from the financial crisis. It's thus also an example of how Congress keeps raising the cost of being public. It's thus yet another example of why American capital markets are losing their competitive standing in the global economy.

In May 2011, I quoted an earlier BNA report predicting that conflict mineral disclosures were going to be hugely expensive to prepare and noted that:

Congress seems to love what I call Kumbayah laws. Everybody on the Hill gets around in a circle, holds hands, condemns some (often admittedly heinous) abuse, sings a couple of choruses of Kumbayah, and then dumps the problem in somebody else's lap. Congress gets to feel good, NGOs pat them on the back, and it costs Congress nothing.

But somebody pays. Consider, for example, the mandate in Dodd-Frank that companies "certify that their products contain no conflict minerals from the Democratic Republic of the Congo (D.R.C.) and adjoining countries." BNA reports that this mandate is going to prove hugely expensive for companies--especially tech companies--and amount to a de facto embargo on such minerals ....

I continued:

Last year President Obama pledged to double US exports by 2015. As the Economist recently commented in a report on the declining value of the US dollar, however:

For Americans concerned about their country’s export prospects, the depressed value of the greenback ought to be good news. In February, the most recent month for which trade data are available, the dollar was 4.5% cheaper in real terms than a year earlier. But although America’s trade deficit did fall in February, it was only because exports fell less steeply than imports. That month’s deficit was still $6 billion higher than a year earlier, when Barack Obama announced a plan to double exports in five years. Achieving that will take more than a cheap currency.

One thing that would help top achieve that goal would be to stop heaping these sort of costs on US business. How about a 4 year freeze on Kumbayah laws?

Does the STOCK Act's impending passage argue for self-funding by the SEC?

The STOCK Act is intended to make clear that the SEC can successfully bring insider trading cases against members of Congress who trade on the basis of material nonpublic information. The practical question that will be posed by passage of the Act is whether the SEC will actually dare bite the hand that feeds it. With that in mind, consider Broc Romanek's argument that:

I've written repeatedly how absurd it is for a so-called independent federal agency - like the SEC - to be subject to the very real political pressures and whims of Congress. And the political pressures faced by the SEC have only grown since the passage of Dodd-Frank a mere two years ago. You may recall that the Senate's version of Dodd-Frank envisioned a self-funded SEC - a concept to be lost during the House-Senate conferencing leading up to the bill's enactment (if I recall, House conferees had accepted self-funding but some Senators stripped it from the final bill). Dodd-Frank also was supposed to dramatically bolster the SEC's resources, a notion that was quickly buried after it became law.

So what to do with the front-page article in the Washington Post today that Rep. Spencer Bachus (R-Ala.), Chair of the House Financial Services committee - the one that oversees the SEC - is being investigated for insider trading by the Office of Congressional Ethics? The case is the first of its kind involving a member of Congress. 

It's a legitimate problem. On the one hand, there have to be mechanisms for holding the SEC politically accountable and control of the budget is a critical mechanism for doing so. Second, we know from watching law enforcement agencies enforcing laws that allow them to get a slice of money forfeited by defendants that self-funding leads to abuses, some very serious. Third, in a democracy founded on the principle of no taxation without representation, the people's House is supposed to control the purse strings.

On the other hand, will the SEC bite the hand that feeds it? I'm not at all sure.

My preference would be to find ways to encourage the SEC to enforce the STOCK Act without moving to a self-funding model.

SEC to get cost benefit analysis knuckles rapped?

On Thursday, (2/16), the House Financial Services Committee will markup H.R. 2308,"SEC Regulatory Accountability Act, a bill pushed b Rep. Scott Garrett (R-NJ). The core of the bill is a requirement that the SEC undertake an enhanced cost-benefit analysis before adopting any regulation:

(1) IN GENERAL- Before promulgating a regulation under the securities laws, as defined in section 3(a), or issuing any order pursuant to such laws, the Commission shall--

(A) clearly identify the nature of the problem that the proposed regulation is designed to address, as well as assess the significance of that problem, to enable assessment of whether any new regulation is warranted;

(B) utilize the Office of the Chief Economist to assess the costs and benefits, both qualitative and quantitative, of the intended regulation or order and propose or adopt a regulation or order only on a reasoned determination that the benefits of the intended regulation or order justify the costs of the intended regulation or order; and

(C) ensure that any regulation or order is accessible, consistent, written in plain language, and easy to understand and shall measure, and seek to improve, the actual results of regulatory requirements.

The bill also lists a number of specific considerations that may/should inform the SEC's evaluation. 

This may seem like gilding the lily, since the SEC is supposed to conduct a cost-benefit analysis in all of its rulemaking proceedings. Yet, the SEC has been spanked by the courts in several high profile recent cases, for having flubbed (perhaps intentionally) that analysis. In Business Roundtable v SEC, for example, which struck down the SEC's proxy access rule, the court explained that:

We agree with the petitioners and hold the Commission acted arbitrarily and capriciously for having failed once again — as it did most recently in American Equity Investment Life Insurance Company v. SEC, 613 F.3d 166, 167–68 (D.C. Cir. 2010), and before that in Chamber of Commerce, 412 F.3d at 136 — adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters. 

Likewise, in March 2011, House Oversight and Governmental Reform Committee Chairman Darrell Issa sent SEC Chairman Mary Shapiro a damning letter, in which he reviewed the declining competitiveness of USA capital markets and laid much of the blame at the feet of SEC cost-benefit analysis failures.

So, like chicken soup, Rep. Garrett's bill can't hurt and might help.

Carlyle's Retreat

Ted Frank has a wonderful post on Carlyle Group's decision to drop its effort to require mandatory arbitration of corporate and securities laws claims by shareholders (actually, limited partners). Money quote:

Shareholders who think class actions are good things can invest in one of the thousands of other securities out there; those who think class actions divert shareholder resources to attorneys now have a new, improved, investment option. Let the market decide which type of stock should trade at a premium and which at a discount.

Go read the whole thing.

Update: I also am in completely agreement with Gordon Smith's take on the issue. Money quote:

This is a nice example of how the right rules could encourage companies to become laboratories of corporate governance. 

I get misused and abused by American Association for Justice President Gary M. Paul

Regular readers will recall that a while back I opined on the Carlyle Group's aggressive effort to include a mandatory arbitration provision in its foundational documents as it went public. Carlyle has announced that it is going to drop that provision, which prompted an outfit (of which I had never heard) called the American Association for Justice to put out a press release in which its President, some guy named Gary M. Paul, is quoted as saying that:

"With the investor community, lawmakers, and former SEC officials speaking out against the use of forced arbitration in Carlyle's proposed IPO, it was evident that this was an ill-conceived move from the start.  Corporations intent on skirting accountability have used forced arbitration as a weapon to hide wrongdoing and deny legal recourse to countless workers and consumers.  Today's developments should send a strong signal to other companies that forced arbitration clauses will not be accepted by investors or the SEC."

The press release continues with clips from a bunch of experts, including yours truly:

What the Experts Say

...

"If Carlyle can get away with this, you are going to have a bunch of CEOs telling their tax accountants, 'Price out what it would cost me.'" –Stephen Bainbridge, a corporate and securities law professor at the UCLA School of Law

I deeply resent the use of my name in this way. They cherry picked one quote from a news story to make it seem as though I was critical of what Carlyle was trying to do. In fact, however, I was in favor of what they were doing. In that same news story, for example, I was also quoted as saying:

The high court would be “almost certain” to strike down SEC policy if Carlyle were to push the issue, Bainbridge said. “Carlyle is admittedly taking an extremely aggressive position, but it’s a position I believe is fully consistent” with U.S. and Delaware law, he said.

And here on the blog, I wrote that:

Setting aside the issues relating to litigation rights and mandatory arbitration, I'm not especially bothered by the governance provisions of Carlyle's set up.  ...

Turning to the mandatory arbitration provision, I continued:

If you can limit fiduciary duties by contract in the case of a public limited partnership, why wouldn't a mandatory arbitration clause be enforceable as well? And, if you can do that with respect to state law claims, why shouldn't you be able to do it with respect to federal claims?

In sum, FREEDOM OF CONTRACT + SUPREME COURT POLICY FAVORING ARBITRATION + MARKET WILL PRICE TERMS = the SEC policy is wrong. Mandatory arbitration clauses ought to be enforced as to both state and federal claims.

So this so-called American Association for Justice is invoking my good name to advance their nefarious pro-litigation, anti-freedom of contract goals. Where's the justice in that?

Update: It turns out that the American Association for Justice is the new name for the American Trial Lawyers Association, the plaintiffs' bar trade association. Since they'll probably sue me for saying their goals are "nefarious," I guess I should emphasize that that's an OPINION. Anyway, I called their PR person and she refused to change the press release. 

Yours truly quoted on Carlyle's IPO

Miles Weiss has a very thorough and careful article on Carlyle's planned IPO, which includes provisions limiting fiduciary duties of the controlling persons, mandating arbitration of investor claims, and so on. He quoted a number of prominent lawyers and law makers opposed to what Carlyle's doing, but he also quoted yours truly at some length:

The U.S. Supreme Court held in the late 1980s that brokerages could require arbitration of customer disputes. The justices have never ruled on whether public companies can extend the concept to shareholders, said Stephen Bainbridge, a corporate and securities law professor at the UCLA School of Law in Los Angeles. That could change should Carlyle meet opposition from the SEC and respond by suing the agency, Bainbridge said.

The high court would be “almost certain” to strike down SEC policy if Carlyle were to push the issue, Bainbridge said. “Carlyle is admittedly taking an extremely aggressive position, but it’s a position I believe is fully consistent” with U.S. and Delaware law, he said.

Carlyle’s structure as a limited partnership, rather than a corporation, is critical to the legality of its arbitration provision, Bainbridge said. That’s because Delaware, the state in which most companies are incorporated, gives partnerships more leeway than corporations to restrict their fiduciary duties to shareholders.

Many closely held firms that manage hedge and buyout funds are also structured as limited partnerships, meaning they too could go public with mandatory-arbitration clauses if Carlyle succeeds, Bainbridge said. Technology and industrial firms that are set up as corporations might consider converting into limited partnerships, weighing the huge tax liabilities they would incur, the UCLA professor said.

“If Carlyle can get away with this, you are going to have a bunch of CEOs telling their tax accountants, ‘Price out what it would cost me’” to convert from a corporation to a partnership, Bainbridge said in a telephone interview.

Convert was a poorly chosen word, of course. You'd have to do it via a merger. Anyway, it's a great article. Go read the whole thing.

Is Carlyle even less shareholder friendly than the Green Bay Packers? Is that a bad thing?

Although the Green Bay Packers have been called the worst stock in America from a shareholder perspective, it looks like the Carlyle Group is going to take a run at the title. Steven Davidoff reports that:

It is quite possible that the Carlyle Group, the private equity firm that is preparing to go public, is proposing the most shareholder-unfriendly corporate governance structure in modern history.

It starts with the fact that Carlyle is providing its soon-to-be public shareholders with no power over the company. Carlyle shareholders will have no ability to elect directors. Instead, Carlyle intends for the company to be controlled by its management ....

Carlyle has eliminated the fiduciary duties applicable to most corporate directors. Instead, shareholders’ rights will be governed by Carlyle’s partnership agreement, which provides that the board can act in its sole discretion without good faith. If a conflict of interest arises between the shareholders and Carlyle, the managing general partner can obtain approval from a conflicts committee that will be conclusive. The conflicts committee will comprise the independent directors who are appointed by Carlyle. ...

Carlyle is requiring that public shareholders arbitrate all claims against the company. The arbitration must be confidential, meaning no one would ever even know about it unless it was required to be disclosed by another law. Class-action lawsuits are specifically barred.

Technically, of course, Carlyle is a limited partnership not a corporation. According to Carlyle's draft registration statement, Carlyle is going public as a Delaware limited partnership. As i discuss below, Delaware law allows a limited partnership agreement to limit--even eviscerate--fiduciary duties and litigation rights even if the partnership is publicly held. As a legal matter, the analogy to the corporate law rights of shareholders thus is inapt.

Setting aside the issues relating to litigation rights and mandatory arbitration, I'm not especially bothered by the governance provisions of Carlyle's set up. The de jure restrictions on Carlyle investors are analogous to the de facto limits on the powers of outside investors in a company that has a dual class capital structure. Indeed, a perceptive commenter at Davidoff's NY Times blog wrote that:

How is the Carlyle proposal significantly different from the arrangement at the NY Times, which leaves control of the company in the hands of the Sulzberger family even though they no longer own a majority of the stock? 

It's not, IMHO.

As I explained in a blog post commenting on Manchester United's decision to go public with a structure in which the insiders retained control by holding a class of stock having greater voting rights than the class of stock sold to outsiders:

I wrote about dual class stock in my article The Short Life and Resurrection of SEC Rule 19c-4, in which I explained that dual class stock structures established in an IPO (as is the case here) pose few concerns:

Public investors who do not want lesser voting rights stock simply will not buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off the firm offered in recompense.

Man U public investors will buy their shares knowing that the Glazers are in charge and will remain so by virtue of the dual class stock structure. They will know or should know that dual class stock presents a serious agency cost problem because incumbents who cannot be voted out of office are almost impossible to discipline. Public Man U investors thus implicitly will have accepted whatever trade-offs the deal entailed as appropriate compensation for that risk.

Put another way, the market will price the risk posed by dual class stock, providing investors who buy the lesser voting rights stock with a discount from the price they would have had to pay if they had had full voting rights. Those who buy the stock thus are paying the right price and are fully protected.

I don't see why the same analysis would not apply here.

But what about the mandatory arbitration provision? It's been a while since I taught Securities Regulation, but my recollection is that the SEC takes the position that shareholder rights under the securities laws cannot be subject to mandatory arbitration. Jennifer Johnson and Edward Brunet sharply criticized proposals to change that rule in their article Arbitration of Shareholder Claims: Why Change is Not Always a Measure of Progress:

Two Blue Ribbon business advisory panels have recently proposed arbitration to remedy the problems endemic to shareholder class action litigation. Critics have long assailed shareholder litigation as harmful to firms without conferring a corresponding benefit upon shareholders or the public. Contemporary criticism has focused on the circularity of the remedy in shareholder suits and the charge that even the potential for shareholder litigation harms the competitive edge of the U.S. financial markets. We contend that even accepting these criticisms at face value, arbitration is not the solution. The lure of arbitration as a panacea to cure the ills of litigation is based upon myths concerning modern arbitral realities. First, arbitrators apply substantive and undefined principles of fairness and equity rather than legal rules. Such decisions, once made, are virtually insulated from judicial review. While historically such a system constituted an efficient dispute resolution system between homogenous members of trade groups, modern consumer arbitration rarely takes place between those with any common understanding of applicable norms other than the law. Second, there is a hidden societal cost to moving to an arbitration system to redress securities law claims. Experience teaches us that mandatory arbitration causes the law to atrophy. This trend would be exacerbated in shareholder litigation, which is often based upon implied causes of action, that by their nature depend upon transparent judicial interpretation. Third, modern arbitration will not cure the ills of class action litigation. Arbitration today is no longer particularly quick or efficient in that it has incorporated many of the procedural appendages such as discovery that are common in litigation. However, the procedural protections against the most vexatious lawsuits against corporations would not operate in the world of arbitration. This danger would be intensified if class action arbitrations were allowed. This essay will critique the proposals calling for arbitration of shareholder claims and conclude that arbitration is not an attractive alternative to litigation.

As Lawrence Cunningham has argued, however, the US Supreme Court increasingly "administers a self-declared national policy favoring arbitration." The conflict between those precedents and the SEC's longstanding policy of refusing to allow a registration statement to become effective if the issuer seeks to compel mandatory arbitration of shareholder claims will be brought to a head by Carlyle. If the SEC refuses to let Carlyle's registration statement become effective, presumably Carlyle will seek some form of judicial review. But how would/ should such a claim come out? Let's defer that for a minute.

A separate question is whether state courts would enforce a mandatory arbitration provision insofar as state law-based claims involving such matters as breach of fiduciary duty are concerned. As noted, Carlyle's draft registration statement specifies that Carlyle is going public as a Delaware limited partnership. In an unpublished opinion, Aris Multi-Strategy Fund, LP v. Southridge Partners, LP, 2010 WL 2173839 (Del. Ch. 2010), former Chancellor Chandler enforced a mandatory arbitration clause in a limited partnership agreement and stated that:

... permitting limited partners to contractually agree to arbitrate their statutory rights-rather than assert those rights in court-is consistent with the manner in which Delaware has treated this issue in other contexts. In the corporate context, for example, parties can agree to submit advancement actions under 8 Del. C. § 145 to arbitration, notwithstanding the Court of Chancery's exclusive jurisdiction over section 145 actions.FN4 And in the limited liability company context, parties can agree to submit derivative actions against company management under 6 Del. C. § 18-110(a) and related statutes to arbitration, notwithstanding the Court of Chancery's jurisdiction over such matters.

Does Carlyle being publicly held change that result? I doubt it. In another unpublished opinion, Gerber v. Enterprise Products Holdings, LLC, 2012 WL 34442 (Del. Ch. 2012), VC Noble wrote that:

Our General Assembly, however, has determined that, with a very limited exception, a limited partnership agreement may eliminate the duties that any person may owe to the limited partnership or the holders of the partnership's LP units. See 6 Del. C. § 17–1101(d). That means that a limited partnership agreement may, with the imprimatur of Delaware law, permit self-dealing transactions between a limited partnership and its controller with almost no oversight by this Court. This raises the issue of just what protection Delaware law affords the public investors of limited partnerships that take full advantage of 6 Del. C. § 17–1101(d). If the protection provided by Delaware law is scant, then the LP units of these partnerships might trade at a discount or another governmental entity might step in and provide more protection to the public investors in these partnerships. Those issues, however, are not ones that this Court need or should address. The General Assembly has decided that this Court has only a limited role in protecting the investors of publicly traded limited partnerships that take full advantage of 6 Del. C. § 17–1101(d), and that is a role this Court must accept.

See also Miller v. Am. Real Estate Partners, L.P., 2001 WL 1045643, at *8 (Del. Ch. Sept. 6, 2001) (citing Sonet v. Timber Co., L.P., 772 A.2d 319, 322 (Del. Ch.1998)) (“But just as investors must use due care, so must the drafter of a partnership agreement who wishes to supplant the operation of traditional fiduciary duties. In view of the great freedom afforded to such drafters and the reality that most publicly traded limited partnerships are governed by agreements drafted exclusively by the original general partner, it is fair to expect that restrictions on fiduciary duties be set forth clearly and unambiguously.”).

If you can limit fiduciary duties by contract in the case of a public limited partnership, why wouldn't a mandatory arbitration clause be enforceable as well? And, if you can do that with respect to state law claims, why shouldn't you be able to do it with respect to federal claims?

In sum, FREEDOM OF CONTRACT + SUPREME COURT POLICY FAVORING ARBITRATION + MARKET WILL PRICE TERMS = the SEC policy is wrong. Mandatory arbitration clauses ought to be enforced as to both state and federal claims.

But what if Carlyle were a corporation? This post is already too long. So the short answer is: I think the result should be the same. And I bet Delaware will move in that direction. See Charles Nathan's post on the analogous issue of the enforceability of exclusive jurisdiction provisions:

In a recent decision, In re Revlon, Inc. Shareholders Litig., newly-appointed Vice Chancellor Laster suggested a solution. In dicta, he endorsed a Delaware entity’s right to mandate in its governance documents a chosen forum for the resolution of state law-based shareholder class actions, derivative suits and other intra-corporate disputes. Vice Chancellor Laster stated that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.” Presumably, the Vice Chancellor had Delaware in mind.

Nathan goes on to discuss the legal issues at some length. In any case, assuming Laster wasn't simply trying to build up business for Delaware courts, there's no immediately obvious policy reason why the same result would not apply to mandatory arbitration provisions.

Will the SEC's conflict minerals disclosure rule get Business Rountabled?

In SEC v. Business Roundtable, the DC Circuit struck down the SEC's proxy disclosure rule in part because the agency failed to do an adequate cost-benefit analysis:

We ... hold the Commission acted arbitrarily and capriciously for having failed once again — as it did most recently in American Equity Investment Life Insurance Company v. SEC, ... and before that in Chamber of Commerce ... — adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.

With that quote in mind, now consider a point Walter Olson made on his blog about the SEC's forthcoming conflict minerals disclosure regime:

Some expected that the big new SEC regulations on industrial users of tin, tungsten, tantalum and gold would mostly affect electronics and jewelry makers, but the actual net being cast is far wider. Manufacturers in general must investigate the supply chains of their products in order to comply with the disclosure requirements, no small matter at a firm like Kraft with 40,000 products and 100,000 suppliers. (Kraft found that the minerals may turn up in pouch packaging of juice products.) No wonder the SEC’s absurd initial estimates of a mere $70 million economy-wide compliance cost have given way to estimates a hundred times higher or more. ...

If the SEC doesn't pull up its socks and do a serious cost-benefit analysis, it may discover that Business Roundtable has become a verb. As in, the court Business Roundtabled yet another SEC rule.

"M&A-Related Litigation Has Replaced Stock Drop Suits as Plaintiffs' Securities Lawyers' Lawsuit of Choice"

Kevin LaCroix reports that:

In her article entitled “Securities Class Action Lawsuits in State Court” (here), Lewis & Clark Law School ProfessorJennifer Johnson examines a database of class actions filed in state court between 1996 and 2010. Her analysis shows that as a result of several Congressional enactments in recent years – particularly SLUSA and CAFA – the prevalence of many types of state court securities class action filings has declined. However, the number of state court class action lawsuit filings involving M&A transactions has been “skyrocketing” and now even outnumber federal securities class action lawsuit filings.

Indeed given that the database of state court filings on which Professor Johnson relied almost certainly understates the number of state court filings, it is probable that the number by which the state court M&A-filings exceeds the number of federal court filings is even greater than her analysis shows.

After describing the phenomenon at some length, LaCroix turns to an insightful analysis of the policy issues posed by these developments. recommended reading.

Judge Rakoff is PO'd

The tiff that began when Judge Rakoff refused to approve the SEC's proposed settlement of fraud charges with Citigroup has now escalated into something approaching open warfare. Judge Rakoff denied the SEC's motion for a stay of his order pending interlocutory appeal. The SEC then went over Rakoff's head and got an order from the Second Circuit granting an emergency stay so that the interlocutory appeal may be taken:

In a decision issued Tuesday, the U.S. Court of Appeals for the Second Circuit authorized such a temporary delay until a panel convenes to consider the matter further. This panel, which will begin deliberations on Jan. 17, will then make a decision on whether to delay the case against Citi indefinitely pending the outcome of the SEC's appeal.

Which prompted Rakoff to issue a supplemental Order:

He [noted] sourly in an order Thursday that he “spent the intervening Christmas holiday” considering the SEC and Citigroup’s requests to freeze a lawsuit against the bank over allegations that it defrauded investors.

But he also made a much more serious charge: That the agency misled him and the U.S. Court of Appeals in seeking to halt the lawsuit while the agency appeals Rakoff’s rejection of a $285 million settlement with the Citigroup. FT has the story here. ... 

The Order is embedded in the WSJ blog post. To yours truly, the most striking part of the Order is in the final paragraph:

Accordingly, the Court is filing this Supplemental Order, both to make the Court of Appeals aware of this background and to attempt to prevent similar recurrences. Specifically, the parties are hereby ordered to promptly notify this Court of any filings in the Court of Appeals by faxing copies of any such filings to this Court immediately after they are filed in the Court of Appeals. In addition, this Court will send a copy of this Supplemental Order, as well as the Memorandum Order that it supplements, to the Court ofAppeals with a request that they be furnished to the motions panel hearing the stay motion on January 17, 2012.

In effect, Rakoff has accused the SEC and Citigroup of commiting a fraud on both his court and the court of appeals. Further, of course, Rakoff is using this order to send a signal to that effect to the court of appeals. He's also sending the SEC a signal that taking an appeal will not divest Rakoff of his ability to continue spanking the agency when and as he sees fit.

It's all getting quite melodramatic.

Reorganizing the SEC

The US Chamber of Commerce has issued a 135-page report proposing numerous changes in how the SEC ought to be organized. The numerous recommendations made by the fall into three broad areas:

1. "the Commission’s leadership structure—how it is managed and organized, and how responsibilities are divided among the Chairman, the Commissioners as a collegial decision making body, the Division directors and office heads, and the career senior officers"
2. "agency resources, agency accountability, and performance metrics"
3. "a thorough examination of long-standing regulatory programs that have not changed to keep pace with the changes in the capital markets"

(HT: Broc) It's a useful and important document. Unfortunately, like a lot of useful and important documents generated inside the Beltway, it'll probably disappear into cyberspace without further action. Given some of the management problems the SEC's had in recent years (failed audits, not to mention Madoff), however, that would be a mistake.

SEC appeals Judge Rakoff's rejection of Citi settlement

Point of Law reports that:

On November 28th, U.S. District Court Judge Jed S. Rakoff, in a 15 page opinion, rejected the proposed agreement between Citigroup and the Securities and Exchange Commission to settle charges filed by the SEC against Citigroup accusing the company of "selling investors slices of a $1 billion mortgage-bond deal called Class V Funding III, without disclosing it was betting against $500 million of those assets." The bulk of Judge Rakoff's criticism was aimed at the SEC's standard settlement practice of permitting agreements where the accused company does not deny nor admit wrongdoing.

The SEC filed a notice of appeal yesterday, seeking appellate review in the Second Circuit of Judge Rakoff's order rejecting the settlement.

Surprised I am. Why? (1) Suppose the highly influential (at least in securities law) Second Circuit agrees with Rakoff, thereby turning an outlier into a major national precedent? Then the SEC will be well and truly fraked.

(2) When the oral argument and eventual decision comes down there will be more rounds of media commentary on whether the SEC let Citigroup off with a slap on the wrist. It's not always truly that all publicity is good publicity.

(3) Given the volume of litigation it does in the SDNY, the SEC likely will have more cases before Judge Rakoff in the future ... and he already seems peeved with the agency.

Owning the Green Bay Packers

My first weekend as a newly minted Green Bay Packers stockholder and fan went well. A 46-16 victory over the Oakland Raiders, a team I've never liked, was a great way to start this new era in sports fandom. Meanwhile, my former favorite team -- the Washington Redskins -- continued their Dan Snyder/Mike Shanahan slide into futility, despite putting up a spirited battle with the New England Patriots. And, the Dallas Cowboys lost. Since my second favorite team is still whoever's playing the Cowboys, my top two teams won this weekend.

Turning to a more serious matter of law, what exactly is it that I own as a Packers' shareholder. Specifically, do I own a "security" as defined in the federal securities laws?

Self-described "business law and NFL" geek Joshua Fershee reviews the issues, but doesn't reach a firm conclusion. Instead, the post reminds me of the sort of advice that made Harry Truman famously wish for a one handed economist. Unfortunately, clients want yes or no answers. As a parter for whom I worked when I was in practice once told me, as he tossed a draft letter back at me for more work, "a legal opinion should at least seem to opine something." (Tip for young lawyers: A wonderful skill to develop is the ability to write an opinion letter that seems to opine something, but really doesn't. It will make you indispensable.)

So I'm sending this memo back to young Fershee with a request; namely, "if you had to write a cold comfort letter, which side of the issue would you come down on?"

Reminder about the upcoming Rakoff v SEC teleforum

The Corporations, Securities, and Antitrust Practice Group of the Federalist Society is sponsoring a teleforum/conference call debate between Jonathan Macey and yours truly on TODAY, Thursday, Dec 8, 2011, at 4 PM (EST).

In a recent case, the Securities & Exchange Commission's consent settlement with Citigroup was rejected by presiding Judge Rakoff of the Federal District Court in Manhattan, calling into question SEC's enforcement regime. What does this decision mean for SEC's normal preference of settling its cases without requiring defendants to admit wrong-doing? Who has ultimate responsibility for protecting investor interests and determining the appropriate regulatory enforcement regime? If the SEC is forced to bring more enforcement actions through litigation, will it ultimately bring fewer enforcement actions? Our experts will discuss these and other issues. After their opening remarks, the speakers will answer questions from callers.

The call in # is 888-752-3232. No registration required.