ProfessorBainbridge.com

Ribstein on Galleon

Larry's got a nice summation of the big picture issues raised by the Galleon insider trading case.

Must do better

Paul Caron provides data from the Princeton Review on the average number of hours per day law students devote to studying. UCLA ranks a woeful 150th at 3.58 hours per day. The only good news is that our students are working harder than those at USC, who rank 158th at 3.32 hours per day.

Staying Put

Regular readers will recall that I planned to spend the 2010-2011 academic year as a visiting professor at the University of Virginia law school. Well, forget that plan. After talking it over with UCLA law school Dean Mike Schill, I've decided to stay at UCLA. Even though the press would have you believe that the University of California system is going down the tubes, Dean Schill persuaded me that the UCLA law school remains not just sound but is on an upward trajectory. So count this as one man's vote of confidence in the future of UCLAW.

I want to thank Dean Schill and the law school's advisory committee for putting together the proverbial "offer I could not refuse."

I also want to tell the folks at the University of Chicago law school, where Mike Schill will be taking over as dean in January, that they are getting the best law school dean in the world. Frankly, you don't deserve him. If I had my druthers, I'd chain him to his desk here in LA at least until we were both ready to retire.

A Comment on Legal Scholarship

As punishment for my many sins, I'm being forced to read massive amounts of legal scholarship by rookies and junior laterals these days. As a result, I've decided that if I never read another article about what some wet behind the ears JD/PhD thinks Rawls or Dworkin would think about Problem X, I'll die a happy man.

SEC v. Dorozhko

I've done a Legal Backgrounder memorandum for the Washington Legal Foundation on SEC v. Dorozhko, which is the Second Circuit decision holding that a computer hacker who broke into a health information company’s computer system and used the stolen information to essentially sell the stock short can be held liable for securities fraud.

The Economics Nobel

The 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has gone to Elinor Ostrom and Oliver E. Williamson. Those of us who thought it should go to Armen Alchian and Harold Demsetz are, thus, once again disappointed. (But at least the Committee didn't repeat a bone-headed choice like Paul Krugman.)

Anyway, here's how MarketWatch reported the news:

In a decision as shocking as Friday's surprise peace prize win, President Obama failed to win the Nobel Memorial Prize in Economic Sciences Monday.

While few observers think Obama has done anything for world peace in the nearly nine months he's been in office, the same clearly can't be said for economics.

The president has worked tirelessly since even before his inauguration to wrest control of the U.S. economy from failed free markets, and the evil CEOs who profit from them, and to turn it over to wise, fair and benevolent bureaucrats.

In a decision as shocking as Friday's surprise peace prize win, President Obama failed to win the Nobel Memorial Prize in Economic Sciences Monday.

While few observers think Obama has done anything for world peace in the nearly nine months he's been in office, the same clearly can't be said for economics.

The president has worked tirelessly since even before his inauguration to wrest control of the U.S. economy from failed free markets, and the evil CEOs who profit from them, and to turn it over to wise, fair and benevolent bureaucrats.

We are amused.

I've written reviews of two of Williamson's books. Let's pull them out of the archives:

Oliver Williamson is one of the seminal figures of New Institutional Economics. The Mechanisms of Governance is the third book in which Williamson has collected his principal writings, while working them into a coherent whole. The earlier volumes, Markets and Hierarchies and The Economic Institutions of Capitalism, are justly regarded as the foundational texts of the transaction costs economics school of institutional economics. The Mechanisms of Governance seems certain to join them as essentials for any legally literate economist or economically literate lawyer.

Transaction cost economics focuses on institutions, in contrast to neoclassical economics' focus on individuals, providing simple models that help us understand how institutions function and how they will respond to regulation. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers. Unlike the Chicago School of law and economics, which posits the traditional concept of rational choice, Williamson asserts that rationality is bounded. Put another way, he assumes that economic actors seek to maximize their expected utility, but also that the limitations of human cognition often result in decisions that fail to maximize utility. Decisionmakers inherently have limited memories, computational skills, and other mental tools, which in turn limit their ability to gather and process information. As he demonstrates, this phenomenon, known as bounded rationality, has pervasive implications for understanding how institutions work.

Accordingly, Williamson's approach provides an analytical framework that is useful not only to economists, but also to lawyers and policymakers. Among other subjects, Williamson tackles such subjects as vertical integration, corporate governance, and industrial organization.

In sum, highly recommended. My only hesitation is Williamson's unfortunate writing style. Although The Mechanisms of Governance is largely free of the recreational mathematics that plagues much modern economic writing, which is useful for those of us who flunked Differential Equations, it is very jargon-intensive. Worse yet, much of the jargon is self-created. All of which makes reading Williamson an effort-intensive project. Usually the cost-benefit analysis nevertheless comes out in his favor, but sometimes one puzzles out the jargon to find a rather obvious point that could have been conveyed far more simply.

*****

Economic Institutions of Capitalism is a classic work of new institutional economics. In it, Williamson works out his theories of transaction cost economics across an array of interesting economic questions. Most of the covered topics will be of interest not only to economists, but also to lawyers and policymakers. Among other examples, Williamson tackles such subjects as vertical integration, corporate governance, and industrial organizations. Why review a book that was published over a decade ago? Because it's a classic that still rewards reading.

Williamson's core idea is the theory of transaction cost economics. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers. Unlike the Chicago School of law and economics, which posits the traditional concept of rational choice, Williamson asserts that rationality is bounded. Put another way, he assumes that economic actors seek to maximize their expected utility, but also that the limitations of human cognition often result in decisions that fail to maximize utility. Decisionmakers inherently have limited memories, computational skills, and other mental tools, which in turn limit their ability to gather and process information. As he demonstrates, this phenomenon, known as bounded rationality, has pervasive implications for understanding how institutions work.

At the policy level, transaction cost analysis is highly relevant to setting legal rules. Suppose a steam locomotive drives by a field of wheat. Sparks from the engine set crops on fire. Should the railroad company be liable? In a world of zero transaction costs, the initial assignment of rights is irrelevant. If the legal rule we choose is inefficient, the parties can bargain around it. In a world of transaction costs, however, the parties may not be able to bargain. This is likely to be true in our example. The railroad travels past the property of many landowners, who put their property to differing uses and put differing values on those uses. Negotiating an optimal solution will all of those owners would be, at best, time consuming and onerous. Hence, choosing the right rule-which is typically the rule the parties would have chosen if they were able to bargain (the so-called hypothetical bargain)-becomes quite important.

In sum, highly recommended. Be warned, however, that you'll have to put up with Williamson's unfortunate writing style. Although EIoC is largely free of the recreational mathematics that plagues modern economic writing, which is useful for those of us who flunked Differential Equations, it is very jargon-intensive. Worse yet, much of the jargon is self-created. All of which makes reading Williamson an effort-intensive project. Usually the cost-benefit analysis nevertheless comes out in his favor, but sometimes one puzzles out the jargon to find a rather obvious point that could have been conveyed far more simply. (The business about contracting nodes, pp. 32ff, is a classic example.)

Pre-Merger Option Grants

Today's WSJ reports that:

Numerous companies have awarded stock options to their top executives while engaged in negotiations to be acquired, according to academic research and a Wall Street Journal review of company filings.

The practice, which experts say appears to be legal under federal law, typically results in the target firm's executives receiving a bigger payout when the takeover is later announced.

On Deal Journal, the same reporter notes that:

David Yermack, a finance professor at New York University’s business school, says doling out new stock options to target company CEOs in the midst of merger talks is like a “bribe” to get them to go along with the deal.

But that may not be such a bad thing, he says.

Yermack was reacting to this page one article in Monday’s Wall Street Journal that focuses on cases in which target companies award unusual stock-option grants to their executives during merger talks. The executives often pocket millions of extra dollars from the new options when a deal later is announced and closes.

Yermack, who is credited for first uncovering the practice of stock-options timing by companies more than a decade ago, says handing out pre-deal grants isn’t much different from golden parachutes or special deal-related bonuses. Such goodies tend to smooth the way for CEOs to agree to sell their businesses, he says, rather than fight to hang on to their well-paid jobs.

“You have to ask the question, would the CEO have advanced the deal if he hadn’t gotten a payoff?” Yermack says. “This may resemble what’s been done with the tacit agreement of shareholders for a long time.”

When I read this story this am, my first reaction was: Huh. Firms have found a way to end run non-deductibility of golden parachute payments and the 20% excise tax imposed on their recipients. Assuming the options are structured so as to avoid being treated as "parachute payments" as defined by the IRS, what we're dealing with here is a tax dodge, not insider trading or securities fraud.)

Larry  Ribstein also noticed the golden parachute parallel:

Assuming the grants were timed to beat public disclosure of the merger, they amount to informal golden parachutes. As with parachutes generally, there’s a question whether the grants enable managers to appropriate some of the gain for themselves, skew their incentives regarding acceptance of the bid, or help shareholders by encouraging managers to accept bids they would otherwise reject.

The authors of the above study note this function of parachutes, but nevertheless suggest that shareholders are being hurt:

[A]bsent any ethical or legal issues, issuing target CEOs unscheduled options during merger talks might be consistent with the incentive alignment hypothesis if such awards induce target CEOs to negotiate higher offers, or, at the very least, offers that reflect their firms’ fair value. However, this last possibility seems unlikely, given that targets that issue unscheduled options to their CEOs during merger talks earn premiums significantly lower than those expected. The failure to earn premiums close to those predicted generates adverse wealth effects for shareholders in those targets. We estimate that in deals involving these firms, shareholders lose about 307 million dollars. To put this result in perspective, the average target loses 54 dollars for every dollar their CEO gets from unscheduled options granted during private merger negotiations.

The problem with this reasoning is that it assumes the takeovers would have happened even without the “parachute.” However, this isn’t clear: Diversified shareholders might get a bigger share of mergers that happen, but might lose across their portfolios because fewer value-increasing takeovers occur because powerful managers have incentives to reject them.

The basic problem with these ad hoc parachutes is that the arguably the shareholders ought to decide rather than letting the executives use a backdoor through the option program. But this ought to be a matter for state fiduciary duties and not federal law. Under state law firms could decide whether to allow their managers to reap some of the gains from impending mergers, rather than being forced by a federal disclosure or other rule to share these gains with the shareholders.

I think that's right as a matter of corporate and securities law, although the IRS may have something to say about the tax dodge aspect.

John Carney also thinks this is much ado about little, noting that the options have the same incentive effect as golden parachutes:

Another options grant story is trumpeted on the front page of the The Wall Street Journal. Those of us who remember how the backdating scandal started out with a bang and ended with a whimper should be asking whether this is another media-manufactured nonscandal.

Before we get to our doubts about the latest options grant scandal, let's run through the mechanics.

• Once again, the Wall Street Journal has picked up the trail of a largely unknown options grant practice that was first uncovered in an academic paper.
• This time around, the practice involves awarding stock options to top executives during negotiations for acquisitions.
• These options grants mean that the executives get bigger paydays when the merger is announced and the stock shoots up.
• In those deals where CEOs got the well-timed, unscheduled options grant, shareholders got a lower takeover premium than shareholders in companies that didn't give these 'spring loaded' grants.

The paper's authors, Eliezer Fich, Jie Cai, and Anh L. Tra, and WSJ reporter Mark Maremont, one of the reporters who won the Pulitzer Prize for reporting on backdating, clearly think they've uncovered a major scandal. While Maremont notes that the practice is probably legal, they clearly imply that shareholders are getting cheated while executives are enriched.

"We estimate that in deals involving these firms, shareholders lose about 307 million dollars," the academics write. "To put this result in perspective, the average target loses 54 dollars for every dollar their CEO gets from unscheduled options granted during private merger negotiations."

Is this what's really happening? We're not so sure. The evidence could actually cut the other way. The crucial finding that the academics think is truly damning is that shareholders in these deals received lower takeover premiums than average. If that is because executives didn't negotiate good deals because they were getting the spring loaded options grants--as the academics believe--then clearly shareholders are being hurt.

But that's not necessarily the case. It could be that the lower takeover premium reflected the maximum price the buyer was willing to pay but that price was too low to entice the target's executives to sell. In that case, the options grants to executives may have prompted a sale where none would have otherwise occurred. 

It's possible that if not for the spring loading, shareholders would not have received any takeover premium at all because the deal would never have been closed. In other words, spring loading may be allowing the shareholders of the targets to get premiums that would have otherwise been unavailable. This is at least as consistent with the correlation of lower premiums and spring loading as the scandalizing conclusion drawn by the academics.

The core problem with the paper and the WSJ piece is that both seem to assume that the acquisitions would have gone forward without the spring loaded options. It isn't obvious why we should accept that assumption.

Excellent stuff.

As for the tax dodge aspect, if I'm right that that's what is happening here (at least in part), I would recall to your attention Judge Learned hand's famous dictum that: "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

Arend on Obama's Peace Prize

My dear friend Anthony Arend is one of the great international law experts, so I take his comments on Obama's Nobel Peace Prize seriously:

We will never fully know what was in the mind of the Nobel Committee, but it seems to me that a main motive for their decision to award the Prize to Obama is the hope for the world that his election inspired: “Only very rarely has a person to the same extent as Obama captured the world’s attention and given its people hope for a better future.” To much of the world, Obama’s election signaled a fundamental new approach to American diplomacy– one that would be less unilateral and more inclusive, one in which human rights would play a more prominent role than it seemed to during much of the previous Administration. Indeed, the Committee’s points to indications that even in the early days of his Administration, Obama is moving in this direction- citing his “vision” on nonproliferation and quoting from his recent United Nations address- “Now is the time for all of us to take our share of responsibility for a global response to global challenges.”

At the end of the day, what the Committee seems to be saying is that even though Obama has not yet had enough time to achieve his goals, his vision (a word used twice in the announcement) is what the world needs. It is a vision that, if implemented, will enhance world peace.

Of course now the challenge is squarely placed at Obama’s door. I am reminded of the last scenes of Saving Private Ryan. Captain John H. Miller, played by Tom Hanks, and his team have just “saved” Private James Francis Ryan. As Miller is dying, he says to Ryan, “James… earn this. Earn it.” No doubt, Obama will hear a similar call as he travels to Oslo to accept the Prize.

Fair enough. Personally, however, I still think the Norwegians gave him the prize as a reward for not being George Bush. It's basically the third time since 2002 that the Committee seemed to make its decision solely as a way of giving Bush the finger.

"The Mount Rushmore of Shut Up"

The RSU guys take on Obama's Nobel Peace Prize, with a brilliant line about Carter, Gore, and Obama:

Ridge Monte Bello (Santa Cruz Mts) 1994

A while back, I had a run of bad luck with 1994 California Cabernets being over the hill. Not surprisingly, however, this Monte Bello was in fine fettle. In my experience, there are few California cabs more cellar worthy than the Monte Bello.

Although this bottle of the 1994 Monte Bello had deposited a substantial amount of sediment, the wine was still a deep ruby in color. The bouquet suggested dark berries, dried currants, cedar, and leather. Smooth and silky on the palate, with whatever tannins it once possessed having rounded and softened. Surprisingly feminine for the vintage. Grade: A-

BTW, I served this wine with Lamb Chops and Mint Salsa Verde from the latest issue of Saveur, along with an Emerald Kale salad and a Greek orzo salad I picked up from Whole Foods. The wine was an excellent match (I totally disagree with Saveur's recommendation of a white wine to match with the lamb; how absurd) and the lamb in salsa was delicious. You need to make this meal. It's excellent.

How Much Skin Should Directors Have in the Game?

From Corporate Board Member:

At Berkshire Partners, a private equity firm in Boston with stakes in almost 20 companies, independent board members “are invited to invest an amount that’s comfortable for them, and we have options,” says managing director Carl Ferenbach, 66. This doesn’t happen at public boards, of course, where not too many directors expect to get rich off their board work. Their total compensation (retainers and meeting fees, primarily) averaged just over $160,000 for Fortune 1,000 companies in 2007, according to Korn/Ferry International. ...

[Malcolm S. Salter, professor emeritus at the Harvard Business School, would] like to see board members more heavily invested in the company. Directors of a corporation with $1 billion to $3 billion in annual revenues, he says, should have between $250,000 and $500,000 of their own money riding on the company’s performance, and from $500,000 to $1 million in a company larger than that. To help directors put together this kind of stake, he proposes that public companies offer their board members interest-free loans to buy company stock. This would lead directors to monitor a public company with the zeal of a private equity board, he says, because they could lose it all if the company failed. And indeed many bought-out companies have subsequently slid into bankruptcy, if only temporarily, including Federated Department Stores, Linens ’n Things, Regal Cinemas, and Wickes Furniture.

I certainly agree that directors should have a fair bit of skin in the game. If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second. (My good friend Charles Elson's work in this area is seminal and excellent. See, e.g., this video and his article Director Compensation and the Management-Captured Board—The History of a Symptom and a Cure, 50 SMU L. REV. 127 (1996).)

Arbitrary dollar amounts, however, are a very bad idea. To somebody like Bill Gates, the prospect of losing $1 million is trivial. To somebody like me, the prospect of losing $250,000 would be so scary that I would refuse to serve on the board.

The right approach is to require the director to put a non-trivial percentage of his net worth at risk. In addition, director compensation should include a substantial amount of restricted stock that the director is unable to sell for some substantial period (say, 5 years) to give him an ongoing commitment to the company's long-term financial health.

The Board and the Private Equity Analogy

From Corporate Board Member:

Do directors need to start looking at their company’s exposure to risk in a radical new way? Absolutely, says Malcolm S. Salter, professor emeritus at the Harvard Business School. He argues that board members of companies owned by Kohlberg Kravis Roberts and other private equity buyers are far more involved in day-to-day management and hence much more aware of the particular business risks the companies face. “They look very carefully at the upside and downside,” Salter says of private equity boards. “They have the risks in mind from the very beginning and follow them very closely.” He says directors of public companies should start to think and act the same way. ...

Andrew Metrick, a Yale School of Management professor who specializes in private equity and corporate governance, agrees that public-company directors should work like their private-company peers. “Being a board member is really a professional thing that should be a career,” he says. “That doesn’t mean giving up your day job, but it does mean giving up your night job” of serving on more than one board. Metrick calls the private equity model “a useful benchmark for thinking about how boards can behave” but notes that “we’re very far away from that now.”

Malcolm Salter bases his ideas partly on research he did for a course he taught at Harvard and describes them in Innovation Corrupted: The Origins and Legacy of Enron’s Collapse (Harvard University Press, $35), along with the lessons that can be learned from that debacle. If public-company directors monitored those companies as closely as private equity boards watch over theirs, he says, disasters like the ones that engulfed Enron back in 2001 and Lehman Brothers recently might have been headed off.

But it’s hard to find wide support for Salter’s theory, typically because of the demands on a director’s time and a general feeling among boards and top managers that the CEO should be left alone to run the company. Steve Odland, 50, chairman and CEO of Office Depot and a director of General Mills, probably speaks for the majority. He acknowledges that directors could be doing a better job of overseeing risk but thinks the way to achieve this is “to have boards look through the front windshield instead of the rearview mirror.”

Another skeptic is Stephen Bainbridge, a professor at the UCLA School of Law, who points out that directors had little to do with the toxic investments that nearly destroyed the financial system. The real villain was “government policies and private-sector decision-making that put way too much money into housing,” he says, adding that Sarbanes-Oxley accounting reforms in the wake of Enron proved ineffective because they were “designed to fight the last war. You can’t point to a single thing that SOX did to make the current situation any better.”

SEC to appeal Cuban Case

Dealbook reports:

The Securities and Exchange Commission is not backing down from its insider trading case against Mark Cuban, the entrepreneur turned professional basketball team owner.

On Wednesday, the S.E.C. filed court papers saying it would appeal a federal judge’s dismissal of the Cuban case, which came in July. The S.E.C. had alleged Mr. Cuban sold his entire 6 percent stake in the Internet search company Mamma.com after being told by senior executives about a secret plan to raise money in a private stock offering.

Stock offerings typically result in a drop in a company’s stock price. By selling his stake before the offering was announced to the public, the S.E.C. alleged that Mr. Cuban avoided about $750,000 in losses.

Mr. Cuban and his lawyers successfully argued that he had never promised not to sell his shares after hearing about the planned stock offering. The judge also said the S.E.C. had no case because it never alleged that Mr. Cuban, who owns the Dallas Mavericks, had made such a promise.

We have covered the Cuban case extensively here at PB.com and your faithful reporter was a signatory on an amicus brief supporting Cuban's position. I was not completely happy with the trial court's decision, however, as I explained:

Judge Fitzwater correctly observed that:

Building on Chiarella, the Supreme Court concluded in O’Hagan that, like the classical theory, the misappropriation theory also involves deception within the meaning of § 10(b). O’Hagan teaches that the essence of the misappropriation theory is the trader’s undisclosed use of material, nonpublic information that is the property of the source, in breach of a duty owed to the source to keep the information confidential and not to use it for personal benefit.

I argued in that old blog post that:

Unfortunately for Cuban, there are some cases that suggest a mere contractual obligation of confidentiality suffices [to establish the requisite duty]. See, e.g., SEC v. Talbot, 430 F. Supp.2d 1029 (C.D. Cal. 2006) (holding that absent an express agreement to maintain the confidentiality of information, the mere reposing of confidential information in another does not give rise to the necessary fiduciary duty). I believe these cases were wrongly decided. Chiarella and Dirks clearly require something more than a mere contract. They require a fiduciary relationship. In turn, a fiduciary relationship requires more than just an arms-length contract.... 

Judge Fitzwater did not agree with that view, holding that:

Because under O’Hagan the deception that animates the misappropriation theory involves at its core the undisclosed breach of a duty not to use another’s information for personal benefit, there is no apparent reason why that duty cannot arise by agreement.

Wrong, wrong, wrong.

As I explain in my book on insider trading (Securities Law: Insider Trading (Turning Point Series)), there are two theories on which someone may be held liable for insider trading: (1) The "classical" disclose or abstain rule. In Dirks v. SEC, 463 U.S. 646, 654?55 (1983), the Supreme Court explained the key limit on that theory:

We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside information "was not [the corporation's] agent, ... was not a fiduciary, [or] was not a person in whom the sellers [of the securities] had placed their trust and confidence." Not to require such a fiduciary relationship, we recognized, would "depar[t] radically from the established doctrine that duty arises from a specific relationship between two parties" and would amount to "recognizing a general duty between all participants in market transactions to forgo actions based on material, nonpublic information."

Chiarella and Dirks clearly require something more than a mere contract. They require a fiduciary relationship. In turn, a fiduciary relationship requires mre than just an arms-length contract:

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.

The most relevant precedent here would be Walton v. Morgan Stanley & Co.,623 F.2d 796 (2d Cir.1980). Morgan Stanley represented a company considering acquiring Olinkraft Corporation in a friendly merger. During exploratory negotiations Olinkraft gave Morgan confidential information. Morgan's client ultimately decided not to pursue the merger, but Morgan allegedly later passed the acquired information to another client planning a tender offer for Olinkraft. In addition, Morgan's arbitrage department made purchases of Olinkraft stock for its own account. The Second Circuit held that Morgan was not a fiduciary of Olinkraft: "Put bluntly, although, according to the complaint, Olinkraft's management placed its confidence in Morgan Stanley not to disclose the information, Morgan owed no duty to observe that confidence." Although Walton was decided under state law, it has been cited approvingly in a number of federal insider trading opinions. Hence, I believe the cases finding liability based on a mere contractual duty of confidentiality are wrongly decided.

The misappropriation theory of insider trading liability is an alternative basis for liability, under which the defendant need not owe a fiduciary duty to the investor with whom he trades. Likewise, he need not owe a fiduciary duty to the issuer of the securities that were traded. Instead, the misappropriation theory applies when the inside trader violates a fiduciary duty owed to the source of the information. As eventually refined, the misappropriation theory imposed liability on persons who (1) misappropriated material nonpublic information (2) thereby breaching a fiduciary duty or a duty arising out of a similar relationship of trust and confidence and (3) used that information in securities transaction, regardless of whether they owed any duties to the shareholders of the company in whose stock they traded.

The "apparent reason" why a mere contractual duty cannot suffice thus is simple: The Supreme Court says so. And has done so on three separate occasions. You have to have a fiduciary duty.

Hopefully, the appellate court will recognize this point and hand the SEC an even more crushing defeat.

Spell Checker for Internet Explorer

I'm a lousy two-fingered typist and a terrible speller. One of many things I like about Safari, which I use on my Macs at home, is the built-in spell checker. I still use Internet Explorer at work, however, because I don't like the appearance of Safari for Windows. Unfortunately, IE7 lacks a built-in spell checker.

I recently discovered IE7Pro, a free downloadable suite of add-ins for IE. "IE7Pro includes Tabbed Browsing Management, Spell Check, Inline Search, Super Drag Drop, Crash Recovery, Proxy Switcher, Mouse Gesture, Tab History Browser, Web Accelerator, User Agent Switcher, Webpage Capturer, AD Blocker, Flash Block, Greasemonkey like User Scripts platform, User Plug-ins, MiniDM, Google sponsored search,IE Faster and many more power packed features." At the moment, the only one I want is the spell checker, and I can customize the program so it is the only add-in that is functional.

I've been very happy with this product and recommend it. (Note to the FTC: This is not an endorsement because I got nothing from IE7Pro for making this recommendation.)

Download it here.

Free Speech, Animal Cruelty, and Campaign Finance

I'm pretty close to a First Amendment absolutist. After all, what part of "Congress shall make no law" is so hard to understand. No means no.

So I'm fascinated by the juxtaposition of two Supreme Court cases: Yesterday, the court heard argument in US v. Stevens. LAT reports:

Last year, a federal appeals court, citing freedom of speech, struck down a law against selling videos with scenes of animal cruelty.

The law applied only to illegal acts of torturing or killing animals, not legal hunting or fishing. It was intended to dry up the underground market in so-called crush videos, which show squealing animals being stomped by women in high heels. More recently, it has been used to prosecute people who sell videos of pit bulls and other dogs fighting.

On Tuesday, most of the justices sounded wary of reviving the law, fearing it might be used to ban depictions of legal activities such as hunting.

Who cares whether the the depiction is of a legal or illegal activity? Suppose I wanted to make a film about online gambling. I film people conducting illegal online gambling. Should Congress be allowed to ban that type of film? No law means no law.

LAT further reports that:

By the arguments' end, the justices seemed to be weighing several possibilities.

One was to narrow the reach of the law to focus only on crush videos. A second would be to uphold the law as written, but make it clear that moviemakers, photographers and others had a right to challenge its use against legitimate work portraying animals. A third possibility was to rule the entire law unconstitutional because it infringed too much on the 1st Amendment.

Let's hope they pick door # 3.

But if they do, that will bring us to Citizens United v. FEC. As SCOTUSwiki reports, the issue in that case is:

Whether federal campaign finance laws apply to a critical film about Senator Hillary Clinton intended to be shown in theaters and on-demand to cable subscribers. After hearing argument, the Court ordered re-argument, to focus on the constitutionality of limiting corporations’ independent spending during campaigns for the Presidency and Congress.

If the SCOTUS holds for both Stevens and the FEC, we will have the odd situation in which political speech gets less political protection than speech about animal cruelty. Of course, today we live in the odd world in which child porn has greater constitutional protection than political speech.

Surely, that's not what the Founders intended.