ProfessorBainbridge.com

Judicial Participation in Market Regulation

David Zarig writes:

With the honest services decisions and the PCAOB decision, (let alone the "foreign cubed" securities case) we can see, contra this good column by Floyd Norris, when courts really get involved with a regulatory scheme.  Late, in many ways.  When you think about the judicial record in relation to the financial crisis - quietude on both the state and federal level during both the merger period and the bailout period - and you think about how long PCAOB has been doing its thing, and how many people have been prosecuted for the government's crazy definition of honest services fraud, you can see just how much of a backstop, rather than proactive participant in the regulatory system, the courts are.  As Lyle Dennison observed in the case concerning the extraterritorial application of our securities laws, "the Court finally took on the issue, after years of declining to review it in a series of cases."  Delayed, rather than immediate participation, defines judicial participation, I think.

It's not clear whether this is meant as a mere observation or a criticism. If the latter, I find it puzzling. The very nature of their social role precludes judges from being proactive regulators. They can make law, of course, but they can't do so without an actual case or controversy to use as a vehicle for doing so. Finding a case that has the right facts and the right procedural posture to make new law can take quite a while. This is especially true for the SCOTUS, of course, since it can take years for cases to find their way through the lower court system.

When it comes to complex issues like the financial crisis, moreover, why would we want judges being "proactive participant[s] in the regulatory system"? Consider the Supreme Court. Nine old farts with hardly a day of business experience between them. Each has a staff of just four (I think) wet behind the ears law clerks who probably took all con law courses. I dare say there's nobody in the Supreme Court building who could tell you the difference between a CSO and a CBO. They simply don't have the expertise available that Congress and the regulatory bodies possess.

And, of course, the judiciary is the least accountable branch. If you're going to be in a position to plunge the entire world economy into a depression, you ought to be democratically accountable.

FinReg and the SOX Analogy

It's appropriate that the Supreme Court decision preserving Sarbanes-Oxley came down concurrently with the struggle to pass FinReg. Why? Because FinReg is likely to be SOX squared.

In my book, The Complete Guide to Sarbanes-Oxley, I explained that:

Sarbanes-Oxley also imposes a much higher regulatory burden on U.S. public corporations than the law’s sponsors ever imagined. According to the Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30%, or even more, due to the tougher audit and accounting standards imposed by SOX. Indeed, just paying the fees now required to fund the Public Company Accounting Oversight Board (PCAOB) can run as much as $2 million a year for the largest firms.

Professional surveys of U.S. corporations confirm the Journal’s report. Foley & Lardner, a law firm that has conducted a number of empirical analyses of SOX and its impact on American business, found that senior managers of public middle market companies expect costs directly associated with being public to increase by almost 100% as a result of corporate governance compliance and increased disclosure as a result of SOX, new Securities and Exchange Commission (SEC) regulations, and changes to stock exchange listing requirements.

The chief regulatory culprit is SOX § 404, which requires inclusion of internal control disclosures in each public corporation’s annual report. This disclosure statement must include: (1) a written confirmation by which firm management acknowledges its responsibility for establishing and maintaining a system of internal controls and procedures for financial reporting; (2) an assessment, as of the end of the most recent fiscal year, of the effectiveness of the firm’s internal controls; and (3) a written attestation by the firm’s outside auditor confirming the adequacy and accuracy of those controls and procedures.

The SEC initially estimated § 404 compliance would require only 383 staff hours per company per year. According to a Financial Executives International survey of 321 companies, however, firms with greater than $5 billion in revenues spend an average of $4.7 million per year to comply with § 404. The survey also projected expenditures of 35,000 staff hours—almost 100 times the SEC’s estimate. Finally, the survey estimated that firms will spend $1.3 million on external consultants and software and an extra $1.5 million (a jump of 35%) in audit fees.

In fairness, some of these costs were one-time expenses incurred to bring firms’ internal controls up to snuff. Yet, many other SOX compliance costs recur year after year. For example, the internal control process required by § 404 relies heavily on on-going documentation. As a result, firms must constantly ensure that they are creating the requisite paper trail.

Now FinReg is getting set to do to small banks what Section 404 did to microcaps. Indeed, an op-ed in today's WSJ argues that FinReg with sound the death knell of community banking:

Here is the problem as I see it. First Federal lends to creditworthy folks who for decades have been well-served by bankers who understand their market and can think creatively to structure credit appropriately. It is what community bankers do. Going forward, we will no longer be able to evaluate loan applications based solely on the creditworthiness of the borrower. We will be making regulation compliance decisions instead of credit decisions. This is not in the best interest of the consumer.

Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan.

An argument could have been made to grant the loan because of the good equity position and due to the fact that we would have been lowering their monthly payment. However, fear of regulatory criticism through the federal examination process and potential money penalties associated with noncompliance were the overriding factors, causing the loan to be denied. ...

... In order to comply with the volumes of new regulation—and small banks are required to comply with the same consumer regulations that apply to the Wall Street banks—we will need to have a proportionately higher number of employees working day after day to interpret and implement all the new federal rules. This in itself, because of the sheer volume, has the potential to destroy community banking. Large banks have entire departments devoted to regulation compliance on a full-time basis; we have one employee, like most institutions our size.

More time and money on regulatory compliance, less time and money doing business. Sounds just like SOX.

It's well established that Section 404 is a major drag on the competitiveness of American corporations and a major deterrent to foreign firms considering raising capital on US stock markets. The betting here at PB.com is that FinReg will make 404 look like small potatoes.

Huh. Maybe I do have a dog in this fight, after all.

Democrats' FinReg Plan B

John Carney reports that Congressional democrats are considering reopening the conference committee on FinReg to address Senator Scott Brown's (R-MA) complaint about the $17 billion fee on banks added to the bill in conference:

One alternative would be for the fee, which is officially called the “Financial Crisis Special Assessment,” to be linked closely to the receipt of TARP funds. But with many of the largest TARP recipients having repaid the capital injections, it’s not clear that this would raise enough funds.

The second alternative under consideration is to replace the new fee with an upward adjustment to the FDIC’s assessments on banks. This could raise enough funds to pay for the costs of the bill but it would also change who would pay the bills.

The biggest banks would still be payers but hedge funds would likely escape the tax, since they are not part of the FDIC system. On the other hand, smaller banks—exempted from the fee under the current bill—that operate under the FDIC system would likely find themselves footing the bill.

Does FinReg Have the Votes?

Here at PB.com, we are agnostic on the merits of 99% of the stuff that is in the Financial Regulation bill. But, as regular readers know, we are dead set against the corporate governance provisions. Today, Ezra Klein reports that passage is now in doubt:

FinReg doesn't have Robert Byrd's or Russ Feingold's votes, and Susan Collins, Olympia Snowe, Scott Brown, and even Evan Bayh are now on the fence, report Victoria McGrane and Corey Boles: "'You have to look at the entirety of the legislation,' [Snowe] said. 'Obviously, it's important to have financial regulatory reform.' Sen. Scott Brown (R., Mass.), who voted yes when the Senate passed its bill in May, reiterated his reservations about the final product because of the fee. 'I've said repeatedly that I cannot support any bill that raises taxes.' Sen. Susan Collins of Maine, calling herself undecided, said there was 'much in this bill to like' but like Mr. Brown, she voiced concern about the fee 'slipped in during the late hours.'"

Remember: Conference reports can be filibustered, but they can't be amended. Short of going back to conference and coming out with a new report, the legislation can't, at this point, be tweaked and changed to pick up the final votes.

On the merits, I'd be pleased if the bill failed. OTOH, I'm working on both a law review article and a book that assumed the bill would pass. It's failure would be a major glitch in my writing plans. So I'm feeling very conflicted.

Donna Nagy on Free Enterprise Fund v. PCAOB

Donna Nagy was the leader of the group that put together the amicus brief of which I was a co-signer in the PCAOB case. She has posted some thoughts on today's opinion at Conglomerate.

Free Enterprise Fund v. PCAOB: SCOTUS Swats Appointments Clause Claims

As I have observed before, I believed the most serious and valid argument raised against the constitutionality of the Public Company Accounting Oversight Board was that sounding under the Appointments Clause of the Constitution:

The Appointments Clause of Article II section 2 of the US Constitution provides that:

[The President] shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

Three questions were thus presented by the Free Enterprise Fund's challenge to the Act creating the PCAOB. First, are the members of the PCAOB "Officers of the United States" and thus subject to the appointments clause? Second, if so, are the members of the PCAOB "inferior Officers" whose appointment Congress "may by Law vest" in one of the specified alternative mechanisms other than the advice and consent process? Third, if so, do the SEC Commissioners collectively qualify as a Head of Department for this purpose?

I believed there was a strong argument to be made in favor of the Fund's position. As the Fund pointedout, the PCAOB wields extensive governmental powers, but limited accountability:

[The PCAOB] has enormous powers to levy taxes on public companies and to regulate the accounting business. The board, a regulatory agency in all but name, is composed of five directors, no more than two of whom may have any experience as accountants or auditors.

The PCAOB, ostensibly a self-regulating organization for the auditing industry, is supported by a general power of taxation over all publicly-held companies. There are early indications that the PCAOB's independence and ability to raise its own revenue through taxation is supporting a dramatic expansion in its size and scope. Its 2004 budget was $103 million, and its staff started the year at 126 employees and ended the year with 262 employees. The PCAOB's 2005 budget is another 30 percent higher, at $136 million, and it expects to end the year with 450 employees.

PCAOB has an enormously broad Congressional mandate to create rules and enforce them under Sarbanes-Oxley. Most regulatory agencies are limited in their reach by the amount of money appropriated to them by Congress -- with its independent power to tax and raise funds as needed, there is hardly any institutional control on the power of the PCAOB.

All of which seemed highly problematic under the relevant precedents. In Edmond v. United States, 520 U.S. 651 (1997), for example, the Court (per Scalia) wrote:

By vesting the President with the exclusive power to select the principal (noninferior) officers of the United States, the Appointments Clause prevents congressional encroachment upon the Executive and Judicial Branches. ... This disposition was also designed to assure a higher quality of appointments: The Framers anticipated that the President would be less vulnerable to interest-group pressure and personal favoritism than would a collective body. ... The President's power to select principal officers of the United States was not left unguarded, however, as Article II further requires the "Advice and Consent of the Senate." This serves both to curb Executive abuses of the appointment power ... and "to promote a judicious choice of [persons] for filling the offices of the union," The Federalist No. 76, at 386-387 [(M. Beloff ed. 1987) (A. Hamilton)]. By requiring the joint participation of the President and the Senate, the Appointments Clause was designed to ensure public accountability for both the making of a bad appointment and the rejection of a good one. ...

The PCAOB, by way of contrast, seems almost designed to avoid public accountability. As the W$J recently opined:

... under Sarbox, the President can neither appoint nor remove Peekaboo members. Sarbox requires that the appointed Securities and Exchange Commissioners themselves appoint the oversight Board. Similarly, only the SEC can remove Board members, and then only if they can be shown to have willfully violated federal laws. Nowhere in any of this is there a role for the elected executive.

There is also little oversight. The only way the SEC can undo any of the accounting Board's regulations is by proving that the rules are obviously inconsistent with the Sarbanes-Oxley statute -- a nearly impossible task given its vague wording. The PCAOB is even largely independent of Congressional oversight because its budget is financed from the fees it levies on the companies it regulates. The Justice Department may well argue in response that the Board simply doesn't rise to the level of a "real" agency. But that will surprise corporate America, given that the Peekaboo can fine accounting firms up to $2 million and individual accountants up to $100,000 for violations.

And, of course, familiar principles of agency capture by the industries it regulates suggest that interest group pressures and favoritism are potentially serious problems.

Likewise, the Fund could draw support from Freytag v. CIR, 501 U.S. 868, 884 -885 (1991), in which the Court opined that:

''The Framers understood . . . that by limiting the appointment power, they could ensure that those who wielded it were accountable to political force and the will of the people. . . . The Appointments Clause prevents Congress from distributing power too widely by limiting the actors in whom Congress may vest the power to appoint. The Clause reflects our Framers' conclusion that widely distributed appointment power subverts democratic government. given the inexorable presence of the administrative state, a holding that every organ in the executive Branch is a department would multiply the number of actors eligible to appoint.''

Holding that the SEC is a Department empowered to appoint the PCAOB would threaten precisely these democratic values the Appointments Clause was designed to protect.

In Edmond, the court also held that:

Generally speaking, the term "inferior officer" connotes a relationship with some higher ranking officer or officers below the President: Whether one is an "inferior" officer depends on whether he has a superior. It is not enough that other officers may be identified who formally maintain a higher rank, or possess responsibilities of a greater magnitude. If that were the intention, the Constitution might have used the phrase "lesser officer." Rather, in the context of a Clause designed to preserve political accountability relative to important Government assignments, we think it evident that "inferior officers" are officers whose work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate.

Because the members of the PCAOB are not subject to such oversight except to the very limited extent they are overseen by the SEC, it would seem that the members of the PCAOB likely are not inferior officers.

The Fund thus had a very strong case that the provisions of Sarbanes-Oxley creating the PCAOB were unconstitutional.

The PCAOB Anti-climax

The much vaunted challenge to the constitutionality of the PCAOB and of Sarbanes-Oxley itself has ended with a whimper rather than a bang.

The decision in Free Enterprise Fund v. PCAOB can be downloaded from the SCOTUSwiki here.

In a 5-4 decision authored by CJ Roberts, the Court held that the statutory provisions for removal of PCAOB members were unconstitutional. Under SOX, the members could be removed only by the SEC and only for cause. Under prior law, the President can remove members of the SEC pnly “inefficiency, neglect of duty, or malfeasance in office.” Humphrey’s Executor v. United States, 295 U. S. 602, 620.

Although the Supreme Court long has upheld statutes -- like the one creating the SEC -- creating an independent agency whose head(s) may be removed only for cause, the Court had never addressed a double layer of tenure of the sort created by SOX.

CJ Roberts explained that:

In those cases, however, only one level of protected tenure separated the President from an officer exercising executive power. It was the President—or a subordinate he could remove at will—who decided whether the officer’s conduct merited removal under the good-cause standard.

The Act before us does something quite different. It not only protects Board members from removal except for good cause, but withdraws from the President any decision on whether that good cause exists. That decision is vested instead in other tenured officers—the Commissioners— none of whom is subject to the President’s direct control. The result is a Board that is not accountable to the Presi­dent, and a President who is not responsible for the Board. ...

This novel structure does not merely add to the Board’s independence, but transforms it. Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws—by holding his subordinates accountable for their conduct—is impaired.

That arrangement is contrary to Article II’s vesting of the executive power in the President. Without the ability to oversee the Board, or to attribute the Board’s failings to those whom he can oversee, the President is no longer the judge of the Board’s conduct. He is not the one who de­cides whether Board members are abusing their offices or neglecting their duties. He can neither ensure that the laws are faithfully executed, nor be held responsible for a Board member’s breach of faith. This violates the basic principle that the President “cannot delegate ultimate responsibility or the active obligation to supervise that goes with it,” because Article II “makes a single President responsible for the actions of the Executive Branch.” Clinton v. Jones, 520 U. S. 681, 712–713 (1997) (BREYER, J., concurring in judgment).

Given that one level of what the Court called "tenure protection" long has been constitutional, why should the creation of a second be a problem? The court explained:

The added layer of tenure protection makes a difference. Without a layer of insulation between the Commission and the Board, the Commission could remove a Board member at any time, and therefore would be fully responsible for what the Board does. The President could then hold the Commission to account for its supervision of the Board, to the same extent that he may hold the Commission to account for everything else it does.

A second level of tenure protection changes the nature of the President’s review. Now the Commission cannot remove a Board member at will. The President therefore cannot hold the Commission fully accountable for the Board’s conduct, to the same extent that he may hold the Commission accountable for everything else that it does. The Commissioners are not responsible for the Board’s actions. They are only responsible for their own determi­nation of whether the Act’s rigorous good-cause standard is met. And even if the President disagrees with their determination, he is powerless to intervene—unless that determination is so unreasonable as to constitute “inefficiency, neglect of duty, or malfeasance in office.” Humphrey’s Executor, 295 U. S., at 620 (internal quotation marks omitted).

The opinion then goes on for page after page of learned discourse on the importance of Presidential power to oversee the Executive Branch.

Now we come to the remedy. As I've often noted, SOX had no severability clause. Yet, as I predicted yesterday, the court was unwilling to strike down the entire PCAOB-- let alone all of SOX.

“Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the prob­lem,” severing any “problematic portions while leaving the remainder intact.” Ayotte v. Planned Parenthood of Northern New Eng., 546 U. S. 320, 328–329 (2006). Be­ cause “[t]he unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions,” Champlin Refining Co. v. Corporation Comm’n of Okla., 286 U. S. 210, 234 (1932), the “normal rule” is “that partial, rather than facial, invalidation is the required course,” Brockett v. Spokane Arcades, Inc., 472 U. S. 491, 504 (1985). Putting to one side petitioners’ Appointments Clause challenges (addressed below), the existence of the Board does not violate the separation of powers, but the substantive removal restrictions imposed by §§7211(e)(6) and 7217(d)(3) do. ...

The Sarbanes-Oxley Act remains “‘fully operative as a law’” with these tenure restrictions excised. New York, 505 U. S., at 186 (quoting Alaska Airlines, Inc. v. Brock, 480 U. S. 678, 684 (1987)). We therefore must sustain its remaining provisions “[u]nless it is evident that the Legis­ lature would not have enacted those provisions . . . inde­pendently of that which is [invalid].” Ibid. (internal quo­tation marks omitted). Though this inquiry can some­ times be “elusive,” Chadha, 462 U. S., at 932, the answer here seems clear: The remaining provisions are not “incapable of functioning independently,” Alaska Airlines, 480 U. S., at 684, and nothing in the statute’s text or historical context makes it “evident” that Congress, faced with the limitations imposed by the Constitution, would have pre­ferred no Board at all to a Board whose members are removable at will.

So, after all the years of litigation, what's the result? The "removal restrictions are invalid," which "leaves the Board removable by the Commission at will, and leaves the President separated from Board members by only a single level of good-cause tenure. The Commission is then fully responsible for the Board’s ac­tions, which are no less subject than the Commission’s own functions to Presidential oversight."

I confess to being unpersuaded. In a footnote, the majority explained that "The second layer matters precisely when the President finds it necessary to have a subordinate officer removed, and a statute prevents him from doing so." So suppose the President wanted a PCAOB member removed. He still has no power to do so. So the President asks the SEC to fire the PCAOB member. Granted, the SEC now could fire the member without cause. But suppose the SEC declined to do so. The President still has no power to punish the SEC members. He still can only remove them for “inefficiency, neglect of duty, or malfeasance in office.” Humphrey’s Executor, 295 U.S. at 620.

I find myself in complete accord with Justice Breyer's dissent, which argues that:

But so long as the President is legitimately foreclosed from removing the Commissioners except for cause (as the majority assumes), nullifying the Commission’s power to remove Board members only for cause will not resolve the problem the Court has identified: The President will still be “powerless to intervene” by removing the Board members if the Commission reasonably decides not to do so.

In other words, the Court fails to show why two layers of “for cause” protection—Layer One insulating the Commissioners from the President, and Layer Two insulating the Board from the Commissioners—impose any more serious limitation upon the President’s powers than one layer.

CJ Roberts nowhere adequately answers that basic objection.

The real problem here is the Supreme Court's decades long acquiescence in the creation of a fourth branch of government comprised of independent agencies over which the President has power of removal only for cause. It is not sio much the double level of tenure protection that offends the President's constitutional prerogatives, as the existence of any level of protection.

As Gary Lawson argued in The Rise and Rise of the Administrative State, 107 Harv. L. Rev. 1231, 1242 (1994), for example, “if a statute vests discretionary authority directly in an agency official (as do most regulatory statutes) rather than in the President, the Article II Vesting Clause seems to require that such discretionary authority be subject to the President's control." Yet, it is not. In Legislative Courts, Administrative Agencies, and the Northern Pipeline Decision, 1983 Duke L.J. 197, Martin Redish acknowledged the practical problems that would follow if the Supreme Court were to strike down the independent agencies as unconstitutional, nevertheless also contended that the language of the Constitution simply does not allow such agencies.

In sum, CJ Roberts slapped a bandaid on a gaping canyon in the Constitution. The decision is wholly unpersuasive.

And a stunning anti-climax.

Update: Jonathan Adler nicely summarizes the holding:

To summarize what the Court did: It held that Congress many not insulate a federal officer from executive control through double for-cause removal authority. So while it is acceptable for Congress to prevent the removal of SEC commissioners except for cause, Congress cannot also require cause for the removal of officers who are only removable by the SEC. In reaching this conclusion the Court held that the members of the PCAOB are, in fact, officers. Stripped of the for-cause requirement for removal, PCAOB members are sufficiently controlled by the SEC that they are “inferior” officers, and thus may be appointed by the SEC (and not the President). Further, the Court held, once thefor-cause limitation on removal is removed, there is no constitutional problem with the PCAOB as constituted nor with the scope of its authority, so it may continue to operate as it has.

He also excerpts some key passages from the majority opinion and provides brief commentary on them. Go read it.

Update: Rick Pildes sees the opinion as a snoozer, as well:

I view Chief Justice Roberts's opinion, for a 5-4 Court, as a symbolic victory for the "unitary executive branch" view of the Presidency, but as little more than symbolic. The decision has no practical effect at all on the Sarbanes-Oxley Act; the SEC and the Board that administers the Act will go on as before. Indeed, lost in the headlines will be the fact that the Court actually rejected all the most expansive constitutional challenges to the SEC and to SOX. It accepted only the most narrow challenge; the Court held that the SEC had to have the power to remove Board members at will, rather than being able to remove them only for "good cause" (as SOX essentially provided). And even on that score, the Court simply severed the offending provision from the law and told the SEC and the Board to get on with continuing to administer SOX.

I agree completely. Although, unlike Pildes, I'm sad--even a little mad--about it.

Prognosticating Free Enterprise v. PCAOB

Here at PB.com, we are eagerly awaiting tomorrow's Supreme Court decision in Free Enterprise Fund v. PCAOB. We were very interested to note SCOTUS blog's Tom Goldstein's prediction that the statute will be going down:

At this time of year, it becomes possible to predict the likely authors – and therefore the likely outcomes – of decisions. By tradition, the Court attempts to evenly distribute majority opinions, both within individual “sittings” and across the entire Term. At the end of the Term, it often becomes apparent that some of the remaining cases logically must have been assigned to particular authors.

The next longest-outstanding case is Free Enterprise Fund v. Public Company Accounting Oversight Board, which is the only remaining case that was argued in December. This is a harder call because neither the Chief Justice nor Justice Kennedy has authored an opinion from that sitting. I think that the Chief is a more likely author, however. In December, Justice Kennedy would have been working on not only his October and November opinions, but also the Citizens United campaign finance ruling, which was argued in a special September sitting. The Chief is also unlikely to leave himself without an opinion in a sitting.

If I’m right, that means that the PCAOB’s structure is likely to be invalidated as unconstitutional. At oral argument the Chief Justice asked no questions of counsel to the plaintiffs and was hostile to the defense of the statute, asking numerous questions. For example, he explained: “So you have got ‘for cause’ squared, and that’s – that’s a significant limitation that Humphrey’s Executor didn’t recognize and Morrison didn’t recognize.”

I therefore predict that the Court will reverse in Free Enterprise Fund, holding the structure of the PCAOB unconstitutional.

Let's remember one key fact about the Sarbanes-Oxley statute: It has no severability clause. Of course, this doesn't mean that the who Sarbox statute would fall. Sometimes the Court sends the severability issue back to the lower courts. And sometimes the Court decides Congress intended the statute to be severable even if there is no express severability clause. The question is one of legislative intent: Would Congress still “have passed” the statute “had it known” that the remaining “provision[s were] invalid”? Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 506, 105 S.Ct. 2794, 2803, 86 L.Ed.2d 394 (1985). I feel fairly confident in predicting that whatever happens in the narrow issue tomorrow, the rest of SOX will remain standing...at least for now.

Safari 5.0 too slow

I readily admit to having swallowed the Apple kool-aid. Between Helen and I, we own 2 Macs, 1 MacBook, 2 iPads, 2 iPhones, and 3 iPods. I love Apple products for a lot of reasons, but mainly because they just work. There's none of the nonsense with which I had to put up when I was living in the Windows world.

Unfortunately, Safari 5.0, the new iteration of Apple's web browser, doesn't work. After installing it on my Mac at home, I'm experiencing an incredible diminution in speed with which pages load and scroll. Google took a timed 30 seconds to open! Google! Frequently, pages don't load at all.

At first, I thought something had gone wrong with my computer or DSL service. But then I noticed that my MacBook, which I had not upgraded from Safari 4.05, was running fine. So I installed Firefox on the Mac and, guess what?, it runs fine.

A quick Google search on Firefox (took like a second to open) revealed that this is a widespread problem:

The new Safari 5 just isn't cutting it. And, despite what you might read online about Safari 5 and its various problems, there aren't any easy solutions to speed it up. Safari 5 is just a bit groggier, cumbersome, and slower than its predecessor.

Apparently, the new Safari 5 is supposed to have a "30% performance increase". Well, I just don't see it, and neither do many members of Apple and Mac forums across the globe. Safari 5 just seems to be slow. It takes longer to load regularly speedy pages like Facebook, Twitter, and StumbleUpon. Even the simple-as-can-be Google takes considerably longer to load in the newer, slower Safari 5.

Clearly, something is awry here. Some say that it has to do with plugins, cookies, or your cache, but I've tried all these simple fixes, and I'm not seeing any results. And, on top of it, I typically "reset Safari" on a day-to-day basis anyway, so this shouldn't be anything new. Safari 5 is slow, especially with the fundamentals of web pages, getting through to links, and logging in to basic social networking sites.

Apple's reputation for quality is at stake here. Safari 5.0 is an unacceptable product. They need to figure out what's wrong and get a patch out now. Unfortnately, at the moment, I can't find anything on the support cite to indicate Apple is even aware of the issue.

Porsche Pipes

An amusing moment from Top Gear, the official TV program of PB.com:

Trek or Wars?

io9:

Would you rather see a Star Trek series set after Voyager, or Star Wars movies set after Return Of The Jedi?

We're discussing this burning question over at io9's Facebook page. Right now, Star Wars is winning. Go over there and make your voice heard!

Why not both? If it were up to me, I'd like to see a series set in The Mirror Universe and one dealing with Thrawn. The former would set Star Trek's tendency towards socialist utopianism firmly on its ear, while the latter would take on a character I've always found far more interesting than any of those in the actual movies. But, as always, YMMV.

State Takeover Laws Back in the News

Back when I was a lad, one of the big corporate law issues was the constitutionality of state takeover legislation. The issue has been quiescent for a long time, but Steven Davidoff reports that it has resurfaced in Alimentation Couche-Tard’s hostile offer for Casey’s General Stores:

Couche-Tard is arguing that Iowa’s antitakeover statutory scheme is unconstitutional because it is pre-empted by the Williams Act (the federal rules governing tender offers), violates the Constitution’s commerce clause and is a seizure of shareholder property in violation of the takings clause.

The first two forms of these claims were regularly litigated in the 1980s, including in the Supreme Court in the cases of Edgar v. Mite and CTS Corp. v. Dynamics Corp. of America. The latter case upheld the Indiana control share acquisition statute, and set the constitutional framework for later federal courts to largely uphold state antitakeover statutes.

In his analysis of the issue, Davidoff kindly cites to my work:

Couche-Tard is relying on the Delaware cases to uphold Delaware’s almost-identical business combination statute. The Delaware cases did so in part on the grounds that bidders could still have a meaningful chance to succeed in their bids.

In Amanda, however, Judge Easterbrook upheld the Wisconsin business combination statutes on broad grounds, namely that “because Wisconsin leaves the process alone once a bidder appears, its law may co-exist with the Williams Act.” The Iowa statute acts in a similar manner.

So, the initial question is whether the Iowa court would adopt the approach of the Delaware cases or that of Amanda. (For a thoughtful and lengthy analysis of this issue, see this post by Prof. Stephen M. Bainbridge, who concludes that any court would be more likely to rely on Amanda than adopt the “meaningful success” test.)

Davidoff also discusses the interesting question of whether state takeover legislation is an unconstitutional violation of the takings clause, which he aptly calls "a completely untested and novel claim."

If this sort of issue is of interest, you'll want to check out my Mergers & Acquisitions book:

GOP Goes on Offensive Against Elena Kagan

I don't have a dog in the fight over Elena Kagan's nomination to the Supreme Court. I don't support her, but I don't oppose her. My guess is that she's about as moderate as anybody Obama was likely to pick and a lot better than some of the options (e.g., Harold Koh).

But the GOP senate caucus may be getting ready to put up a fight anyway. Brandon Bartels finds one of the GOP's arguments weak:

The new line of attack is that Kagan is incapable of being impartial because of her political/policy role in the Clinton administration. Senate Minority Leader Mitch McConnell, who on Sunday would not rule out a filibuster of Kagan, is leading the charge with a new narrative that Kagan is more of a “political operative” than a lawyerly type. McConnell cites memos that Kagan wrote about campaign finance reform while she worked for Clinton. Quoting McConnell from the Senate floor:

In other words, these memos and notes reveal a woman whose approach to the law was as a political advocate — the very opposite of what the American people expect in a judge.

Sen. McConnell’s logic would cast nearly every justice who ever served on the Court as an “advocate” seemingly incapable of being impartial. What Sen. McConnell — and frankly all senators, both Republican and Democrat — apparently needs to remember is that lawyers are supposed to be zealous advocates for their clients’ interests. While Kagan’s role in the Clinton White House was as a policy adviser and not as a lawyer, the role she played parallels the manner in which a lawyer represents a client. As Obama spokesman Ben LaBolt notes, Kagan simply gave Clinton advice “that reflected the president’s well-established views.” She worked to advance Pres. Clinton’s agenda, just like a lawyer works to advance his/her client’s interests. Most Supreme Court justices were lawyers who represented clients before they entered the judging profession. They worked to advance their clients’ interests.

Meanwhile, my friend and UCLA law colleague Adam Winkler thinks that Kagan's lack of judicial experience could be a major stumbling block, and that the nomination could end up hurting Obama:

Her opponents are casting her as inexperienced because she has never been a judge and only practiced law for a few years, and that line of attack has purchase with the American people. My own view is that the Supreme Court needs fewer people who were previously judges; some of the finest Supreme Court Justices had never before been judges, like William Rehnquist, Earl Warren, and Louis Brandeis. Judicial experience should not be mandatory for a Supreme Court appointment. Still, casting a nominee as insufficiently experienced and lacking in the requisite qualifications may be the most powerful line of attack in any Supreme Court confirmation battle.

In Advise and Consent, Lee Epstein and Jeffrey Segal examined the history of confirmation battles and found that concerns about experience and qualifications were more difficult to overcome than concerns about ideology. With one especially notable exception, Robert Bork, most nominees who are opposed on the basis of their ideology end up being confirmed. Nominating someone with views similar to his own is one of the perks of being President. But appointing someone who is thought to lack the requisite experience and qualifications can be devastating. Harriet Miers was forced to withdraw because she was seen as an unqualified crony of President Bush; Abe Fortas's nomination to be Chief Justice was rejected, even though he had already served on the Supreme Court, because he was seen as lacking the most important qualification for a Justice, impartiality (he had accepted payments for speeches from private businesses); Douglas Ginsburg still sits only on the D.C. Circuit because, as a professor, he showed disrespect for the law by smoking pot.

Barring any extraordinary revelations, Kagan has the votes to be confirmed. But President Obama doesn't need a squeak-though victory. His presidency is on the ropes already. If he had chosen a John Roberts of the left -- someone with a long background of arguing before the Supreme Court, like, say, a Seth Waxman -- this nomination could have been a political victory for the President. Instead, even if Kagan gets through and turns out to be a terrific Justice, the President will have lost some of the confidence of the electorate that is so precious to him now.

Free Enterprise v. PCAOB Coming Down Monday

We've periodically dropped in on the Free Enterprise v. PCAOB case, which challenges the statute creating the Public Company Accounting Oversight Board as an unconstitutional violation of the Appointments Clause. It's one of four cases the Supreme Court announced it will be releasing on Monday. Law Blog says:

The Supreme Court will examine the law’s constitutionality in Free Enterprise Fund v. PCAOB. The law gives the Securities and Exchange Commission power to name the members of the Public Company Accounting Oversight Board. The plaintiffs in the case — a free-enterprise group and an accounting firm — say the SEC’s naming authority violates a clause of the Constitution giving the president the power to appoint government officials. If the justices agree that the accounting board isn’t constitutional, it could force Congress to revisit Sarbanes-Oxley, or at least the portion of it that creates the accounting board. It could also call into question other independent agencies and how they appoint members of similar boards.

Here is my take on the issues. FYI: I'm a signee of an amicus brief supporting the plaintiff's arguments that the PCAOB is unconstitutional.

Kirkendall on Skilling

Houston lawyer Tom Kirkendall has been at the forefront of the fight against criminalizing agency costs. He blogged extensively on the Skilling case. He's now posted a thoughtful and lengthy analysis of the Supreme Court decision, which then proceeds to discuss the serious problems with the government's case, concluding that:

The truth about Enron is that no massive conspiracy existed. In reality, Skilling and the late Ken Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation. Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Fastow and a few of his minions.

That Jeff Skilling did not predict that Enron would fail under those conditions does not make him a criminal. Unlike his main accusers Fastow and Ben Glisan, Skilling didn't embezzle a dime from Enron. Did he tirelessly advocate this highly-leveraged but innovative company that was dealing with difficult market conditions during 2001? You bet. But since when is it a crime for a CEO to be optimistic -- even overly-optimistic -- about his company?

Go read the whole thing.