ProfessorBainbridge.com

Porsche versus the Global Reach of US Securities Laws

To what extent should a foreign issuer be liable in US courts in connection with securities transactions effected outside the United States? Porsche famously ditched plans for an American listing when Sarbanes-Oxley was adopted. Porsche made clear that it didn't want to be sucked into the morass of trial lawyers and regulators that comprises our securities law regime. Yet, a bunch of hedge funds are now trying to drag Porsche into a US court for alleged securities violations even though the securities transactions in question took place abroad.

Steven Davidoff explains that their prospects look grim:

The automaker is subject to a lawsuit by 39 hedge funds in Federal District Court in Manhattan related to its ill-fated attempt to surreptitiously take over Volkswagen in 2008. Porsche recently filed its motion to dismiss this case, and it looks like Porsche has a good chance at success. The main reason: a Supreme Court decision in Morrison v. National Australia Bank Ltd. that severely limited the ability of security holders to sue foreign corporations in an American court for securities purchased abroad.

The case not only has the potential to force these hedge funds to go to Germany to pursue their claims, but also illustrates the strong effect that the Morrison decision is already having on foreign securities litigation in the United States. ...

Davidoff goes on to explore the complex jurisdictional questions posed by the case. It's a very good read.

Repeal Dodd-Frank?

President Obama today criticized GOP talk about repealing Dodd-Frank. While some Dodd-Frank reforms make sense, there is certainly much in the Act that at the very least needs a second look. Yet, just as with Obamacare, it's hard to see how you get repeal past a Democrat filibuster in the Senate and a Presidential veto. Instead, the GOP ought to be looking at defunding some aspects of Dodd-Frank through the budgetary process.

Don't tell Glen Beck

Evolution in action:

As one of the primary carriers of malaria, the Anopheles gambiae mosquito is one of the most dangerous animals in the world. Now efforts to wipe out malaria must succeed quickly, because it's rapidly evolving into two separate species.

Malaria infects two hundred million people a year, and killed nearly 900,000 people in 2009. Many efforts to stop the spread of the disease involved targetting the different strains of the Anopheles gambiae mosquito. Researchers at Imperial College London have found that two strains which are physically identical but have genetic variations at 400,000 points in their genome. The variations are not likely to converge. In fact, Dr Mara Lawniczak of Imperial College London says they're diverging quickly:

From our new studies, we can see that mosquitoes are evolving more quickly than we thought and that unfortunately, strategies that might work against one strain of mosquito might not be effective against another. It's important to identify and monitor these hidden genetic changes in mosquitoes if we are to succeed in bringing malaria under control by targeting mosquitoes.

One of the things I found attractive about Catholicism was its openness to evolution relative to the creationism that dominates the evangelical churches in which I grew up. Rome's come a long way since Galileo.

Do I Need the New Apple MacBook Air?

No. I've got a perfectly good MacBook and, more important, an iPad. If I ever get on an airplane again, I'll  take the iPad instead of either a netbook or laptop unless I'm going to be away for a week or more. if I eventually get a nep laptop, it'll probably be a desktop replacement model that I can use when Helen's on the computer.

As always, of course, YMMV. For those of you sticking with laptops and netbooks, you ought to check out Charles Stross' review of the new Apple offerings.

Harvard Club's got higher standards than Harvard University

David Lat:

In April, we reported that Eliot Spitzer — former governor and attorney general of New York, until he resigned from office in the wake of a prostitution scandal — was applying for admission to the Harvard Club of New York. Spitzer graduated from Harvard Law School in 1984.

Well, the jury has reached a verdict for the ex-prosecutor — and the news for Spitzer is not good. His application was rejected earlier this year, according to an article by Sewell Chan and Nicholas Confessore of the New York Times.

So what did Spitzer, famously known as Client No. 9, have to say about his rejection?

Through a spokesperson, Lisa Linden, Spitzer described the decision as “disappointing.” Linden added: “Last year, Harvard asked Eliot to speak on ethics at the school. He supports the institution financially. It would seem that whoever made this decision at the club is not on the same page as the university itself.”

It's kind of appalling to learn that Harvard University lets Spitzer speak on ethics. It's almost as bad as letting Bill Lerach speak on legal ethics, as some law schools have done. Setting aside Spitzer's penchant for kinky and unsafe sex, his conduct as attorney general was fraught with borderline ethical conduct and, of course, there was Troopergate when he was governor. The guy is a slimeball and it's good to see somebody finally tell him to crawl back under the rock from whence he came.

Yes, Ann, Much Insider Trading Inside the Beltway is Illegal

Bloomberg opinion columnist Ann Woolner opines that:

Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

What’s wrong with this picture? Nothing, according to the law. Nor would it be illegal for him to tip someone else, say, his largest campaign contributor.

Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. And while scholars differ on whether existing law could be applied on Capitol Hill, it hasn’t been.

Scholars who assert that insider trading laws don't apply on Capitol Hill are wrong. As I demonstrate in Insider Trading Inside the Beltway, while it is true that, under current law, it is unlikely that Members of Congress can be held liable for insider trading, Congressional staffers and other federal government employees can be held liable for trading on the basis of material nonpublic information.

Maybe my case books aren't obsolete after all

NY Times:

They text their friends all day long. At night, they do research for their term papers on laptops and commune with their parents on Skype. But as they walk the paths of Hamilton College, a poster-perfect liberal arts school in this upstate village, students are still hauling around bulky, old-fashioned textbooks — and loving it.

“The screen won’t go blank,” said Faton Begolli, a sophomore from Boston. “There can’t be a virus. It wouldn’t be the same without books. They’ve defined ‘academia’ for a thousand years.” ...

For all the talk that her generation is the most technologically adept in history, paper-and-ink textbooks do not seem destined for oblivion anytime soon.

According to the National Association of College Stores, digital books make up just under 3 percent of textbook sales, although the association expects that share to grow to 10 percent to 15 percent by 2012 as more titles are made available as e-books.

In two recent studies — one by the association and another by the Student Public Interest Research Groups, a national advocacy network — three-quarters of the students surveyed said they still preferred a bound book to a digital version.

Many students are reluctant to give up the ability to flip quickly between chapters, write in the margins and highlight passages, although new software applications are beginning to allow students to use e-textbooks that way.

The big issue, of course, is price. As someone who makes a substantial chunk of his income from royalties, I used to worry that textbooks would go digital and our market would be lost to file sharing. These days I worry more about the used book market and rental programs. Authors need to figure out ways to add value so students are willing to buy new books, while also trying to help hold down costs so we don't price new books out of the market.

Towards that end, I was struck by this piece of the story:

“It depends on the course,” said Victoria Adesoba, a pre-med student at New York University who was standing outside that school’s bookstore, a powder-blue book bag slung over her shoulder. “Last semester, I rented for psychology, and it was cheaper. But for something like organic chemistry, I need to keep the book. E-textbooks are good, but it’s tempting to go on Facebook, and it can strain your eyes.”

How do I make my case book be the equivalent of that organic chemistry text? More explanatory text? Research guides?

How much is too much when it comes to taxes?

Michael Kinsley tells us that "although I favor Obama’s tax increase, I could not defend [a top marginal tax rate of] 90 cents on the dollar." Why not? Once you accept the liberal view of taxes, why not go all the way to a top rate of 100%? It's the Alice Trillin tax. She argued that, over a certain level, the government gets everything.

This got me to thinking, what's the total tax burden? Everything combined: income, FICA, state and local, property, sales, excise, etc.... The Tax Foundation reports:

The shift toward a lower tax burden since 2007 has been driven by three factors: (1) The recession has reduced tax collections even faster than it has reduced income; (2) President Obama and the Congress have enacted large but temporary income tax cuts for 2009 and 2010, just as President Bush did in 2008; and (3) Two significant taxes were repealed for 2010 as part of previous legislation, the estate tax and the so-called PEP and Pease provisions of the income tax.

The kicker, however, is that:

Despite all these tax reductions, Americans will pay more taxes in 2010 than they will spend on food, clothing and shelter combined.

I'd say that that's more than enough. If the government can't get by with what the rest of us spend on "food, clothing and shelter combined," the government's just going to have to learn to do with less.

Of course, if Kinsley wants to voluntarily make a contribution to the government, that's fine by me too.

Is Citizens United the death of democracy?

I get quoted in a rather hyperbolic post by breathless WSJ reporter Brett Arends on the effect of Citizens United:

Shareholders will have no say. “Political-speech decisions can be made without input from shareholders, a role for independent directors or detailed disclosure,” law professors Lucian Bebchuk of Harvard and Robert Jackson of Columbia will report in a forthcoming paper on the issue. As Bebchuk told me: “Companies certainly are not required, and do not disclose, contributions to intermediaries that engage in political spending.”

Cornelius Hurley, director of Boston University’s Morin Center for Banking and Financial Law, said companies can bury these types of spending in the budget for marketing, community involvement, or lobbying. Also, under the rules, the bigger the company, the more it can spend and hide.

“It’s incredibly rare that corporate contributions rise to the size that would be material, and only material facts need to be disclosed,” says Stephen Bainbridge, law professor at the University of California in Los Angeles. “You’d have to have contributions on the order of 10% of assets to be deemed material.”

All of which is true, it's the rest of the piece that's over the top. For example, we're told that:

Thanks to changes in the law, company honchos can now buy an election as easily as they order office furniture. The president has tried to make an issue of this in the past 10 days, but I suspect his commentary will have little effect.

In case you missed it, recent Supreme Court rulings mean that corporations can now effectively spend freely on political campaigns, including during elections. Loopholes in the tax code, particularly pertaining to 501(c)4 nonprofits, mean they can do so secretly through anonymous front groups.

It doesn’t matter whether you are a Republican or a Democrat, whether you hate the president or like him.

Under this system, the game is over. Our democracy is dead. We just don’t know it yet.

Before we panic, however, let's consider a few facts. First, in the 2008 election cycle, the total amount spent on all political campaigns by all actors was, according to OpenSecrets.org, $5,285,680,883. By way of comparison, Proctor and Gamble alone--all by itself--spent over $3 billion to advertise soap and toilet paper in 2008. As a society, we spend much more money selling stuff to wipe our bottoms with than we do deciding who should run the most powerful country in the world. Charmin or Scott? Obama or McCain? We still get to decide.

Second, James McRitchie reports on a survey of 68 companies, which found that:

• Many smaller companies stated that because they generally do not engage in the political process, they do not see the need to implement a policy regarding independent expenditures or trade association monitoring.
• Several companies stated that they currently or will begin to inform their trade associations that no portion of their dues may be used for political expenditures. Philip Morris International included a template of the communication it sends with its dues payments stating that none of the dues may be used for election activity. ...
• 30 companies stated that they would not engage in independent expenditures, but were reluctant to monitor or impose conditions on their trade association payments or did not address the issue at all.

Not exactly evidence of massive corporate engagement.

Third, consistent with that finding is the general impression that Citizens United is more myth than fact:

... Fred Malek, a longtime Republican operative who is helping to lead fund-raising for the Republican Governors Association and is chairman of a new nonprofit advocacy group, American Action Network, said the ruling had seldom come up in his conversations with donors.

“‘I don’t find anybody who is contributing based on that ruling,’ he said. ‘People are contributing because they have deep reservations about the policies and direction of this Congress and this administration. That’s what’s bringing them in.’”

Fourth, Arends says nothing--nada, zip, zilch--about the way Citizens United also opens the gate for unions and liberal groups like MoveOn to make independent expenditures.

In sum, if it comes to the end of democracy in the United States, I worry more about the role of counter-majoritarian judges than I do that of corporations. Those 9 unelected old farts in robes on the Supreme Court have a lot more power to affect our lives than does the Fortune 500 combined.

The Simpsons are Catholic?

Daily Dish:

So says the Vatican's official newspaper, L'Osservatore Romano. Money quote:

"The Simpsons are among the few TV programmes for children in which Christian faith, religion, and questions about God are recurrent themes." The family "recites prayers before meals and, in their own peculiar way, believes in the life thereafter".

‘Where in the Constitution Is Separation of Church and State’?

Elie Mystal mocks Republican Senate candidate Christine O'Donnell for posing the titular question. I have little or no use for O'Donnell. As someone whose vocation is principally the study of Delaware corporation law and, of late, the creeping intrusion of federal law into areas traditionally left to the states, I take a great deal of interest in who Delaware sends to Washington. O'Donnell leaves me unimpressed.

Yet, even a stopped clock can be right twice a day. As all ought to know, the term "separation of church and state" does not appear in the Bill of Rights. Instead, the infamous wall metaphor appears in Thomas Jefferson's correspondence. There is a perfectly respectable body of opinion that says the First Amendment was intended to preclude an establishment of a church at the federal level, while leaving the question of whether to have an established church to the states.

The idea that there should be no American equivalent of the Church of England is a highly attractive one. As someone who is an adult convert to Catholicism from Baptism, I would have been out of luck either way. An established church in America likely would have been some version of Anglicanism or one of the derivatives thereof, not my cradle or adult faiths.

But there's a hell of a big gap between saying that we don't have an official church to whom we all pay taxes and saying that a city can't put a creche on public property. Yet, the extra-constitutional Jeffersonian wall metaphor has become the underpinning for making that leap. So asking why that metaphor dominates the text strikes me as a perfectly reasonable question.

Foreclosure-gate

Larry Ribstein situates some of the roots of the crisis in the changing legal market.

"Why has stimulus become a dirty word?"

Paul Krugman poses the titular question and explores some possibilities, among which are "an inadequate plan combined with a wildly overoptimistic forecast [that] was more or less guaranteed to create the impression of a failed program." "Wildly overoptimistic" is far too generous to the president.

Obama sold the stimulus package in large part on the claim that there were, as NPR put it in February 2009, "thousands of projects nationwide that he calls "shovel ready" — meaning planning is complete, approvals are secured and people could be put to work right away once funding is in place."

We now know, of course, that this was a lie. Or, to give Obama the benefit of the doubt, at the very least a negligent misrepresentation.

Even Obama now admits that there were no shovel ready jobs.

The whole concept of "stimulus" was thus tainted by the lies that were told to sell the last one. To cite an appropriate aphorism, my guess is that the American people are thinking "fool me once, shame on you, fool me twice, shame on me."

The impending put-back/law suit crisis in the mortgage bond industry

John Carney thinks the government won't let it happen, without explaining what it is. So let's go to Felix Salmon:

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

The put back issue thus refers to the prospect that the purchasers of the bond may be able to rescind the transaction and put the bonds back to the banks. Carney dismisses this as a problem, because "the politicians will not let the financial stability of the largest bank in the nation be threatened by contractual rights."

Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.

There’s a big difference between the financial crisis of 2008 and the new crisis. In 2008, banks were destabilized by the growing realization that they were over-exposed to the real estate market. Huge portions of their balance sheets were committed to mortgage-linked investments that were no longer generating the expected revenues or producing losses. That was a problem of economics that could only be solved by recapitalizing banks or letting some of the biggest banks in the U.S. fail.

The put-back crisis is not driven by economics. It is driven by legal rights. And there’s simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.

So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.

He's probably right. But there's another problem lurking out there. Back to Salmon:

It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

Salmon goes on to detail the disclosure issues. Personally, I doubt very much that even the most massive litigation mess of all time would create a serious financial crisis of the sort we experienced in 2008. But it does go to show the extent to which mass financial torts now adversely affect American business.

The private party securities fraud class actions that will result if Salmon is right are the real problem.

The vast bulk of recoveries in class asctions historically have been paid either by issuers or their insurers, rather than by individual defendants. As a result, any recovery by investors typically comes out of the corporate treasury, either directly or indirectly in the form of higher insurance premia. In either case, these payments reduce the value of the residual claim on the corporation's assets and earnings. In effect, the company’s current shareholders pay the settlement, not the directors or officers who actually committed the alleged wrongdoing.

The effect of securities class actions thus is a wealth transfer from the company’s current shareholders to the injured investors. In the case of a diversified investor, such transfers are likely to be a net wash, as the investor is unlikely to be systematically on one side of the transfer rather than the other. Because there are substantial transaction costs associated with such transfers, moreover, the diversified investor is likely to experience an overall loss of wealth as a result of the private securities class actions. Legal fees to plaintiff counsel typically take 25-35% of any monetary class action settlement, for example, and the corporation’s defense costs are likely comparable in magnitude.

All of which is why litigation reform remains a pressing issue.

Broadband Advice Needed

In my little corner of Los Angeles, my broadband provider options are AT&T DSL, Time Warner Road Runner Cable, and DirectTV. I currently have AT&T DSL. I'm getting about 4500 kbps download speeds. Would I get better speeds/service with Road Runner? Any helpful consumer advice welcome.