ProfessorBainbridge.com

Speaking of academic freedom

As we just saw, I'm not an academic freedom abolutist, but surely deciding what and how one teaches a course is at the heart of academic freedom. So did USC law school really tell a professor "to change the way he was teaching the class because some of the material was 'offensive'"? It had better have been damned offensive to justify such an intrusion on academic freedom.

Did any Members or Staffers of the Super Secret Deficit Non-Cutting Committee Short the Market?

Joshua wants to know. So do I.

He who pays the piper calls the tune

Brian Leiter:

Cut to the University of Maryland Environmental Law Clinic.  It's the old story: law school clinic work is unpopular.  Local industry gets sued.  Politicians respond.  Here, Maryland's Governor wrote a tough letter pressing the clinic to drop a suit against a Maryland farmer/polluter.  This follows similar pressure from legislators last year.  The good news: Dean Phoebe Haddon is pushing back.  You can find letters from both the Governor and Haddon here.

I'm on the Governor's side here. I've never understood why a state law school should expect to be able to spend taxpayer dollars on clinical litigation that harms the state's economy and to which the politicians who those taxpayers elect object. Granted, even state law schools ought to have academic freedom. Freedom to teach and do research. But to sue the state or otherwise actively interfere with the state's economic policies? To me, that's beyond the line. At some point, after all, we're state employees working on the taxpayer dime. If you don't like having the state as a boss, go work for a private law school.

Why isn't the Federal Reserve subject to Regulation FD?

We know that corporate insiders often have access to material nonpublic information that can have a significant potential impact on stock prices. When some investors have access to insiders and others don't, the former can have a significant trading advantage. In order to prevent selective disclosure by insiders to some but not all investors, the SEC adopted Regulation FD: 

Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information.

Recent research suggests that Reg FD has not fully leveled the playing field:

Executives of publicly‐traded firms spend considerable time meeting privately with investors, despite regulation restricting their ability to convey material nonpublic information. Using a set of records of all one‐on‐one meetings between senior management and investors for a NYSE traded firm, we investigate which funds meet privately with management and the consequences of these interactions. We find that hedge funds, large block holders, geographically close investors, and investors with higher turnover meet more frequently with management. We also find that trades are more correlated among funds that meet with management and these trades better predict future performance. Overall, our results suggest that private meetings help some investors make more informed trading decisions.

Which confirms that (a) private meetings with investors persist despite Reg FD and (b) investors privileged to participate in such meetings still get a significant advantage when trading.

The Federal Reserve is not subject to reg FD, of course, because it's not a Securities Exchange Act  of 1934 reporting company. Yet, if private issuers shouldn't be giving select investors an informational advantage, shouldn't the same principle apply to the government.

The WSJ today reported that:

Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist. ... Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank's next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn't comment for this article. ...

Mr. Bernanke discusses only matters already public, a spokeswoman said. But hedge fund managers and Wall Street executives who meet regularly with him and other Fed officials—both in his office and through advisory committees—say they get valuable insights during the face-to-face talks.

I find this quite astonishing. Basically it means that the Fed is tipping off select investors who use what they learn to reap trading profits by trading with less well informed investors. If the policy against selective disclosure makes any sense, it ought to apply to the Fed as much as to private issuers.

Like the Rump Parliament, Our Congress "is no more capable of managing the affairs of this nation than ... of running a brothel"

On days like today, our Congress reminds me of nothing so much as the Rump Parliament.

As Cromwell said to the Rump House of Commons, "You are no more capable of managing the affairs of this nation than you are of running a brothel!," so say I to both sides of our modern Congress. Let us hope, however, that we find a better solution that that chosen by Cromwell.

I have seen the STOCK Act to "ban" Congressional insider trading and I am unimpressed

I commend Senator Scott Brown and his cosponsors for introducing the Stop Trading on Congressional Knowledge (STOCK) Act. I've now had a chance to review the Act, however, and it's seriously lacking in several important respects.

The key operative language of S. 1871 is contained in section 2. It reads as follows:

Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, prohibit any person from buying or selling the securities or security-based swaps of any issuer while such person is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if--

(A) such information was obtained by reason of such person being a Member or employee of Congress; or

(B) such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained.

Identical language appears in the House version of the bill (H.R. 1148).

An SEC rule comporting with this requirement would ban Members of Congress and Congressional staffers from trading on the basis of material nonpublic information obtained by virtue of their position. It also would ban the tippee of a member or staffer from trading so long as the tippee knew the information was obtained from a member or staffer. The provision thus solves the basic doctrinal problems associated with prosecuting Members of Congress who commit insider trading. (As to those problems, see my article Insider Trading Inside the Beltway.)

Note, however, that there is a key limitation on the scope of the prohibition authorized by the Act; namely, the information must relate to a “pending or prospective legislative action,” which action in turn must relate to the issuer of the securities traded. As to the former condition, it is unclear how broadly “legislative action” will be interpreted. As to the latter, it fails to account for the fact that information about one issuer may often allow one to profit by trading in the securities of another company.

The following hypotheticals illustrate the gaps created by the Act’s current phrasing:

• After Congress defeats proposed legislation that would have sharply increased Acme’s costs of doing business, Acme’s CEO gives a key Congressman a hot tip on Acme stock as a pay off. There was a legislative action, but it was in the past and, accordingly, is neither pending nor prospective.
• A Member of Congress learned from a Cabinet member that a government agency was about to enter a large procurement contract. There is no “pending or prospective” legislative action, but there is valuable material nonpublic information on which the member could trade.
• The CEO of Acme is an avid hunter. Congress is considering legislative action that would ban hunting of the CEO’s favorite game animal. The CEO of Acme gives a key Congressman a hot tip on Acme stock as a bribe to oppose the hunting law. This is perhaps the most egregious form of Congressional insider trading, yet there is no “pending or prospective legislative action relating to such issuer.” To the contrary, the legislative action in question is entirely unrelated to the issuer.
• During a confidential committee investigation, a Member of Congress learns that Acme is about to announce a major new discovery. The member infers that Ajax—Acme’s major competitor—will take a serious hit. The member shorts Ajax stock. Technically, the member has not traded in the stock of “such issuer.”

Three other problems with the present statutory language deserve mention. First, the Act applies only to “the securities of any issuer.” The rulemaking authorized by the Act thus could not proscribe trading in third-party derivatives, except to the extent they are captured by the commodities provision of the Act. Second, while the Act authorizes a ban on tippee trading, it does not expressly authorize a regulatory ban on tipping by members or staffers. There is no reason members and staffers should be allowed to tip with impunity. Finally, Rule 14e-3 prohibits tippees from trading on the basis of material nonpublic information about a tender offer not only if the tippee knows the information came from one of the specified sources, but also if the tippee “has reason to know” that it came from a proscribed source. The STOCK Act should do likewise with respect to information obtained from a member or staffer.

Another key provision of the STOCK Act is the rule it would impose on Congressmen to report their trading activities. The operative language is as follows:

Within 90 days after the purchase, sale, or exchange of any stocks, bonds, commodities futures, or other forms of securities that are otherwise required to be reported under this Act and the transaction of which involves at least $1,000 by any Member of Congress or officer or employee of the legislative branch required to so file, that Member, officer, or employee shall file a report of that transaction with the Clerk of the House of Representatives in the case of a Representative in Congress, a Delegate to Congress, or the Resident Commissioner from Puerto Rico, or with the Secretary of the Senate in the case of a Senator.'.

A member thus would have up to 90 days after the transaction is effected to disclose it. This compares quite unfavorably with the two days corporate insiders have to report transactions covered by Section 16 of the Securities and Exchange Act. A shorter disclosure window is in order.

Again, identical language appears in the House version of the bill (H.R. 1148), which therefore likewise needs a shorter disclosure window.

I have not yet seen the text of the version introduced by Senator Kirsten Gillibrand and her cosponsors (S. 1903), as it is not yet available on Thomas. Initial press reports, however, are not promising:

Sen. Kirsten Gillibrand’s move to end insider trading by members of Congress is so full of loopholes it would do almost nothing to end the lucrative practice among lawmakers and their families, experts say.

It might not even deter Gillibrand’s husband, Jonathan, who regularly trades stocks and whose risky trades seem to have benefited from the downturn in the housing market.

Gillibrand’s proposed STOCK Act does not specifically bar lawmakers and their employees from sharing information with their spouses and family members — meaning Gillibrand could pass on tips that her husband could use in trades. ...

Another expert scorned a section in the bill giving lawmakers 90 days to report trades.

“Stock trades need to be reported in real time,” said Alan Ziobrowski, a real-estate professor at Georgia State University who has researched insider trading by members of Congress.

“After 90 days, these reports will simply end up in the bowels of Congress where they will probably be forgotten,” he said.

Jonathan Gillibrand made more than 250 stock transactions in 2008 at the height of the mortgage crisis, according to the senator’s financial disclosures.

He made dozens of risky investments in home-building stocks, using put options, which let him take advantage of falling real-estate prices.

Good PowerPoint Practice

As an inveterate user of PowerPoint in both teaching and and when making academic presentations, I'm always open to ideas for how to make PowerPoint better. I'm not sure I learned anything new from Megan McArdle's post on good PowerPoint practice, but it's a very useful reminder of the basics of a useful PowerPoint presentation. There's still too much bad PowerPoint in the world, so make sure you're at least observing her basic ideas.

Appreciations of former Delaware Chancellor William Chandler

The Conglomerate has an online symposium of posts on the legacy of former Delaware Chancellor William Chandler. I'm a big fan of Chancellor Chandler and the posts reminded me of how many significant contributions he made to the court's jurisprudence. I wish Chancellor Chandler well in his new career as BigLaw law partner.

New Report on the S&P 500's Corporate Governance of Political Expenditures

Elizabeth Pollman has details.

"It's time to ban insider trading by Congress"

Fortune senior editor Roger Parloff has a great editorial out on why It's time to ban insider trading by Congress. Money quotes:

There is actually a debate within legal academia about whether Congressmen could be held liable for insider trading even as the law stands—law professor Donna Nagy of the University of Indiana has argued that they could be, while Stephen Bainbridge, a law professor at U.C.L.A., has argued that they can't—but the very fact that there is such a debate deters prosecutors from pursuing cases. Why mount an inherently shaky case against such a high-profile target? As for the SEC, wrote Bainbridge in 2009, "Any government agency is likely to be reluctant to bite the budgetary hand that feeds it."

While Congress never consciously created the cracks in the insider trading laws that its members now enjoy slipping through, they have consciously refused to seal them. Legislation has been introduced in each session of Congress since 2006 (by Louise Slaughter of New York and a handful of others), known as the STOCK Act (for "Stop Trading on Congressional Knowledge Act"), that would solve most of the problem. But until Sunday's 60 Minutes piece, it somehow never gained any traction.

That segment, though—produced by Ira Rosen and Gabrielle Schonder and reported by Steve Kroft—seems to have finally hit a nerve. Since it aired, two Senators have introduced new versions of the STOCK Act, and the House Financial Services Committee—now chaired by Representative Bachus—has already scheduled a hearing on the House version for December 6.

Now that it's made it onto the agenda, can you seriously imagine anyone opposing it?

Nope. But I can imagine members of Congress stringing it out in hopes that people will stop paying attention and then letting the bill die. We must keep their feet to the fire on this one.

A trial lawyer finally does something useful

ATL:

In early October, officers in St. Petersburg, Florida shot and killed a 12-year-old, arthritic golden retriever named Boomer. That’s because in St. Petersburg, it’s just standard procedure. Well, that was standard procedure, until Boomer was killed. The St. Petersburg Times has more information:

Boomer belonged to personal injury lawyer Roy Glass. Since his dog was killed, Glass and his wife, Lauren, have led a campaign to demand that police be trained in dealing with animals. The movement includes an online petition at change.org and a dedicated Facebook page with more than 3,700 followers.

Did they really think that they could just kill a lawyer’s dog and get away with it? If this personal injury attorney could’ve brought a wrongful death claim for his dog, I’m sure he would’ve. But here’s what happened because Glass wouldn’t sit and lie down after Boomer’s death:

[On] Wednesday, [St. Petersburg police Chief Chuck] Harmon announced policy changes for the department, including the use of “catch-poles” to help restrain dogs and stricter requirements for deploying officers on vicious dog calls.

From now on, officers will be dispatched to such calls only when a person is in “imminent danger,” Harmon said.

So now, instead of shooting random dogs, police in St. Petersburg will try to treat dogs more humanely. And it took a solo practitioner’s activism for that change to happen.

Kudoes to Mr. Glass. But what kind of spineless, cowardly, wimp of a pig cop thought she needed to kill "a 12-year-old, arthritic golden retriever"? I'm looking straight at you "Officer Misty Swanson, 25." Are you really such a wuss you thought you were in danger from that dog?

Will Congress Finally Ban Congressional Insider Trading?

Securities Law Prof:

Since the 60 Minutes segment aired on Sunday, there has been a quite a flap over alleged insider trading by Congressional officials and a healthy debate over the legality of the practice.  Professors Donna Nagy (it is already illegal) and Stephen Bainbridge (it is currently legal) have eloquently stated their positions in scholarly publications and other communications. My post earlier this week gives the citations to Professor Nagy's work, and Professor Bainbridge provides a link to his discussion in his comment to my blog.

Although legislation to ban the practice has previously been introduced, and quickly died, in Congress, there is now renewed interest.  Senator Scott Brown (R-Mass) introduced S. 1871, the Stop Trading on Congressional Knowledge (STOCK) Act, on Wednesday.  It would prohibit members or employees of Congress and Executive Branch employees from buying or selling stocks, bonds, or commodities futures based on nonpublic information they obtain because of their privileged status. The Act would also prohibit Members and employees from disclosing any non-public information about any pending or prospective legislative action obtained from a member or employee of Congress for investment purposes.  Members of Congress and employees would also be required to report the purchase, sale or exchange of any stock, bond, or commodities future transaction in excess of $1,000 within 90 days.

A different version of legislation has been introduced by some Democratic senators, including Senator Kirsten Gillibrand.  It would redefine insider trading to include knowledge gained from Congressional work and service, create rules and reporting requirements, and require “political intelligence consultants” to register as lobbyists.

For a critique of the problems with the STOCK Act, see my article The Stop Trading on Congressional Knowledge Act (August 13, 2009), which analyzes present law to determine whether members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech and Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the prior version of the STOCK Act, proposing several improvements.

Say no to law school porn

National Law Journal:

It's that time of year when law school faculties are inundated with so-called "law school porn" — slick mailings extolling the virtues of individual law schools meant to sway voting in the U.S. News & World Report's reputation survey, now underway.

Some legal educators believe the annual barrage of mail has gotten out of control, and proves that rankings are driving administrative decisions. They say it's time to stop paying for glossy brochures and invest that money in students. ...

A study released in 2009 that was partially funded by the Law School Admission Council, "Fear of Failing: The Effect of U.S. News & World Report Rankings on U.S. Law Schools," [concluded] that administrators are spending significant amounts of money on brochures and marketing materials in hopes of getting better results on the reputation survey. ...

In a recent blog post, University of California at Los Angeles School of Law professor Stephen Bainbridge estimated that this material — commonly referred to in legal academic circles as "law school porn" — comprises 67 percent of his work mail. He added that never reads it.

He noted that he has started to receive law school promotional materials via e-mail, which he dismissed as spam.

This material does serve a few purposes, according to University of Alabama School of Law professor Paul Horwitz, who defended them on the PrawfsBlawg blog. They can provide useful information about as recent faculty hires, scholarly publications and other innovations, he wrote.

And, yes, as several of you emailed me to point out, my school does it too. The Sextonism virus infects us all.

Leo Strine on the covenant of good faith and fair dealing in merger and acquisition earnout clauses

According to BNA, Delaware Chancellor Leo Strine pithly dismissed a claim airing under the covenant of good faith and fair dealing by observing that:

“The implied covenant of good faith and fair dealing is not a license for a court to make stuff up, which is what [the plaintiff] seeks"

The timing of the opinion is quite opportune as I was working on the earnout section of the forthcoming third edition of my Mergers and Acquisitons text last week. As a taste of what's to come, here's the updated section as further revised to include this latest Strine opinion:

Using Earnout Clauses to Adjust the Price Ex Post: Because valuation is such an inexact science, the parties may not be able to agree on a definitive price. In such cases, the deal may still be able to go forward if the parties include ex post price adjustments in the merger agreement. In LaPoint v. AmerisourceBergen Corp.,[1] for example, the merger agreement between acquirer AmerisourceBergen Corporation (“ABC”) and target Bridge Medical, Inc. (“Bridge”) included an earnout clause pursuant to which the former bridge shareholders would receive additional compensation in the event that Bridge met certain financial targets during the first two years after the merger closed. Specifically, the agreement contemplated “sliding scale of earnout payments depending upon the Adjusted EBITA achieved by Bridge in 2003 and 2004. EBITA was to be calculated according to GAAP and adjusted according to the provisions of the merger agreement. In 2003, former Bridge shareholders would receive no earnout payments if Adjusted EBITA fell below $2.31 million, and would receive a maximum earnout of $21 million if Adjusted EBITA exceeded $4.29 million. In 2004, former Bridge shareholders were to receive no earnout if Adjusted EBITA did not reach $5.46 million, and would receive a maximum of $34 million if Adjusted EBITA exceeded $11.83 million.”[2]

 The trouble with these sort of ex post price adjustments, of course, is that they create an incentive for the acquirer to hold down earnings during the earnout period and only take full advantage of its newly acquired business once the earnout period ends. Typically, the agreement will contain certain provisions designed to prevent the acquirer from doing so. In LaPoint, for example, the agreement obliged ABC to “exclusively and actively promote [Bridge's] current line of products and services” and to refrain from “any products, services or companies that compete either directly or indirectly with [Bridge's] current line of products and services.” In addition, ABC agreed to “act in good faith during the Earnout Period and” to “not undertake any actions during the Earnout Period any purpose of which is to impede the ability of the [Bridge] Stockholders to earn the Earnout Payments.” When ABC allegedly violated those agreements, former bridge shareholders successfully brought suit seeking damages.

The disadvantage of earnout clauses should be obvious; how do the target’s former shareholders monitor the acquirer’s compliance with its obligations? Earnout clauses are most effective in sales of closely held businesses in which the target’s former shareholders remain affiliated with the company as officers, board members, or some other capacity. The resulting access to inside information is invaluable in monitoring the acquirer’s efforts.

The acquisition of closely held Advanced Bionics Corp. (“Bionics”) by publicly held Boston Scientific Corp. provides a good example of the kinds of provisions that can be used to make an earnout clause more effective. 

Under the merger agreement, Bionics shareholders received $742 million in cash at closing and the right to receive additional compensation through earnout payments contingent upon Bionics's sales growth. Approximately 800 former Bionics shareholders and option holders had a right to receive earnout payments with a projected value of $3.2 billion.

The merger agreement contained provisions outlining a system of joint control of Bionics designed to protect the interests of the earnout recipients. The officers of Bionics would be responsible to a six-person executive board comprised of three representatives appointed by Boston Scientific and three representatives appointed by the earnout recipients. A multi-step dispute resolution process was provided to deal with deadlock. The disputed matter would first be referred to Mann and the chief executive officer of Boston Scientific (or their successors). If they were unable to resolve the dispute jointly, the chief executive officer of Boston Scientific was entitled to resolve it unilaterally, provided that if Mann or his successor disagreed with Boston Scientific's decision, Mann could refer the matter to a committee of three independent business people jointly selected by Mann and the Boston Scientific chief executive officer to propose a nonbinding resolution.  Ultimately, if the Boston Scientific chief executive officer made a decision over the objection of Mann and the executive board, the Bionics stockholders' representative, acting on behalf of the earnout recipients, was entitled to challenge the decision in a court proceeding.

 The merger agreement also specifically provided that: “for the benefit of the Earn Out Recipients, without the approval of the Executive Board,” Boston Scientific was prohibited from replacing Mann or Jeffrey Grenier (“Grenier”), the co-chief executive officers of Bionics, and that if either ceased to be a co-chief executive officer, Mann and the Boston Scientific chief executive officer were required to agree jointly on the appointment of a successor.[3]

In effect, the merger agreement turned Mann and the earnout recipients’ representatives on the executive board into monitors of Boston Scientific’s compliance with the earnout clause. The case thus “illustrates the importance of addressing in detail in an acquisition agreement what corporate governance and other business restrictions will be imposed on the operation of the target company during the earnout period.”[4]

Winshall v. Viacom International Inc. further illustrates the importance of contractual specificity in drafting earnout clauses.[5] Vicaom effected a triangular merger with a company called Harmonix Music Systems, Inc., which manufactured two highly popular music video games, “Rock Band” and “Guitar Hero.” As a result of the merger, Harmonix became a wholly owned Viacom subsidiary and the former Harmonix shareholders got a total of $175 million in cash and an earnout clause granting them contingent rights to additional payouts based on Harmonix’s performance in 2007 and 2008. Prior the merger Harmonix had entered into a distribution agreement with Electronic Arts Inc. After the merger, EA asked to renegotiate the distribution contract so as to get broader distribution rights to Rock Band and its sequels. In return for granting EA the broader rights, Harmonix could have bargained for an immediate reduction in the distribution fees it paid EA, which would have increased the earnout payments to the former shareholders. Instead, at Viacom’s direction, Harmonix negotiated a reduction in those fees for future years, after the earnout period ended.

 The selling Harmonix shareholders knew about the deal with EA and could have protected themselves contractually against the possibility that that deal might be improved during the earnout period. But the contract failed to do so.

The former Harmonix shareholders nevertheless sued, claiming a breach and the covenant of good faith and fair dealing. Delaware Chancellor Leo Strine dismissed, pithily opining that the “implied covenant of good faith and fair dealing is not a license for a court to make stuff up.” Chancellor Strine elaborated that the covenant does not give the court “a license to rewrite contractual language just because the plaintiff failed to negotiate for protections that, in hindsight, would have made the contract a better deal. Rather, a party may only invoke the protections of the covenant when it is clear from the underlying contract that “the contracting parties would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.”

All the implied covenant of good faith and fair dealing requires in the context of an earnout clause thus is that the buyer refrain from arbitrary or unreasonable conduct that deprives the former target shareholders of the fruits of its bargain. The buyer has no duty to give the former target shareholders the benefit of a better deal than the one for which they bargained. The take home lesson once again is for target shareholders to devote considerable attention to drafting an earnout clause that takes into account foreseeable future changes in this business that could affect the target’s profitability.

 Update: There's more analysis at Francis Pileggi's blog.

Another update. There's a very interesting new paper by Brian J.M. Quinn, Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Corporate Acquisitions (November 12, 2011), which argues that:

Recently available data suggests that actual target company performance post-closing often falls short of the expectations of both buyers and sellers – even when those expectations have been discounted for risk. The consistent failure of sellers to meet earnout targets of all types and the declining values of contingent earnout payment suggests that the earnout provision may not be an adequate response to the dual problems of adverse selection and moral hazard. Rather than be an effective contractual tool to overcome information asymmetries, earnouts may be more modestly credited with the distribution of the costs of uncertain adverse outcomes between the parties, thereby insuring buyers against the risk of overpayment without necessarily the benefit of the revelation of private information. Consequently, the earnout mechanism may not have the level of utility ascribed to it by academics studying transactional law. These conclusions with respect to the utility of earnouts have implications for the larger normative project for transactional lawyering, which seeks to provide a conceptual framework to guide the study and teaching of transactional law.

I'll be working some of his key points into the draft.

Henry Blodget Opines on Congressional Insider Trading. What's the definition of Chutzpah again?

Henry Blodget has posted on the Congressional insider trading scandals. His post is wrong in at least three respects. First, he claims:

The fact that many members of Congress appear to have traded on non-public information in their personal brokerage accounts during the financial crisis is outrageous. But since this bombshell news broke on Sunday night, the excuse has been that, however ridiculous it may sound, insider trading is legal for Congress. 

(a) The argument that Congressional trading is legal under current law is not offered up as a defense of what the members of Congress allegedly did. It is being made in the context of criticizing this glaring--even obscene--loophole in current law. Of course, Congressional insider trading is wrong...and it ought to be illegal.

Insider trading is just as illegal for members of Congress as it is for the 300+ million Americans, Indiana Law Professor Donna Nagy argues.

(b) Well, yes, but I and most other commentators think Professor Nagy's wrong on this issue. See, among others, this post explaining why and the comments section thereto.

The definition of insider trading is trading while in possession of material non-public information.

(c) No it isn't. The relevant definition of insider trading is trading while in possession of material nonpublic information in violation of a fiduciary duty of confidentiality and loyalty to the source of the information. It is precisely because (Prof. Nagy's arguments to the contrary notwithstanding) members of Congress owe no such duty to anyone that their trading--while reprehensible--falls outside the legal definition of insider trading. It's also why the definition needs to be changed to capture Congressional insider trading.

And then there's this whopper from Mr Blodget:

Even if this behavior is not judged to be illegal, it's certainly unethical. At the very least, the SEC should launch a full investigation.

Worse yet, in an earlier post, Blodget dared opine that one of the alleged Congressional inside traders should "resign in disgrace":

Rep. Bachus should return whatever money he made by betting on the direction of the markets (or anything else) in the fall of 2008. He should apologize for his behavior and jaw-dropping lack of judgement. He should urge his fellow members of Congress to immediately enact legislation that defends the fairness of the markets by holding Congress to the same insider trading laws as everyone else. He should then resign in disgrace.

Wow. For the benefit of those of you who weren't paying attention back during the Enron era, the Wikipedia entry on Mr. Blodget will get you up to date:

Henry Blodget (born 1966) is an American former equity research analyst, currently banned from the securities industry, who was senior Internet analyst for CIBC Oppenheimer during the dot-com bubble and the head of the global Internet research team at Merrill Lynch. ... In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget gave assessments about stocks which conflicted with what was publicly published.[4] In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission.[5] He agreed to a permanent ban from the securities industry and paid a $2 million fine plus a $2 million disgorgement.[6]

For Henry Blodget to accuse anybody of unethical stock market behavior and call for them to be investigated by the SEC, let alone to call on them to resign in disgrace--no matter how deserving the objects of his calumny may be--takes a degree of chutzpah that I can't imagine possessing.

It's the flip side of the proverbial boy who was convicted of murdering his parents and asked for leniency on grounds that he was an orphan.

Indeed, come to think of it, it's a bit like Eliot Spitzer calling for somebody to be investigated for soliciting prostitutes.

If anybody ought to be hiding under a rock in disgrace, instead of lecturing others on stock market ethics, it's Henry Blodget.