ProfessorBainbridge.com

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

Kevin LaCroix reports that:

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

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

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

Obama and Arend support corporate liability under the Alien Tort Statute

My friend Tony Arend congratulates the Obama administration on its support of corporate liability under the Alien Tort Statute and quotes recent comments Arend made at a panel on the subject. I have great respect for Tony's well-known expertise in international law and his analysis makes a lot of sense. 

As a policy matter, however, I still think that must of what goes on under the ATS consists of “Lawsuits that benefit only lawyers”

Rakoff may still be an outlier, but at least he's not alone

I've been skeptical that the sort of intrusive review Judge Rakoff gave the proposed SEC--Citigroup settlement would become commonplace. As one reporter summed up my comments about Rakoff:

"He's signalled for a while that he's not going to play ball with the usual process," said UCLA law professor Stephen M. Bainbridge.

As newsworthy as the judge's Citigroup opinion is, "I don't think this in any way indicates the SEC is going to have problems with other judges," Mr. Bainbridge said.

As a practical matter, the SEC does not have the budget or staff to bring every case to trial. So it settles many of them, trying to get the most justice it can by settling rather than rolling the dice on a long, costly trial against an adversary with superior funding.

Settlements also appeal to judges. If the parties to one of the dozens of cases on their docket "want to make one of those cases go away, judges are pretty happy," Mr. Bainbridge said.

Judge Rakoff, he added, "obviously doesn't mind the extra workload."

I still think that analysis is basically right and that Rakoff will remain an outlier. But he's no longer all alone out on the far fringe of the judicial spectrum:

U.S. District Judge Rudolph Randa ... has asked the SEC to show why its proposed settlement with headphone maker Koss Corp. and its chief executive are “fair, reasonable, adequate, and in the public interest.” The judge asked for more information from the SEC, saying he has concerns about issuing a vague order banning future securities violations.

The SEC has accused Koss of preparing inaccurate financial statements, books and records, and lacking adequate financial controls from fiscal 2005 through 2009.

Randa also asked the agency for a “written factual predicate” addressing the adequacy of proposed disgorgement by Koss.

The settlement says Koss will be required to reimburse the company for $242,419 in cash and 160,000 of options. The bonus reimbursement, along with $208,895 in a previous reimbursement, covers his incentive bonuses from 2008, 2009 and 2010, according to the SEC.

“Without any factual predicate for how those disgorgement terms were determined and what more, if anything, could have been subject to disgorgement, the Court cannot assess their fairness,” Randa wrote.

As support for his request, Judge Randa cited -- you will have guessed it -- Rakoff's Citigroup decision.

I'll still be surprised if this becomes a trend instead of the judicial equivalent of the flavor of the month. But you never know.

Judge Rakoff is PO'd

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

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

Which prompted Rakoff to issue a supplemental Order:

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

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

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

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

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

It's all getting quite melodramatic.

Antinori Solaia (Tuscany) 1999

Although it had thrown only a modest amount of sediment, I nevertheless double decanted it about 35 minutes before service, which turned out to provide useful aeration. In contrast to the Tignanello we also drank tonight, which comes from the same producer and was from the same vintage, the Solaia was tighter and less evolved. It's also bigger, firmer, and more tannic. The finish is shorter, as well. Dark ruby color. Stroing nose suggesting blackberry, blackcurrant, and espresso. On the palate, dark fruit dominated. I'd estimate that this wine needed another couple of years to show its best. Unfortunately, this was my only bottle. (I forget why I didn't buy more.) Grade: B++

Happy Boxing Day!

I got a lovely Christmas gift from Francis Pileggi, who wrote:

For those who want gift giving ideas that can be fulfilled online, I recommend the latest publication from one of the nation’s most respected corporate law experts and a favorite of the Delaware Courts (based on their frequent citations to his scholarship), Professor Stephen Bainbridge. Entitled: Corporate Governance after the Financial Crisis, and available for pre-order via Amazon.com here , this latest work from a prolific scholar has been described by Professor Steven Davidoff, as follows:

“Professor Bainbridge has written an important book for those seeking to understand the theoretical and practical implications of Dodd-Frank, Sarbanes-Oxley and the federal government’s foray into corporate regulation. It is a book that for years to come will influence the controversial debate over the federal regulation of corporate governance.” –Professor Steven Davidoff, N.Y. Times “Deal Professor”

Many thanks!

Burying the hatchet

Over at Brian Leiter's blog, the Coffee v. Romano, Ribstein, and Bainbridge tiff continued with an exchange between Coffee and Romano. At the end of the post, however, Brian posts the following message from Professor Coffee:

"Given that we are at Christmas Eve, I would like to close off this dialogue by clearly expressing my view that Professors Romano, Bainbridge and Ribstein are all highly creative and original scholars (with whom I sometimes, but not always, disagree strongly).  Professor Romano is quite correct that my Cornell paper as of the conference date had many incomplete or missing footnotes.  To that charge, I do plead guilty. Seasons Greetings to all."

With Christmas just behind us and the incredibly shocking passing of my dear friend Larry Ribstein, I look back on this tiff and am reminded of the aphorism that academic politics are so vicious preciserly because so little is at stake. I very much appreciate Professor Coffee's final comments and reciprocate. He is deservedly one of the giants of the field and he ended up taking a very classy position. As far as I'm concerned, this hatchet is buried.

Merry Christmas

UIUC College of Law Obituary for Larry Ribstein

Here

Larry Ribstein, RIP

I was stunned and deeply saddened to learn that my dear friend Larry Ribstein has passed away. The news came via an email from our mutual friend Henry Manne and has been confirmed on several blogs. 

The first time I met Larry, I thought he would make a brilliant Mephistopheles. He was lean in body with sharp and angular facial features, ever so slightly swarthy, and somehow just a little scary. As I got to know him over many years, of course, I learned that he was a brilliant scholar with a wide array of interests, an incisive mind, a vast store of learning, and a talent for getting to the heart of the matter, but also that he was a great person and someone whose company was always a treat.

Larry's scholarship ranged widely. He wrote frequently on securities regulation, with an especial emphasis on the ways securities regulators and legislators tended to err in response to financial crises. See, for example, his brilliant book The Sarbanes Oxley Debacle (co-authored with Henry Butler), which greatly influenced my own thinking in this area. He provided devastating critiques of the tendency to criminalize agency costs. He made contributions to the literature on federalism that ranged from corporate law to marriages.

Larry is probably best known, of course, for his work on "uncorporations," to use his awkward neologism. I.e., agency, partnerships, and, especially, limited liability companies. His book The Rise of the Uncorporation remains the single best book I've ever read on the subject.

Yet, I liked best -- and I suspect he did too -- his work on how lawyers and businessmen are portrayed in movies. Larry loved movies and was one of the few people to successfully turn that love into serious scholarship. His essay, Wall Street and Vine: Hollywood's View of Business (March 8, 2009) has been downloaded over 1100 times at SSRN. As the abstract explains: "American films have long presented a negative view of business. This article is the first comprehensive and in-depth analysis of filmmakers' attitude toward business. It shows that it is not business that filmmakers dislike, but rather the control of firms by profit-maximizing capitalists. The article argues that this dislike stems from filmmakers' resentment of capitalists' constraints on their artistic vision. Filmmakers' portrayal of business is significant because films have persuasive power that tips the political balance toward business regulation."

Sadly, I had never had the opportunity to work with Larry on a joint scholarly project. Next year, however, he was to contribute a paper to a volume of essays on insider trading that I will be editing. I was looking forward to working with him on that project. Now both the book and the experience will be all the lesser for his absence.

In recent years, of course, Larry and I shared an interest in blogging. Larry frequently commented on my posts, not always favorably, but always incisively and in the spirit of intellectual debate. As Ted Frank observed, Larry was "an intellectually honest [friend] who wouldn't hesitate to tell you when he thought you were wrong (which happened several times a year to me)." Me too. So I not only enjoyed our back and forths tremendously, I always came away from them feeling I had learned something useful.

I will miss him. A lot.

My condolences and deepest sympathy go out to his wife Ann and the rest of his family.

Excerpts from tributes elsewhere:

Todd Henderson: "I will consider it a life well lived if when I die there is at least one person left behind who feels as I do about Larry." Ditto.

Larry Solum: "My former colleague and dear friend Larry Ribstein passed away this morning.  Ribstein had a powerful intellect and iron will.  His contributions to legal scholarship are many.  In recent years, he has been best know for his work on the "uncorporation"--the move away from the corporate form of business organization, and for his work on jurisdictional competition and choice of law. ...  I have fond memories of many long discussions with Ribstein.  He defended his vision of law with a tenacity and rigor that is rare, even among law professors."  

Josh Wright: "Larry was — as those who crossed his path in legal academia know — a force to be reckoned with.  He pursued his research interests — from corporate law and jurisdictional competition to the reform of legal education — with a passion not rivaled by many in the academy.  The legal academy will be worse off for losing Larry’s voice as a scholar."

Geoff Manne: "The intellectual life of everyone who knew him, of this blog, and of the legal academy at large is deeply diminished for his passing."

Ilya Somin: "My personal favorite among his many excellent works is his recent book The Law Market (coauthored with Erin O’Hara), which is perhaps the best recent book on the potential benefits of competition between state legal systems in American federalism."

Ted Frank:

I cannot begin to say how devastated I am at the sudden death of Larry Ribstein this morning, just two days shy of his fortieth wedding anniversary. Larry was so creative and innovative in so many fields (this is just how many times we cited to him since February, including just this week), I often found myself wishing that there were several Larrys because everything he wrote had such opportunity cost for other things he didn't have time to write. I was always begging him to write for me when I was at AEI, and the time he said yes, he (with Henry Butler) turned out the important The Sarbanes-Oxley Debacle, a devastating and persuasive takedown of the new law. I'd end up plagiarizing Professor Bainbridge's summary of the rest of Ribstein's body of work to discuss the rest of it, so I'll refer you to his thorough post. In area after area—overcriminalization, overregulation, popular-culture portrayal of business, the cartelization of legal practice and education—he was often close to alone in taking important contrarian positions. If I found myself disagreeing with Larry, I knew it meant I'd better put some soul-searching and analysis into my own position; if I hadn't already thought about an issue of corporate law or federalism, I knew I could scan Ribstein's work on the subject to have a good starting point. So not only do we not have the three or five Larry Ribsteins we needed, we now don't even have the one, and we're poorer for it.

But beyond the loss to legal scholarship is the loss of a good person. Larry was also a friend, but an intellectually honest one who wouldn't hesitate to tell you when he thought you were wrong (which happened several times a year to me). But that made it all the more flattering when he demonstrated support, and he was an early supporter of mine when it was far from clear that my hare-brained quixotic scheme would accomplish anything. I'm going to miss him a lot. Condolences to his family and friends.

Reorganizing the SEC

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

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

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

Ron Paul's Portfolio

The WSJ has an interesting report on Ron Paul's financial disclosure:

According to data available through his 2010 “Form A” financial disclosure statement, filed last May, Rep. Paul’s portfolio is valued between $2.44 million and $5.46 million. (Congressional disclosures are given in ranges, not precise amounts.) ...

... about 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash. But he owns no bonds or bond funds and has only 0.1% in stock funds. Furthermore, the stock funds that Rep. Paul does own are all “short,” or make bets against, U.S. stocks. ...

The remainder of Rep. Paul’s portfolio – fully 64% of his assets – is entirely in gold and silver mining stocks. 

At the asset level, that's a remarkably undiversified portfolio. It's also a remarkably pessimistic portfolio, which seems to assume that the dollar's going to tank and that inflation's going to take off.

Anyway, I wonder what the annual return on his portfolio's been. If memory serves, stocks have outperformed gold over the last 80 or so years, but gold's at least matched stocks over the last ten years (depending on whether one includes dividend yield as well as stock price appreciation). So he might have done okay, especially because his buy and hold strategy would have avoided a lot of transaction fees that erode the return of more frequent traders.

Milken Fellowship at UCLAW

The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship.  This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2012 through June 2013 or June 2014).  The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching.  No degree will be offered as part of the Fellowship program.

For additional information, download this: Download Lowell Milken Institute Law Teaching Fellowship Advertisement 2011-12 final

 

The practicalities of the payroll tax cut

As we wait to see if the Washington deadlock on extending the payroll tax cut gets resolved, it's interesting to note that a lot of businesses are getting screwed by the delay. Here at UCLA, for example, we were informed today that:

As of today, Dec. 20, no legislation has passed extending the lower rate.

The University of California has processed the Jan. 1 payroll using the 6.2 percent employee contribution rate, to be reflected in your Jan. 3 paycheck. If any change in legislation occurs before the end of the year, UC will implement the newly revised rate as soon as possible, including retroactive corrections to paychecks calculated at the higher rate.

One wonders just how much the computer programming and so on necessitated by the uncertainty is going to end up costing businesses.

UCLA Political Scientist says Newt Gingrich is Biggest Threat to Obama

UCLA political scientist Lynn Vavreck is a very impressive and perceptive analyst (I've heard here talk here on campus several times). In the video attached to this story she discusses her reasearch on the 2012 campaign. At the end of the video, she casually drops the bombshell that she believes Newt Gingrich poses perhaps the most serious threat to Obama of all the GOP candidates.