ProfessorBainbridge.com

Trends in Proxy Access: 2012 Proxy Season Overview

A very useful overview.

Dissenting from Judge Leval's hagiographic "Remarks on Henry Friendly"

It was a typical Saturday evening in the Bainbridge household. I had made a shrimp pasta for dinner, loosely based on a recipe by the always reliable Giada de Laurentis. To accompany it, I had poured a Veuve Clicquot Brut NV (if it's good enough for Queen Elizabeth II, it's good enough for me). Yum.

Sometime later, Helen and Bella had gone off to bed, while Toby and I curled up at opposite ends of the the living room sofa. Assorted Windham Hills music on the stereo (actually, streaming from iCloud to my TV via Apple TV). I opened a bottle of Dow 20 year old tawny port, lit a Dunhill Peravia, and settled in to read the June 2012 issue of The Green Bag. (Yes, we've kissed and made up from the unpleasantness of a few years ago, which makes me glad because I've always been a huge fan of this self-proclaimed "entertaining journal of law.")

The second article in this issue is entitled "Remarks on Henry Friendly" by Judge Pierre Leval. Only a few paragraphs into it, I was brought up short -- nearly doing a spit take with fairly expensive port, which would have been a tragic waste -- by a paean that transcends mere praise and rises to heights of hagiography:

In every area of the law on which he wrote, during a quarter century on the Second Circuit, his were the seminal and clarifying opinions to which everyone looked as providing and explaining the standards. 

I have no quarrel with the proposition that Friendly was a learned jurist whose memory deserves preserving. But I teach two Friendly opinions in Business Associations and while both of them were seminal they were both wrong. Indeed, not just wrong. They were egregiously wrong. Indeed, not just egregiously wrong. They plumb the depths of error.

The first crops up in agency law. As I explain in Agency, Partnerships & LLCs:

Perhaps no court has gone further in eviscerating the scope of the employment doctrine than did the Second Circuit (per Judge Friendly) in Ira S. Bushey & Sons, Inc. v. U.S.[1] The Coast Guard ship Tamaroa was being overhauled in a Brooklyn drydock. per the Coast Guard’s contract with the drydock’s owner, the ship’s crew continued to live aboard and therefore were allowed to come and go freely. Late one night Seaman Lane, a member of the crew, returned to the ship in an intoxicated state. As Judge Friendly explained: “For reasons not apparent to us or very likely to Lane, he took it into his head, while progressing along the gangway wall, to turn each of three large wheels some twenty times; unhappily ... these wheels controlled the water intake valves.” The drydock began to fill with water. The Tamaroa floated free of its supporting blocks and then toppled over against the drydock. Bushey, the corporate owner of the drydock, sued the U.S. government for the resulting damage to its drydock. The trial court ruled that Bushey was entitled to damages in an amount to be determined. The United States appealed, claiming that Lane’s act was outside the scope of his employment.

Obviously, no purpose to serve the master could be found in Lane’s conduct—no matter how hard you look. The trial court nevertheless found for plaintiff Bushey. Under the trial court’s approach, plaintiffs no longer would be required to show that the agent was motivated by a purpose to serve the master. Instead, it would suffice to show that the conduct arose out of and in the course of the employment. The trial court’s analysis amounted to virtually a rule of strict liability for the torts of an employee as long as any connection in time and space could be made between the conduct and the employment.

The trial court’s holding was grounded in economic theory. The court argued that imposing liability on the principal would cause the principal to internalize the negative externalities of its agents conduct. On appeal, however, Judge Friendly rejected this analysis. From a deterrence perspective, as he correctly pointed out, forcing the principal to internalize the costs of particular misconduct by an agent only makes sense if the principal can take steps to prevent future instances of such misconduct. If the principal cannot do so, imposing liability effectively makes the principal an insurer of its agents. On the facts of Bushey, it is far from clear how imposing liability on the government would induce principals to take cost-effective precautions: “It could well be that application of the traditional rule might induce drydock owners, prodded by their insurance companies, to install locks on their valves to avoid similar incidents in the future,  while placing the burden on ship owners is much less likely to lead to accident prevention.”

Despite his rejection of the trial court’s economic analysis, Judge Friendly nevertheless thought the government should be held liable. Instead of economic efficiency, he relied on rather vague fairness concerns; namely, the “deeply rooted sentiment that a business enterprise cannot justly disclaim responsibility for accidents which may fairly be said to be characteristic of its activities.”[2] To implement that sentiment, he adopted a foreseeability standard: (1) If some harm is foreseeable, the principal is liable, regardless of the fact that the particular type of harm was unforeseeable. Why was it foreseeable on these facts that some harm would result? Because the government insisted that the seamen be able to stay on board the boat and be able to go to and fro. (2) Conduct by the servant which does not create risks different from those attendant on the activities of the community in general will not give rise to liability. (3) The conduct must relate to the employment. The notion here seems to be that the existence of the employment relationship causes the employee to encounter unusual circumstances which he or she otherwise would not.

Consider the application of Judge Friendly’s standard to following hypothetical: Mary owns a gas station. She hires Sam to work as a pump attendant. Assume Sam is a servant. Sam smokes cigars. One day Sam is smoking while he fills a patron’s gas tank. An explosion results, injuring the patron. Is the conduct within the scope of the employment? Older cases said smoking was merely a personal convenience and hence outside the scope of the employment. Some modern courts say smoking is necessary to the servant’s comfort while on the job and therefore foreseeable harms are within the scope of the employment.[3]  Surely this harm is at least as foreseeable as that involved in Bushey.

Now suppose Shirley works as a cashier in the gas station. After years of inhaling Sam’s smoke, she comes down with lung cancer. If she sues Mary, is Sam’s conduct within the scope of the employment? Arguably it is foreseeable, as we are routinely told that passive inhalation of smoke may cause cancer. On the other hand, Judge Friendly did say that conduct by the servant which does not create risks different from those attendant on the activities of the community in general will not give rise to liability. But then again, the harm did occur within the physical boundaries of the enterprise, which does tend to distinguish it from the examples he cites. It would be foolhardy to pretend to know how this last case would come out. One can say this much, however: Judge Friendly was absolutely right when he said “the rule we lay down lacks sharp contours.”

Not exactly the sort of opinion that can be praised for "providing and explaining the standards." Instead, the sort that should be condemned for mucking up the standards. The scope of the employment doctrine was a mess before Friendly took it on in Bushey. Afterwards, however, there was nothing left to do but blow the whole thing up and start over.

My second sample of Friendly's handwork comes up when we reach insider trading. In SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969), Friendly established the so-called disclose or abstain rule. He did so by holding that when an insider has material nonpublic information the insider must either disclose such information before trading or abstain from trading until the information has been disclosed.

Of course, that's not really an option that's available in the real world. presumably phrased the rule in terms of disclosure because this was an omissions case under Rule 10b-5. Recall that in such cases the defendant must owe a duty of disclosure to some investor in order for liability to be imposed. As a practical matter, however, disclosure will rarely be an option. Given that the corporation typically will have no duty to disclose, the insiders’ fiduciary duties to the corporation would preclude them disclosing it for personal gain. Put bluntly, Friendly's suggestion that disclosure could ever be an option was a bogus fig leaf to cover what amounted to a blanket prohibition on insider trading unsupported by either the statute or the legislative history (a point I make at some length in The Law and Economics of Insider Trading: A Comprehensive Primer).

The policy foundation on which Friendly erected the disclose or abstain rule was equality of access to information. He contended that the federal insider trading prohibition was intended to assure that “all investors trading on impersonal exchanges have relatively equal access to material information.” Put another way, he thought Congress intended “that all members of the investing public should be subject to identical market risks.” Again, the legislative history analyzed in my Primer shows just how egregiously this missstates the scant legislative history.

The real world implications of the equal access principle become troubling when we start dealing with attenuated circumstances, moreover, especially with respect to market information. Suppose a representative of TGS had approached a landowner in the Timmons area to negotiate purchasing the mineral rights to the land. TGS’s agent does not disclose the ore strike, but the landowner turns out to be pretty smart. She knows TGS has been drilling in the area and has heard rumors that it has been buying up a lot of mineral rights. She puts two and two together, reaches the obvious conclusion, and buys some TGS stock. Under a literal reading of Texas Gulf Sulphur, has our landowner committed illegal insider trading?

The surprising answer is “probably.” The Texas Gulf Sulphur court stated that the insider trading prohibition applies to “anyone in possession of material inside information,” because § 10(b) was intended to assure that “all investors trading on impersonal exchanges have relatively equal access to material information.” The court further stated that the prohibition applies to anyone who has “access, directly or indirectly” to confidential information (here is the sticking point) if he or she knows that the information is unavailable to the investing public.

In Chiarella v. US, 445 U.S. 222 (1980), the Supreme Court squarely rejected Friendly's approach. Indeed, the SCOTUS tore Friendly's approach out of the law books root and branch. In doing so, the SCOTUS made clear that the disclose or abstain rule was inconsistent with the basic function and purpose of the securities laws, holding that there can be no fraud absent a duty to speak, and no such duty arises from the mere possession of nonpublic information. 

Once again, we thus confront an an important Friendly opinion that no one any longer looks to as "providing and explaining the standards." To the contrary, we still teach it mainly to act as a foil by which to show why an overly expansive insider trading ban is a bad idea.

Again, my point is not that Friendly was a bad judge. And I admit that I've offered up just two anecdotes (while falling back on the aphorism that lawyers believe the plural of anecdote is data). My point is just that, like all of us, Friendly's record needs balanced assessment, not mere hagiography.

The search for "helpful legal scholarship" ought to start in Delaware

In the latest issue of the Journal of Law, Ross Davies offers "Part 1" of "In Search of Helpful Legal Scholarship." Prof. Davies' essay is prompted by SCOTUS Chief Justice John Roberts' frequently expressed disdain for legal scholarship. In particular, this quote from Roberts seems to have provoked davies:

Pick up a copy of any law review that you see, and the first article is likely to be, you know, the influence of Immanuel Kant on evidentiary approaches in eighteenth-century Bulgaria, or something. . . 

This leads Davies to speculate about "how to be academically helpful to the Supreme Court." Personally, I think his search would be aided by starting with a detailed tour of deepest darkest Delaware with laptop and camera in hand.

You see, if I were a constitutional law scholar, I'd be pretty depressed. When I sit down to write a new law review article, I almost always have ten specific people in mind as my core target audience; namely, the five men and women who sit on the Delaware Supreme Court and the five who sit on the Delaware Court of Chancery.

Granted, I also hope to influence the Delaware Bar (by which I mean all those countless corporate lawyers around the world who must engage Delaware law, not just those who live in Wilmington). And, of course, my fellow academics.

But it always comes back to those 10 Delaware jurists.

If I thought those jurists felt about legal scholarship the way CJ Roberts does, I would be quite depressed. If you asked Jack Jacobs or Leo Strine what was the last law review article they had read and they answered, as Roberts did, "I have to think very hard before I come up with one," I'd probably quit writing law review articles and try my hand at The Great American Novel.

Fortunately, however, the Delaware judiciary is, perhaps uniquely, engaged with the legal academy. Indeed, as Matt Bodie has noted, it's a two-way street:

... one of the very special things about the Delaware Chancery, and the once and future chancellors, is their openness to corporate law scholarship.  Not only do Chancellor Chandler and Chancellor Strine have SSRN pages, but their opinions reflect a willingness to engage with the academic literature that goes beyond any other court in the nation. It's not even close.

Contrast Roberts' disdain for law review scholarship to former Delaware Chancellor William Chandler's comments on his Airgas opinion:

If the question is, "Would I have written this as long or in the same way?" probably not, because back when I wrote Unitrin in the mid-1990s, there hadn't been as much ink spilled by academics. You saw a lot of academic references in the opinion, and that probably resulted in a slightly different approach to how to write it, because I was writing it for the parties but also acknowledging the views of various academics on this question from professor [Lucian] Bebchuk to others.

On the one hand, you've a SCOTUS jurist who thinks the law reviews are all full of crap. On the other hand, you've got a Delaware jurist who admits his last major opinion was made longer because he wanted to acknowledge the views of academics.

The empirical data backs up these anecdotes. See Michelle M. Harner & Jason A. Cantone, Is Legal Scholarship Out of Touch? An Empirical Analysis of the Use of Scholarship in Business Law Cases, 19 U. Miami Bus. L. Rev. 1 (2011), which "focuses on the use of legal scholarship by Delaware state courts from 1997 to 2007, as well as on an interval basis dating back to 1965." Their study detected "no general downward trend in the use of legal scholarship in business law cases."

Of particular relevance to Davies' search, the Harner and Cantone study includes a detailed analysis of factors tending to predict whether the Delaware courts will cite legal scholarship in a given case:

In summary, an opinion that (1) is longer in page number, (2) includes more case citations, (3) is authored by Vice Chancellor Strine, (4) features more plaintiffs, (5) features more defendants, (6) involves breach of contract issues, and (7) finds for the plaintiff in part (as opposed to in full) will likely cite more scholarship. 

Hence, my recommendation that Professor Davies start his search in Delaware. Then he can embark on a project that I might respectfully suggest might be named the "Strinification of Roberts."

BTW, my cite count in the relevant Westlaw databases:

SCT: 0

DE-CS: 26

Hmm. Not a depressing number, but not one that leaves me ecstatic. ... Maybe I should try writing about breach of contract issues ...

Dodd-Frank Turns Two Tomorrow. It's Still Quack Corporate Governance.

The WSJ's David Benoit opines:

Break out the champagne, Saturday marks the two-year anniversary for the famed Dodd-Frank financial reform act.

Deal Journal can only speculate that Senators Dodd and Frank and President Obama are celebrating with the traditional two-year anniversary gift of cotton, perhaps a hoodie emblazoned with their legacies. Several law firms have taken a more straightforward approach to the anniversary and delivered progress reports.

So far, the work is incomplete. In fact, in terms of homework completed, the agencies charged with making nearly 400 rules would be failing if they were in school. Still, the rule has led to changes by banks and created new oversight.

The only good thing about Dodd-Frank in fact is that it is still incomplete. One other thing's for sure, however, is there is nothing here to celebrate. Dodd-Frank is still, as I called it when it was born, quack corporate governance:

In 2005, Roberta Romano famously described the Sarbanes-Oxley Act as “quack corporate governance.” In this article, Professor Stephen Bainbridge argues that the corporate governance provisions of the Dodd-Frank Act of 2010 also qualify for that sobriquet. 

The article identifies 8 attributes of quack corporate governance regulation: (1) The new law is a bubble act, enacted in response to a major negative economic event. (2) It is enacted in a crisis environment. (3) It is a response to a populist backlash against corporations and/or markets. (4) It is adopted at the federal rather than state level. (5) It transfers power from the states to the federal government. (6) Interest groups that are strong at the federal level but weak at the Delaware level support it. (7) Typically, it is not a novel proposal, but rather a longstanding agenda item of some powerful interest group. (8) The empirical evidence cited in support of the proposal is, at best, mixed and often shows the proposal to be unwise. 

All of Dodd-Frank meets the first three criteria. It was enacted in the wake of a massive populist backlash motivated by one of the worst economic crises in modern history. As the article explains in detail, the corporate governance provisions each satisfy all or substantially all of the remaining criteria.

Bainbridge, Stephen M., Dodd-Frank: Quack Federal Corporate Governance Round II (September 7, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-12. Available at SSRN: http://ssrn.com/abstract=1673575

Should we mandate/encourage separating the CEO and the Chairman of the Board posts?

Nell Minow says yes. I've said no. Compare and contrast. 

More evidence that proxy advisory services can have invidious effects

An important new paper shows that ISS and other proxy advisory services are wielding increasing amount of power, which does not always redound to the benefit of shareholders:

This paper examines changes in executive compensation programs made by firms in response to proxy advisory firm say-on-pay voting policies. Using proprietary models, proxy advisory firms, primarily Institutional Shareholder Services and Glass, Lewis & Co., provide institutional shareholders with a “for” (positive) or “against” (negative) recommendation on the required management say-on-pay proposal in the annual proxy statement. 

Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three important results. 

First, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms apparently in an effort to avoid a negative recommendation. Third, the stock market reaction to these compensation program changes is statistically negative. 

Thus, the proprietary models used by proxy advisory firms for say-on-pay recommendations appear to induce boards of directors to make choices that decrease shareholder value.

Larcker, David F., McCall, Allan L. and Ormazabal, Gaizka, The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies (July 5, 2012). Stanford Graduate School of Business Research Paper No. 2105. Available at SSRN: http://ssrn.com/abstract=2101453

Review of my Insider Trading anthology

The Criminal Lawyer (UK)'s May/June 2012 issue contains a review of my edited book, Insider Trading:

Stephen Bainbridge has made the study of insider trading a very understandable law book, despite the complexity of the subject and reading this book could well assist UK prosecutors to understand the subject more comprehensively as it applies to the US and UK, especially with regard to disclosure where the issue of the property rights of the information is addressed in Part IV of the book ...

Insider trading edited by Stephen M Bainbridge is a most useful conglomeration of vital thoughts on the issues of insider trading as it applies across the world. The papers on inside information and on information withheld give much food for thought and will bring much imagination to prosecutors. It makes light reading of a very important matter and is a highly recommended book that must be included in law libraries everywhere ...

As the Amazon book description explains:

This timely collection, edited by a leading academic in the field, brings together seminal works of scholarship on insider trading over a 40 year period, with contributions from many prominent law professors and economists. Areas covered in the volume include the origins and development of insider trading law, insider trading statues and the policies surrounding insider trading. Along with an original introduction, Professor Bainbridge provides a comparative and international focus as well as coverage of important issues in the US law of insider trading. This volume will be of immense value to scholars and practitioners interested in this evolving and topical field of study.

Foxen 7200 Range 30 West (Happy Canyon) 2009

This Meritage-style Santa Barbara county single vineyard wine is 58% Merlot and 42% Cabernet Sauvignon. The wine is bottled without either fining or filtration. At age 2.5, it's delicious. Warm chocolate, blackberry, mocha java, and plums. It's already thrown a little bit of sediment. Not enough to justify decanting but just enough to muddy the last glass of the night. Grade: B+

Does Aaron Sorkin exemplify why people hate liberals?

Aaron Sorkin is why people hate liberals. He’s a smug, condescending know-it-all who isn’t as smart as he thinks he is. His feints toward open-mindedness are transparently phony, he mistakes his opinion for common sense, and he’s preachy. Sorkin has spent years fueling the delusional self-regard of well-educated liberals. He might be more responsible than anyone else for the anti-democratic “everyone would agree with us if they weren’t all so stupid” attitude of the contemporary progressive movement. And age is not improving him.

via www.salon.com

Seinfeld v. Slager and the fiduciary duty of directors re taxes. Thoughts on Kamin as a teaching tool.

Francis Pileggi posts on an interesting recent Delaware case, Seinfeld v. Slager, which raises two issues:

(1) Whether board approval of a supplemental retirement bonus was a breach of fiduciary duty to the extent that it constituted waste and did not qualify for a tax deduction; and (2) Whether a stock option plan for the directors was self-interested and not entitled to the benefit of the business judgment rule.

Francis explains that the court answered those questions as follows:

(1) The Court found a failure to plead demand futility and dismissed the waste claim, and the Court found that Delaware law did not impose a fiduciary duty, per se, to minimize corporate taxes, thus rejecting a related tax argument about the deductibility of the compensation paid to a retiree; (2) The Court found also, however, that the stock option plan for directors did not have sufficient limitations despite shareholder authorization, and therefore, could be considered self-interested and not entitled to the benefit of the business judgment rule.

I suspect that the second holding will get most attention. And deservedly so. As Edward McNally explains, the case raises the difficult practical question of When May Directors Vote Themselves Bonuses? Indeed, not just bonuses, but any compensation.

When directors vote on their own compensation, there is ample Delaware precedent that the vote may be set aside and the directors ordered to return the funds they received to their company. Awards of attorney fees in those cases are also well established. See Valeant Pharmaceuticals International v. Jerney, 921 A.2d 732 (Del. Ch. 2007), and Julian v. Eastern States Construction Service, 2008 WL 2673300 (Del. Ch.).

What, then, may a board of directors do to protect itself from litigation risk when determining its own compensation?

McNally goes on to offer some suggestions. 

To my mind, however, it is the first question that is the more interesting one. It reminds me of a New York case, Kamin v. American Express, in which AmEx shareholders challenged the board's decision to structure the disposition of shares Am Ex owned in a firm called Donaldson, Lufken and Jenrette as a dividend of property to the shareholders rather than as sale on the market:

... the complaint alleges that in 1972 American Express acquired for investment 1,954,418 shares of common stock of Donaldson, Lufken and Jenrette, Inc. (hereafter DLJ), a publicly traded corporation, at a cost of $ 29,900,000. It is further alleged that the current market value of those shares is approximately $ 4,000,000. On July 28, 1975, it is alleged, the board of directors of American Express declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind. Plaintiffs contend further that if American Express were to sell the DLJ shares on the market, it would sustain a capital loss of $ 25,000,000 which could be offset against taxable capital gains on other investments. Such a sale, they allege, would result in tax savings to the company of approximately $ 8,000,000, which would not be available in the case of the distribution of DLJ shares to stockholders.

The court held that the business judgment rule protected the directors' decision from judicial review. The parallel to the Seinfeld case is readily apparent, of course.

My interest arises because Kamin is one of the business judgment rules cases in our Business Associations case book. I spend quite a lot of time on it in class, as illustrated by the following PowerPoint presentation on the case:

As you can see, this case allows the instructor to raise many important business and legal concepts. It is my students' first introduction, for example, to financial statements beyond simple balance sheets and the efficient capital markets hypothesis. That's a lot of educational value from a fairly short case.

Obama's comment re businessmen not building businesses

Much could be said about how stupid was President { }'s recent comments about business founders not really having built their businesses by themselves, but rather owing them in large part to things others, especially the government, did for them. You drove on a public road to meet your 457th potential angel investor. Your third grade public school teacher taught you always to say please. And so government gets a lot of the credit for the thing you sweated blood to create. Big surprize. If you build anything, you can absolutely bet people will line up for the credit, like Al Gores for the internet. Failure, you can keep the credit for that.

But here's the question to ask -- how many more successful businesses, inventions, products, services, toys, tools, insights, and just plain fun would there be, if government did not in the first place make it so ridiculously difficult to start a business and keep it going? I don't see our young president taking credit on behalf of the state for all the failures it help cause, all the ideas that never got off the ground because the regulatory hurdles were so high, or all the established companies that never had to face competition because they had managed to get their rents written into law. This is part of the seen and not seen insight of Bastiat. What you see is a successful business when it manages to survive, and then people run up, the same people who taxed and regulated it nearly to death, and say I helped! I helped! What you don't see are all the businesses that perished or never got started because of the heavy hand of the state. And it's a very heavy hand.

Yeah, the state provides public goods we all use, but could they do it any worse?

via rightcoast.typepad.com

I've said it before and I'll say it again, Tom Smith is one of the most insightful bloggers out there.

The lesson of LIBOR: If we can't trust regulators to enforce current law, why would more regulation be a good idea?

Schumpeter makes a point I've been emphasizing in discussing the LIBOR scandal:

BOOSTERS of financial regulation are making hay from the widening scandal over allegations that LIBOR, a key interest rate, was rigged repeatedly for at least five years since 2005. Yet the trove of documents that have emerged also reveal the very flawed nature of regulation, in which government bureaucrats are asked to keep tabs on high-flying financial sorts. Transcripts of calls between officials at the Federal Reserve Bank of New York and traders at Barclays show that regulators didn’t really pick up on cues, even when they spelled out misbehaviour.

LIBOR, of course, is not the only pertinent example. Also in current news are the regulator failures at Peregrine Financial Group:

The Wall Street Journal reviewed the letters, which a person familiar with the situation said were left by Peregrine Chief Executive Russell Wasendorf Sr. They offer the first account of where Peregrine's missing money might have gone in a case that has left holders of thousands of accounts facing possible losses and fueled new concern over regulation of the futures-trading industry.

One of the notes, which was a general statement describing Mr. Wasendorf's alleged fraud and signed by him, says regulators first examined Peregrine's use of client funds as far back as 1993, triggering Mr. Wasendorf to start his alleged fraud. Deceiving the regulators was "relatively simple," said the statement. ...

The statement indicates a potentially closer involvement by the CFTC in overseeing Peregrine, commonly known as PFGBest, than previously thought. The CFTC has said it left the day-to-day regulation of Peregrine to the National Futures Association, an industry self-regulatory body. Thus, the note could put further pressure by investors and lawmakers on the CFTC for missing the scandal, particularly given the intense scrutiny alleged in the note.

If we can't trust regulators to capably enforce the laws on the books, why would we remotely think that more regulation is the right answer?

Why prediction markets fail. Is insider trading the answer?

In what ways do prediction markets fail? The paper provides some discouraging answers. First, they struggle when there is a high degree of insider information. On the question, "Will the mandate be struck down", for instance, only the Chief Justice himself could say for sure, and so the market was likely to be wrong. There must be information to aggregate. "Will there be WMDs in Iraq?" was the basis of one contract. But which Iraqi arms tattletale is trading predictions contracts? None, so the market was mistaken.

But if markets need information to predict accurately—as these two criteria entail—then so much is off limits. Who has information on next year's GDP? So much can change; so many things could happen. Sure, a merchant may have an idea, he may take a guess. But is that guess as reasonable as one's guess on WMDs? Is the future as foreign a realm as the far-off sands of Iraq? The thinking behind a market is that trading creates an incentive for players to develop the best possible information, to come up with new statistical models of the economy and place bets on their basis, for instance. The more dumb money in a market, the richer the pot for smart money, which should entice such money in and move the price in the right direction. But the very best processing of available information may still be wildly offbase where future events are concerned.

The third failure is a behavioural one. Individuals tend to overestimate low probabilities and underestimate high ones. (The former explains why so many play the lottery; the latter is just an inverse of the former.) But this means we have to rule out so many estimates as unreliable.

via www.economist.com

My friend Henry Manne would argue that one solution to the first and possibly third concerns would be to allow insider trading on the prediction market. I can see his point. If the prediction at issue is one that is either (a) known already by insiders or (b) uncertain but subject to much more accurate estimates by insiders, the contract will be far more accurately priced.

Henry discussed insider trading in prediction markets in his article Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark. Available at SSRN: http://ssrn.com/abstract=679662

Check it out.

Social science law professor and citation counts; yes, it's time for yet another anti Jd-PhD rant

Apropos of the latest faculty scholarly impact study, about which I blogged below, David Zarig posts that:

A lot of the younger JD-PhDs, who do careful work that isn't very accessible to very many law professors, will never do well on law review citation metrics.  As I think a comparison of your own mental list of whom the best quantitative social science business law professors are with a list of the most cited business law professors would reveal.  But at the same time, my sense is that many faculties are pushing hard in a social science direction.  What will happen if these trends continue?  We could see the building of a professional elite whose work can't get arrested in student notes and survey articles.

Personally, I deplore the trend of which Zarig speaks. All too many of those "JD-PhDs, [whose] careful work ... isn't very accessible to very many law professors [and] will never do well on law review citation metrics," are producing work that is even less accessible to practicing lawyers, judges, legislators, and regulators. Their work would do even worse on a survey of citations by judicial opinions or Congressional committee reports than they do on surveys of law review citations.

Personally, I believe that law schools are hiring all too many JD-PhD's with middling law school credentials who really ought to be in a political science, economics, or sociology department but who don't have the chops in their home discipline to get a good position or simply prefer the higher salaries law schools pay. (As a local anecdote of what seems to be a widespread problem, I'm still annoyed at our appointments committee for having asked me what I thought about a number-cruncher who wanted to teach Business Associations despite having straight Bs in business law courses at Harvard. What I thought was not printable in a family blog.)

What we are seeing throughout the law school community is "the building of a professional elite whose work" is increasingly divorced from the practice of law and the process of lawmaking.

And, yes, I'm being uncivil and disparaging, as well as making sweeping generalizations, but, like the guy in Network, I'm mad as hell and I'm not going to take it anymore.

Update: Mildly revised to make clear I'm discussing a problem I believe is pervasive throughout legal education rather than localized to any particular school. Like, say, mine.

UCLA Law # 14 in scholarly impact

Brian Leiter:

Gregory Sisk (St. Thomas-Minnesota) and his colleagues in the law library there have prepared a new scholarly impact study, using the methodology of the 2010 study, but this time Professor Sisk and his colleagues did all the real work, and I acted only as a 'consultant' (looking over faculty lists, flagging suspicious results that should be double-checked and the like). ...

Here are the "top 25" in scholarly impact, with the ten most-cited faculty listed in parentheses (an * indicates a faculty member 70 or older in 2012), followed by the rank in the scholarly impact study for 2005-2009 ....

14. University of California, Los Angeles (Stephen Bainbridge, Devon Carbado, Kimberle Crenshaw [part-time], Jerry Kang, Russell Korobkin, Lynn LoPucki, Hiroshi Motomura, Neil Netanel, Kal Raustiala, Eugene Volokh) (15)

I like to do my part. Speaking of which, Orin Kerr notes that, "Unlike the previous version of this study, the results only rank the schools: The study does not include a ranking of individual scholars by subject area." Disappointing. Seeing where I stacked up was always one of my guilty pleasures, as I suspect it was for others. (If you're curious, here's how I stacked up last time.)