ProfessorBainbridge.com

Do compensation consultants really "make prostitutes look respectable"?

Apparently former UK Chancellor of the Exchequer and Tory peer Lord Lawson thinks so:

Lord Lawson, who ran Britain’s finances under Margaret Thatcher, refused to back down even when a female witness giving evidence to him took exception to the characterisation.

Carol Arrowsmith, a senior pay consultant with accountancy firm Deloitte, said it was ‘difficult’ to accept the suggestion that her profession was worse than prostitution.

‘It may be difficult but it may be true,’ retorted the famously outspoken Westminster grandee.

Lord Lawson, who as Nigel Lawson served as Chancellor under Margaret Thatcher, said pay consultants feared missing out on future advisory fees if they angered bank bosses by suggesting modest pay deals.

I discuss compensation consultants in my book Corporate Governance after the Financial Crisis. It's not a happy story, as Lord Lawson's complaint about their conflicts of interest is well taken for the most part, although I lack the expertise to know if his precise comparison has merit.

Does Chevron mandate deference to the SEC on Rule 10b5-2?

Just read two different articles on the titular topic. A student note by Joseph Pahl (106 Nw. U. L. Rev. 1849) says no:

Rule 10b5-2(b)(1) overreaches the statutory authority of the SEC by creating liability under § 10(b) without the existence of deception or manipulation. It is unreasonable to interpret a promise not to disclose confidential information as a simultaneous agreement not to use that information (while keeping it confidential) for an individual's personal benefit. The acts of disclosure and use are temporally separate acts, and it would be perverse to believe that, when an individual agrees not to disclose a piece of information, it is inherently deceitful to use that information for his personal benefit while maintaining confidentiality. ...

Assuming arguendo that 10b5-2(b)(1) is not contrary to the courts' interpretation of the meaning of the statute, the rule does not pass the second prong of the Chevron test: Rule 10b5-2(b)(1) is “arbitrary, capricious, or manifestly contrary to the statute.” ... A confidentiality agreement alone fails to create a situation where a deceptive act is possible by trading without some further fiduciary or fiduciary-like relationship. 

I am highly sympathetic to that line of argument, but Professor Steven Cleveland argues that (65 Fla. L. Rev. 73):

To date, commentators [including yours truly, as Cleveland notes] have argued against the rule's validity by applying the Supreme Court's securities law jurisprudence without considering the role of administrative law-despite the Court's comments that the pertinent statute is ambiguous, despite express delegation of rulemaking authority by Congress to the Commission, and despite developments in administrative law subsequent to the Court's relevant securities law decisions. By not considering the role of administrative law, commentators have approached the rule with undue skepticism. Administrative law principles dictate judicial deference to the Commission's rule. The Commission once commanded deference from courts. The time has come to resurrect that deference.

Cleveland makes a thoughtful and reasoned argument. But in my judgment, however, the time for deference has not yet come.

I will once again quote Michael Greve:

I’m teaching something called, fraudulently, administrative “law.” Believe you me: nothing in that corpus juris poses any meaningful constraint on government. E.g., I’m supposed to teach and therefore do teach that judges must bow to any bureaucrat’s take on the law (unless it’s completely nuts) because otherwise the D.C. Circuit might end up running the country and good sense and lawful government might break out.

I will also note that deference ought to be earned rather than given by Supreme Court fiat. To wit, consider Business Roundtable v. SEC, 647 F.3d 1144 (DC Cir. 2011):

Under the APA, we will set aside agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” ...

We agree with the petitioners and hold the Commission acted arbitrarily and capriciously for having failed once again—as it did most recently in American Equity Investment Life Insurance Company v. SEC, 613 F.3d 166, 167–68 (D.C.Cir.2010), and before that in Chamber of Commerce, 412 F.3d at 136—adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.

I believe close examination of the relevant history fo the SEC's adoption of Rule 10b5-2 will reveal precisely the same shortcomings that mandated striking down the proxy access rule. Compare, e.g., both the majority and Judge Winter's separate opinions in the old Chestman case to the proposing and adopting releases for Rule 10b5-2. The first pair is thoughtful, analytical, reasoned. The second one isn't. 

Something sensible on the constitutionality of gun control

My colleague Adam Winkler has co-authored a letter signed by a slew of prominent law professors in which they address the constitutionality of gun control legislation:

In 2008, the U.S. Supreme Court held that the Second Amendment, which provides, "A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed," guarantees an individual's right to have a functional firearm in the home for self-defense. The Court's decision in that case, District of Columbia v. Heller, struck down a D.C. law that effectively barred the use of any firearm for self-defense. The law is now clear that the government may not completely disarm law-abiding, responsible citizens. The Court also made clear, however, that many gun regulations remain constitutionally permissible. "Like most rights," the Court explained, "the right secured by the Second Amendment is not unlimited." Writing for the Court, Justice Antonin Scalia explained that restrictions on "dangerous and unusual" weapons are constitutional and that "nothing in our opinion should be taken to cast doubt" on laws that prohibit "the possession of firearms by felons or the mentally ill" or laws that impose "conditions and qualifications on the commercial sale of arms."

In this sense, Justice Scalia recognized in Heller that, like other constitutional rights, the Second Amendment is not an absolute. The First Amendment, for example, provides that "Congress shall make no law... abridging the freedom of speech," but the Supreme Court has long and consistently held that some types of speech -- for example, defamation, obscenity and threats -- can be regulated; that some people -- for example, public employees, members of the military, students and prisoners -- are subject to greater restrictions on their speech than others; and that the government can reasonably regulate the time, place and manner of speech. As Justice Scalia explained in Heller, the rights guaranteed by the Second Amendment are likewise subject to appropriate regulation in order to enhance public safety.

As Brian Leiter observes:

It's a pretty sober and straightforward analysis, and it doesn't even question the decision in Heller ....

The signatories include the usual suspects but also include folks like  libertarian legal giant Richard Epstein and ex-conservative Charles Fried (who, granted, is well on his way to becoming one of the usual suspects).

Second Amendment absolutists will have their usual conniption, as will the gun confiscation crowd, but reasonable people will find the argument persuasive.

I'll keep my day job

When I was a kid I wanted to be (among other things) a science fiction writer when I grew up. But I think I'll keep my day job. Apparently being one of the best current writers out there just doesn't pay all that well. 

A disgruntled Admin Law prof's take on his subject

Michael Greve:

I’m teaching something called, fraudulently, administrative “law.” Believe you me: nothing in that corpus juris poses any meaningful constraint on government. E.g., I’m supposed to teach and therefore do teach that judges must bow to any bureaucrat’s take on the law (unless it’s completely nuts) because otherwise the D.C. Circuit might end up running the country and good sense and lawful government might break out.

Barrall on Elson on Executive Compensation

Prominent UCLA law alum/LA lawyer Jim Barrall reports:

It was my special privilege and pleasure to serve as the moderator of The Conference Board Governance Center-sponsored debate between Charles Elson and Craig Ferrere of the John L. Weinberg Center for Corporate Governance at the University of Delaware, in one corner, and Ira Kay of Pay Governance LLC, in the other corner, on the subject of executive pay in the USA, held on January 18, 2013.

Simply put, this 90 minute exchange is the single best discussion on the subject of the causes and effects of peer group benchmarking, and on the subject of CEO pay in general, that I have ever heard in my many years of working in the executive pay and governance arena.

The catalyst for this friendly but intense debate was Charles and Craig’s paper, “Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution,” which argues that:

• Peer group benchmarking of CEO pay is not justified by market forces based on  data which shows that over many years relatively few CEOs quit to take other CEO jobs
• There is little CEO mobility because CEO skills generally are not transferable
• Benchmarking CEO pay ratchets it up and has been the prime cause of its inexorable rise since World War II (punctuated only occasionally when stock market bubbles burst)
• Companies and investors would be better served by benchmarking CEO pay internally to that of other officers and
• Internal executive pay benchmarking is attracting support from investors and will become more influential.

...

Anyone who is in any way involved in designing or evaluating executive pay plans and practices should watch the video debate, take notes and then reflect on what Charles, Craig, and Ira have said.  If I chaired a Compensation Committee, I would make it mandatory viewing for the committee, and would ask the company to note it as a best 2013 practice in the next CD&A.

The video or the debate is here:http://www.conferenceboard.org/directorroundtables/peergroups.

 

Academic conferences should be done electronically

Admittedly, I have a vested interest in this idea because I (1) hate to fly and (2) love going to academic conferences. But considering that 90%+ of law professors are liberals in good standing, they ought to go along with the idea. After all, as their favorite newspaper reports today:

Your Biggest Carbon Sin May Be Air Travel

...

For many people reading this, air travel is their most serious environmental sin. One round-trip flight from New York to Europe or to San Francisco creates about 2 or 3 tons of carbon dioxide per person. The average American generates about 19 tons of carbon dioxide a year; the average European, 10.

So if you take five long flights a year, they may well account for three-quarters of the emissions you create. “For many people in New York City, who don’t drive much and live in apartments, this is probably going to be by far the largest part of their carbon footprint,” says Anja Kollmuss, a Zurich-based environmental consultant.

A report on smart meetings opines that:

Traveling by plane to meetings and conferences makes up a significant part of many companies’ internal carbon footprint, often 50 percent or more among non-manufacturing companies.  

So wouldn't it make sense that sending law professors flying around the country for workshops and conferences is the biggest part of a law school's carbon footprint?

The smart meeting report continues:

Technology and services are available that can support virtual meet- ings and conferences in a much more time and resource efficient way. Online meeting rooms, video-conferencing, ad hoc Internet video links such as Skype, remote desktop sharing, webcasts, and other advanced communication aids are giving businesses tools to work remotely and thereby avoid business trips or physical commuting. Virtual meetings range in sophistication from high definition immersive telepresence experiences (which can even allow surgery to be performed remotely) down through dedicated medium resolution office to office systems, to pure audio conferencing and on to simple online text chats. One or another of these new techniques can be used with the same or better result as a physical meeting in many cases. 

So why aren't we using them to conduct legal conferences? Can you imagine what the carbon footprint of the AALS annual meeting must be?

In the meanwhile, in case you were wondering, my current rule is that I will attend an academic conference or workshop if I can get there by car in a day (or so) or via Amtrak (with a sleeper car). But I'd rather Skype from home. 

Completed updated my aStore

All new recommendations

Memo to Barry Gross and his lawyers

Get over yourselves and stop trying to profit from frivolous lawsuits. So your sandwich was an inch short of a foot? Back in college I noticed that "60 Minutes" actually only runs for 58 minutes. So you going to sue them next?

Even a plaintiff lawyer gets it:

Lawsuits like this - and celebrities that sue for every possible slight - really sends a message to people, who later become jurors, that the judicial system is not often a place for serious justice. So when an injured plaintiff begins a trial, she does not begin on the 50 yard line. She starts deep in her own territory. That's not an impossible mission for a worthy plaintiff by any stretch - people flip quickly when they learn facts. But it makes the hill a tougher climb and it can change the way they value personal injury cases.

Subway says the word "footlong" should not be taken literally, as it is a trademark and "not intended to be a measurement of length." But they are misleading people. They misled me. I thought it was a foot long till I read this story. But consumers who think like me have two reasonable choices: (1) decide not to buy the Subway subs because they are mad at the false advertising, or (2) remain annoyed but say, "Hey, Subway is not perfect, I don't think many big companies are, but I think make a good sandwich and I'm going to eat it." (I pick the latter. Subway makes a good low fat sandwich, albeit with a ridiculous amount of sodium.). 

Theodore Dalrymple on the anti-smoking zealots and their trial lawyers

At Liberty Law Blog:

I am no friend to smoking, therefore; but even I feel a certain unease about the zealotry of the anti-smokers. The problem is that, in the modern world (though perhaps it was always so), a good cause is turned into rent-seeking, and generally into rent-finding as well.

Examination of the legal proceedings in the United States against the tobacco companies persuaded me that the real tort in the case was, in effect, the transfer of the profits of the tobacco companies from the shareholders to the trial lawyers. The last thing that anyone wanted to do was drive the milch-cow, the tobacco companies, into bankruptcy, or simply to close them down so that they could be sued no more. Governments, which had been deriving large revenues from the tobacco companies’ products for many years in spite of knowledge of the effects of smoking, were at least as responsible for any harm done by tobacco as the companies. No doubt the tobacco companies lied in a disgraceful fashion about the harmfulness of their products, but I have never met anyone who believed their lies; and although no longer young, I grew up knowing that smoking was bad for you in the same way that I knew that the world was round and the Battle of Hastings was in 1066. As to the supposed impossibility of giving up smoking once started because of the addictiveness of nicotine, this was clearly nonsense; what millions of people (including my mother) have done cannot be impossible.

And where there are rents to be found, lawyers will be there to take our cut.

"Government regulation often rules out the options people would otherwise want to pursue that would let them work together more"

President Obama said this in his 2nd inaugural address:

For the American people can no more meet the demands of today's world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we'll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together.

I object to this move, which seems to have become popular with Democrats in the past couple years, of equating "doing things together" with government. To suggest that anyone who'd like to see less heavy-handed government regulation thinks one person can do everything alone is a straw-man argument. It indicates a lack of understanding of how the private-sector economy works and how libertarians or conservatives actually think about economics. The private sector isn't just a bunch of people "acting alone."

via jaltcoh.blogspot.com

Swapping sex for inside information

John Carney has a provocative post about insider trading (pun intended):

Someone has placed a job placement notice on a controversial online classified ads site seeking "beautiful, sophisticated ladies" to seduce businessmen in hopes of "extracting key pieces of information."

Carney goes on to explore the legality of the business under the securities laws:

Tipper-tippee liability has two important elements. First, there must be a disclosure of material, nonpublic information by someone with a fiduciary duty. Second, the person doing the disclosing—the tipper—must expect a personal benefit as a result of the disclosure. In effect, this means that accidental disclosures do not give rise to insider trading liability for either the tipper or the tippee.

Quite correct.

After a detailed review of the relevant law, Carney concludes from his extended analysis that:

The legality of trading on information intentionally extracted from a seduced businessman, in other words, would largely turn on his motivation for revealing the information and the length of the relationship. If he thinks he is just blowing off steam about a business deal to a one-night stand who was going to sleep with him anyway, this entire scheme wouldn't violate any insider trading rules.

What do we think? First, the law is quite clear than an exlicit quid pro quo in which an executive swapped inside information for sex would constitute an illegal tip. Second, "pillow talk" in which information is inadvertently disclosed does not (subject to Carney's correct anlysis of the potential application of Rule 10b5-2).

But, third, there is a tricky precedent out there that Carney does not discuss; namely, SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009), which dealt with a question left open in the U.S. Supreme Court U.S. v. O’Hagan decision--i.e., the liability of persons who steal inside information but have no fiduciary duty to either the source of the information or the issuer of the securities in which the thief trades.  

I've got a backgrounder on the case here, in which I explain that:

In Dorozhko, the SEC alleged that a computer hacker broke into a health information company’s computer system and used the stolen information to essentially sell the stock short. The Second Circuit tried to finesse the rules discussed below by treating the case as one involving a misrepresentation rather than insider trading: “we recognize that the SEC’s claim against defendant—a corporate outsider who owed no fiduciary duties to the source of the information—is not based on either of the two generally accepted theories of insider trading.” The problem is that the case makes no sense other than as an insider trading case.

An affirmative misappropriation can be actionable under Section 10(b) and Rule 10b-5 if it is committed in connection with the purchase or sale of a security. In order to find that the hacker committed an affirmative misrepresentation, a court first must find a lie. Calling computer hacking a lie is a rather considerable stretch. At most, the hacker “lies” to a computer network, not a person. Hacking is theft; not fraud.

Even if hacking is fraudulent in the sense of an affirmative misrepresentation, it has to be in connection with a purchase or sale of a security to be insider trading. In SEC v. Zandford, 535 U.S. 813 (2002), the Supreme Court emphasized that “the statute must not be construed so broadly as to convert every common-law fraud that happens to involve securities into a violation of § 10(b).” That case, moreover, involved “a fraudulent scheme [by a stockbroker] in which he made sales of his customer’s securities for his own benefit.” The SEC had taken the position that such conduct violated 10b-5 since the 1940s. In contrast, the district court in Dorozhko “found it ‘noteworthy’ that in the over seventy years since the enactment of the Securities Exchange Act of 1934, ‘no federal court has ever held that those who steal material nonpublic information and then trade on it violate § 10(b),’ even though ‘traditional theft (e.g. breaking into an investment bank and stealing documents) is hardly a new phenomenon, and involves similar elements for purposes of our analysis here.’” Dorozhko, 606 F. Supp. 2d 321, 339 (SDNY 2008). 

In that light, consider Carney's argument that:

What would also work against the "beautiful, sophisticated ladies" in this case is that they have set out to seduce the businessmen in order to obtain the information. This means that, at least on their part, the disclosure is not accidental. They intend for it to occur. It's easy to see a court believing that the businessman in question would understand this intention and so any disclosure would be in search of a personal benefit. 

It might be possible to get around this, however, by training the seductresses well enough so that the businessmen never realize the purpose of the seduction. Obtaining information from a businessman who was unaware that the attentions of a young woman were based on his access to and looseness with insider information, wouldn't give rise to tippee liability. So the company employing the women might retain its freedom to trade on the information.

I think Dorozhko works against Carney here. Theft by seduction likely would be viewed as analogous to theft via hacking.

Anyway, it's an interesting thought experiment. In these politically corret times, however, I don't recommend that law professors use it in class or on an exam. Some hyper-sensitive student doubtless would go running to the dean to complain about your lack of sensitivity to something or other.

Strine et al. on derivative suit jurisdiction

Delaware Chancellor Leo Strine, law professor Larry Hammermesh, and practititoner Matthew Jennejohn have posted a very interesting new paper on derivative litigation procedure entitled Putting Stockholders First, Not the First-Filed Complaint:

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

And so the GOP swerved

The House is scheduled to vote Wednesday on an increase in the nation's debt limit, a move designed to prevent a first-ever government default.

The vote marks a change in strategy for House Republicans who run the chamber and who remain adamant about reducing government spending but decided not to use the debt limit to trigger a confrontation with President Barack Obama.

via bigstory.ap.org

In yet another Chicken Game with Obama, the House GOP swerved first. Spineless, useless, enablers of runaway debt...

A Bit of Sarbanes-Oxley for Universities, Please

The impulse to impose Sarbanes-Oxley on universities is tempting.  Indeed, formal legal mandates on conflicts of interest and the other attributes of good governance might be even more appropriate for universities than for public corporations, as universities lack many of the safeguards of good governance, such as the ability to measure performance through profitability and engaged  shareholders with incentives to monitor performance.

via www.mindingthecampus.com

But ultimately not a good idea.