ProfessorBainbridge.com

Mirror of Justice: "An important win for Catholic institutions in HHS litigation"

The dioceses of Erie and Pittsburgh secured a preliminary injunction from a federal court against the so-called contraception-coverage mandate.  The story is here.  What is particularly important about this case, it seems to me, is that -- unlike the rulings that have been the subject of a lot of news coverage lately, and that the Supreme Court is likely to take up soon -- it does not involve the protections afforded by RFRA to for-profit entities or individuals operating businesses.  It involved, instead, not only the dioceses themselves but various Catholic non-profit entities (Catholic Charities, Erie Catholic Preparatory School, St. Martin Center, etc.).  And, the case -- unlike Hobby Lobby, etc. -- involves a challenge to the "accommodation," not the mandate as it applies to businesses.

Here is a bit from the news story:

The judge wrote in his 65-page opinion that he was ruling on whether "the Government will be permitted to sever the Catholic Church into two parts (i.e., worship and faith, and 'good works') -- in other words, whether the Government will be successful in restricting the Right to the Free Exercise of Religion as set forth in the First Amendment to a Right to Worship only."

The judge wrote that he "is constrained to understand why religious employers such as Catholic Charities and Prince of Peace Center -- which were born from the same religious faith, and premised upon the same religious tenets and principles, and operate as extensions and embodiments of the Church, but are not subsidiaries of a parent corporation -- would not be treated the same as the Church itself with respect to the free exercise of that religion."

The opinion in the case (Zubik v. Sebelius) is available here: Download Erie opinion.

via mirrorofjustice.blogs.com

"The Feds Are Spending $8 Million To Take Your Blood At Roadblocks"

If you live in one of 30 cities, you may find yourself pulled over soon at roadblocks where police and federal contractors ask to swab your cheeks, take your blood or give a breath sample to see if you're on drugs without any probable cause that you've committed a crime. Such an exciting time for your civil liberties! P

NBC DFW has the scoop on a Fort Worth woman who was pulled over last week at a police roadblock, directed to a parking lot, and then asked for a couple of her bodily fluids in exchange for cash.P

She wasn't under arrest, nor was she suspected of a crime — she was merely being asked to participate in a study by the National Highway Traffic Safety Administration that supposedly aims to analyze how many drivers on the road are under the influence of alcohol or drugs.

via jalopnik.com

My Friday Follows: Corporate Law Prawf and Catholic editions

#FF Catholic edition: @tomwelbers @Pontifex @ActonInstitute @chezami @CardinalDolan @CardinalSean @ArchbishopGomez @fatherjonathan

— Stephen Bainbridge (@ProfBainbridge) November 22, 2013

#FF Corporate law prawf edition: @bjmquinn @ProfPadfield @mjloewenstein @VolunteerTwit @vicfleischer @FrankPartnoy

— Stephen Bainbridge (@ProfBainbridge) November 22, 2013

Delaware's competition

The Economist uses the pending vacancy pf the Chief Justiceship of the Delaware Supreme Court as an excuse to riff on the state's vulnerable position as the leader of American corporate law.

Revisiting the Gang of 14 deal after Reid goes nuclear on judicial nomination filibusters

WaPo:

Senate Democrats took the dramatic step Thursday of eliminating filibusters for most nominations by presidents, a power play they said was necessary to fix a broken system but one that Republicans said will only rupture it further.

Democrats used a rare parliamentary move to change the rules so that federal judicial nominees and executive-office appointments can advance to confirmation votes by a simple majority of senators, rather than the 60-vote supermajority that has been the standard for nearly four decades.

It's a sad day for democracy. I explained why the judicial filibuster was a good idea in a TCS column back when the Gang of 14 saved it during the Bush administration. It seems to me the argument still apply.

Would Argentina Defy the SCOTUS?

Ed Whelan has a brief comment on the continuing intransigence of the Argentinian government in the ongoing litigation over its bond default.

"Adam Levine Is PEOPLE's Sexiest Man Alive": But why is it always an actor or singer?

People announces:

He may be battling to be the winning coach on NBC's hit series The Voice but Adam Levine has this year's Sexiest Man Alive crown in the bag.

I don't see it myself, but YMMV. In any case, at least it's not an actor this year. But, OTOH, why is it always an entertainer? Why not, say, a football player? How about Tom Brady, for example, who is sexy enough to have snared Gisele Bundchen? Or Cam Newton? Or Tony Gonzalez? Or David Beckham (to switch sports)?

Michael Greve on "Dodd-Frank: Adversarial Corporatism"

Conservative-libertarians mope about Dodd-Frank’s subsidies to big financial institutions. They also mope about the feds’ civil and criminal prosecutions of financial institutions—like, J.P. Morgan. My view is that these things are of a piece. As David Skeel (who also spoke at the Hillsdale gig) has explained in a very fine book, Dodd-Frank cements a symbiotic, “corporatist” partnership between the government and the big banks. Wall Street lives with de facto bailout guarantees and other embedded subsidies. That’s the quid; what’s the pro quo?

Answer, the government gets to siphon off a big chunk of the profits (in the case of Fannie and Freddie, all of the profits), chiefly by means of “law enforcement” (see, e.g., the $13 billion settlement in the works between JPM and DoJ). The SEC, the CFTC, the Fed, the FHA—they’ve all become profit centers for a cash-starved Congress. That’s the essence of adversarial corporatism: the bankers get to make a boatload of money, and the government gets to treat them like a criminal class. Whether these people have actually done something wrong is secondary, if not wholly irrelevant. With Wall Street’s capable assistance, government has managed to institutionalize and monetize the perp walk.

via www.libertylawsite.org

"The authority on insider trading case law is Prof. Stephen Bainbridge"

Page 2, footnote 3 of Bhattacharya , Utpal, Insider Trading Controversies: A Literature Review (October 15, 2013). Available at SSRN: http://ssrn.com/abstract=2340518:

No brag, just fact.

WSJ: "For In-House Corporate Lawyers, the Good Times Keep Getting Better"

Pay is going up for top in-house lawyers, as corporate profits rise and general counsel play an increasingly key role helping companies navigate a host of new regulations and other legal challenges.

In 2013, median total compensation for general counsel at FortuneFT.T -3.23% 1000 companies jumped 4.9% — to $1.6 million — compared to the previous year, according to a new survey to be released Tuesday by pay researcher Equilar Inc. The report is based on data from nearly half the companies in the Fortune 1000 across a range of industries. Total compensation includes base salary, annual cash bonus, and option, stock and performance-based awards.

via blogs.wsj.com

Hmmm… Where do I sign up?

Mark Cuban's Lawyer Critiques the SEC's Insider Trading Case

Lyle Roberts defended Mark Cuban against the absurd SEC insider trading charges to which Cuban was subjected. In today's WSJ, Roberts critiques the case against his client:

When Mark Cuban stood outside the federal courthouse in Dallas last month—after a jury found him not liable for insider trading—he noted that the Securities and Exchange Commission lacks "bright-line rules" and resorts to "regulation through litigation." Mr. Cuban, who owns the Dallas Mavericks basketball team, raises a very good point. In pursuing insider-trading claims, the SEC often appears to be making up the rules as it goes along. This is not healthy behavior for government law enforcement. ...

In its Nov. 17, 2008, press release announcing its lawsuit against Mr. Cuban—I represented him in the case—the SEC claimed that it was "fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market." Statements like this are misleading. Contrary to a popular misconception about insider trading, there is nothing wrong with a person trading on the basis of nonpublic information about a corporation.

That is, of course, absolutely correct. In Chiarella v. United States, the Supreme Court made clear that when a Rule 10b-5 action is based upon nondisclosure, as is always true in insider trading cases, there can be no fraud absent a duty to speak, and no such duty arises from the mere possession of nonpublic information. The trouble, of course, is that the SEC has never accepted Chiarella and has done everything in its power to evade and eviscerate Chiarella's holding.

An entire profession—the stock market analyst—is predicated on the idea that investors can and should seek an informational advantage to better manage their investments. Trading based on an informational advantage is only illegal when it results in a fraud, and that only happens in certain narrow circumstances.

Also entirely correct. As I noted in an earlier post, however, the SEC's enforcement program has been structured--one can but assume intentionally so--to chill legitimate market research.

[The SEC in 2000 adopted] a regulatory rule (Rule 10b5-2) designed to address how the misappropriation theory could be extended to exchanges of information between friends or family members. Under the rule, the required duty of trust and confidence is formed any time a friend or family member formally agrees to keep the information confidential.

Soon thereafter, however, the SEC began citing Rule 10b5-2 in courts across the country as applying whenever any material, nonpublic information is exchanged and the recipient, regardless of whether he is a friend or family member, formally agrees to keep the information confidential. Recently, the SEC abandoned even that broad standard and essentially has argued that a wink and a nod (or even silence) to confidentiality when material, nonpublic information is shared is sufficient to hold anyone who trades on that information liable for insider trading.

Sadly, also true. Now for the conclusion:

In the wake of this case, the SEC needs to re-evaluate its insider trading program. It—or Congress—should clarify that under the misappropriation theory of insider trading, the required relationship of trust and confidence can be created by agreement only if someone who receives material, nonpublic information about a company agrees to keep that information confidential and not trade on it. These are standard terms in corporate nondisclosure agreements.

No. No. A thousand times, no! As I wrote in an earlier post:

Under Dirks, "the individual must have expressly or impliedly entered into a fiduciary relationship with the issuer." SEC v. Ingram, 694 F.Supp. 1437, 1440 (C.D.Cal.1988).

Unfortunately for Cuban, there are some cases that suggest a mere contractual obligation of confidentiality suffices. See, e.g., SEC v. Talbot, 430 F. Supp.2d 1029 (C.D. Cal. 2006) (holding that absent an express agreement to maintain the confidentiality of information, the mere reposing of confidential information in another does not give rise to the necessary fiduciary duty). I believe these cases were wrongly decided.

Chiarella and Dirks clearly require something more than a mere contract. They require a fiduciary relationship. In turn, a fiduciary relationship requires mre than just an arms-length contract:

A fiduciary relationship involves discretionary authority and dependency: One person depends on another?the fiduciary?to serve his interests. In relying on a fiduciary to act for his benefit, the beneficiary of the relation may entrust the fiduciary with custody over property of one sort or another. Because the fiduciary obtains access to this property to serve the ends of the fiduciary relationship, he becomes duty-bound not to appropriate the property for his own use.

The most relevant precedent here would be Walton v. Morgan Stanley & Co.,623 F.2d 796 (2d Cir.1980). Morgan Stanley represented a company considering acquiring Olinkraft Corporation in a friendly merger. During exploratory negotiations Olinkraft gave Morgan confidential information. Morgan's client ultimately decided not to pursue the merger, but Morgan allegedly later passed the acquired information to another client planning a tender offer for Olinkraft. In addition, Morgan's arbitrage department made purchases of Olinkraft stock for its own account. The Second Circuit held that Morgan was not a fiduciary of Olinkraft: "Put bluntly, although, according to the complaint, Olinkraft's management placed its confidence in Morgan Stanley not to disclose the information, Morgan owed no duty to observe that confidence." AlthoughWalton was decided under state law, it has been cited approvingly in a number of federal insider trading opinions. Hence, I believe the cases finding liability based on a mere contractual duty of confidentiality are wrongly decided. ...

The SEC will claim that the Mamma.com CEO was the source of the information and that Cuban owed him a duty of confidentiality arising not out of a traditional fiduciary relationship but rather out of a similar relationship of trust and confidence. The SEC will then rely on Rule 10b5-2, which provides "a nonexclusive list of three situations in which a person has a duty of trust or confidence for purposes of the 'misappropriation' theory...." Crucially, the Rule purports that such a duty exists whenever someone agrees to maintain information in confidence. Rule 10b5-2's imposition of liability whenever someone agrees to maintain information in confidence is inconsistent with the emphasis in Chiarella and its progeny on the need for a duty of disclosure that arises out of a relationship of trust and confidence. Whether the SEC has authority to create a rule imposing misappropriation liability on the basis of an arms-length contractual duty of confidentiality--as opposed to a fiduciary duty-based duty of confidentiality--has not been tested. For the reasons stated above, however, I think the SEC lacked authority to adopt the rule.

Contra the otherwise estimable Mr. Roberts, I thus believe that to the extent Rule 10b5-2 imposes liability on the basis of a mere agreement rather than a fiduciary relationship the rule is invalid, improper, an a gross abuse of the SEC's discretion.

Business Law Professors on Twitter

Haskell Murray has a list.

I stand corrected re SEC v. Mark Cuban

I got an email from one of Mark Cuban's lawyers in regard to this post about the upshot of the Cuban case. In pertinent part, it reads:

In the Cuban case, the district court invalidated Rule 10b5-2 in its motion to dismiss decision.

 

“Because Rule 10b5-2(b)(1) attempts to predicate misappropriation theory liability on a mere confidentiality agreement lacking a non-use component, the SEC cannot rely on it to establish Cuban’s liability under the misappropriation theory.  To permit liability based on Rule 10b5-2(b)(1) would exceed the SEC’s Sec. 10(b) authority to proscribe conduct that is deceptive.”  SEC v. Cuban, 634 F.Supp.2d 713, 730-31 (N.D. Tex. 2009).

 

On appeal, the Fifth Circuit did not disturb that holding.

 

“Given the paucity of jurisprudence on the question of what constitutes a relationship of ‘trust and confidence’ and the inherently fact-bound nature of determining whether such a duty exists, we decline to first determine or place our thumb on the scale in the district court's determination of its presence or to now draw the contours of any liability it might bring, including the force of Rule 10b5-2(b)(1).  FN40.  FN40: Nor must we reach the validity of Rule 10b5-2(b)(1).”  SEC v. Cuban, 620 F.3d 551, 558 (5^th Cir. 2010).

 

Accordingly, at trial, the SEC was required to prove (contra Rule 10b5-2) that Mr. Cuban entered into an agreement to BOTH keep the information confidential AND not trade on or otherwise use the information for his own benefit.  The jury found that he did NOT enter into any such agreement (in addition to finding that the information Mr. Cuban received was not material, nonpublic information).

 

To that extent, I think it is more accurate to say that Mr. Cuban did, at least in part, “beat his insider trading charges by having a court rule that SEC Rule 10b5-2 was invalid.”  At the moment, of course, that holding does not extend beyond the persuasive value of the district court’s decision, but it’s a start!

Supreme Court grants cert in case that will rethink fraud on the market theory, with yours truly on amicus brief

Lyle Denniston:

The Supreme Court agreed on Friday to reconsider a 1988 decision that has been the key to investors’ right to sue when they lose money because of securities fraud — the ruling in Basic Inc. v. Levinson.  That is the main issue in Halliburton Co. v. Erica P. John Fund, Inc. — a case that was before the Court two years ago.

The Court’s decision in the Basic Inc. case a quarter-century ago laid down the rule that a group of investors who claim that they lost money because of distorted information about a stock need not show that they had actually relied upon the misinformation.  The Court, relying upon a theory that an efficient stock exchange will reflect all of the information that there is about a given security, said that investors could be presumed to have relied upon the distortions without specific proof that they had done so.  The presumption could be rebutted, though.  The shortcut that investors are allowed to take is known to lawyers and judges as the “fraud-on-the-market” presumption.

Basic Inc. was a four-to-two decision, with only six Justices taking part.  The only two current Justices then on the Court — Justices Anthony M. Kennedy and Antonin Scalia — did not take part in that ruling.  Four of the current Justices, though, have said that, at some point, they would be willing to reconsider the Basic Inc. precedent.

Halliburton Co., locked for years in a lawsuit over investors’ claims that the company put out seriously misleading information that affected the company’s stock price, argued in the new case that the Basic Inc. decision was based upon a flawed economic theory.  The company contended that the presumption of “reliance” was especially misplaced when investors sue in a class-action lawsuit, because it enables them to proceed as a class even without proving that their own losses could be traced to distorted information.

The issues on which the Court granted cert are pretty broad:

(1) Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-themarket theory; and (2) whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

So it could either nix the theory or, if it keeps some version, broaden the ability of defendants to rebut the presumption.

Alison Frankel comments:

Basic’s fraud-on-the-market theory freed securities class action lawyers from having to show that individual shareholders made investment decisions based on fraudulent misrepresentations, permitting the certification of enormous classes of investors. If the justices decide to chuck Basic’s presumption of reliance, it’s hard to imagine how plaintiffs’ lawyers will be able to win certification of securities fraud class actions. As Max Bergerof Bernstein Litowitz Berger & Grossmann said at a securities litigation conference on Tuesday, “I seldom lose sleep at night, but one of the things that keeps me up is what the Supreme Court is going to do in Halliburton. It’s a game changer.”

Well, yes, but ... As Frankel notes, under current law it is virtually impossible to rebut the presumption of reliance. Worse yet, it is trivially easy for plainitffs to establish the presumption under current law. As a result, Basic effectively wrote reliance out of the 10b-5 cause of action, with no basis in the rule or statute for doing so.

In addition, as Frankel notes in quoting former SEC Commissioner Joseph Grundfest, the trial lawyers are  protesting too much:

Grundfest pointed out that even if the court eliminates the presumption of classwide reliance, investors in some cases will still be able to bring class actions under Section 11 of the Securities Act of 1933, which does not require a showing of reliance but holds defendants strictly liable for material misstatements in offering materials. Individual investors with sizeable losses may also still sue for fraud under both state and federal law, as long as they can show that they relied on alleged misrepresentations, Grundfest said. ...

And even if the Supreme Court eliminates its fraud-on-the-market precedent, shareholders can still bring Exchange Act class actions based on allegedly fraudulent omissions, rather than misrepresentations, according to Paul Vizcarrondo of Wachtell, Lipton, Rosen & Katz .... Because the Supreme Court has previously held that shareholders do not have to establish that they relied on such omissions, Vizcarrondo predicted in an interview Friday, plaintiffs’ lawyers will likely try to reframe cases to claim that defendants deliberately failed to disclose material information. So, for instance, instead of arguing that JPMorgan Chase CEO Jamie Dimon misstated the bank’s risk when he called losses from trades by the so-called London Whale “a tempest in a teapot,” shareholder lawyers might argue that JPMorgan officials fraudulently avoided revealing the magnitude of losses by its chief investment office. Plaintiffs’ lawyers, as we all know, are nothing if not resourceful.

Resourceful is one way of putting it. Slick, devious, sneaky, and insatiable also come to mind as apt descriptors.

In any event, I am pleased to be one of the co-signers of an amicus brief signed by a slew of prominent former SEC Commissioners and law professors. The amici are:

• The Honorable Paul S. Atkins served as a Commissioner of the SEC from 2002 to 2008.
• Professor Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at the University of California, Los Angeles School of Law.
• Brian G. Cartwright served as General Counsel of the SEC from 2006 to 2009.
• Richard A. Epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
• Professor Allen Ferrell is the Greenfield Professor of Securities Law at Harvard Law School.
• The Honorable Edward H. Fleischman served as a Commissioner of the SEC from 1986 through 1992.
• The Honorable Joseph A. Grundfest is the W.A. Franke Professor of Law and Business at Stanford Law School and served as a Commissioner of the SEC from 1985 to 1990.Professor M. Todd Henderson is a Professor of Law at the University of Chicago Law School.
• Simon M. Lorne served as General Counsel of the SEC from 1993 through 1996.
• Professor Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School.
• Professor Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School.
• Professor Kenneth E. Scott is the Ralph M. Parsons Professor of Law and Business, Emeritus, at Stanford Law School.
• The Honorable Laura S. Unger served as a Commissioner of the SEC from 1997 through 2002 and as acting Chairman from February to August 2001.
• Andrew N. Vollmer served as Deputy General Counsel of the SEC from 2006 through early 2009. 

A pretty high-powered bunch, eh?

Here's the summary of our argument:

The fraud-on- the-market presumption was, instead, the work of a bare majority of a bare quorum of this Court. A judicially created rule, tacked on to a judicially created right of action, the fraud-on-the-market presumption did not derive from the text, structure, or history of the federal securities laws. Instead, it embodied two raw judicial policy judgments—first, a belief that “[r]equiring proof of individualized reliance” should be dispensed with, so that Section 10(b) plaintiffs could be free to “proceed[] with a class action”; and, second, an acceptance of what were then “[r]ecent empirical studies” supporting the efficient capital markets hypothesis, the theory “that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.” Basic Inc. v. Levinson, 485 U.S. 224, 242, 246 (1988). 

... 

Whatever its merits as an economic theory, the [efficiant capital markets] hypothesis was not designed or intended to be used to prove reliance in securities fraud cases. And twenty-five years on, it has become clear that this expansive theory cannot, as a practical matter, be applied by judges to actual cases. The petition thus correctly contends that the judiciary should not be an arbiter of economic theory, that it is ill-equipped to assess market efficiency, and that these are good and sufficient reasons why Basic should be overruled. On a narrower level, the petition is also right that, if Basic is to be retained, there is a sharp and consequential circuit split over how it applies, a split that by itself requires the attention of this Court.

But there are other reasons why Basic should be constrained, if not overruled. The first that we present below, in contrast to rendering judgments on economic theory and market efficiency, does involve a task that a court of law is particularly well-suited to perform—the application of settled principles of construction to interpret a federal statute. Applying those principles to the Securities Exchange Act makes clear that there is no basis for imposing a presumption of reliance to actions seeking damages under Section 10(b). 

... The rule of Basic has become exactly what the dissent in that case feared—“[a] nonrebuttable presumption of reliance” that “effectively convert[s] Rule 10b–5 into a scheme of investor’s insurance.” Basic, 485 U.S. at 252 (White, J., dissenting; citation and internal quotation marks omitted). The decision to create such “an investor insurance scheme[] should” have—and should still—“come from Congress, and not from the courts.” Id. at 256–57 (White, J. dissenting). 

Is the State Department Insane? Letting Russia Put GPS Stations in US is Nuts

From NYT:

In recent months, the Central Intelligence Agency and the Pentagon have been quietly waging a campaign to stop the State Department from allowing Roscosmos, the Russian space agency, to build about half a dozen of these structures, known as monitor stations, on United States soil, several American officials said.

They fear that these structures could help Russia spy on the United States and improve the precision of Russian weaponry, the officials said. These monitor stations, the Russians contend, would significantly improve the accuracy and reliability of Moscow’s version of the Global Positioning System, the American satellite network that steers guided missiles to their targets and thirsty smartphone users to the nearest Starbucks.

...

For the State Department, permitting Russia to build the stations would help mend the Obama administration’s relationship with the government of President Vladimir V. Putin, now at a nadir because of Moscow’s granting asylum to Mr. Snowden and its backing of President Bashar al-Assad of Syria.

But the C.I.A. and other American spy agencies, as well as the Pentagon, suspect that the monitor stations would give the Russians a foothold on American territory that would sharpen the accuracy of Moscow’s satellite-steered weapons. The stations, they believe, could also give the Russians an opening to snoop on the United States within its borders.

via www.nytimes.com

Is the State Department determined to cut bad deals with all of our strategic competitors? This story on top of the lousy Iranian nuclear deal they want makes one wonder.