ProfessorBainbridge.com

A law school insider trading hypothetical comes to life

A buddy of mine posted this on Facebook:

I was getting a tire replaced this morning at the Firestone in [omitted] and one of the customers was on a conference call on his phone. He was wearing big headphones, so we couldn't hear the folks he was on call with, but he was speaking loudly so I got the gist of the meeting: a merger between two companies, his and someone else's. I heard him say some really odd things that seemed to make no sense but I am no business dude, for all I know the non-sequiturs that flowed from his tongue mean something in the merger world...but they were odd...for the most part I zoned him out, then he said this...

"we don't want to run so fast that we drop the potatoes between the grate."

I get that he's basically saying let's be cautious and steady...but couldn't he have just said that? I lol'd...and he turned down the volume on his voice after that.

I can't wait to use this at the next staff meeting.

Like my friend, I love that expression. But I desperately want him to tell me the name of the company in question. After all, I discuss this very hypothetical in my book Insider Trading Law and Policy:

An instructive case is SEC v. Switzer,[1] which involved Barry Switzer, the well-known former coach of the Oklahoma Sooners and Dallas Cowboys football teams. Phoenix Resources Company was an oil and gas company. One day in 1981, Phoenix’s CEO, George Platt, and his wife attended a track meet to watch their son compete. Coach Switzer was also at the meet, watching his son. Platt and Switzer had known each other for some time. Platt had Oklahoma football season tickets and his company had sponsored Switzer’s television show. Sometime in the afternoon Switzer laid down on a row of bleachers behind the Platts to sunbathe. Platt, purportedly unaware of Switzer’s presence, began telling his wife about a recent business trip to New York. In that conversation, Platt mentioned his desire to dispose of or liquidate Phoenix. Platt further talked about several companies bidding on Phoenix. Platt also mentioned that an announcement of a “possible” liquidation of Phoenix might occur the following Thursday. Switzer overheard this conversation and shortly thereafter bought a substantial number of Phoenix shares and tipped off a number of his friends. Because Switzer was neither an insider nor constructive insider (do you see why?) of Phoenix, the main issue was whether Platt had illegally tipped Switzer.

Per Dirks, the critical issue was whether Platt had violated his fiduciary duty by obtaining an improper personal benefit: “Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider [to his stockholders], there is no derivative breach [by the tippee].”[2] The court found that Platt did not obtain any improper benefit. The court further found that the information was inadvertently (and unbeknownst to Platt) overheard by Switzer. Chatting about business with one’s spouse in a public place may be careless, but it is not a breach of one’s duty of loyalty. Accordingly, as the court explained, “Rule 10b–5 does not bar trading on the basis of information inadvertently revealed by an insider.”[3]

So we could make some fast and perfectly legal money.

 

[1]   590 F. Supp. 756 (W.D.Okla.1984).

[2]   Dirks, 463 U.S. at 662.

[3]   Switzer, 590 F. Supp. at 766.

Delaware Supreme Court oral arguments now stream live

Some of these arguments will be reservation viewing for us corporate law folks:

The Delaware Supreme Court has entered a partnership with the Brooklyn-based technology company Livestream to offer this free service to the public and legal community. On days when the Delaware Supreme Court holds oral arguments in Dover, a live video broadcast of the argument can be viewed at https://livestream.com/DelawareSupremeCourt/. A link to the Court’s live stream is also available through the Delaware Courts website at http://courts.delaware.gov/supreme/

The Justices also hope that, in addition to the benefit to the legal community, that the live broadcast will provide an educational opportunity for students, schools and members of the public interested in learning about the Delaware Courts. ...

The Court will continue to archive video recordings of its non-confidential proceedings on its website for those who are not able to watch the live online broadcast. Recordings of arguments are usually posted within 24 hours.

Rick Garnett on the Garland Nomination

Our friend Rick Garnett has an op-ed on CNBC about the nomination of Merrick Garland to the Supreme Court:

Some have suggested that the Constitution somehow requires or legally obligates the Senate to hold hearings and vote on Judge Garland's nomination. It clearly does not. The president has the power and the right, for his entire presidency, to nominate candidates to fill judicial vacancies; the Senate has the power, in turn, to delay or decline hearings and votes. The federal government created by our Constitution has three different branches, which check and balance each other in various ways. When the branches disagree, more often than not the disagreements are worked out politically, rather than legally. ...

The court has often operated with fewer than nine members many times in our history and, more than a few times, presidents and the Congress have jockeyed, struggled, and contested over vacancies and confirmations. It is understandable that many regret the politicization of the court's membership but it is also understandable, given the role that the court now plays in our democracy, that many people care, a lot, about the court. There can be little doubt that, if the president were a Republican and the Senate were controlled by Democrats, things would proceed similarly to the way they are now. 

Citizens United and Apple: The Inconsistency of the Month

I agree. But I can't help but observe how many of the people who hate Citizens United now think Apple has rights. https://t.co/jVxwhjy8X7

— Stephen Bainbridge (@ProfBainbridge) March 17, 2016

Cory @doctorow hates Citizens United. But suddenly he thinks Apple CORPORATION has rights that must be defended at all costs. Consistent?

— Stephen Bainbridge (@ProfBainbridge) March 17, 2016

Well said. https://t.co/aOzDqYWze4

— Stephen Bainbridge (@ProfBainbridge) March 17, 2016

Zing. https://t.co/B8sXHfrNjl

— Stephen Bainbridge (@ProfBainbridge) March 17, 2016

Why it's interesting that the Newman defendants' suit against their prosecutors wasn't dismissed

David Zaring explains.

Conservatives using the shareholder proposal rule to advance our causes

Ann Lipton's got an example.

Lifting the Veil of Auditor Anonymity

Ann Lipton has an interesting analysis of the pros and cons of the proposal to require auditing firms to disclose the names of engagement partners, and other firms, involved in an audit of a public company.

Social justice warriors don't care about due process, even the law student variety

Brian Leiter takes the UC Berkeley law students to task:

This is really disgraceful for a bunch of alleged adults and lawyers, to call for the firing of a tenured faculty member based on a university investigation and a complaint, the latter of which is obviously not an adequate basis on which to base any conclusions.  I agree that the university investigation should have been sufficient to remove him from his role as the Dean, but the demand that he be fired from Berkeley "in any capacity" is shocking.  (The letter states:  "As long as Choudhry remains at Boalt or the University of California in any capacity, we cannot in good conscience contribute financially to Berkeley Law or to the University."  Ordinarily, everyone would recognize the inappropriateness of alumni making financial threats unless tenured faculty are fired.)

As a law professor in the UC system wrote to me:

Keep in mind we do not know what actually happened.  The Title IX proceeding gives the respondent no procedural rights.  He is not allowed to examine witnesses or to hear their testimony.  Sujit's admission is to violating a policy that did not require a finding that he knew or should have known his conduct was offensive.  The process and findings are confidential because the process is intended to err on the side of the complainant, and to permit quick remediation of the situation.

Was there an offense adequate for the revocation of tenure?  Perhaps, but right now, we have no idea, and the Berkeley law graduates should be embarrassed by their contempt for process and fairness.

Issuer liability for opinions

Alison Frankel has a highly informative column on how the Second Circuit has cabined the Supreme Court's Omnivore decision.

Donald Trump's adding SLAPP suits to his arsenal for silencing critics

Some of Donald Trump's fans--and even staffers--have been getting rough with critics, which obviously is inexcusable. It turns out that Trump's also planning to use SLAPP suits to silence his critics:

Mr. Trump’s saber-rattling toward the media isn’t an idle threat. In 1984, he sued the Chicago Tribune and his chief critic at the paper, Paul Gapp, for $500 million based on an article declaring Mr. Trump’s plan to build the world’s tallest tower as “one of the silliest things anyone could inflict on New York or any other city.” The court ultimately tossed the suit by finding “that the statements contained in the Tribune article [were] expressions of opinion” that enjoyed full First Amendment protection. From the time the suit was filed, Mr. Trump seemed more interested in thumping his detractors than actually recovering damages with a weak legal argument.

For the uninitiated, that type legal action is known as a strategic lawsuit against public participation (SLAPP). A SLAPP uses the legal process as a weapon against free speech. It isn’t designed to assert a claim likely to succeed on the merits. Instead, the plaintiff uses the cost, hassle and reputational damage associated with a lawsuit to force silence, avoid transparency or intimidate a defendant from expressing his views.

...

We’re currently operating under a patchwork of anti-SLAPP laws. Slightly more than a quarter of the states have some form of protection against SLAPPs. The laws serve two basic purposes: Creating a disincentive to file SLAPPs and providing a lower-cost litigation exit for defendants. Some of them, like Texas’ Citizens Participation Act, suspend the costly discovery process until the court rules on the anti-SLAPP motion.

Unfortunately, even those protections are in jeopardy when it comes to federal courts. As a general rule, substantive state laws apply in federal court, but procedural rules do not. Judges serving on both the District of Columbia U.S. Circuit Court of Appeals and the 9th U.S. Circuit Court of Appeals have suggested that state anti-SLAPP laws should be considered procedural prescriptions and ignored by federal courts.

Here at PB.com we are not fans of SLAPP suits and believe that existing laws need to be strengthened at the state level and that a federal anti-SLAPP law is long overdue. Accordingly, we abjure and condemn Trump's plans in this regard (not to mention, of course, the punching stuff too).

Links to earlier posts are embedded in the tweets that follow (use the bit.ly links):

Suing Wine Blog Commenters and Westboro Church https://t.co/JcFxV1mxmF In re @realdonaldtrump's SLAPP suit plans: Bad idea. #BanSLAPPsuits

— Stephen Bainbridge (@ProfBainbridge) March 10, 2016

Memo to @realdonaldtrump SLAPP suits suck. Stick to turning the other cheek. https://t.co/m3SjUtWZqU

— Stephen Bainbridge (@ProfBainbridge) March 10, 2016

Hutchinson versus Strine on Hobby Lobby

Last year Delaware Chief Justice posted an article on the Hobby Lobby case:

This article connects the Supreme Court’s decision in Burwell v. Hobby Lobby to the history of “corporate paternalism.” It details the history of employer efforts to restrict the freedom of employees, and legislative attempts to ensure worker freedom. It also highlights the role of employment in healthcare coverage, and situates the Affordable Care Act’s “minimum essential guarantees” in a historical and global context. The article also discusses how Hobby Lobby combines with the Supreme Court’s earlier decisions in Citizens United and National Federation of Independent Business v. Sebelius to constrain the government’s ability to extend the social safety net, and shows how those decisions put pressure on corporate law itself.

A Job Is Not a Hobby: The Judicial Revival of Corporate Paternalism and Its Problematic Implications (January 26, 2015). Journal of Corporation Law, 2015, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 15-2. Available at SSRN: http://ssrn.com/abstract=2555816 

Harry Hutchinson recently posted a reply, which argues that:

In his recent article, A Job is Not a Hobby: The Judicial Revival of Corporate Paternalism and its Problematic Implications, Judge Leo Strine endeavors to fashion an unbreakable link between the Supreme Court’s recent decision in Burwell v. Hobby Lobby in combination with the Court’s recent corporate law jurisprudence surfacing in Citizens United and the reappearance of “corporate paternalism.” This move ostensibly threaten employee autonomy and positive rights. Advancing a profuse panegyric on the New Deal and later Fair Deal reforms, Strine stoutly defends the quest for “social progress.” He is particularly animated to counter the efforts of employers, such as the respective corporations that participated in the Hobby Lobby decision to pursue a religious accommodation from generally applicable law. Properly appreciated his article raises the vexed question whether corporations — particularly religious corporations — have rights either directly or derivatively when such rights delimit the nation’s social safety net that progressives and liberals have constructed and sustained through novel interpretation of the law. This article also questions the Supreme Court’s understanding of corporate law, which on Strine’s account threatens the return of “wage slavery.”

This essay responds to Strine’s observations and analysis in several ways. After summarizing his argument, this essay ascertains whether Judge Strine’s largely utilitarian calculus eradicates debate or rather sparks it. This inspection is complemented by reconsidering Progressive Era currents, New Deal labor law and the ongoing plight of marginalized individuals and groups despite increasing levels of government intrusion in society grounded in the presumed benefits of reform initiatives. In addition, this response evaluates the possibility that the United States can be defined plausibly as a truly secular society and the implications arising from an answer to this question for purposes of sorting out whether religious exemptions ought to be available for for-profit corporations either within the meaning of the Religious Freedom Restoration Act or within the parameters of the First Amendment. Lastly, I consider whether Supreme Court jurisprudence has reinstituted “corporate paternalism” that somehow transforms corporate law or, alternatively strengthens it. Of particular interest is Strine’s claim that granting corporations statutory or constitutional rights is incompatible with the notion of corporate “separateness,” a claim that may be difficult to square with a robust conception of the theory of the firm grounded in contractarianism and law and economics scholarship. Taken as a whole, Judge Strine’s approach is refracted through a prism supplied by political theorists, constitutional scholars and corporate law scholars. Such an inspection exposes the doubtful provenance of his claims.

Hobby Lobby, Corporate Law, and Unsustainable Liberalism: A Reply to Judge Strine (February 16, 2016). Harvard Journal of Law and Public Policy, Vol. 39, 2016, Forthcoming; George Mason Legal Studies Research Paper No. LS 16-06. Available at SSRN: http://ssrn.com/abstract=2733349

How weak corporate governance contributed to the VW scandal

My friend and law school classmate Charles M. Elson, who runs the University of Delaware's John L. Weinberg Center for Corporate Governance, along with Craig K. Ferrere and Nicholas J. Goossen, have posted a very interesting and important article to SSRN on the ways in which VW's corporate governance contributed to the emissions testing scandal:

Although the primary cause of the emissions scandal at Volkswagen appears to have been misfeasance and malfeasance on a corporate-wide scale, we argue that such a problematic culture existed at Volkswagen because of the composition of the board itself in combination with the unique governance structure known as “co-determination,” that defines many German companies, including VW. There are three major problems from a corporate governance standpoint with the Volkswagen board. First, is the interest-conflicting nature of the dual-class stock held by the dominant shareholding Porsche and Piech families. Second, is the presence of a government as a major shareholder. And third is the organization of its characteristically German “two-tier” board around the principle of co-determination, which mandated significant labor representation. We argue that each of these elements of the VW ownership and governance structure contributed in varying degrees to the board failure of oversight that led to the management decision to evade emissions regulations.

Elson, Charles M. and Ferrere, Craig K. and Goossen, Nicholas J., The Bug at Volkswagen: Lessons in Co-Determination, Ownership, and Board Structure (November 25, 2015). Journal of Applied Corporate Finance, Vol. 27, No. 4, 2015. Available at SSRN: http://ssrn.com/abstract=2737544

They very kindly cited some of my work in the area, including Privately Ordered Participatory Management: An Organizational Failures Analysis (September 1997). Available at SSRN: http://ssrn.com/abstract=38600

Apple shareholders reject liberalized proxy access proposal

Bloomberg story here. Proxy access, of course, has been a frequent subject of interest here at PB.com:

Does proxy access matter? - ProfessorBainbridge.com

www.professorbainbridge.com/.../2016/.../does-proxy-access-matter.html

 

Jan 13, 2016 - I'm not a fan of proxy access. As I wrote in my book Corporate Governance after the Financial Crisis : … because proxy access' effect will be to ...

The case against proxy access for shareholders ...

www.professorbainbridge.com/.../the-case-against-proxy-access-for-shar...

 

Nov 12, 2015 - This challenge to a board prerogative is called proxy access by shareholders to the director nomination process. As a result of amendments to ...

Should proxy access be imposed by the SEC or through ...

www.professorbainbridge.com/.../should-proxy-access-be-imposed-by-t...

 

Aug 4, 2015 - Events surrounding the legal challenge of a 2010 proxy access rule allow us to benchmark the market's expectation of the benefits of ...

Is Proxy Access Inevitable? - ProfessorBainbridge.com

www.professorbainbridge.com/.../2009/.../is-proxy-access-inevitable.htm...

 

Aug 27, 2009 - I've written about proxy access frequently in the past, explaining why I think it's a very bad idea. See, e.g., A Comment on the SEC Shareholder ...

Proxy Access Questions - ProfessorBainbridge.com

www.professorbainbridge.com/.../2014/12/proxy-access-questions.html

 

Dec 4, 2014 - Brian Quinn has a post raising two important questions about proxy access. First, is he right that it is a "laudable goal." Not in my humble ...

Proxy Access Invalidated on APA Grounds ...

www.professorbainbridge.com/.../proxy-access-invalidated-on-apa-grou...

 

Jul 22, 2011 - The DC Circuit has struck down the SEC's proxy access rule. The opinion is here. Here is background from my essay The Corporate ...

Fattoria di Fèlsina Berardenga Chianti Classico Riserva (Tuscany) 2007

I served the 2007 Fèlsina tonight with cheese lasagna, which was probably not a match that encouraged it to show its best, but it was still quite enjoyable. Medium depth ruby color. Good bouquet of cherries, spice, and earth. Ditto the palate. Light to medium body. Short finish. Smooth tannins suggest it's probably at peak (or just past it). Grade: 87

Should TV investment gurus be subject to Labor Department regulation? Not if I were in charge.

There was an important article in today's WSJ about the Labor Department's forthcoming rules under ERISA that will dramatically change how investment advising for IRAs and other retirement vehicles works:

The idea of the regulation, which could be released this month by the Labor Department, seems unobjectionable enough—that brokers would follow a “fiduciary” standard when making investment recommendations. Currently, brokers’ advice only has to be “suitable,” which critics say is a weaker standard that allows the sale of expensive products that eat into returns.

The rule’s opponents, including many in the brokerage industry, say it will increase their costs and make providing investment advice to small-balance retirement accounts less profitable. ...

The rule, provisions of which would be phased in over time, could add costs at industry giants such as Morgan Stanley, which has nearly 16,000 brokers, and Bank of America Corp.’s Merrill Lynch, with more than 14,000. But it is expected to weigh far more heavily on small and midsize firms, which make up the bulk of the industry. ...

Brokerage-industry executives and analysts say the rule is likely to accelerate brokerages’ shift toward fee-based accounts and away from commissions, a trend in which smaller firms generally lag behind their bigger rivals. Smaller firms also tend to have more small accounts that might be uneconomical to serve in a fee model, and they have fewer clients across whom to spread added compliance costs.

This is a classic example of federal government regulation of the stock market and financial services: It screws small business and the middle class, while benefiting the wealthy and the largest firms. (Which leads one to wonder why people like Lucian Bebchuk are so eager for federal regulation of corporate law, but that's an issue for another day.) Because the costs apparently do not scale, the largest brokerage houses will be better able to bear them and wealthy investors will not lose access to professional advice.

But then it gets worse. Forbes reports that:

Popular financial radio show host Dave Ramsey caused a firestorm on Twitter last week when he weighed in against the “fiduciary rule”—the controversial pending Department of Labor regulation that would impose new restrictions on a vast swath of financial professionals who handle IRAs and 401(k) accounts. Yet, Ramsey was only echoing concerns about the costs of the rule already expressed by Members of Congress from both parties. ...

Fittingly, even before Ramsey came out against the rule, one of his critics called for using the rule against Ramsey, supposedly for providing advice said critic deemed harmful to savers. In an October article in LifeHealthPro, an online trade journal for insurance agents and financial advisers, Michael Markey, an insurance agent and owner of Legacy Financial Network, called for Ramsey to “be regulated and to be held accountable” by the government for the opinions he gives to listeners. Markey hailed the Labor Department rule as ushering a new era in which “entertainers like Dave Ramsey can no longer evade the pursuit of regulatory oversight.”

Classic. Markey wants to use regulation to shut down a competitor, which is a primary function of the DC bureaucracy these days.

Experts both for and against the rule I have talked to agree its broad reach could extend to financial media personalities who offer tips to individual audience members, a group that includes not just Ramsey but TV hosts like Suze Orman and Jim Cramer, as well as many other broadcasters who opine on business and investment matters. They would be ensnared by the rule’s broad redefinition of a vast swath of financial professionals as “fiduciaries” and its mandate that these “fiduciaries” only serve the “best interest” of IRA and 401(k) holders.

I admit that I am not an expert on First Amendment law--especially the complexities of commercial speech regulation--but this strikes me as a classic infringement on free speech. But as Forbes notes:

Such limits on financial discussion may seem to violate the First Amendment on its face. But a lawsuit against such restrictions would not be a slam dunk, as this is largely uncharted legal territory. Courts have tread lightly on financial regulation that may harm free speech. In Lowe v. SEC, 472 U.S. 181 (1985), the Supreme Court did strike down a ban by the Securities and Exchange Commission on an investment newsletter published by a convicted felon. But the opinion did not touch upon constitutional issues, as the Court ruled that the law itself – different from the Employee Retirement Income Security Act that governs the Labor Department – applied only to person-to-person, rather than general, advice.

It's these sort of issues that make it so essential to have judges and justices committed to liberty as opposed to being enablers of the nanny state.