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A post-Salman insider trading/tipping personal benefit hypothetical (comments open)

Target CEO Tony Treadwell has become highly stressed as a result of the high pressure merger negotiations and begins seeing a psychologist for therapy. In the course of their sessions, Treadwell discloses confidential information about the merger to his psychologist. Unbeknownst to Treadwell, the psychologist buys Target stock on the basis of that information. Does Treadwell’s conduct constitute an illegal tip under SEC Rule 10b-5?

In Salman v. US, the Supreme Court recently held that:

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit undisclosed trading on inside corporate infor- mation by individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage. ...

These persons also may not tip inside information to others for trading. The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, 463 U. S. 646 (1983), this Court explained that a tippee’s liability for trading on inside information hinges on whether the tip- per breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” ...

Making a gift of inside information to a relative like Michael is little different from trading on the information, obtaining the profits, and doling them out to the trading relative. The tipper benefits either way.

One issue is whether disclosing information to a mental health care provider in order to receive appropriate treatment should be deemed the requisite sort of personal benefit required for a disclosure to be deemed an illegal tip. Your instinct may to say no, because Tony disclosed the information not with the intent of conducting an exchange or of making a gift. But this confuses the personal benefit test with the requirement of scienter. 

Scienter is (probably) required in order for a tipper to be held liable. Scienter requires something more than mere negligence on Tony's part, but all lower courts agree that recklessness--i.e., "conduct that reasonable persons know is unsafe or illegal"--suffices. So if Tony was reckless in making the disclosure, the scienter requirement would be satisfied.

Where an insider discloses information for a corporate purpose, there is no personal benefit (which is why the SEC had to adopt Regulation FD). But here Tony has disclosed the information at least in part for the personal purpose of being restored to good mental health.

In Salman, the Supreme Court blew off these sort of hypotheticals:

It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” 463 U. S., at 664. But there is no need for us to address those difficult cases today, because this case involves “precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.” 792 F. 3d, at 1092 (quoting 463 U. S., at 664).

To which one can only reply, thanks a bunch. That's a big [expletive deleted] help.

So the question remains: Because personal benefit is not limited to a monetary or similar quid pro quo, what is the outer limit of the personal benefit requirement?

Note, by the way, that U.S. v. Willis, 737 F.Supp. 269 (S.D.N.Y.1990) held that a psychologist could be held liable under the misappropriation theory on basically these facts. But I'm concerned with Treadwell's liability as a tipper under the classical theory.

Bill Klein suggests some further complications:

1. Suppose TT knows that the psychologist is an active trader who has in the past traded on information TT has revealed in therapy sessions and has become especially accommodating to TT’s scheduling problems.
2. On the other hand, suppose TT has warned the shrink not to trade on anything revealed in sessions and has tried to avoid revealing anything more than what is necessary therapeutically—but the shrink figures out what the deal is that is causing TT’s anxiety and trades anyhow.

Bonus questions:

1. Suppose you were TT's lawyer. He tells you he is going to the psychologist. What do you tell him about disclosing information to the therapist?
2. Do you think the lawyer (assume he's Target's general counsel) has a duty to go to the board and report that the CEO is so stressed out?

State regulators retaliated against financial adviser for anti-Obama speech

Go here for a very interesting post by my UCLAW colleague Eugene Volokh on a pending SCOTUS case involving a financial adviser who got fired, allegedly due to pressure by state regulators, for making an anti-Obama ad.

My Christmas present to myself. Hope you had a blessed day too.

Sea Smoke Botella Pinot Noir (Sat. Rita Hills) 2008

Christmas dinner was a couple of Rock Cornish game hens pretending they were turkeys with corn bread dressing and the other usual accompaniments. I like Pinot Noir with poultry and Sea Smoke is my favorite Pinot Noir producer (sorry my friends at Foxen, you are a very close second), so the 2008 Botella seemed a likely choice. And it worked out well.

It had thrown enough sediment to justify decanting, which I did about 45 minutes before dinner. A lovely medium ruby with decent legs. Good bouquet of red cherry, raspberry, strawberry, earth, and warm spices. On the palate, it is a delicious and very well balanced wine. Good red fruit character. Very clean. Soft smooth tannins. Oaky vanilla on the finish. Drinking really well now but probably at peak. Grade: 92

Chateau Gruaud-Larose (St. Julien) 1999

Christmas Eve dinner was prime rib roast for which the 1999 Gruaud-Larose made a wonderful match. Despite having thrown a substantial amount of sediment, the wine was still quite a deep ruby. Complex bouquet of blackcurrant, blackberry, cedar, leather, and earth. On the palate, there is still a lot of dark fruit, but also leather, cedar, spice, and earth. Long finish. Well integrated tannins. Perfect balance of alcohol, tannins, and acid. For a wine from a middling vintage, it showed quite well. Grade: 93

Catherine et Pierre Breton Chinon Beaumont 2014

Simple dinner tonight of a grilled flat iron steak with Caesar salad. The Beaumont made a lovely match. Pretty aromas of blueberry and blackberry. On the palate, the wine is well balanced with ideal acidity and smooth tannins to make it a great food wine. Some smoke and earth on the finish add complexity. Hard to resist now but could age in interesting ways. Grade: 89

Realigning the corporation in derivative litigation

In theory, a derivative lawsuit is filed on behalf of the corporation, so logically the corporation should be aligned as a plaintiff. For most purposes tis is largely irrelevant, but it does matter where the suit is filed in federal court on diversity grounds or where defendants seek to remove a case from state to federal court. Keith Paul Bishop discusses the relevant law here.

Rick Garnett on the 2014 “Erroneous Autonomy: The Catholic Case Against Libertarianism” Conference

You will recall that I expressed annoyance with the upcoming “Erroneous Autonomy: The Catholic Case Against Libertarianism" conference to be held at Catholic University. Rick Garnett comments:

The event is co-sponsored, it appears, by the AFL-CIO and that union's President, Richard Trumka, is one of the speakers.  (I'm afraid I was not invited to explain that and why the Church's social teachings regarding the dignity of work and the freedom of association do not, contrary to the suggestions of some, provide support for public-employee unionism as it exists and is practiced in the United States.  Maybe next time.) 

I continue to suspect that the anti-libertarianism campaign of some Catholics who are political progressives often sets up straw men (i.e., attacks as "libertarian" or "Randian" positions that do not depend on or reflect the unsound anthropological premises of philosophical libertarianism). Here's a post I did a little while ago (on the occasion of an earlier CUA conference in this series), that tries to develop this concern.  

The earlier post is well worth a read.

Catholic social thought in a progressive bubble at Catholic University of America

There's going to be a third meeting at Catholic University on "the relationship of Catholicism to libertarianism." As with the others, there are no libertarians (or, indeed, anyone remotely right of center) on the docket. Instead:

There will be three major talks. The first, by Bishop Robert McElroy of San Diego, will examine three faces of erroneous autonomy in the current political climate, and author Thomas Frank will give a presentation of the political landscape from a liberal, and populist, perspective. Cardinal Sean O'Malley of Boston will speak about the dignity of work, and Trumka will give concluding remarks.

McElroy is a progressive unlikely to articulate libertarian or conservative views. Thomas Frank, of course, is a darling of the progressive movement and sharp critic of capitalism. And the Trumka in question is Richard Trumka, president of the AFL-CIO.

One would have hoped that CUA would have included representative voices of pro-capitalist Catholic social thought thinkers such as Michael Novak, Fr. Robert Sirico, or, for that matter, yours truly.

Although I give due assent to the Church's teaching on these issues, I am compelled once again to observe that:

Michael Novak, the preeminent Catholic neoconservative, ... has sometimes been a harsh critic of the Church’s prudential pronouncements on the economy. In Toward a Theology of the Corporation, for example, Novak asserted that Christian theologians tend to be poorly trained in economics and inexperienced with the business world: They “are likely to inherit either a pre-capitalist or a frankly socialist set of ideals about political economy.”[1] Consequently, theologians “are more likely to err in this territory than in most others.”[2]

A persistent error “in this territory” is the tendency towards what Milton Friedman called “the collectivist moral strain” in Catholic social thought.[3] Indeed,  it is fair to assert that some documents in the social teaching more closely resemble “the platforms of European social democratic parties” than Biblical exegesis.[4] Even some of John Paul’s encyclicals have a statist flavor. In Laborem Exercens, for example, his sharp criticism of Marxism is strikingly offset by the statement that “one cannot exclude the socialization, in suitable circumstances, of certain means of production.”[5]

Importantly, however, Novak’s critiques are widely acknowledged as having substantially influenced the current Pope’s encyclicals on the economy,[6] thereby shifting the direction of Catholic social thought.

Strikingly, as is so often the case with progressive Catholic discussions of CST, Laborem Exercens and Centesimus Annus are curiously missing from the lengthy description of the CUA program.

In sum, Catholic social thought is not simply a rehash of the Democratic Party's platform on economic issues, as much as events like the one to be held at CUA would like to claim.

[1] Michael Novak, Toward a Theology of the Corporation 59 (rev. ed.1990).

[2] Id. at 12.

[3] Milton Friedman, Good Ends, Bad Means, in The Catholic Challenge to the American Economy 99 (Thomas M. Gannon ed. 1987).

[4] Robert Benne, The Bishops’ Letter—A Protestant Reading, in The Catholic Challenge to the American Economy 76, 79 (Thomas M. Gannon ed. 1987).

[5] John Paul II, Laborem Exercens ¶ 14, reprinted in Proclaiming Justice & Peace: Papal Documents from Rerum Novarum Through Centesimus Annus 351 (Michael Walsh & Brian Davies eds. 1991).

[6] Edward W. Younkins, Michael Novak’s Portrait of Democratic Capitalism, available at http://www.acton.org/publicat/m_and_m/1999_spr/younkins.html.

Occupational licensing

Occasionally the LA Times stumbles into truth. A case in point is an op-ed they published today on occupational licensing:

Over the past several decades, occupational licensing laws in California – and across the country – have grown dramatically. In the 1950s about 5% of occupations were licensed nationwide. Today, roughly 25% of occupations require a state license, many for poor and middle-income professions, according to a recent White House study.

The Golden State’s occupational licensing laws are stricter than most. In fact, the Institute for Justice ranks California as “the second-most broadly and onerously licensed state.” California is one of seven states to license tree trimmers, one of 10 to license landscape workers, one of two to license still machine setters, one of two to license funeral attendants, and one of nine to license farm labor contractors. ...

On average, Californians seeking an occupational license will pay $300 in fees, lose 549 days to training requirements and have to take an exam. That’s just the average. Some of the burdens are far more cumbersome. For instance, a tree trimmer must complete 1,460 hours of training, pass two exams, and pay $851 in fees; a mobile home installer must also complete 1,460 hours, compared to the national average of 245; and a pharmacy technician must complete 730 hours in addition to meeting educational requirements, a bar that’s only as high in three other states. 

This not just burdens business and impedes job formation, but it contributes substantially to California's high recidivism rate:

Whatever the state’s intentions, however, its onerous licensing laws have the effect of keeping ex-convicts out of licensed occupations. After years behind bars, they don’t have the savings needed to enroll in training programs, much less pay licensing fees. To become a licensed security alarm installer, for instance, an individual must complete 933 hours of training, which can easily cost upwards of $1,200. Many of the training programs, moreover, require a high school degree, which two in five inmates nationwide never obtained, according to a 2003 U.S. Department of Justice study.

To stay out of prison, ex-convicts need a way to provide for themselves legally. With so many barriers to employment, it’s no wonder that states with abundant licensing laws experience a higher recidivism rate.

Analysis of data from the Institute for Justice, the Pew Center on the States and the National Employment Law Project reveals that states with the most burdensome licensing laws saw an average 9% increase in recidivism from 1997 to 2007. On the other hand, the states that had the lowest licensing burdens and no provisions excluding ex-convicts saw an average decline in recidivism by nearly 2.5%. 

On the other end of the law business spectrum, Gillian Hadfield muses on the way occupational licensing for lawyers raises the cost of hiring lawyers and increases the number of people who lack competent representation:

The rules that prohibit the “corporate practice of law” or any “fee-sharing” (otherwise known as profit- and revenue-sharing) with anyone who is not a lawyer–like investors or business managers or software engineers.  A small-scale practice–which is where we find the lawyers who provide services to individuals and small businesses–is hugely inefficient.  Lawyers don’t benefit from that inefficient scale.  But clients pay for it–and mostly, can’t pay for it and so can’t access services.

That’s the irony:  Lots of lawyers are actually willing to provide their legal help to the market in exchange for an average of about $35 an hour.  That deal could be struck with the millions of people who need some legal help and who could pay that price (but not $200 an hour) if the rules let lawyers work for and with the non-lawyer professionals and investors who can get us to the scale and technology needed to generate large-scale access.

New study finds shareholder proposals do not create value, especially those from gadflies

Subject to all the usual qualifiers about empirical work, I note a new study of shareholder activism that suggests it does not creat value and can even be value destroying:

Corporate managers are highly skeptical of shareholder proposals, and often seek to prevent them from coming to a vote. Managers argue that proposals are uninformed or opportunistic, and will destroy firm value. In contrast, governance reformers argue that shareholder proposals are needed to counteract managerial agency problems, and can be used to increase firm value. This study estimates the value consequences of shareholder proposals challenged by managers, using announcement returns from SEC no-action letter decisions. Previous studies have not found a significant market reaction to shareholder proposals, but those studies have been limited by an inability to identify the date at which investors become aware of a proposal. Our new approach is to study a well-defined event date at which the SEC makes an exogenous and arguably unpredictable decision to block or allow a proposal to go forward, allowing estimates that can be interpreted as causal. We find that over the period 2007-2016, the value consequences of shareholder proposals – implied from abnormal returns around SEC no-action letter decision dates – are negative on average, suggesting that investors agree with managers that these proposals are value-destroying. The market's assessment varies across most proposal topics, and investors appear to dislike proposals that would increase the E-Index. Investors are not particularly skeptical of proposals by unions and public pensions, but appear to view proposals by individual "gadfly" shareholders as value-destroying.

Matsusaka, John G. and Ozbas, Oguzhan and Yi, Irene, Why Do Managers Fight Shareholder Proposals? Evidence from No-Action Letter Decisions (December 2016). Available at SSRN: https://ssrn.com/abstract=2881408 

Memo to PEOTUS Trump: Here's how to build a system of apprenticeships to get people back to work

Really interesting paper by Gail Heriot:

A college education is not everyone’s cup of tea. The United States needs other ways to instill job skills in the younger generation. The German apprenticeship system is sometimes viewed as an appealing alternative. But substantially increasing apprenticeship opportunities in the United States may not be as easy or inviting as it sounds. The German model depends for its success on strong unions and professional licensing requirements. Applying the German method to the United States would require huge — and, for some, hugely unpopular — changes to the structure of the economy.

Successfully expanding the availability of apprenticeships in the United States will therefore require real thought. Any American-style apprenticeship model will need to deal effectively with the age-old problem of the “runaway apprentice” — the apprentice who leaves his employer after the employer has invested time and energy in training him, but before the apprentice has been useful enough to make the employer’s investment worthwhile.

In centuries past, the problem was dealt with by jailing runaway apprentices. Today, Germany instead denies them union membership or professional licenses. The dominant solution in the United States has been to try to teach job skills at publicly subsidized educational institutions, so students will emerge already valuable to employers, in theory making apprenticeships unnecessary. But this method has not been a smashing success. This paper discusses various ways to encourage apprenticeships — from ensuring that potential apprentices can borrow money to finance apprenticeships in the way they currently borrow for college (thus allowing the employer to avoid having to pay an apprentice more than he is initially worth) to more elaborate public subsidies and changes in the law.

Heriot, Gail L., Apprenticeships: Useful Alternative, Tough to Implement (November 17, 2016). Cato Institute Policy Analysis No. 805. Available at SSRN: https://ssrn.com/abstract=2877970

 

Limited liability

KEY 2016 TITLE: Limited Liability: A Legal & Economic Analysis by @ProfBainbridge & @ProfHenderson free chapter https://t.co/MtTsfArXQz pic.twitter.com/S799aWYiK9

— Elgar Law (@Elgar_Law) December 16, 2016

Mike Guttentag calls Salman "a Hollow Win for Prosecutors"

Michael Guttentag (Loyola-LA) is one of my favorite corporate law scholars--smart, thoughtful, meticulous. He's got an on point analysis of the recent Salman insider trading/tipping decision up at CLS blog:

The Salman opinion is, however, most notable for how studiously the Court avoids addressing issues related to insider trading law more generally. There are only two footnotes in the opinion, and both are dedicated to clarifying the extent to which it does not address other related topics. Similarly, the opinion uses one paragraph to summarize the Government’s argument that the test for tipper liability should be whether a tip was made for a “noncorporate purpose,” without the additional requirement that the tipper receive a personal benefit. The rest of the opinion ignores the Government’s proposal without explanation.

Another example of this minimalist approach is the Court’s explanation of why it chooses to continue to rely on the Dirks personal benefit test to determine whether there was wrongdoing by the tipper. What little explanation is provided is problematic. The justices cite Dirks for the proposition that a prohibition against insider trading needs to include tipping, “because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” But this rationale suggests that any gift of material nonpublic information should trigger insider trading liability, and   Dirks prohibits only gifts to “a trading relative or friend.” That seems a significant gap in the logic of Dirks, as some commentators have noted.[1] Yet there is no mention of this disconnect in the Salman opinion.

Go read the whole thing. For my take on Salman, see US Supreme Court’s ‘Salman v. US’ Decision Answers One Insider-Trading Question, Leaves Others Unresolved

Boks by Professor Bainbridge make great Christmas gifts