ProfessorBainbridge.com

Yours Truly Quoted in The Motley Fool re the Insider Trading Prohibition Act

From The Motley Fool:

The bill before the Senate would outlaw insiders from trading or tipping in exchange for a "direct or indirect personal benefit." It also states prosecutors don't have to prove a trader knew the info was exchanged for benefit, only that they recklessly ignored its illicit source, thus negating the Newman ruling.

Potential Side Effects: Extensive research is routine for stock traders, and many insider trading cases come down to fuzzy scenarios of analysts seeking an "edge." Distinguished UCLA financial law professor Stephen Bainbridge wrote the proposed legislation could "expand the scope of insider trading in undesirable ways," leading to apprehension among stockbrokers attempting to do legitimate research.

The paper to which he refers is: Bainbridge, Stephen Mark, A Critique of the Insider Trading Prohibition Act of 2021 (June 17, 2021). UCLA School of Law, Law-Econ Research Paper No. 21-08, Available at SSRN: https://ssrn.com/abstract=3869222

To promote Board Diversity States are Rampantly Ignoring the Internal Affairs Doctrine

A guest post on Kevin LaCroix's D&O Diary site reports on the status of board diversity legislation at the state level. Money quote:

While California and Washington are currently the only states with mandatory diversity requirements, nearly all of the bills introduced in state legislatures in 2021 have followed that approach – including Connecticut, Hawaii, Massachusetts, Michigan, New Jersey, and Oregon. Illinois and Maryland require only disclosure of boardroom demographics, but do not mandate any level of board diversity. Colorado and Pennsylvania have non-binding diversity requirements, urging companies to act on their own; Ohio has introduced similar legislation.

Some striking points:

• Maryland's mandatory disclosure statute applies to both for-profit and not-for-profit entities. 
• New York's mandatory disclosure bill applies to both public AND privately held companies authorized to do business in the state.
  • If adopted, Ohio's non-binding resolution urging board diversity also applies to both public and privately held corporations that are "doing business" in the state.
• 9 of the 11 statutes apply not just to companies incorporated in the adopting state but also to companies headquartered in the state
  • As noted, New York applies to any corporation--whether incorporated in New York or not--authorized to do business in the state
  • As noted, Ohio's applies to all companies "doing business" in Ohio, whether incorporated there or not.

All 11 have thus tossed the internal affairs doctrine out the window. As regular readers know, I believe that the internal affairs doctrine is both sound public policy and a constitutional requirement. As such, my view is that all of these statutes are constitutionally suspect.

As always, the wisdom and constitutionality of such statutes if limited to companies incorporated in the adopting state is a matter as to which I have no opinion.

Financial Times cites yours truly on the Insider Trading Prohibition Act of 2021

In today's Financial Times, Sujeet Indap reports on the House passed Insider Trading Prohibition Act of 2021. He quotes yours truly:

Another eminent professor, Stephen Bainbridge of University of California, Los Angeles, wrote in a recent paper that TPA will “expand the scope of insider trading in undesirable ways and introduce new ambiguities”. Bainbridge’s specific concern is that the legislation will chill the work that stock traders do to determine asset prices if that work is more easily prosecuted with the help of a misguided law.

The paper to which he refers is: Bainbridge, Stephen Mark, A Critique of the Insider Trading Prohibition Act of 2021 (June 17, 2021). UCLA School of Law, Law-Econ Research Paper No. 21-08, Available at SSRN: https://ssrn.com/abstract=3869222

Abstract

The Insider Trading Prohibition Act of 2021 has been passed by the House of Representatives and, as of this writing, is awaiting action in the Senate. The Act’s proponents claim that it simply codifies and clarifies existing law. In fact, the Act does neither. It likely will expand the scope of insider trading in undesirable ways and introduce new ambiguities into the law.

The ways in which the Act likely will expand the insider trading prohibition, coupled with the new ambiguities it introduces, threatens the central policy on which the insider trading prohibition rests. The Supreme Court has recognized that the work of market analysts and other investment professionals inherently entails seeking information advantages. In turn, as the Court also recognized, that work is an essential part of maintaining efficient stock markets. By increasing the risk of liability, especially in light of the Draconian penalties associated with insider trading, the Act likely will chill this vital activity, to the detriment of all investors.

When a very similar bill passed the House in the 116th Congress, the legislation died in the Senate. The Insider Trading Prohibition Act of 2021 now awaits Senate action. The Senate would be well advised to let this bill die as well.

Does no one at the SEC listen to Commissioner Hester Pierce? The SEC Progressive Pezzonovante's Moronic Ramping up of ESG Enforcement

The SEC is a financial regulation agency that has two purposes: protecting investors and promoting capital formation. Saving the planet is not a task with which it has been assigned or as to which it has any expertise.

THE SEC HAS NO BUSINESS REGULATING ESG ISSUES, INCLUDING DISCLOSURE ASPECTS.

I posted the other day a link to SEC Commissioner Hester Pierce's incisive and decisive demolition of the arguments in favor of SEC regulation of ESG disclosures. But apparently the progressive pezzonovantes running the SEC have their marching orders from Liz Warren and are going to proceed not just with new rules but with enforcement proceedings:

... the SEC has its eye on “systemically large firms” as part of its inspection work related to environmental, social, and governance issues, he said. Kahl is the deputy director of the agency’s Division of Examinations and is set to become the acting director in August.

The agency’s examiners are interested in getting a readout on firms’ thinking about climate risk for a potential risk alert, he said. Risk alerts highlight problems examiners are seeing and can precede enforcement actions.

SEC Commissioner Hester Pierce's Coherent and Persuasive Deconstruction of the Proposed SEC ESG Disclosure Rulemaking

SEC Commissioner Hester Pierce's analysis of the potential SEC rule making on ESG disclosures is one of the best things I have read on the topic. She advances a number of theses:

• Thesis 1: ESG as a category of topics is ill-suited, and perhaps inherently antithetical, to the establishment of clear boundaries and internal cohesion.
• Thesis 2: Many ESG issues lack a clear tie to financial materiality and therefore do not warrant inclusion in SEC-mandated disclosure.
• Thesis 3: The biggest ESG advocates are not investors, but stakeholders.
• Thesis 4: ESG rulemaking is high-stakes because so many people stand to gain from it.
• Thesis 5: “Good” in ESG is subjective, so writing a rule to highlight the good, the bad, and the ugly will be hard.
• Thesis 6: An ESG rulemaking cannot resolve the many debates around ESG models, methodologies, and metrics.
• Thesis 7: Emotions around ESG issues may push us to write rules outside our area of authority.
• Thesis 8: ESG issues are inherently political, which means that an ESG rulemaking could drag the SEC and issuers into territory that is best left to political and civil society institutions.
• Thesis 9: ESG disclosure requirements may direct capital flows to favored industries in a way that runs counter to our historically agnostic approach.
• Thesis 10: An ESG rulemaking could play a role in undermining financial and economic stability.

10 for 10.

This is a must read for those who labor in this vineyard.

The University of California Vaccination Mandate

The UCLA Faculty Association has a couple of posts up about the UC's vacation mandate:

Details of the UC Vaccination Mandate

There are limited exemptions for religious and other reasons.

UC's Vaccination Mandate - Follow Up

It is possible there may be legal challenges to the mandate, but a recent court decision regarding a similar mandate of Indiana University suggests getting a court to overturn UC's policy may be difficult ....

Keith Paul Bishop Reports on a "New Challenge Filed To California Board Quota Laws"

Here:

Earlier this month, a Texas non-profit membership association filed a complaint in the United States District Court for the Central District (Western Division) of California, Alliance For Fair Board Recruitment v. Weber, Case No. 2:21-cv-05644-RGK-RAO (July 12, 2021).  Unlike an earlier court challenges, this lawsuit takes on both SB 826 and AB 979. ... 

This new challenge differs from the others because it takes on both requirements and argues that both quota requirements are contrary to the "internal affairs doctrine".   The plaintiff asserts:

California's race and gender quota laws expressly apply "to the exclusion" of the laws of the state of incorporation.  Cal. Corp. Code §§ 2115.5(a), 2115.6(a).  In other words, these board laws assert that they override other states' laws governing corporations incorporated in their own states.  Therefore, California's "diversity" laws violate the internal affairs doctrine.

The plaintiff's complaint also differs in that it claims associational standing since it is brought on behalf of an association.  

As regular readers know, I am agnostic on the equal protection claims against these statutes but am in full agreement with plaintiffs that, as drafted, they are unconstitutional under the internal affairs doctrine because they purport to apply the law of a state other than the state of incorporation to an internal affair of that corporation. See Internal Affairs, the California Board Gender Quota Law, and Chin v. CH2M Hill Companies, Ltd.

Ann Lipton on whether Elon Musk Controls Tesla

Recommended read.

Federalist Society CLE Program on Board Diversity Requirements, Featuring Yours Truly

Register here.

Beef Hot Dish

• ½ pound ground beef (not ground sirloin, which is too low in fat)
• 1 tablespoon unsalted butter
• 1 shallot, diced
• 2 cloves garlic, minced
• 1 tablespoon tomato paste
• ½ pound cremini mushrooms, rinsed, trimmed, and diced
• 1 teaspoon dried thyme
• 1 tablespoon Wondra® flour
• 1 package Better than Gravy, Beef Gravy® mix
• 1 cup water
• ½ tablespoon Worcestershire sauce
• ½ cup frozen peas
• ½ cup frozen carrots
• ½ package frozen Ore-Ida tater tots or frozen Ore-Ida diced hash brown potatoes
• ½ cup freshly grated cheddar cheese
• salt and pepper

Preheat oven to 375°.

Brown beef in a large sauté pan over medium-high heat. Transfer to a paper towel-lined plate to drain. Blot pan with paper towel without disturbing any fond that developed.

Reduce heat to medium. Add shallots to the pan and sauté for 1 minute. Add garlic and tomato paste. Sauté an additional 45 seconds.

Add mushrooms and thyme. Season with salt and pepper. Cook until the mushrooms have softened, given up their liquid, and begun to color. Sprinkle with flour.

Whisk together gravy mix, water, and Worcestershire sauce in a small bowl. Add to pan. Return beef to pan. Add frozen peas and carrots to pan. Mix well to combine.

Put the potatoes in a bowl add 1 tablespoon olive oil and salt to taste. Mix.

Raise heat and bring to a boil. Transfer mixture to a lightly greased 8x8 baking dish. Top mixture with cheddar cheese and potatoes.

Transfer to oven and bake until potatoes are golden brown and mixture reads at least 160°. It should take about 25 minutes. If the potatoes don't brown in that time, stick them under the broiler element for 5-10 minutes.

Let cool for 10 minutes before serving.

Choose a pleasant red wine but don't push the boat out too far.

What law applies to veil piercing claims?

Keith Paul Bishop reports:

In an opinion issued last week, U.S. District Court Edward M. Chen ruled that Ohio law applied to an alter ego claim against the members of an Ohio limited liability company.  Greenlight Sys., LLC v. Breckenfelder, 2021 U.S. Dist. LEXIS 120288.   He found support for his ruling in California Corporations Code Section 17708.01 which provides:

(a) The law of the state or other jurisdiction under which a foreign limited liability company is formed governs all of the following:

(1) The organization of the limited liability company, its internal affairs, and the authority of its members and managers.

(2)The liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company.

Bishop goes on to ask why the court ignored "the Court of Appeals' holding in Laborers Clean-Up Contract Admin. Trust Fund v. Uriarte Clean-Up Service, Inc., 736 F.2d 516, 523, (1984): 'In considering whether to disregard the corporate form, we apply federal substantive law, although we may look to state law for guidance.'"

Interesting question.

 

Christianity and Market Regulation has been published, including an essay by yours truly on Christianity and Corporate Purpose

Cambridge University Press has released Christianity and Market Regulation: An Introduction, edited by Daniel A. Crane and Samuel Gregg. 

Historically, the Christian tradition has played an influential role in Western economic thought concerning the regulation of markets, but, with the fracturing of the Christian tradition following the Reformation, the decline of Christian influence in academia, and the increasing specialization of economic analysis, that influence has become increasingly opaque. This volume brings together an interdisciplinary team of prominent academic experts on market regulation from four different continents and various faith traditions to reconsider the impact of Christianity on market regulation. Drawing on law, economics, history, theology, philosophy, and political theory, the authors consider both general questions of market regulation and particular regulatory fields such as bankruptcy, corporate law, and antitrust from a Christian perspective.

My essay, Christianity and Corporate Purpose, is one of 10 essays in the book.

 

My essay critiquing the Insider Trading Prohibition Act of 2021 is up at The Harvard Law School Forum on Corporate Governance

You can read it here.

The Insider Trading Prohibition Act (“Act”) passed the U.S. House of Representatives by a wide bipartisan margin on May 18, 2021, and is now awaiting Senate action. The Act’s proponents claimthat the bill makes only modest changes in the definition of insider trading as it has been developed in the courts, while at the same time creating “a clear definition of insider trading . . . so that there is a codified, consistent standard for courts and market participants.” Unfortunately, the Act neither codifies nor clarifies.

Congratulations to Andrew Verstein on WSJ article re his research

A new research paper co-authored by my friend and UCLAW colleague Andrew Verstein and forthcoming in the Duke Law Journal got a nice write up (albeit without enough Verstein quotes!) in the Wall Street Journal today: Improper ‘Insider Charitable Giving’ Is Widespread, Study Says

The paper is Avci, Sureyya Burcu and Schipani, Cindy A. and Seyhun, H. Nejat and Verstein, Andrew, Insider Giving (February 25, 2021). 71 Duke Law Journal (Forthcoming 2021), UCLA School of Law, Law-Econ Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3795537

Abstract: Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and enforcement. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed. In particular, we show that it is not limited to officers and directors. Large investors appear to regularly receive material non-public information and use it to avoid losses. Using a vast dataset of essentially all transactions in public company stock since 1986, we find consistent and economically significant evidence that these shareholders’ impeccable timing likely reflects information leakage. We also document substantial evidence of backdating – investors falsifying the date of their gift to capture a larger tax break. We show why lax reporting and enforcement encourage insider giving, explain why insider giving represents a policy failure, and highlight the theoretical implications of these findings to broader corporate, securities, and tax debates.