Business Law Society

The transaction costs of moving from one city to another have long inhibited the efficiency of labor markets. In times of high unemployment, these costs can slow recovery. To what extent are they attributable to government fees and regulation? Investment News reports that origination and title costs on a $200,000 mortgage average $4,070 nationwide and are $6,183 in New York. Other high cost jurisdictions are no surprise — Washington, D.C., Hawaii, and California — but others — e.g., Texas, Idaho and Utah — have a reputation as low-tax jurisdictions. The lowest-cost states are Arkansas, North Carolina and Indiana. Some claim these costs are increasing because of recent regulatory changes.

What are the components of closing costs? How could they be reduced? For example, what is the utility of a title search and why isn’t it as simple as checking an electronic database? Why do minorities pay higher closing costs, and college graduates pay $1,100 less than those with no college education?

In an article entitled “Candidate of Doom and Gloom,” Barron’s describes presidential candidate Ron Paul’s investment portfolio as a “super bearish bet against the U.S. economy.” It also notes, in connection with Paul’s vote against raising the debt ceiling, that “[i]f the country had defaulted on its debt earlier this month, he likely would have made a bundle.” Paul has invested heavily in gold-mining stocks, presumably a reflection of his fear of the onset of inflation, and mutual funds that bet against major stock indices.

What are investing rules for members of Congress? Are Paul’s investments a conflict of interest — or the sign of a principled policymaker? To the extent that the rules protect against conflicts of interest, do (can) they apply broadly enough to ensure that members do not have a financial interest in the general decline of the U.S. economy? A related issue is the oft-reported prevalence of Congressional staff trading on nonpublic information. What are the rules governing this activity and what should they be?

In 1996, a Delaware Chancery court set forth what has become the corporate law standard for directors’ personal liability in cases involving a failure to exercise adequate compliance oversight. See In Re Caremark International, Inc., Derivatives Litigation. But directors in Caremark were not actually held personally liable. Nor have they been subject to personal liability in most cases applying the Caremark standard (see, e.g., Guttman v. Huang and Stone v. Ritter). Even when courts authorize recovery from directors, indemnification and insurance often will spare them from incurring any actual out-of-pocket payments. In Van Gorkum, the acquiror (Pritzker) covered most if not all of the directors’ personal liability.

Since Caremark, dozens of companies have paid billions in criminal penalties and civil damages arising, in part, from inadequate compliance procedures. Have there been any cases where directors have actually been held personally liable in connection with the oversight failures? Is the emphasis in corporate law on conduct standards for directors consistent with the actual threat of personal liability? Should federal compliance law be the focus instead?

Alison Frankel says on her blog: “At this rate, anyone selling a complex financial instrument should just insist that buyers complete transactions outside of the borders of the United States.” She is describing the effect of a 2010 Supreme Court decision, Morrison v. National Australia Bank, that held that foreign plaintiffs had no cause of action against an American defendant under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Frankel was commenting on the recent dismissal of a case based on Goldman Sachs’ infamous Timberwolf deal that made headlines (see also video below) and provided a major impetus in the Dodd-Frank Act becoming law. Here is Goldman’s Morrison brief, and here is the plaintiffs’ response. In June 2011, the same judge dismissed on Morrison grounds certain SEC claims against Goldman’s Fabrice (“Fab”) Tourre in connection with the same deal (here is the Reuters story). Here’s an article discussing another Morrison dismissal last October.

Is Frankel correct about the impact of Morrison? Congress intended to reverse Morrison as to SEC and DOJ actions in Section 929P of the Dodd-Frank Act, but some critics argue that the statutory text failed to accomplish the task. How do the securities laws need to be amended to accomplish Congress’s purpose?

Mortgage Win for Goldman 7/22/11 (WSJ subscription req’d)
Australian Hedge Fund Takes Goldman Back to Court 10/28/11 (WSJ subscription req’d)

For the third time in 6 years, the U.S. Court of Appeals (DC) has vacated an SEC rule because the agency failed to conduct an adequate cost-benefit analysis. After stymying the SEC’s efforts to reform mutual fund governance (2005 & 2006) and regulate equity-indexed annuities (2008), it has now vacated the SEC’s “proxy access rule,” which required that public companies, under certain circumstances, include on the company’s proxy persons nominated for the board by shareholders owning at least 3% of the company’s voting securities.

What are the standards being applied by the court? Can they be addressed by the SEC? Do requirements that agencies consider efficiency concerns in their rulemaking effectively rule out action based on unquantifiable factors, such as “enhanced confidence in the markets?”

The WSJ  reports (subscription req’d) on a group that has stormed state legislative sessions to warn of mayhem that a pending bill would cause — but it’s not in Wisconsin and does not involve collective bargaining. It is in Florida, and the bill would de-regulate interior designers, thereby exposing Floridians to a pandemic of bad taste. It’s not just the risk of a pink flamingo lampshade in every living room, say designers. For example, the measure would “contribut[e] to 88,000 deaths” from the use of non-bacteria hospital fabrics,” and lead to “prison furniture being turned into weapons and flammable carpets sparking infernos.”

Until 2009, Florida residential interior designers could not describe themselves as “designers,” but only as “decorators” (that had to hurt!). A federal trial court, affirmed on appeal, found that restriction to be unconstitutional as to residential designers, but not as to commercial designers. There has also been interior designer regulation litigation in Connecticut, New Mexico, Oklahoma, and Texas.

The Florida bill is being actively opposed by big hitters including the mighty American Society of Interior Designers and powerful National Kitchen and Bath Association. Have no fear — the Interior Protection Design Council is hard at work fighting this “full-scale assault on design freedom.” If designing the ideal cubicle is not protected regulatory burdens, then is any form of expression truly free? What other forms of artistic expression trigger or should trigger license requirements? Street musicians? Yoga instructors? And how are standards established?

Yoga Studios Defeat State Regulations; ‘Soul of Yoga’ at Stake in Texas Regulation Push

The Stanford Financial fraud that cost investors billions has produced an unusual defendant — twice. Stanford sued the SEC for “unfair, abusive law-enforcement methods and tactics,” but withdraw the claim in March. Investors have sued the SEC under the Federal Tort Claims Act claiming that former SEC attorney Spencer Barasch ignored red flags in failing to take action against Stanford.

Barasch was the enforcement director of the SEC’s Dallas office that examined Stanford four times between 1997 and 2004 and, according the SEC’s inspector general, concluded each time that Stanford’s CD program was a Ponzi scheme or similar operation. The IG found that, after leaving the SEC, Barasch briefly represented Stanford until told by the SEC that this violated ethics rules. Pursuant to section 968 of the Dodd-Frank Act, the GAO is conducting a study on the revolving door at the SEC that is due before July 21 (see below). A “pal” of Barasch’s at the Dallas office was later convicted of penny stock fraud is serving an 8-yer sentence in federal prison.

How is the investors’ claim against the SEC likely to fair? Under what circumstances have private claims against regulators succeeded and are most likely to succeed?

Stanford Investors Sue SEC for Losses

Update: GAO Report: Existing Post-Employment Controls Could be Further Strengthened (7/12/11); Critics slam Finra panel ban plan (7/12/11)

Under free trade agreements, governments surrender national authority to foreign tribunals with respect to disputes regarding not only local private firms, but also the government signatories themselves. The NYT has reported on Pacific Rim’s claim against El Salvador before the World Bank’s International Center for Settlement of Investment Disputes (ICSID) under the Central America Free Trade Agreement. The same tribunal is hearing Exxon’s lawsuit against Venezuela under a bilateral investment treaty (BIT) between Venezuela and the Netherlands. 
 
In neither case is the parent company domiciled in the country that that is party to the applicable treaty. Exxon may have restructured its operations specifically to create a Netherlands entity, but the ICSID rejected Venezuela’s jurisdictional argument that that was an abuse of the treaty system. There are more than a thousand bilateral investment treaties (the U.S. is party to dozens). How would a corporate lawyer incorporate them into general guidance regarding a firm’s optimal corporate structure? It is fair that companies can use corporate structure to trigger or avoid investment treaties, while countries cannot reorganize to do the same?

BusinessWeek reports that the UK is considering reforms that would make it more difficult to take over UK companies. The UK has a liberal reputation in the takeover-law world, especially in comparison with the land of poison pills across the pond. 

One concern is “foreign” companies taking over “UK” companies, although it is not really clear what these terms mean in the takeover context. These terms should relate to some idea of a “national” interest, such as the effect of takeovers on in-country jobs. A foreign takeover of a company is generally associated with layoffs at the target firm, so strong labor might equate to a strong anti-takeover regime. However, the UK has a decidedly stronger union culture than the US, so if that is what defines “national” interest as expressed in takeover laws, why would the UK have more liberal takeover laws in the first place?

Is what makes takeovers a matter of one jursidiction gaining an advantage at the expense of another the change in ownership from UK shareholders to foreign shareholders? If so, then why wouldn’t the advantage depend on whether, for example, UK shareholders of Cadbury received more than their shares were worth when they sold out to Kraft in 2010, rather than the direction of the takeover being the US over the UK? If it’s a truly “global” economy, why does the jurisdictional direction of takeovers matter? What, exactly, are the determinative “national” interests (or national “interest groups”) in the context of takeover laws?

Kraft Plans up to 150 Cadbury Job Cuts

Dozens of state attorneys general are opposing a private class-action settlement with Encore Capital Group, the nation’s largest debt buyer. Encore has reached a proposed agreement to pay $5.7 million to settle claims that it used phony affidavits to collect on debts. In some cases, borrowers ended up jail because of bad paperwork.

One lawyer said that the settlement would complicate state enforcement efforts because there would be nothing “left to go after.” The Mass. AG’s office claimed that the deal would leave Encore free to continue to engage in “wrongful debt-collection practices.” What are their practical concerns? Does legal preclusion apply? Are states’ remedies limited by the terms of private settlements?

The cancellation of the U.S. segment of Facebook’s private offering is having an effect. In an April 6 letter to House Committee on Oversight and Government Reform Chairman Darrell Issa (see March 22 Issa letter), SEC Chairman Mary Schapiro outlined significant reforms to private offering regulation that the staff is considering.

She discussed increasing the number of shareholders that can trigger public reporting under the Exchange Act (currently 500). She also mentioned permitting “crowd-funding,” or the unregulated sales of securities in very small offerings to any investor, subject to a maximum dollar amount (e.g., $100/investor). The SEC recently settled a case with crowd-funders who jumped the gun in raising capital to buy Pabst Beer. What would a crowd-funding rule look like?

Mutual fund shareholders will be interested to learn that the firms they’ve hired to manage their money are no more than “speechwriters.” That was the basis of the Supreme Court’s ruling yesterday that fund managers, who typically control every aspect of a mutual fund’s operation, cannot be held responsible for misrepresentations in a fund’s prospectus. This is the same court that in a 2010 decision restated its longstanding position that the fund manager exercises de facto control over its funds.

Where does this leave fund shareholders who buy shares, for example, of a conservative bond fund (according to the prospectus) that invests primarily in risky stocks? Whom does the law hold responsible for fraudulent prospectuses?

Law school is a business and an overdue subject for a BLS post. So why not start with a lawsuit against a law school? An unemployed, enterprising graduate of Thomas Jefferson Law School has filed a class action her alma mater, claiming that the school distributed misleading employment data.

The complaint seems to have some teeth and the support, of course, of website lawschooltransparency.com, but it is more of an indictment of the industry than of TJLS and draws heavily on a recent NYT article, Is Law School a Losing Game? (This article was a handout at the inaugural meeting of the BLS; every law student should read it.)

One problem for the plaintiff may be that a Kaplan study found that only 8% of law school applicants named placement success as the most critical factor in choosing a school, with law school ranking claiming the #1 spot at 30%. But placement stats are often a component of ranking formulas, and they may be among the easiest to fudge, so the stats still matter. TJLS may point to the 24% who name location as the most critical factor, with that number probably being significantly higher for a school (like TJLS) located in San Diego.

Will Villanova Law School, which admitted knowingly falsifying employment data, be the next defendant? Or if the entire reporting system is corrupt, why not bring a class action against all law schools? According to law professor Paul Campos, “All law schools inflate their employment rates” (see video below). What advice would you give a law school about distributing placement information?

Latest Job Data from NALP Confirm that Class of 2010 is Lost

Updates: Could Thomas Jefferson School of Law Actually Lose? (6/17/2011); Thomas Cooley Sues A Law Firm And Four ‘John Does’ On the Internet For Defamation (7/15/11) (WSJ subscription req’d)

Inteview with law professor Paul Campos about his article on law schools’ inflated employment data: