Business Law Society

Does Regulation Drive High Closing Costs?

Mercer Bullard — Mon, 29 Aug 2011 16:59:51 +0000

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?

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Do Corporations Pay Fines to Protect their CEOs?

Mercer Bullard — Sat, 27 Aug 2011 12:14:18 +0000

When Google settled a probe into its carrying ads for unlicensed pharmacies for $500 million, was part of the payment made to protect its CEO? The Rhode Island U.S. Attorney prosecuting the case, Peter Neronha, said that Google CEO Larry Page “knew what was going on.” The WSJ reports that Google executives had previously stated (WSJ sub. req’d) that Google had stopped running the ads, including in Congressional testimony by former executives Sheryl Sandberg, now Facebook’s COO, and Andrew McLaughlin, who later as President Obama’s Deputy U.S. Chief Technology Officer was reprimanded for inappropriate Google contacts. Neronha described Google’s actions as reflecting a “corporate decision to engage in this conduct,” rather than the actions of “two or three rogue employees.” Nonetheless, he indicated that no individual charges would be brought (WSJ sub. req’d), raising the question as to how much of the settlement might have been attributable to a deal under which Page would not be charged.

There have been many complaints that individual executives have been let off the hook in connection with the financial crisis. How many of those executives worked for firms that paid large settlements? How often has the DOJ announced the settlements while also indicating that individual charges would not be brought? And how often does the DOJ agree in a settlement not to release emails implicating a CEO and then explicitly cite “documents we reviewed” as proof of the CEO’s knowledge?

See video alleging Google is still carrying illegal ads two days after settlement:

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Do U.S. Politicians Invest in America?

Mercer Bullard — Thu, 25 Aug 2011 11:16:12 +0000

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?

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Can You Trust Bank Disclosure?

Mercer Bullard — Tue, 23 Aug 2011 19:54:33 +0000

Bloomberg reports that, in March, the Federal Reserve released a trove of materials that revealed more than $1 trillion in secret lending to banks during the financial crisis. Banks did not disclose these loans at the same time that they were touting strong balance sheets, which raises the question of what securities law disclosure requirements applied to this information. The tension between banking regulation’s safety and soundness focus and securities regulation’s full disclosure goal is a longstanding one. The Fed opposed the release of the information in part because it would stigmatize the banks and hurt their stock price — which is exactly how full disclosure is supposed to work. The Fed was also worried about triggering a run on the banks, which is a different matter.

Exactly why were banks not required to disclose this information under the federal securities laws (or were they)? Could they have hidden the information indefinitely, as the Fed argued should be allowed? What should investors in banks know about information that banks may be keeping from them?

Update: Morgan Stanley Speculating to Brink of Collapse Got $107 Billion From Fed (8/28/11)

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Is Corporate Director Liability Real?

Mercer Bullard — Fri, 19 Aug 2011 19:37:34 +0000

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?

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Debt Collection from the Deceased

Mercer Bullard — Mon, 15 Aug 2011 21:20:10 +0000

TheStreet.com reports that the FTC has loosened its interpretation of debt collection laws to allow collectors to contact not just a deceased debtor’s spouse, but also his or her friends or anyone else who might know who was handling the estate. The new policy ”encourages” — but does not require — debt collectors to make a good faith effort to do record searches, such as calling the probate court where the deceased resided before calling anyone the deceased knew to point out that he or she had “outstanding bills.” (The FTC believes that the term “bills” lack the stigma of “debts,” but what difference does it make.) The FTC rejected requests to impose a cooling-off period to prevent debt collection calls to family members immediately following the death.

The Consumer Financial Protection Bureau — newly created by the Dodd-Frank Act — has the authority to enact rules under the Fair Debt Collection Practices Act. What steps should it take to codify, or strengthen or weaken, FTC interpretations of the law?

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Exporting Fraud Under Morrison?

Mercer Bullard — Thu, 11 Aug 2011 19:47:20 +0000

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)

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Expert Networks & Insider Trading

Mercer Bullard — Wed, 27 Jul 2011 21:50:46 +0000

A number of individuals have been convicted of, or entered guilty pleas to insider trading in connection with their work for expert networks. Expert networks connect firms that seek a better understanding of particular business issues with experts in specialized areas. The experts may be employed by firms that give them access to material nonpublic information, and clients of expert network firms have used that information to make profitable trades. One tipster named Winnie (called the “Poohster” by traders for leading them to a pot honey) received Cheesecake Factory gift certificates and lobster shipments, in addition to hundreds of thousands of dollars. Some have raised questions about whether cooperating witnesses have entrapped expert network consultants into disclosing inside information.

What lapses in corporate policies, if any, have enabled these relationships to flourish? Can corporations allow employees to consult for expert networks without creating too great a compliance risk? At what point does a trading firm’s use of experts reflect a bona fide piecing together of disparate information as opposed to a mosaic of material, nonpublic sources?

Update: SEC Reaffirms Expert Networks Okay (3/23/11)

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Is SEC’s Cost-Benefit Analysis Lacking?

Mercer Bullard — Sun, 24 Jul 2011 22:37:33 +0000

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?”

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Debt Collectors and Forum Shopping

Mercer Bullard — Mon, 18 Jul 2011 23:05:28 +0000

“I’m pretty much the insurance company judge,” says Judge A. Douglas Stephens, a self-described “Renaissance redneck” who wears a gun strapped to his ankle when sitting on the bench. MarketWatch reports that debt collectors are successfully forum-shopping for judges who will give them wide leeway to recover against small debtors’ assets. Small differences in the hospitability of courts to collectors can have a significant impact on the value of debts, which sell at large discounts. Small debts sell for only 2 cents on the dollar in Texas — a less hospitable forum — compared with 7 cents in Indiana (where Judge Stephens hangs his robes). Some townships impose filing fees that may create an incentive for courts to accommodate plaintiffs’ forum shopping. In one instance, the Pennsylvania AG alleged that debt collectors took forum shopping a bit too far by setting up a fake courtroom (see video). Can the price of small debts be tied empirically to characteristics of local courts?

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