Ideoblog

The Ring of Brodgar

The Ring of Brodgar
Originally uploaded by jo mclure

I'm headed here tomorrow (June 27) (do you know where that is?) for a couple of weeks. Blogging will be light to non-existent. Happy 4th of July!

The effect of Heller

I haven’t read Heller, but I did read the WSJ Law Blog, and found out that while there is now no law against owning or buying a gun in DC, there’s a problem: There are no gun stores in DC, new ones are likely to be kept out by zoning, and DC residents can’t buy guns in other states. But if you now live in a state that allows guns, like VA, you can buy it there and, post-Heller, bring it into the District without disassembling it.

Of course most people aren’t going to move to DC just because this would allow them to bring a gun in. Unless, of course, you really want to bring a gun in. I can just see defenseless Washingtonians hiding out from all those gun-slinging Virginians.  Sort of gives new meaning to the expression: if guns are outlawed, only outlaws will have guns. Then again, I guess outlaws don’t usually have legal guns anyway.

Or maybe outlaws will be less likely to rob people who just moved to DC.  Or maybe they will be more likely to in order to find a gun.

Ok, back to work. . . .

A former prosecutor looks at Enron and Bear

Writing in the WSJ, Robert Mintz, now gone over to the other side, says of the Bear hedge fund indictments,

[t]his is not Enron, where executives were charged and ultimately convicted of cooking the books* * * [L]ike all indictments, [it] benefits from the wisdom of 20/20 hindsight. We all know how the story ends, and it isn't pretty. But these two hedge fund managers were not alone in reaping huge profits for years from the subprime market. Nor were they alone in understanding the fundamentally risky nature of investments that relied so heavily on the misguided expectation of perpetual real estate appreciation. * * * Lying to the investing public is a serious breach that cannot be condoned if we are to maintain the integrity of our markets * * * But it is all too tempting for the government to ride in after a colossal collapse that many should have seen coming and look for someone to blame, when clearly there's plenty of blame to go around.

Ah, but it is Enron. 

New York C of A affirms on Grasso

Here and here are my earlier posts on the lower court decision and the pending Court of Appeal decision. 

This is going to make it very hard for NY to prevail against Grasso, since it will have to prove not only that the pay approved by a sophisticated board was illegal, but that Grasso knew it was and that he was wrong to accept it.  Depositions in the case would seem to indicate this will be all but impossible.

Illinois sues Countrywide

Illinois attorney general Lisa Madigan is suing Countrywide for engaging in “unfair and deceptive practices” in making mortgage loans. "We’ll get unbelievable publicity from being the first state to sue Countrywide, and we want the people to think that we are doing something about their economic problems,” Madigan said.

The complaint will charge that Countrywide failed to disclose to borrowers that they didn’t have a lot of money. The problem was compounded by the fact that Countrywide was allegedly making profits from loaning money even if the money was not repaid. The complaint also will allege that the company actually gave incentives to its employees for increasing these profits by selling more mortgages.

The state is also suing Countrywide’s chief executive, Angelo Mozilo, who is “very famous,” Madigan commented.

Or at least that's the gist of the story.

SOX and investor over-confidence

Yesterday I pointed to a post about a survey showing that executives still thought that SOX was burdensome yet had done nothing to improve ethical standards. Dealbreaker’s John Carney points to the same survey, and adds that it indicates executives nevertheless thought SOX had improved investor confidence. Carney says:

if the executives are right, this means investors have been lulled into a false sense of confidence by the law. We've said before that the ideology of Investor Confidence is dangerous: it can lead to policies intended to instill an unwarranted confidence in the stock market. This divergence between effect on ethics and effect on confidence is good reminder that you can't spell "Investor Confidence" with a "con." Who says you can't put lipstick on a pig?

I made a similar observation six years ago in my initial article about SOX (SSRN version).  In the final version, (28 J. Corp. L. at 31-32) I point out that (footnotes omitted)

even if lack of confidence is keeping investors out of the market, it is not clear that regulation should bring them back in unless it actually justifies greater confidence. The Sarbanes-Oxley Act may justify little confidence because it makes only incremental changes in prior law. Corporate frauds arguably were facilitated because there was too much investor confidence, as indicated by investors’ willingness to ignore what the market knew about questionable accounting and to not question firms’ extravagant claims about unproven business plans. Overselling regulation might perpetuate this misjudgment and mislead investors back into the same complacency that contributed to the recent frauds.

Welcome to Flight 666

Passengers are welcome to United-Continental-Delta’s 5 p.m. Flight 666 to Chicago's O'Hare International Airport. Our boarding process is expected to begin at 6:30. Until then, please listen to these important announcements.

To better serve you, UCD’s Star Quality class service on this plane has been configured for UCD's new "aisle-free" flying. After the doors close, there will be no cabin service to these seats and customers may not move around the cabin or use the restrooms reserved for UCD’s prestige-class customers. Adult diapers are for sale as you board the plane.

The boarding pass you obtained at check-in indicates your seat size. Passengers with an S on their boarding passes will board first and occupy the standard-size seats at the back of the airplane. Passengers with an EXL on their boarding passes will board second and occupy the plus-sized seats at the front of the Star Quality section.

Remember that these seats have been especially sized for your comfort. Customers with S boarding passes have not paid for and may not occupy EXL seats.

Because there is no room in or under seats and there are no overhead compartments, all hand carried items including purses, cameras, briefcases and books have been tagged and will be available to be picked up at the end of the flight. When you board, please have your hands above your heads so that attendants may determine if any additional items need to be tagged and checked.

Entertainment is available on the screen on the seatback in front of you. Our entertainment partners will provide you with previews of their latest shows and films. The sound is brought to you through our state of the art speakers in the ceiling of the aircraft. You may not adjust the picture or sound, but you are always free to look out our vista-view windows.

Boarding will begin soon. Welcome to the friendly skies!

WLF on criminalizing business

I've often discussed the problems of what I call criminalizing agency costs.  But this is only a part of a broader trend, as the Washington Legal Foundation documents in a report, available on its home page.  Here's a description:

[The report] meticulously documents how our federal government has criminalized the conduct of free enterprise in America. Special Report: Federal Erosion of Business Civil Liberties offers readers analysis, case studies, references, and policy recommendations in seven key areas that have fueled the criminalization trend. Those seven topics or chapters are (1) Mens Rea, Public Welfare Offenses, and the Responsible Corporate Officer Doctrine; (2) Environmental Protection Agency Criminal Enforcement Policies; (3) Department of Justice Prosecution Policies; (4) Attorney-Client and Work Product Privileges; (5) Parallel Civil and Criminal Prosecution; (6) Deferred Prosecution and Non-Prosecution Agreements; and (7) U.S. Sentencing Guidelines. The report features a foreword by The Honorable Dick Thornburgh, former Attorney General of the United States.

Have CEOs adjusted to SOX?

Uh, no. 

Will Skilling walk?

Some commentators see this happening, via a Fifth Circuit decision that might be issued this week. See this Financial Week article (HT Sox First). 

Of course these sources see such a development with the standard media-conditioned trepidation.  But I first asked the title question two and a half years ago, before the conviction, and most recently in the wake of reports of prosecutorial misconduct (see Tom Kirkendall). 

The forthcoming decision will indicate whether a big part of Enron's enduring legacy is prosecutorial excess.

America's finest news source

The title of this post is, of course, The Onion’s tagline, and I won’t argue with this. It’s certainly not the LA Times, by the evidence of the Kozinski so-called scandal.

The LAT played into the “litigation strategy” of a litigious Beverly Hills lawyer, who accessed Judge Kozinski’s computer’s pile of humorous off-color material. Gordon Crovitz writes today in the WSJ that the case “showed how easily privacy is breached online, how mainstream media botch a story, and how bloggers can redeem journalism by reporting facts.”

Specifically, Kozinski’s wife used a blog to publish a defense of the judge. As Crovitz says, within a week “citizen-journalist bloggers establish[ed] this as a nonscandal.” (Not least among these blogs was Overlawyered.)

This “redemption” of the mainstream media by bloggers might surprise some who still think of bloggers as an excrescence on the “legitimate” press. But this is part of the important work blogs do. I’ve written in my article on blogging that blogs' accuracy-increasing function “is comparable to the market efficiency function of securities analysts. . . Blogs ironically may actually increase the value of at least some conventional media sources.” In other words, sources like the LAT have value because lots of people read them, including bloggers, who correct them.

Of course there may come a point at which a particular msm source becomes so inaccurate that nobody will bother to read it in the first place, including bloggers. That may happen to the LAT, but hopefully not to The Onion.

The Third Year

On the third minute of the third hour of the third day God made the third year of law school. And God saw that it was good.

But then a heathen from the Northwestern part of the world looked upon the third year and banished it, or at least squeezed the three years into two. The Tribune spread the word across the land.

And the deacons of the faith, hearing of this horror, gaped in despair. "Irresponsible," cried one to the Tribune.

Perhaps the critics did not notice that the Northwestern heathen had actually added important content: Required courses in quantitative reasoning, covering accounting, finance and statistics, and teaching how to deliver legal services, including teaching teamwork, social networks, project management – all skills lawyers need.

Also, the program selects students with work experience for the program. This, plus the students' willingness to take on a more difficult task helps send a signal to future employers.

And even if the Northwestern heathen charges a full three years' tuition, the program reduces the effective cost of a legal education by enabling students to get a several-month head start on earning a lawyer's income.

So other voices could be heard in defense of the heathen. "Other schools are likely to follow," said GMU dean Dan Polsby to the Tribune. "I heartily endorse these changes. Well done, Northwestern!" cheered Gordon Smith.

Now some students will choose the traditional route, either because the two-year program is too hard, or because they don't want to miss the standard hiring cycle.

So this is simply an experiment.  Will it work?

"What about relying on the market to answer this question?" asks Bill Henderson.

Amen.

More on the Bear indictments

New details are emerging in the forthcoming Bear hedge fund indictments. The WSJ says the government will rely heavily on an email from hedge fund manager Tannin to co-manager Cioffi that their fund was "toast."

Cioffi and another colleague later persuaded Tannin he was overreacting, that the funds were expecting new financing, and that markets were, after all, unpredictable. In hindsight, of course, Cioffi was wrong. But is this sort of second-guessing really the stuff of a criminal indictment? Tannin and Cioffi made a business judgment.  Do we really want business people -- whether at funds or companies -- always to err on the side of pessimism in this situation?

The WSJ article also suggests that investors were well aware of the peril and were demanding their money back. Precisely at what point did the undisclosed facts (vs. defendants' subjective beliefs) rise to materiality here? Again, should years in jail turn on these distinctions?

And it's not that the defendants would get off scot free if they weren't indicted. The WSJ says that the SEC is planning civil fraud charges against Cioffi and Tannin. And surely there will be private actions.

But this subtle stuff is for the boring trial somewhere down the road. What really matters for now is the impression on the public. According to the WSJ:

Prosecutors in Brooklyn are expected to hold a news conference to announce the criminal charges, and to publicly escort Messrs. Cioffi and Tannin to the Brooklyn federal court house, say people familiar with the matter.

Ah yes, the famous perp walk.  This should convince the people that we're really doing something about the credit markets, etc. 

And let's keep in mind that there's more at stake here than the defendants' freedom. Dealbreaker  reports on where the Enron Task Force is now:

Kathryn Ruemmler, John Hueston, and Cliff Stricklin took partnership offers at top firms in DC, LA, and Denver, respectively. Sam Buell opted for the ivory tower instead and teaches at The University of Texas law school. Matthew Friedrich now heads the Criminal Division at DOJ after serving as special counsel to Attorney General Al Gonzalez, while his former colleague, Lisa Monaco, was first special counsel and now Chief of Staff to FBI Director Robert Mueller. Andrew Weissman, the second director to head up the Task Force, was also special counsel to Mueller and is now a partner at Jenner & Block's New York office. Leslie Caldwell, the previous director, is presently co-chair of the White Collar Practice at Morgan, Lewis & Brockius. Ben Campbell is the US Attorney for the Eastern District of New York. John Kroger won the Democratic primary for Oregon's Attorney General race and followed this up by winning the Republican primary as a write-in candidate. Sean Berkowitz, the third and last director of the Task Force, joined Latham & Watkins as a partner immediately after the disbandment, then successfully wooed Bethany McLean and ensured a lifetime of good press coverage (plus a table at the Waverly Inn).

Frank Lucas, businessman

Frank Lucas is just an ordinary businessman. He's nice to his mom and his brothers, and a real gentleman to his girlfriend. Best of all, he takes care of his customers -- sells the best stuff, and undercuts the competition because he buys direct. See Frank cutting business deals, playing hardball with competitors, doing all that typical business stuff.

Like your typical businessman, he's oblivious to the problems caused by his product (cut from Frank living the good life to customers dying). The product happens to be heroin, but, hey, could be any product, right?

At least that seems to be this film's message. Yet another anti-capitalist message brought to you by the film industry.

For other examples, see my Wall Street & Vine (which has a section on films that compare criminals with business people, often favorably).

Down with LLC derivative suits

My paper for the Suffolk conference is now on SSRN: Reforming Limited Liability Company Fiduciary Litigation.  Here's the abstract:

Derivative suits are designed for publicly held corporations. In limited liability companies, the remedy creates significant costs and complications. These costs are unnecessary because more appropriate remedies -- member-authorized and direct suits -- are available. The application of the derivative remedy to LLCs is an example of lawmakers’ applying rules across business entities without adequately thinking through which rules belong in a coherent business association statute.

Any questions?

The Enronization of Bear

The government is considering criminal charges against Bear hedge fund managers Ralph Cioffi and Matthew Tannin for being overly optimistic about the health of their funds (WSJ).

As Tom K has pointed out (and see my post on this) this scenario was shades of Enron – the swift collapse of a trust-based business. Here the “truth” may be particularly elusive. What in retrospect seems to be appropriate pessimism might have caused an unnecessary bank run. This sort of case is suited for a civil fraud claim, but not a criminal case. Note, too, that the sophisticated hedge fund investors were a far cry from the public investors and employees imperiled in Enron.

Of course what’s really happening here is that the hedge fund managers are taking the fall for the collapse of Bear, and the even broader reverberations from that, including the controversial merger, the bailout and the credit markets’ woes.

As with Enron, the public is screaming for action.  When in doubt, throw somebody in jail. The public will eventually calm down, by which time the now impoverished defendants will be in jail or being exonerated on appeal.

Beyond the politics there is the gross unfairness of the corporate crime lottery. Wrongful misrepresentations of this sort usually land you in a civil case. But if you stumble into a national disaster you end up in jail.

The hedge fund managers also had the bad luck of their chosen line of work, as distinguished, say, from being corporate executives. Remember that Bear’s Alan Schwartz said on the eve of the collapse “we don’t see any pressure on our liquidity, let alone a liquidity crisis.” He's lucky that he didn't head up a hedge fund, or that he wasn't Lay or Skilling. As I've often said, Steve Jobs was a beneficiary of this sort of calculus in the backdating fuss.

Anyway, get ready for another misguided high-profile corporate criminal prosecution.

Insurance and the criminalization of agency costs

Kevin LaCroix points out that the government in responding to Bennett’s sentencing memo in the Refco case opposed leniency partly on the basis that

"rather than limit the impact of his fraud, [Bennett] knowingly accepted millions of dollars from Refco’s directors and officers insurance (the premiums for which, of course, were paid with fraud proceeds) to pay his legal bills, money that Bennett knew he had no right to claim.” The government added in a footnote that Bennett was also aware that in light of the government’s asset forfeiture case “there would be no money left to repay the insurance company upon his conviction. In substance, at the same time that Bennett was supposedly accepting full responsibility for his actions, he was in fact, taking millions of dollars from insurance companies under false pretenses. Notably, Bennett has not offered to cooperate with these civil litigants.”

LaCroix rightly criticizes the principle underlying this position:

Defending against a criminal charge is extraordinarily expensive, and one of the purposes of D&O insurance is to provide for the advancement of post-indictment criminal defense expense. For many criminally accused corporate officials, particularly those whose former company is bankrupt, the D&O insurance may be their only means of defending themselves. An insured forced to rely on this last line of defense should not be have to be concerned that accepting these contractual rights will put them at hazard that it might later be used against them if they ultimately face a criminal sentencing. * * * Bennett may well have known he would never be able to repay the amounts advanced, but I suspect that most criminal defendants know that, if called upon, they too could never hope to repay the amounts advanced in their defense. If awareness of an inability to repay is bar to seeking leniency, the ability to seek leniency would be unavailable to many corporate criminal defendants.

LaCroix adds: 

D&O policies are structured as they are because that is what the marketplace requires for the policies to be commercially competitive. Presumably the carriers believe they are adequately compensated for the risks inherent in the structure.

Essentially the government’s position here is similar to its anti-advances position in KPMG. Obviously defendants who are effectively disabled from defending themselves are more pliable marks for government prosecutors. More fundamentally, as I discussed in connection with KPMG, the government’s position ignores the parties’ contract rights – a problem at the heart of many government efforts to broadly criminalize agency costs.

Goodbye to New York

Tomorrow is farewell to NYC where we've been since last August. It will be hard to live without

• My favorite movie theatre.
• The world's best pizza.
• My morning run along the Hudson, turning around when I saw the lady.
• Looking out the window.
• The subway (stand clear of the closing doors!)
• The cheese.
• The gelato.
• The restaurants (that's going to have to be a whole other post)).
• Broadway (that too).
• Chelsea.
• The park.
• The old buildings.
• The new buildings.
• Shopping.
• Always a poet ready to help.
• Listening to music (especially jazz).
• Finding suprising things in the East Village, Governors Island, Staten Island, the jail,
• The odd pedestrians.
• My neighbors.
• The art museums (especially this one).

Thanks to my hosts at NYU Law who welcomed me and made it all easy.

A few thoughts on LLCs at 20

As I recently reported, Suffolk Law School threw a 20th birthday party for LLCs.  Here's some quick observations from the conference.

First, for those of you who are unconvinced, LLCs are, in fact, a big deal.  For example, Ann Conaway reported on the recent data on Delaware LLCs:  490,000 in all, producing about the same percentage of Delaware's gross revenues as its booming business in big corporations.

Second, LLCs are getting into some very interesting niches.  A good example is non-profits. Bob Keatinge talked about use of LLCs particularly for profit/non-profit partnerships -- firms straddling the line between the profit and non-profit world.  I understand in talking to one of the practitioners in attendance that LLCs are being used to essentially fill the gap left by the states' failure to have separate statutes for charitable and non-charitable non-profits. 

I view this development in LLCs as somewhat ironic. My own theory has been that LLCs and other partnership-type firms actually enhance the profit orientation of firms by enabling more managerial accountability than in corporations. See my Uncorporating the Large Firm. LLCs accomplish this substituting discipline and incentives for monitoring devices such as fiduciary duties.  However, the same ability to modify fiduciary duties lets LLCs accommodate responsibilities to non-owners.  So the non-profit LLC illustrates the dominant characteristic of all unincorporated firms:  flexibility.

Ann Conaway also talked about "series" LLCs -- the device, originated in Delaware, that allows separate entities in one umbrella organization.  This has been considered a rather speculative and niche device -- so arcane that the uniform law commissioners refused to provide for it in the Revised Uniform Limited Liability Company Act.  But did you know that 1% of the 490,000 Delaware LLCs are series LLCs?  5000 firms gets beyond arcane.

All those firms are likely to generate some interesting legal issues.  For example, what do you do with a series that doesn't have a member?  The operating agreement is supposed to allocate all the income, but you can't really allocate to a member-less firm.

The main series question for me is how veil-piercing law applies.  (There was a fair amount of talk at the conference about veil-piercing generally).  This is still an unanswered question. 

I have assumed that a key objective of series provisions was to legislatively clarify that the series are separate and thereby inhibit judicial interference with that separation through veil-piercing.  But I wonder if all of the formalities required to create series don't encourage the courts to pierce when the formalities aren't observed. Or do the provisions in some statutes preventing piercing in LLCs merely for non-compliance with formalities operate to protect series LLCs?  I suppose we'll have to wait for some courts to instruct us.

Finally, there was some discussion in the last panel session about the future of LLCs. The big quesiton is whether abuses of the LLC form might kill the goose that has been laying the golden eggs of flexibility for 20 years. I have expressed my own concerns about abuse of the LLC (see my paper on Reverse Limited Liability).

I've also worried, including in my Uncorporating article linked above, that the spread of the "uncorporation" into the large firm realm might spark an adverse political reaction. I hope not, because I think that's been and promises to be a positive development.

Anyway, there's a lot happening in this realm that, sooner or later, will be big news in the so-called "corporate" world.

A pro-capitalist movie: profits to the people

I’ve written about the anti-capitalist tendency of movies, often in this blog (see my film archive) and in my paper, Wall Street & Vine. Often have I yearned to see a real unvarnished pro-capitalism message in films, rarely has my yearning been fulfilled.

So it’s with great interest that I viewed this clip from the obscure film Home Town Story sent me by a reader.

Now I have to see the film. And as a bonus get a glimpse of the 1951 version of Marilyn Monroe.