The University of Akron School of Law’s Joseph G. Miller and William C. Becker Center for Professional Responsibility will offer its inaugural Journalism and the Law Lecture titled “Covering the Roberts Court in the Obama Era: A Reporter’s Reflections.” The lecture will be given by Adam Liptak, Supreme Court Correspondent and columnist for The New York Times. The lecture, which is free and open to the public, will be held Tuesday, April 6  at 4 p.m. at The Quaker Square Inn at The University of Akron, 135 South Broadway, Akron, Ohio. One hour of free CLE credit will be offered.

In his presentation, Liptak will discuss the Supreme Court in a time of rapid change. After a decade without new justices in the final years of the Rehnquist Court, the Roberts Court has welcomed three new justices and it may well see a fourth appointment in the near future. Liptak will also consider the leadership of Chief Justice John G. Roberts Jr., the impact of Justice Sonia Sotomayor and the implications for the Court of the fact that it has become, given Democratic control of Congress and the Presidency, the most conservative of the three branches of government.

The lecture is offered free of charge, however registration is required. Click here to register.

I was struck recently by the contrast between individuals discussing the personal moral obligation to keep paying the mortgage on a home that is "under water" (they owe much more to the bank than the home is currently worth) and business advice encapsulated in this New York Times Headline:

Fire Your Relatives. Scare Your Employees. And Stop Whining.

So this business consultant's approach is to be clear-eyed, unsentimental, and focus always on bottom line business principles. In contrast, we have a discussion about consumers strategically defaulting on a home loan, and part of the topic is whether it's morally wrong to do so. Meanwhile, the entire financial system is depending on all of those homeowners continuing to make their payments, feeling bound by more than a clear-eyed, unsentimental focus on bottom line principles. (Last November it was estimated that nearly one in four American homes are underwater.) Here's an analysis by Richard Thaler. Should banks be guided by different principles than people? If so, is that in some way unfair?

Food for thought here.

Here and here.

"I think people need to get past the view that you can't have a successful life without one day owning a home." This from the Atlantic's Business blog, agreeing with Barney Frank's apparent suggestion that the poor should be encouraged to rent, rather than to buy homes. What do you think? Is owning a home part of the American dream that poor people should participate in? I was struck by the point (which I've seen before) that home ownership reduces labor mobility. A lot of people right now can't move to where the jobs are because they are stuck with a house they can't sell.

More here.

I think not.

The fundamental premise of the Court's decision in Citizens United v. FEC is that a corporation should have the same First Amendment rights to engage in political speech as any citizen, because a corporation is simply an "association of citizens" in the "corporate form." I think this is going to lead to the politicization of everyday economic life.

The Court's reasoning that corporate speech is simply the collective speech of individual citizens does ring true for certain non-profit, ideologically-oriented corporations, especially when they are membership-driven. When the NRA or the Sierra Club takes members' dues and uses that money to speak on political issues, they in a rough way are simply amplifying the voices of their members, even if an individual member disagrees with one policy or another advocated by the group. That person can always quit.

BUT I don't think that most stockholders in for-profit corporations think that those corporations represent the stockholders' political views. We expect that corporation to be an economic actor, to be interested in making money, and to be generally agnostic with regard to political matters. They are the subjects of government regulation, not the makers of government regulation. Yes, we understand that our bank probably has a lobbyist that advocates a position with regard to banking regulation, but they aren't representing us in any but the most attenuated way. I suppose there's a sense in which we expect the bank to favor regulation that allows them to make money in the long run, but that could lead them to either support or oppose any particular proposal, depending on their political ideology, and I doubt that many people choose their bank based on its political ideology and attitude towards regulation.

So we tend to think of our market decisions and our political advocacy in different ways. We buy the best or the cheapest pizza without regard to whether the founder of the company and its top executives ardently oppose abortion.  We buy stocks of promising corporations without regard to whether its board of directors believes that global warming is a hoax.

This is of course a false barrier, and always has been. And it has already been breaking down. Recently several companies resigned from the Chamber of Commerce because of its strong political stance in opposition to legislation aimed at climate change. In the last election cycle there were websites rating companies as "blue' or "red" based on the proportion of employee contributions given to one party or the other. Readers were encouraged to support those companies that reflected the readers' political allegiances.

SO NOW the Supreme Court has exposed the connection between our political and economic commitments, and cognitive dissonance is no longer sustainable. The Court is telling us that Wal-Mart's speech is our speech when it works to oppose fair pay rules. That the Teamsters' speech is our speech when it opposes trade agreements. That Citibank speaks for us when it fights against banking regulation.

I don't see how I can now avoid making political calculations with regard to my investments and purchases. No, I won't be able to be pure in my judgments, and yes my decisions surely will be incomplete and inconsistent.  But the Court's decision challenges those who disagree with certain aspects of free market ideology to step out of it. It tells us that our corporate associations are not only economic but political. It's on.

For some time now, the Wall Street Journal has been running a series entitled "USA Inc.", wherein it examines "the consequences of the federal government's deep intervention into the U.S. economy, from Wall Street to Detroit and beyond."  This past Monday, it ran an article entitled "After the Bailouts, Washington's the Boss", wherein it made the assertion that, "In 2008 and 2009, Washington strove to save the economy.  In 2010, Americans will get a clearer picture of how Washington has changed the economy."

In the face of all this, one may conclude that those of us who have in the past been concerned about excessive corporate influence over our nation's political system should turn our attention elsewhere.  However, as I  note in my article "Finding State Action When Corporations Govern" (soon to be published in the Temple Law Review):

This Article argues that corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action.  This is happening via new governance, and while the recent financial crisis may suggest that the problems associated with new governance are waning, the reality is that the corporate consolidations likely to follow in the wake of the downturn – together with the government's oft-stated desire to divest its bailout stakes in private companies as soon as possible – will result in even more powerful corporate actors with an even greater ability to govern.

Clearly, the balance of power between private corporations and the federal government has shifted.  Case in point (also from the WSJ):

The Treasury Department on Wednesday said it will provide GMAC Financial Services with an additional $3.8 billion in capital and assume a majority stake in the firm. . . . In exchange for committing more funds, the Treasury will appoint a total of four directors to the company's board instead of two as previously planned.

And legislation is on the table that would give the government the power to dismantle firms that get "too big".

However, the consolidation I predict is also taking place, government is exiting its shareholder role at many institutions, and heated corporate lobbying continues.  Furthermore, the United States Supreme Court is considering expanding corporate "free speech" rights to allow for greater influence of the political process.  Finally, they don't call it "regulatory" capture for nothing.

All in all, I'd say it is still way too early to sound the death knell for excessive corporate political influence.

Prof. Stephen Brown has posted a paper on SSRN entitled "The Efficient Markets Hypothesis: The Demise of the Demon of Chance?"  The abstract reads as follows (HT: Prof. Ribstein):

Many commentators have suggested that economists in general and financial economists in particular have some responsibility for the recent global financial crisis.  They were blinded by an irrational faith in a discredited Efficient Markets Hypothesis and failed to see the bubble in asset prices and to give due warning of its collapse.  There is considerable confusion as to what this hypothes is is and what it says.  The irony is that the strong implication of this hypothesis is that nobody, no practitioner, no academic and no regulator had the ability to foresee the collapse of this most recent bubble.  While few economists believe it is literally true, this hypothesis is considered a useful benchmark with some important practical implications.  Indeed, a case can be made that it was the failure to believe in the essential truth of this idea which was a leading factor responsible for the global financial crisis.

The Efficient Market Hypothesis (EMH) suggests that efficient markets incorporate information in such a way as to make it futile to attempt to predict change in stock price through information gathering.  There are generally understood to be three versions of the EMH: (1) the weak version, in which the efficient market incorporates all preceding price information such that studying price movement trends can provide no advantageous information to the investor (don't tell that to the technical analysts who are frequently quoted in market coverage); (2) the semi-strong version, in which all publicly available material information is already incorporated in the current market price; and (3) the strong version, in which all material information–public or private–is incorporated in the market price.

Brown writes that: "In the period leading up to the current financial crisis few practitioners believed that the EMH had any practical implications. It was believed to be rather easy to make money investing in short term trends."   However, given that the semi-strong version of the EMH is generally considered to be the most in accord with reality, there is really no inconsistency with believing in the EMH and trying to gain an investing edge through the use of inside information.  Overconfidence in one's ability to do so without getting one's hand caught in the cookie jar may be another story.

Also, many of the recent critics of the EMH may in fact be criticizing a more general theory that markets are efficient in the sense that they are guided by an invisible hand in such a way as to make regulation unnecessary.  Thus, when Alan Greenspan admitted the shortcomings of his long-held belief that markets were efficient in terms of allocating risk, he was not criticizing the EMH per se:

[O]n Thursday [Oct. 22, 2008], almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.  “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

Having said all that, more humility vis-a-vis our ability to outsmart the market and hedge away all risk would certainly have helped.

On my drive to the law school this morning I started listening to John Cassidy's "How Markets Fail: The Logic of Economic Calamities".  Cassidy is a staff writer and blogger at the The New Yorker.  Early on in the book, Cassidy introduces the term "utopian economics"–which he uses to describe, as I understand it, the belief that unregulated markets work perfectly.  Upon arriving at work I did a web search for the term and found a review of the book posted on Bloomberg today.  James Pressley, the Bloomberg reviewer, writes:

It’s high time, Cassidy says, for the Fed to repudiate the Greenspan Doctrine, the former Fed chief’s argument that modern markets — so efficient, so rational — can be counted on to disperse risk and police themselves. . . .  Greenspan’s claim that the market economy was innately stable was “an absurdity,” Cassidy says.

I've only started the book, but so far I believe I can recommend it.

There was an interesting article in the Wall Street Journal recently about the economist Arthur Cecil Pigou (1837-1959).  The article describes Mr. Pigou as an economist “whose intellectual legacy is being rediscovered, and, unlike those of Messrs. Keynes and Friedman, it enjoys bipartisan appeal.”  This bipartisan appeal may be a reflection of the fact that Mr. Pigou’s appreciation of markets was apparently tempered by a recognition of their limitations:

[W]hile Mr. Pigou believed capitalism works tolerably most of the time, he also demonstrated how, on occasion, it malfunctions.  His key insight was that actions in one part of the economy can have unintended consequences in others.

But what really caught my eye was the following quote from Milton Friedman:

The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.

Now, I am not sure this statement is factually correct even if you believe that it is possible to neatly divide humanity’s creations into those arising from centralized government and those arising from the private sector.  For example (and at the risk of setting off a flurry of Al Gore jokes), I believe the defense department is generally credited with creating the internet.

But what I’m really interested in is this idea that one can in fact neatly separate centralized government and the private sector.  And this is where the Buddha comes in.  Buddhism, as I understand it, includes a belief that “all existences are not discrete and separate but are interdependent.”

Another way of putting this in the current context would be to ask whether a creation that arises at a time when centralized government exists could have arisen but for the presence of that centralized government.  If all things are interdependent, the answer is “no”.

Interestingly, it seems this is a realization modern science is coming to as well:

In nineteenth-century science the relationship between various elements of the world was understood in purely mechanical terms. The causal relationship described by classical physics implied a discreteness between objects. The Cartesian scheme of the world as a movement of innumerable but logical cogs was clean and simple: "cog it out, here goes a sum" (304.31). The subatomic experiments of quantum physics, however, indicated that the discreteness is only superficial and that ultimately all matter is united in a profound way that simple causal relationships do not suggest.

(For a somewhat interesting and related movie experience, check out Mindwalk.)

All this comes full circle in a very interesting way in the light of our recent financial crisis.  Arguably, our failure to recognize the interconnectedness of the various players in our markets was part of the problem.  Conversely, a greater appreciation of the interconnectedness of all things might lead us to adopt regulation limiting the ability of entities to get "too big to fail" or for keeping better track of the various financial derivative dominoes.

Over at the Wall Street Journal, James Stewart is giving thanks for Ben Bernanke and Tim Geithner:

As we sit down this week to give thanks, investors face a cornucopia of blessings. Federal Reserve Chairman Ben Bernanke and other economists have proclaimed the end of the worst recession since the Great Depression. The gross domestic product grew 2.8% in the third quarter. For the stock market, this year seems destined to enter the record books. From its low on March 9, the Dow Jones Industrial Average has soared just under 60%. . . . Mr. Bernanke, Mr. Geithner, and then-Treasury secretary Henry Paulson played the leading roles in steering the nation through the perilous shoals of last year's financial crisis. . . . Ideology aside, the most important thing to me is that all economic indicators suggest the remedies have worked.

Meanwhile, Ron Paul is not so thankful for the Fed.  In fact,

The end of the Federal Reserve is the ultimate goal of an audit of that institution, Rep. Ron Paul (R-Texas) said Monday.

Now, I am probably one of the last people to jump up to defend Washington insiders protecting Wall Street, but I have to say that my current view of the recent financial crisis is that: (1) the threat of "Great Depression II" was real, and (2) the Fed's ability to act quickly and powerfully in the face of that threat likely is the most important factor in our avoiding that fate.

So, while I remain uncomfortable with the "bankers watching bankers" aspect of our central banking system–today I join Mr. Stewart in giving thanks for Ben Bernanke and Tim Geithner.  I reserve the right to change my mind.  I remain concerned about the apparent recovery's failure to trickle down to consumers, home owners, and workers.  I favor serious examination of our central banking system and am open to new regulation (though the devil is, as almost always, in the details).  But I am grateful we avoided "Great Depression II".

In today's Wall Street Journal, there is an interview with Prof. Daylian Cain of the Yale School of Management.  Prof. Cain teaches a course entitled, "Business Ethics Meets Behavioral Economics."  In the interview, Prof. Cain states that:  "Behavioral economics is such a great tool because it shows how people make bad decisions and separate their actions from their values."  In other words, you can be really smart and have really great values and still make terrible mistakes because you are not the perfectly rational actor of classical economics who lives in a world where all the messy realities of life are assumed away.

Perhaps some of this insight is implicated by today's post by Prof. Lawrence Cunningham over at Concurring Opinions (HT: Kristina Melomed).  Prof. Cunningham recounts that:

In practice and scholarship, intensifying through the 1980s and into the 1990s, transactional and financial innovation was the rage.  Corporate lawyers turned innovative, cutting edge, exciting, doing deals, developing new contractual devices for financial products—including those I worked on.  Corporate law scholars took up finance theory with alacrity, doing exciting research showing how this innovation worked, with many producers and devotees of this work arguing how law should give it maximal space to flourish (though there were dissenters from this dominant view, including me).   As recently as 2005, Professor Romano, a leading scholar in this dominant style, urged doing more of it, more innovative financial engineering in practice and more finance oriented and exciting research in the academy.

However, as Prof. Cunningham goes on to point out, the roots of the recent financial crisis can be traced back to these very same "exciting" financial products:

Causes of the worldwide credit crisis include, perhaps dominantly, the proliferation of innovative financial contracts, purportedly devices that would reduce financial risk but that instead backfired to concentrate and intensify it on a galactic scale.

Maybe more attention to the lessons of behavioral economics can help stem some of the hubris that commonly precedes a fall.  But then again, perhaps we'll just do with the lessons of behavioral economics what we do with the knowledge that not everyone can be an above-average driver.  You know it's true, but that in no way changes the fact that you also know that you are one of the above-average drivers.

The following post comes from Prof. Jay Dratler, Jr.:

The case of Bilski v. Kappos, argued yesterday before the Supreme Court, 2009 Term, No. 08-964, addresses a question vital to the survival of our free enterprise system. (Number citations are to pages and lines of the oral argument transcript.)

Can anyone with a new and nonobvious business idea (or business “model,” in current parlance) patent it and exclude competition for twenty years from the patent’s application date?  Twenty years are an eternity in many innovative businesses today, so the “limited Time” of the patent grant has limited practical effect.

Since Parliament adopted the Statute of Monopolies in 1623, England’s and others’ free-market economies have answered that question “no.”  In 1998, a panel of our own Federal Circuit—our primary patent appeals court—answered it “yes.”  See State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).  See generally, Jay Dratler, Jr., Does Lord Darcy Yet Live?  The Case Against Software and Business-Method Patents, 43 Santa Clara L. Rev. 823 (2003).

Now the patentee-petitioner in Bilski wants the same “yes” answer for slightly different facts.  Yet this time the en banc Federal Circuit said “no,” in a limited way.  Our Deputy Solicitor General supported the Federal Circuit’s ruling in his oral argument.

There are some technical subtleties. The Bilski patent claims abstract steps in a process for consummating certain commodities-trading transactions.  The Federal Circuit, sitting en banc, rejected that process as unpatentable subject matter for being insufficiently tied to a physical machine or transformation. See 545 F.3d 943, 963-64 (Fed. Cir. 2008).  Its limitation has become known as the “machine-or-transformation” test. (3-12)

But as five Justices acknowledged in oral argument yesterday (see below), upholding that limitation will have no discernable effect, except on the parties to Bilski and others with already-issued patents whose claims cannot be amended.

The reason is simple.  Our patent law explicitly provides for patents on both a “process” and a “machine.”  35 U.S.C. § 101.  If Bilski wins, patent applicants can circumvent the age-old prohibition against general business monopolies by patenting business ideas in the abstract, step by step, as “processes” or “methods.”  As Chief Justice Roberts helpfully illustrated (10-7 to 10-8): “I initiate a series of transactions with buyers.  I buy low and sell high.  That’s my patent for maximizing wealth.”

But if Bilski loses, his successors can reach the very same goal by a slightly more circuitous route.  They can write a computer program to perform the desired process or method, load it into a computer, call the computer-cum-program a “machine,” and patent it.  In Justice Breyer’s words (46-20 to 46-24), “all you do is you get somebody who knows computers, and you turn every business patent into a setting of switches on the machine because there are no businesses that don’t use those machines.”

Thus any decision in Bilski, for which the patent bar has waited 28 years (since Diamond v. Diehr, 450 U.S. 175 (1981)), will be a practical, commercial and economic nullity, except perhaps for poor Bilski and those like him.  Heads Bilski wins and the public loses.  Tails the public loses and those who can still claim business ideas as programmed computers win.  As Justice Sotomayor sagely observed, “No ruling in this case is going to change State Street.”  (30-1 to 30-2; see also, Kennedy, 40-2 to 40-10)

Here’s the math:

Seven Justices (all but Alito and Thomas) expressed unease with both the current state of the law and any decision for Bilski that would reject the machine-or-transformation test. (Breyer, 6-5 to 7-4; Ginsburg, 5-22 to 6-1, 12-21 to 13-1, 39-17 to 39-22; Kennedy, 10-21 to 11-9, 18-4 to 18-9, 21-25 to 22-10; Roberts, 9-23 to 10-10, 22-16 to 22-18; Scalia, 16-1 to 16-17; Sotomayor, 7-7 to 7-12, 8-9 to 8-13, 14-5 to 14-9, 18-18 to 19-3, 20-17 to 21-11; Stevens, 14-24 to 15-8, 44-1 to 44-14)

Five Justices worried that a decision upholding the machine-or-transformation test might have unintended consequences for specific industries.  (Alito, 27-16 to 27-22; Breyer, 31-8 to 32-4; Ginsburg, 47-18 to 48-3; Scalia, 30-22 to 30-24; Sotomayor, 28-3 to 28-12, 36-23 to 37-4).

Five Justices noted that future Bilskis could circumvent a decision against petitioner Bilski by using the computer-program-machine three-step outlined above.  (Breyer, 46-10 to 46-23; Kennedy, 40-2 to 40-10, 44-15 to 44-16; Roberts, 33-8 to 33-18; 35-13 to 35-18; Sotomayor, 30-1 to 30-4; Stevens, 44-11 to 44-14, 45-19 to 45-22)  Deputy Solicitor General Stewart admitted as much. (42-1 to 42-12; 43-13 to 43-21; 45-11 to 45-18).

Two Justices asked for a better test than the Federal Circuit’s machine-or-transformation test and got no answer.  (Breyer, 9-1 to 9-17; 19-8 to 20-12; Sotomayor, 37-19 to 37-24)

So the Bilski math produces the following result, strange as it may seem:

7 + 5 + 5 + 2  = 0.

Apart from Bilski and those like him (who cannot now write computer programs and add new machine claims to their patents), nothing the good Justices may decide in Bilski will save our free-enterprise system from patent cancer.

Yet there is hope.  The five Justices who noted or described the easy “machine” circumvention of any decision in Bilski seemed not to like the idea.  So a definitive ruling on business-method and computer-program patents, which are intimately related, awaits the next case.  In the meantime, patent lawyers will continue to claim business ideas one way or the other, and the scope of freedom in our free-enterprise system will continue to shrink.

Interesting article over at MSN Money.  Here's a taste:

Just where did Wall Street go wrong? It's popular to blame misaligned incentives, lack of regulation or just plain greed. . . . The truth is, sadly, more complex, but it boils down to this: Harvard Business School is to blame. Harvard Business School led the charge away from an approach to business centered on relationships and commerce and toward one rooted in markets and competition. . . . a Hobbesian view of business — nasty, brutish and every man for himself — and a rejection of the idea that ultimately we're all in this together. . . . In this worldview, "business ethics" is an oxymoron, not because of bad behavior but because ethics can't even exist apart from some notion of a "relationship" to something or someone else. Subordinating everything to shareholder value is, literally, anti-ethical.

I just want to say that I fully support blaming Harvard.  I graduated from Brown.  In fact, I think this should justify granting sole possession of the 2008 Ivy League football championship to Brown.

The University of Akron School of Law will host a lecture by leading tax authority Rick Grafmeyer, a 1982 graduate of Akron Law on Thursday, Nov. 5 at 5 p.m. in Room 152. The event is free and open to the public.

Grafmeyer is currently a partner with Capitol Tax Partners, Washington D.C.’s largest independent consulting firm specializing in tax legislative and regulatory matters. He served as chief tax advisor to Sen. John McCain during the 2008 Presidential election. From 1998 to 2000, he was deputy chief of staff of the Joint Committee on Taxation (JCT) and was responsible for major simplification study (three volumes), and separate studies on Tax Code penalty and disclosure provisions and tax-exempt organizations issued by JCT.

In the 1990s, Grafmeyer was nominated to the Social Security Advisory Council by President Clinton and was the deputy republican staff director of the Senate Finance Committee. He also served as senior republican tax counsel for the Senate Finance Committee and was responsible for general business tax issues, tax-exempt organizations, employee benefits, tax accounting, and IRS compliance.

Prior to his work on Capitol Hill, Grafmeyer was a partner in Arthur Andersen's National Office of Federal Tax Services and the leader of the firm's legislative practice and involved in regulatory and administrative issues before the Treasury Department and the Internal Revenue Service.  He also was a partner with Ernst & Young and National Director for Washington Tax Services focusing on tax issues before Congress or pending within Treasury or the IRS.

 Grafmeyer is also a frequent commentator on tax and budget issues for CNN, CNBC, and PBS Nightly Business News.

Some commentators are fretting that the recent blockbuster insider trading case involving Galleon Management (nice summary here) is going to chill market-enhancing research.  For example, Prof. Bainbridge argues that:

There is a very serious risk that this case could chill aggressive but legitimate research by hedge funds and other professional investors.  If so, the SEC will have done a serious disservice to the ordinary investors it claims to be protecting.  Those investors will be left with a less efficient and less liquid market.

Prof. Painter adds, in a comment to Prof. Bainbridge's post, that:

I am as concerned as anybody about illegal insider trading by hedge funds and others.  I am also concerned about the great lack of clarity in this area of the law — a topic I and two coauthors raised after the O'Hagan case in a law review article — "Don't Ask, Just Tell: Insider Trading After United States v. O'Hagan" 84 Virginia Law Review (1998).  Eleven years later there is still insufficient clarity here.  One should not have to have Professor Bainbridge on call to avoid running afoul of a criminal statute.

But I am not convinced that this is such a gray area.

Under Dirks v. SEC, 463 U.S. 646 (1983), we know that:

1.  "[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach," and

2.  "[T]he test is whether the insider personally will benefit, directly or indirectly, from his disclosure.  Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach."

In this case we apparently have evidence of direct exchanges of value for the information as well as seemingly very little doubt on the part of the participants that they were engaging in illegal conduct (e.g.:  “You put me in jail if you talk,” and “I’ll be like Martha…Stewart.”).  Does this kind of conduct really implicate legitimate research analysts?

AIG has been in the news for over a year now for its fiasco involving the payment of bonuses to employees from government-loaned bailout funds.  Just last week, AIG was back in the news, seeking to pay additional bonuses.  The "pay czar," Ken Fienberg (the former head of the 9/11 compensation fund) is also trying to find ways to stop AIG's payments — with no success.  It appears AIG has found a huge loophole: bonuses paid pursuant to contracts entered into prior to fall 2009 (the date of the bailout legislation) are exempt from limitation.  Thus, lawmakers are once again searching for ways to recoup the money.  In a recent essay, I suggest that the law of restitution provides several options for seeking the return of unjust gains.  To read it, go to http://lawreview.wustl.edu/slip-opinions/bailouts-bonuses-and-the-return-of-unjust-gains/

Imagine you are invested in a hedge fund around the time the credit crisis was beginning to rear its head.  You get on a call with one of the hedge fund managers and are told that he is "very comfortable with exactly where we are" and "there's no basis for thinking this is one big disaster."  When asked about redemptions by other investors, the hedge fund manager reports that there were "just a 'couple of million' dollars of redemptions requested by investors in June."  In another conversation, the hedge fund manager assures you that he himself is putting more of his own money in the fund.

It turns out, however, that three days before the conference call the hedge fund manager e-mailed a colleague to say: "The entire subprime market is toast," . . . "[t]here is simply no way for us to make money — ever." He had also written that "if an internal report prepared by a colleague is 'ANYWHERE CLOSE to accurate, I think we should close the funds now.'"  Furthermore, it turns out that rather than investors asking for merely a couple of million dollars back, one investor had informed the fund that "it wished to withdraw its entire $57 million investment."  The fund manager later admits that "he pulled the couple of million dollars amount 'out of thin air.'"  Finally, the manager was taking millions of dollars of his own money out of the fund while claiming to be adding to his investment.

Now let's say that you and the rest of your fellow investors ended up losing $1.5 billion on your investment in this fund.  Were you defrauded?  Should the hedge fund manager go to jail?  Should he go to jail for 20 years?

Well, that's exactly what a jury will get to decide in the criminal trial of former Bear Stearns executives Ralph Cioffi and Matthew Tannin, which began this past Tuesday.  (The quoted language above was taken from here and here.)  Commentators are framing the case as one of spin versus fraud, but the real issue is going to be intent.  Most people would equate "spin" with immaterial puffery.  But even as far as courts and judges are willing to go to label optimistic misstatements immaterial puffery in the context of securities litigation, I think that would be a hard sell on these facts.  Rather, the difficult task for the prosecution in this case will be to prove that these statements were made with an intent to defraud as opposed to being mere responses to "panic and desperation . . . that he was simply paralyzed by circumstances spiraling out of control."  Of course, he apparently wasn't too panicked or paralyzed to pull out his own money or chat up investors.

The University of Akron School of Law and Vestige presents the Electronic Evidence Certificate Program.  Learn to advise clients using electronic evidence to accurately document and prove maximum damages in civil cases, investigate without interviewing personnel, find facts without relying upon human recall, document events without incurring outside counsel fees, and lead outside counsel and client to claims and defenses faster and more economically.  Participants will receive an Electronic Evidence Certificate demonstrating competency in the legal and technical knowledge and skill sets necessary to advise clients.

Cost:  $450 per person (early bird registration received before Nov. 9), $500 per person (registration received after Nov. 9).  Cost includes 12 CLE hours (one hour ethics, one hour professionalism and .5 substance abuse).  Lunch and Breakfast provided for both days.

An email exchange played out on my desktop that I thought readers might find interesting.  It started with Kristina Melomed (a former student of mine and a JD and MTax Candidate here at the University of Akron) passing on the following:

"Please find attached a chart showing the top 5 banks holding the largest percentage of credit default swaps, measured in outstanding notional amounts, as reported by the Office of the Comptroller of the Currency.  I was pretty excited to learn that the OCC releases reports on credit default swaps."

The chart can be found here: http://www.thesunshinereport.net/marksunshine/wp-content/uploads/2009/10/100609-0226-whoownsthed12.png

Another recipient of the email responded: "Staggering numbers.  If I'm understanding them, the banks, in the aggregate, have some 20 – 30 times as much derivatives as they do assets.  After what happened last year, it's hard to just trust that that's not a problem b/c they know what they're doing."

This prompted Professor Cohen to opine:

They don’t and it is.  FASB changed the accounting rules so we could ignore this problem for some time, but the toxic assets are still there (at least for now).  The banks will not be able to earn their way out of this mess (even with “free money”) and they still have defaults in CRE, credit cards, Alt-A mortgages, etc. to account for.  And the icing on the cake is that they are currently under-reserved, by most accounts.

I remain amazed that the American public is not completely outraged by the bank bailouts and all the policy measures and accommodations for Wall Street and the big banks.  This is not a political statement.  I don’t care who did it – in my view, it’s morally wrong and filled with moral hazard.  The worst part is that all these bailouts and accommodations will inhibit a recovery, not encourage one (as the Fed & others believe).  Politically, we are incapable of accepting short-term pain for longer-term concerns.  When a recession starts, we immediately work at overcoming it.  Recessions are a normal part of the business cycle – they are cleansing mechanisms.  The financial crisis involved systemic imbalances and misallocation of capital (as do our policies to deal with the crisis).  Instead of allowing the system to correct the imbalances (to be sure, a painful process), we work to overcome the crisis and interfere with the corrective process.  In fact, we have effectively maintained the imbalances (no doubt, as an unintended consequence – I hope – of our policies).

Interestingly, the New York Times DealBook Blog just posted a piece by Daniel Alpert of Westwood Capital entitled "Banking Lessons We Should Have Learned," wherein he noted that:

Some observers may (not incorrectly) point out that, despite some degree of recovery, certain, arguably systemically critical institutions simply cannot currently raise sufficient private capital to eliminate the true risks they pose to the financial system. After all, even today, the magnitude of potential losses to many institutional balance sheets is still too great — and, to an extent, unknowable.

Asset sales to raise capital may not be an option, given that many bank assets, held in excess of market value, are still on the books. . . .

Requiring banks to increase capital substantially will — assuming investors of equity capital are rational and wish to avoid future dilution — require banks to make greater provisions for troubled assets. . . .

We would argue that we are past the point of panic and that it is now time to take the necessary steps to recapitalize the most sickly of institutions on the backs of any of their stakeholders (owners and/or creditors), where this needs to occur.

Apparently, serious questions remain about whether we have really learned our lesson.

The New York Times described the case of Citizens United v. FEC, which was recently re-argued before the Supreme Court, as "a momentous case that could transform the way political campaigns are conducted."  As the NYT reports:

The case involves “Hillary: The Movie,” a mix of advocacy journalism and political commentary that is a relentlessly negative look at Mrs. Clinton’s character and career.  The documentary was made by a conservative advocacy group called Citizens United, which lost a lawsuit against the Federal Election Commission seeking permission to distribute it on a video-on-demand service.  The film is available on the Internet and on DVD.  The issue was that the McCain-Feingold law bans corporate money being used for electioneering.

The Times article goes on to note that:

[T]he relevant law, the Bipartisan Campaign Reform Act of 2002, more commonly called McCain-Feingold, applies only to broadcast, satellite or cable transmissions. That leaves out old technologies, like newspapers and books, and new ones, like the Internet. . . . The McCain-Feingold law [also] does contain an exception for broadcast news reports, commentaries and editorials.

One possible way of describing the tension here is as follows:  On the one hand, owners and managers of corporations consider the corporation to be their property and believe they should be protected by the First Amendment in the use of that property for political speech.  On the other hand, one can argue that the corporation is a "creature of the state" uniquely designed to facilitate wealth accumulation for the benefit of society as a whole and that the use of that wealth to influence elections may be regulated by the state.  As I wrote in an article a few years ago:

It is important to note here (and should be obvious upon reflection) that the State did not grant limited liability to shareholders or immortality to the corporate entity merely out of a benevolent desire solely to increase the wealth of shareholders.  Rather, the State saw that its interests as sovereign, whether building specific pieces of infrastructure or promoting economic growth generally, could be furthered via the corporate form.

But somewhere along the way the corporation was granted personhood under the Constitution and now we are arguing about the free speech rights of a fictional entity.  In the oral arguments last week, newly-appointed Justice Sotomayor questioned this fundamental attribute of the corporation.  The Wall Street Journal reported it this way:

During arguments in [Citizens United], the court's majority conservatives seemed persuaded that corporations have broad First Amendment rights and that recent precedents upholding limits on corporate political spending should be overruled.  But Justice Sotomayor suggested the majority might have it all wrong — and that instead the court should reconsider the 19th century rulings that first afforded corporations the same rights flesh-and-blood people have.  Judges "created corporations as persons, gave birth to corporations as persons," she said.  "There could be an argument made that that was the court's error to start with…[imbuing] a creature of state law with human characteristics."

This made me think back to some of the warnings regarding the abuses of corporate power that I wrote about in another recent article:

Almost from the time of the birth of the modern corporation there have been many voices loudly proclaiming that the accumulation of power that the corporate vehicle promised posed a threat to the people. . . .  These voices include U.S. Presidents like Thomas Jefferson, who urged citizens to "crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country"; Abraham Lincoln, who wrote that "corporations have been enthroned and an era of corruption in high places will follow," and predicted that "the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed"; and Dwight D. Eisenhower, who warned us to "guard against the acquisition of unwarranted influence . . . by the military industrial complex."  President Ruthord B. Hayes went so far as to assert that, "This is a government of the people, by the people and for the people no longer. It is a government of corporations, by corporations and for corporations."

However, it does not seem like these warnings will be heeded by the Court in Citizens United.  As SCOTUSBLOG noted in reviewing the oral argument:

If supporters of federal curbs on political campaign spending by corporations were counting on Chief Justice John G. Roberts, Jr., and Justice Samuel A. Alito, Jr., to hesitate to strike down such restrictions, they could take no comfort from the Supreme Court’s 93-minute hearing Wednesday on that historic question. Despite the best efforts of four other Justices to argue for ruling only very narrowly, the strongest impression was that they had not convinced the two members of the Court thought to be still open to that approach. At least the immediate prospect was for a sweeping declaration of independence in politics for companies and advocacy groups formed as corporations.

PS–Former Akron Law Jurist-in-Residence Judge Rakoff has been making quite a bit of news lately with his refusal to approve the proposed settlement between the SEC and B0fA over allegations of impropriety in connection with the failure to fully disclose Merrill bonuses before the BofA-Merrill merger.  I plan on blogging on this story next week.

PPS–I have been listening to William Cohan's "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street", and I can highly recommend it.  It's all about how rational and efficient markets can solve everything

Here are a few bits of news you might find interesting:

1.  The race is on to write the script, can you guess how this movie ends (hat tip to Kristina Melomed)?

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one. The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. . . . The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

The link to the NYT story is here.  More after the break.

2.  In honor of Labor Day:  "Swiss topple U.S. as most competitive economy."  The money quote for the guy always complaining about about private business taking over the government:

The [World Economic Forum] said the U.S. economy was still extremely productive but a number of escalating weaknesses were taking its toll. Concerns were growing about the government's ability to maintain distance to the private sector . . . .

3.  Speaking of big business running governments, the Wall Street Journal reported this past Saturday that:

British oil giant BP PLC lobbied the U.K. in late 2007 over a controversial prisoner transfer agreement with Libya . . . . Revelations of the efforts Friday fed speculation by opposition politicians and victims' families that the recent release of the convicted Lockerbie bomber is entangled with oil interests.

On Tuesday the WSJ reported further that:

Scottish Justice Secretary Kenny MacAskill, who recently released the Lockerbie bomber, has a brother who is an energy-industry executive and who has worked at firms that have pitched for oil business in Libya.

But I'm just paranoid.

This is what I wrote a while back in my paper "Finding State Action When Corporations Govern" (last revised April 15, 2009):

This Article argues that corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action.  This is happening via “new governance,” and while the recent financial crisis may suggest that the problems associated with new governance are waning, the reality is that the corporate consolidations likely to follow in the wake of the downturn . . . will result in even more powerful corporate actors with an even greater ability to govern.

This is what David Cho wrote in The Washington Post this past Friday:

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance.  A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms.  And it allowed the survivors to emerge from the turmoil with strengthened market positions . . . .  [N]o consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

Stay tuned.