Author Archive for lawrence-cunningham

The Revolving Door, Covington Style

posted by Lawrence Cunningham

The revolving door through which government officials return to private practice and back and round-and-round is a much-debated issue.

It seems most vexing concerning lobbyists, where public policy formulation can be poisoned, and least problematic for certain agencies such as the SEC, as research and a fine New York Times essay by David Zaring (Penn/Wharton) attest, as enforcement intensity and oversight rigor does not seem adversely affected.

Still, there is considerable debate about the matter, with protective public responses that impose waiting periods and other limitations.  Glenn Reynolds (U. Tennessee) excoriated the practice in a USA Today column, calling for punishing income tax on practitioners.

Amid the professional and scholarly debate, the masses seem to find the revolving door inherently repulsive while stock market reactions suggest that sophisticates value the practice.

Within that framework, it is not surprising that the esteemed Washington law firm of Covington & Burling boasted today about its rich roster of former prosecutors, on the occasion of the return to the firm of the latest example, Lanny Breuer, who has just stepped down from a four year stint as assistant U.S. attorney general.

A press release and an email blast went out detailing the deep bench.  The email had three paragraphs; the boastful last follows.   All law firms boast an impressive bench of former government officials, but this would seem to brook few rivals.  Are they more effective at helping clients avoid violations or evade accountability? Is the firm really able to cash in on this experience through a bigger and more lucrative book of business?  The research is equivocal, but many think the answer is yes, including the masses, the money and, manifestly, the firm.
Read the rest of this post »

  April 4, 2013 at 7:49 pm   Posted in: Current Events   Print This Post   No Comments

Harvard Law Review and Others to Cease Hard Copy Publication; Going Digital

posted by Lawrence Cunningham

Embracing post-print modernity, the Harvard Law Review and several other journals announced over the weekend that they would cease producing hard copy versions in favor of publishing only on-line.

The announcement, joined by the group of journals that co-edit “The Bluebook,” a  leading guide to legal citation that went digital five years ago, responds to rising costs of printing along with declining demand for the format.

“Legal scholars, like other people, do their reading digitally,” said the announcement, issued jointly by the editors of Harvard, Columbia and Penn Law Reviews and Yale Law Journal, which already has a substantial on line commitment.

Reaction from across the legal academy was mixed.  Some law review editors at other schools expressed relief. “We have long desired to move this way too, but feared ridicule if we got out ahead of the fanciest journals,” confided one journal’s editor in chief, insisting on anonymity.

Other editors criticized the move as over-broad.  ”There  continues to be widespread belief that printed versions of symposium issues are cost-effective and in demand,” opined Allen Nobile, symposium editor at Cardozo Law School’s top journal.

Among those applauding the move were some who attributed the development to advocacy on this blog, especially the recent post by Aaron Zelinsky urging this step.  After all, as Zelinsky noted, law reviews are among the last cohort to make the shift, lagging behind such organs as the Internal Revenue Bulletin, ProPublica, and the science journal PLOS-ONE.

More old-fashioned sorts were seen poised to lament the move as continued evidence of the decline of the printed word, bound volumes of historic and cultural value lost at some cost, perhaps.

  April 1, 2013 at 6:00 am   Posted in: April Fools, Humor   Print This Post   3 Comments

Introducing Guest Blogger Chuck Whitehead

posted by Lawrence Cunningham

We are delighted to introduce as a guest blogger during April Charles K. Whitehead. Chuck is a Professor of Law at Cornell University Law School and is visiting this semester at Peking University.   He specializes in the law relating to business organizations, capital markets, financial institutions and transactions, and mergers and acquisitions.

Before entering into teaching in 2006, at Boston University, Chuck held senior legal and business positions in the global financial services industry, practicing in New York, London, and Tokyo. He remains active in important global financial leadership groups, including those concerning derivative products, international arbitration and financial services.

Chuck is also a member of the American Law Institute and Fellow of the American Bar Foundation. Examples of recent scholarship include:

*  Lawyers and Fools: Lawyer-Directors in Public Corporations (Georgetown Law Journal 2013; co-authored with Lubomir Litov and Simone Sepe)

* The Goldilocks Approach: Financial Risk and Staged Regulation (Cornell Law Review 2012)

* Sandbagging: Default Rules and Acquisition Agreements (Delaware Journal of Corporate Law 2012)

* The Volcker Rule and Evolving Financial Markets (Harvard Business Law Review 2011)

* Destructive Coordination (Cornell Law Review 2011)

Chuck is a graduate of Cornell University and Columbia University Law School and served as clerk to the Hon. Ellsworth A. Van Graafeiland, U.S. Court of Appeals (2d Circuit).

Welcome to Concurring Opinions Chuck!

  April 1, 2013 at 5:00 am   Posted in: Administrative Announcements   Print This Post   No Comments

Introducing Guest Blogger Claire Hill

posted by Lawrence Cunningham

We are delighted to introduce as a guest blogger during April Claire Hill.  Claire holds the James L. Krusemark Chair in Law at the University of Minnesota Law School, where she specializes in law and economics and the the law relating to contracts and corporations.

Berfore entering into teaching, Claire practiced at Milbank, Tweed, Hadley & McCloy in New York and Dickstein Shapiro in Washington D.C. She has taught at the law schools of Boston University, George Mason, Northwestern, Georgetown (where she was a Sloan Visiting Professor) and Chicago-Kent.

Claire is founding director of  U.  Minnesota Institute for Law and Rationality, and the associate director of its Institute for Law and Economics. She is also an affiliated faculty member of the University’s Center for Cognitive Sciences.

Co-editor of Research Handbook on the Economics of Corporate Law (Edward Elgar, 2012, with Brett McDonnell), Claire has published more than 50 law review articles including the following recent representative works:

* Limits of Disclosure (Seattle University Law Review 2013) (with Steven Davidoff)

* Bankers Behaving Badly? The Limits of Regulatory Reform, (Review of Banking and Financial  Law 2012)

* Compromised Fiduciaries: Conflicts of Interest in Government and Business (Minnesota Law Review 2011) (with Richard Painter)

* Why Didn’t Subprime Investors Demand a (Much Larger) Lemons Premium? (Law and Contemporary Problems 2011)

* Concepts, Categories, and Compliance in the Regulatory State (Minnesota Law Review 2010) (with Kristin Hickman)

* Rationality in an Unjust World: A Research Agenda (Queen’s Law Journal 2009)

Claire has a B.A. and M.A. in philosophy from the University of Chicago, a J.D. (summa cum laude) from American University and an LL.M and J.S.D. from Columbia University School of Law, where she was an Olin Fellow.

Welcome to Concurring Opinions Claire!

  April 1, 2013 at 5:00 am   Posted in: Administrative Announcements   Print This Post   No Comments

Delaware Chancery Court’s Role Understated Accidentally

posted by Lawrence Cunningham

The State of Delaware, often seen to compete to attract the chartering of businesses, makes a strange pitch for its Chancery Court, one that seems intended to brag suitably but which accidentally is watered down to the trivial:

The Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world’s commercial affairs is conducted.

The statement (my emphasis added) meant to say that the Chancery Court is among the best business law courts in the country, probably true.  Instead it says that the court is the best at a narrow specialty: the internal affairs of business entities chartered in Delaware (which, it then notes, are important in global commerce).

The next sentence tries to make up for the modesty, but it both comes too late and overstates with its use of the words “unique” and “unmatched”:

Its unique competence in and exposure to issues of business law are unmatched.

Government officials charged with promoting Delaware’s business sophistication need a rewrite.

  March 30, 2013 at 8:32 pm   Posted in: Corporate Law   Print This Post   No Comments

Blog Cross Posting and Multiple Postings

posted by Lawrence Cunningham

What are the norms about whether you can manually post the same blog post more than once on the same blog or multiple times on other blogs or other media, such as newspapers?

There has been much fair criticism about cross-posing automatically, especially given the varying platforms of different social media.  But while there seems to be acceptance of manual cross-posting, it too comes in for criticism when done excessively just to get out there.

When is it too much or too little?  It seems that, as a general rule, it ought always be okay to re-post when bloggers at another site (or in another forum) invite the re-posting.  They predict another group of readers will find it valuable.

It also seems reasonable to ask, when being invited to post as a guest elsewhere, to be allowed to re-post on your own blog.  It may be fair in either case for a site to negotiate for a limited period of exclusivity, such as two weeks.

A more contextual approach would compare the probable audiences on different blogs.  If readership overlaps substantially, it imposes too great a tax on readers to cross-post.  But cross-posting across different blogs (or other media) with varied readership makes sense all around, to enhance each outlet, to distribute the ideas widely, and to offer readers more.

That leaves re-posting on the same blog.   This is usually done by “moving something to the front” and seems most acceptable when the content concerns something seeking reader reaction, such as a survey.  Otherwise, I’m not so sure about this practice.

We always feel as if some of our best blog posts are posted, contribute fleetingly, and then disappear.   But re-posting does not seem to be the answer.   The better way? Continue to write and expand on a topic, linking to the older posts, and trying to move the conversation along.

  March 30, 2013 at 9:17 am   Posted in: Blogging   Print This Post   4 Comments

posted by Lawrence Cunningham

Via Glom, Sat Eve Post review of The Essays of Warren Buffett.

  March 27, 2013 at 7:35 am   Posted in: Asides   Print This Post   No Comments

posted by Lawrence Cunningham

Jack Coffee on Bad Plaintiffs’ Counsel in M&A Deals and What Must Be Done to Break Them

  March 26, 2013 at 8:31 pm   Posted in: Asides   Print This Post   No Comments

“Where Are the Books?”

posted by Lawrence Cunningham

Books have lined the shelves of the offices of all my colleagues at every school where I have worked.  In my early days of teaching, or when spending a term as a visitor, I’d wander into a learned neighbor’s office to get acquainted.  The titles and content of those books announced a persons’s intellectual background and interests. They were instantly and extensively a topic of earnest discussion.  If my interlocutor should be interrupted by a call or an assistant popping in, I’d amuse myself by grazing over the titles, scanning the shelves that added up to an inventory of knowledge.  On their shelves and mine, students attending office hours would likewise find easy ice breakers.

When visiting the homes of friends, especially new friends but longer-term friends as well, it has always interested me to see what books are stacked on their shelves, in the living room, the study, along hallways. At parties, these books have been great conversation starters, fountains of discourse and debate.  You could even pick them up and hand them over, citing the passage on a given page where you recalled a point being made particularly well.

My wife and I, when house hunting the last time around, inspected two dozen apartments before falling in love with the homey charm of the one where we live now.  As an anonymous broker showed us through the absent homeowners’ place, we’d scan the stacks of books that gave a sense of the people who lived there–lovers of art history, a denizen of Wall Street, devotees of history, biography, the Civil War.  Stephanie and I would joke, when viewing that rare apartment empty of books, that the absence of books was an absence of warmth and that we would not trust the people who lived there.  ”Where are the books?,” we’d ask in bewilderment as we rode down the elevator, never to return.

Today, with reading so often done and “books” acquired digitally, stored in pixels on hand-held devices, we see fewer new titles gracing the offices of colleagues and teachers, the homes of friends.  No longer on display, they can no longer be conversation pieces.  The average age of books on shelves is rising steadily and even these becoming anachronistic.  Shelves are given over to decoration, clocks, cups, bells, photographs.   My wife and I wonder, “what will our kids think, 10 or 20 years from now, when they see an apartment without a single book in it?”  Maybe nothing.  We would be horrified.

But exactly what the future holds is uncertain.  One of my recent books, The Essays of Warren Buffett, is selling briskly in both print and digital, though with vastly more sales in print than digital, yet it costs $35 in print and half that in digital.  Time will tell.

  March 26, 2013 at 2:08 pm   Posted in: Culture   Print This Post   23 Comments

Why Other People’s Money is The Best Hollywood Film About Business

posted by Lawrence Cunningham

Go down the list of Hollywood films about business and you will find one biting portrayal of capitalism after the next. As the late Larry Ribstein documented and explained, all of the following movies and most other artistic renderings have this biased flaw: Erin Brockovich, A Civil Action, The Constant Gardner, Blood Diamond, Michael Clayton, Pretty Woman, Wall Street (or take older examples such as Dinner at Eight or The Hudsucker Proxy or those once listed by Forbes as epitomizing this genre, such as Citizen Kane, The Godfather, It’s A Wonderful Life, Glengarry Glen Ross).  

That’s why I find Other People’s Money (1991) refreshing, and probably the best Hollywood film about business (contrary to dominant, contending, opinion).  The movie is among the few nuanced artistic portrayals of corporate life. The play, and the movie it became, presents two sides of the story when conflicts arise between economic imperatives and socially pleasant outcomes. That’s why I often assign the film as part of my course in Corporations (hello students!).

OPM pits against each other two men seeking to control the destiny of an ailing New England family company in the dying industry of manufacturing wire and cable: a greedy and creepy takeover artist called Larry “the Liquidator” Garfield (in the film played by Danny DeVito) and the patrician lord of the target company named Jorgenson (Gregory Peck, making for perfect casing of both roles). 

Garfield opens with a monologue celebrating money, along with dogs and doughnuts, and denigrating love and basic human kindness. In his first encounter with Jorgenson, Garfield announces that the New England company is worth “more dead than alive.”

Jorgenson sniffs at such short-termism, stressing moral aspects of business life, and refuses either to pay Garfield to go away or borrow money to navigate through the difficult times. Garfield counters with assertions about free enterprise, Darwinian markets and the imperatives of business change.

The drama pursues this contrast between “doing right” and “doing well” through a proxy fight for corporate control. It climaxes with an exchange of speeches at a special meeting of shareholders.  Read the rest of this post »

  March 25, 2013 at 3:10 pm   Posted in: Corporate Law, Culture   Print This Post   3 Comments

More Than 7 Million Served

posted by Lawrence Cunningham

Seven million visits have been logged to Concurring Opinions since Dan Solove and his friends created it 8 years ago, according to Site Meter, which tracks such things.  That milestone was reached over night last night, yielding a grand total of 10,796,601 page views.   We have hosted a total of  9,855 published posts, triggering a total of  35,760 comments.   Posts have been authored by 476 different people (thanks guests and contributors to symposia!)

It is difficult to calculate the exact number of brilliant ideas, interesting opinions, or bits of knowledge generated or disseminated, but these figures suggest that the results are non-trivial.  Thanks to the vast numbers of people involved for making it such a delight. 

  March 24, 2013 at 10:45 am   Posted in: Uncategorized   Print This Post   2 Comments

Stating the Facts in Judicial Opinions

posted by Lawrence Cunningham

Modern judges are responsible for reciting the facts of cases in their opinions.  But before the 20th century, it was a frequent practice for the facts to be written by someone else, usually a court official (called an auditor or reporter) but sometimes by one of the advocates. [In contracts, see, e.g.,Lawrence v. Fox (NY 1859); Boothe v. Fitzpatrick (Vermont 1864); Cotnam v. Wisdom (Ark. 1907)].

The result sometimes created conflicts between what the judge appeared to assume the facts to be and the way they had been stated.   That may have been a factor that led to abandoning the old-fashioned practice and having judges write their own facts.  Would judges have preferred to avoid writing the facts or favor laying them out for themselves?

I wonder what was the reason for the old-fashioned approach.   What were the other reasons for its displacement by the modern approach?  Has it made a particularly important difference in many cases?   When one sees such ancient opinions in casebooks for first year classes, what should students be told to make of that old practice as a matter of legal method?  Informed insights are eagerly sought.

  March 22, 2013 at 2:59 pm   Posted in: Jurisprudence   Print This Post   4 Comments

SSRN Law Professor Top 50 by Downloads

posted by Lawrence Cunningham

 Inspired by Paul Caron’s listing of the latest SSRN ranking (as of March 1) of tax law professors by number of paper downloads from the SSRN database, following are the top 50 active US-based law professors in all subject areas in the all-time downloads category.  (For the top 25 in corporate law, see here.) Please see Paul’s post for his summary of other rankings  SSRN provides, inherent limits of the meaning of such things, and links to some of his academic writings about them.  See also here for a piece I once wrote about them for a conference Paul hosted some years ago.   

 

  March 21, 2013 at 11:49 pm   Posted in: Law School (Scholarship)   Print This Post   4 Comments

SSRN Corporate Law Professor Top 25 by Downloads

posted by Lawrence Cunningham

  March 21, 2013 at 11:45 pm   Posted in: Law School (Scholarship)   Print This Post   No Comments

Bad Book Reviews by Bad Reviewers

posted by Lawrence Cunningham

The disease of critics who write book reviews without first reading the subject book is spreading.

The illness [bad book reviews by bad reviewers] erupted in January when amateurs attacked Randall Sullivan’s biography of Michael Jackson with a campaign of negative 1-star reviews on amazon.  It spread to the professional class last month with illiterate attacks on Sheryl Sanbderg’s book “Lean In”  run in Forbes and the New Republic.  Amid the epidemic, the Columbia Journalism Review’s Ryan Chittum now denigrates books after reading reviews written by non-readers.

Bad book reviews thus must be taken with a grain of salt these days.   Especially for books addressing controversial topics, “reviewers” reflect what they believe about the topic. They do not engage with the substance of the book author’s argument or the content of her book.

It is easy to spot some such faux reviews, broadcast by inane headlines favored by the 1-star posters at amazon.   But the more sophisticated versions are harder to detect.  Writers make references to the book, giving a summary of its arc or stating the broad thesis. Yet they leave clues.  Look for a snarky tone, particularly strident language, straw men, and hyperbole.  Be especially skeptical of any review that cannot find one redeeming point to make about a book.

Helpful also are crowd-sourcing techniques.  As one example, reviewers on amazon are rated by other customers.  Seek out those having earned a great number of “helpful” votes.  Amazon even has designations such as “hall of fame” and “top 1oo reviewer” for such people.  Read those reviews and you will invariably find reliable information and analysis.  (My own favorite is Robert Morris, a top reviewer who has reviewed two of my books in a constructive, and favorable, manner.)

In the old days, literati cocktail party-goers would joke about not having read a book but having read its reviews.  It was a bit of a dodge but you could at least count on the reviewer having read the book.  Pity those days are gone.

  March 20, 2013 at 6:13 pm   Posted in: Articles and Books, Book Reviews   Print This Post   No Comments

Warren Buffett: Not Bullish on the Newspaper Business

posted by Lawrence Cunningham

In case you missed it, journalists have been saying that Warren Buffett is bullish on newspapers, with the New York Times running a headline reading “In His Annual Letter, Buffett Plays Up Newspapers.”  They cite the fact that he devoted 1800 words of his March 2013 missive to Berkshire Hathaway shareholders to the topic of newspapers. They stressed how Berkshire invested $344 million in the industry in the past 15 months. The Oracle of Omaha was putting his mouth where his money was, newspaper insiders reported.

The trouble with this narrative is that it’s not exactly what Buffett’s letter said, suggesting a dose of wishful thinking among practitioners of the trade. True, Berkshire has made the indicated investment and Buffett expresses his belief that newspapers, especially local newspapers with local niches, have a vital role which should translate into profitability. That was followed by a huge qualification: IF they can find an appropriate business model that marries traditional print and advertising with on-line distribution and revenue. But none has done so yet, Buffett’s letter reminds everyone.

Buffett’s allocation of three pages of his letter to newspaper investments seemed more an explanation of why Berkshire would invest such small sums, for its size, in anything, whether newspapers or some other industry. The letter stressed the continuing decline in circulation, profitability and cash flows of the newspaper business, though mentioning that Berkshire’s own newspapers have done better than most.  The letter also made clear that, should the economics of the newspaper businesses Berkshire owns continue to deteriorate substantially, they will be candidates for sale.

The newspaper business, in short, remains in serious trouble. In fact, the real information content of this year’s Berkshire letter may be another point that Buffett emphasized: the only way buying a newspaper business makes sense today is if it can be bought for an extremely low price compared to earnings.  Berkshire’s acquisitions met the stringent test.

That mindset reflects the market’s sense about the value of the newspaper business as well, suggested by such examples as the lack of buyers a few years ago for the Seattle Post-Intelligencier and Rocky Mountain News (Denver) and what has become notoriously clear were wildly excessive valuations of Rubert Murdoch when be acquired the Wall Street Journal in 2007 and of the New York Times when it acquired the Boston Globe two decades ago.

Civic mindedness, noblesse oblige, or a desire to be relevant and in the mix may stoke the appetites for some potential buyers of newspapers, such as Murdoch, the group of businessmen who bought the Philadelphia Inquirer last year, Mort Zuckerman, or even the Hearsts, Sulzbergers and Zells of the world. But despite Buffett’s obvious personal fondness for newspapers, that isn’t his style. Journalists who thought Buffett was saying he’d play that role should likewise think again.  As I read the letter, the real message is that the newspaper business, like many others being throttled by rapid disruptive change, faces profound challenges.

  March 19, 2013 at 12:28 am   Posted in: Current Events   Print This Post   No Comments

posted by Lawrence Cunningham

An interview of me over at Beyond  Proxy on The Essays of Warren Buffett here, along with my guest blog post on the subject.

  March 17, 2013 at 8:19 pm   Posted in: Asides   Print This Post   No Comments

Gulliver, CEOs, and University Presidents

posted by Lawrence Cunningham

University presidents are starting to feel some of the constituency pressure visited since the 1980s on their CEO counterparts in corporate America. Until then, CEOs reigned supreme over their corporate bastions, many ruling with an iron fist. Directors were supportive and shareholders deferential.  There would be occasional upheaval but this was rare.  CEO tenures were long.  Those days have been long gone for some time.

Until the past few years, university presidents ruled their roosts as well, with helpful trustees and deferential faculty.  Not anymore.

As John Sexton of NYU found out in a “no-confidence” vote of his largest faculty group last week, the constituencies are restless.  NYU’s trustees pledge their continued support, but other NYU faculties and some of the school’s unionized employees promise further pressure. Last summer, Teresa Sullivan, president of U. Va., felt such pressure from the university’s trustees, who ousted her temporarily until the faculty came to her rescue. Similar upheaval occurred at Harvard a few years ago and more recently at Oregon, Texas and Wisconsin (and at several other places if academic leaders below the rank of president are counted).

Interestingly, presidents in quite a few of these episodes have been charged with the complaint of operating the university too much like a corporation.  That’s one of the central assertions of the NYU faculty voters, who say Sexton is too focused on growth. They cite his “Global Network University” with lucrative campus footprints worldwide and his tendency to pay high salaries to selected scholars rather than offer across-the-board increases.  Many are upset at plans to expand the Greenwich Village campus in a radical way. They despise his top-down management style. 

So presidents who run their universities like corporations now face the fate of corporate chiefs for doing so. The power of shareholders and directors increased exponentially in the past 20 years, making the all-powerful CEO a relic.  With the rising power of faculties and trustees in the university, academic presidents may soon turn into short-term caretakers as well.  

There is a good case that the pendulum swung too far in corporate America in favor of shareholder democracy and outside power. It will be a shame if a similar thing happens to America’s universities.  Maybe that’s the NYU faculty’s point. Sexton should probably not run NYU as if it were a modern corporation, given its educational mission and unique fiduciary duties to attend to student needs rather than to maximize profits for shareholders.  Running NYU that way not only subverts those goals, but will ultimately and ironically weaken the president’s position.

Photo: Gulliver’s Travels, an apt analogy for what happened to corporate CEOs from 1980 to 2000 and what may be happening to university presidents.

  March 17, 2013 at 6:30 pm   Posted in: Current Events, Education   Print This Post   4 Comments

C.V. / Resume in Word Cloud

posted by Lawrence Cunningham

My students tell me they sometimes get advice to word-cloud their resumes.  Advisers say this can help assure that the document conveys the most important messages students wish.  I’ve toyed with word clouds for other applications and decided to word cloud my own c.v.  (below).  Nothing surprising to my eyes.  It does make me curious what I’d see in the word clouds of other prawfs. Also, could a refined version of this rival the entry-level AALS forms now used for aspiring prawfs?

  March 16, 2013 at 11:00 am   Posted in: Humor   Print This Post   No Comments

Auditing’s Snafu: Foreign Secrecy and Impaired Audits

posted by Lawrence Cunningham

Many US companies maintain substantial global operations, with increasing volumes of business done in China; many foreign companies are listed on US securities exchanges.  This cross-border expansion makes the reliability of financial reports created in foreign locales increasingly important.  Yet, in tandem with this cross-border expansion, there have been increasing assertions abroad, including in China, that local secrecy laws restrict access to the work papers of auditors, frustrating the ability of US federal authorities to enforce US securities laws designed to promote financial reporting integrity.

The snafu was joined this week in a case where the SEC is seeking access to audit work papers of a Deloitte affiliate in Shagnhai but the firm refuses.  The firm’s lawyers cite Morrison v. National Australia Bank, the 2010 SCOTUS ruling that, absent explicit language, federal statutes are seen as intended to apply within the US, not be extraterritorial.  It said that the federal securities laws lacked such explication.   

Furthermore, for Deloitte to comply with the SEC’s requests, the lawyers said, would risk committing a serious crime under Chinese law, one punishable by imprisonment. Deloitte’s lawyers say that the combination of Morrison and Chinese secrecy laws puts the records beyond the SEC’s reach.

Lawyers for the SEC object that these points cannot possibly be seen to limit the SEC’s administrative subpoena power under which it has demanded the Deloitte documents. But, during oral argument, the SEC’s lawyers did not acquit themselves well, according to one report, as they could not readily cite the precise legal authority supporting their position. 

Deloitte says there isn’t one and that the appropriate procedure to handle such cross-border securities matters is by diplomacy not enforcement. In this view, the SEC is wrong to proceed against Deloitte in court but must dispatch appropriate US officials to broker a resolution with Chinese regulatory counterparts.

The stakes are high for both sides in the case, of course, and for investors and students of auditing. After all,  audits endow financial statements with credibility. Shareholders are willing to pay for audits in exchange for that credence value.  But if an auditor’s work papers are top secret, inaccessible even to a regulatory overseer, how much of an audit’s credence value is lost? Is it still rational for shareholders to condone paying the auditor’s fee?

When the credibility of financial statements are in doubt, investors should shun their issuer and sell the stock.  A critical mass of shareholders of companies affected by this snafu might do well to follow that old-fashioned Wall Street Rule. If they did, then, along with such companies, the need to resort to either a diplomatic or enforcement solution would disappear. Read the rest of this post »

  March 15, 2013 at 4:22 pm   Posted in: Accounting, Administrative Law, Corporate Law, Securities Regulation   Print This Post   No Comments

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