Category: Securities

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Agencies in the Cathedral?

AgenciesAreas of law dominated by government agencies haven’t taken advantage of the rich literature on property rules and liability rules, which are “workhorse concepts that permeate every corner of the economic analysis of law.” In their 1972 article Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, Calabresi and Melamed observed that there are fundamentally two types of remedies: (1) property rules, such as injunctions or disgorgement, which aim to deter, and (2) liability rules, like compensatory damages, which aim to compensate. This framework has paid rich dividends in areas like torts, property, IP, contracts, and conlaw — but seems to have bypassed areas of law dominated by agencies.

Government agencies’ remedies can be classified as either property rules or liability rules. For example, if a business has a permit from the EPA but violates the permit’s conditions, the remedy could be either taking away the permit (a property rule), or requiring proportional compensation (a liability rule). Similarly, if a broker has a license from the SEC and violates securities law, the remedy could be either yanking the license (a property rule), or requiring compensation for the harmed parties (a liability rule).

I apply the property rule and liability rule framework to my favorite agency — the IRS — in a forthcoming Virginia Law Review article. When a taxpayer violates a tax-law requirement, the remedy can be either yanking the taxpayer’s favorable tax status (a property rule), or requiring compensatory additional tax (a liability rule). Counterintuitively, anecdotal evidence shows that property-rule remedies may be less effective at deterring violations, because the threat of political and media blowback may make the IRS unwilling to impose a draconian property-rule remedy. As a result, when Congress protects a requirement with the property-rule remedy of yanking a favorable tax status, politically-powerful or sympathetic taxpayers are rarely deterred from violating the requirement. The IRS doesn’t dare impose it. Surely similar problems plague enforcement by other agencies.

Anyone working in any agency-dominated area of law could consider how the property-rule/liability-rule framework fits into their area.

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Vanderbilt Law Review En Banc – Roundtable: The JOBS Act and SEC Rulemaking

Vanderbilt Law Review En Banc is pleased to present our Spring 2013 Roundtable, which considers the SEC’s rulemaking authority under the JOBS Act of April 2012.

Practicing securities attorney Douglas Ellenoff, and Professors Usha Rodrigues and Andrew Schwartz each consider the public policy rationales of the JOBS Act, its legislative history, congressional intent, and practical considerations in order to offer some friendly advice to new Chairman Mary Jo White and the Commission.

Mr. Ellenoff and Prof. Schwartz focus on the rules required or allowed relating to crowdfunding under Title III of the Act, while Prof. Rodrigues examines the lifting of the ban on solicitation and advertising of securities offered to accredited investors under Title II. We hope you find this Roundtable informative and engaging.

Roundtable Essays

Making Crowdfunding CREDIBLE
Douglas S. Ellenoff · 66 Vand. L. Rev. En Banc 19 (2013)

In Search of Safe Harbor: Suggestions for the New Rule 506(c)
Usha Rodrigues · 66 Vand. L. Rev. En Banc 29 (2013)

Keep It Light, Chairman White: SEC Rulemaking Under the CROWDFUND Act
Andrew A. Schwartz · 66 Vand. L. Rev. En Banc 43 (2013)

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Call for Papers: National Business Law Scholars Conference

I am delighted to pass along the following notice from the organizers of the National Business Law Scholars Conference.  I’m also honored to report that they have asked me to deliver the keynote at this year’s conference, and I look forward to doing so.  

Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, re-posted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by MAY 31, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

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Theseus’s Paradox – Form and Substance in Evolving Capital Markets

Living in Beijing underscores the importance of change and adaptation.  There is a noticeable drop in the amount of processed sugar in foods, reflecting local (and healthier) tastes.  Virtually every restaurant delivers, including McDonald’s (which raises the ques­tion, if you’re going to order delivery, why McDonald’s?).  And, most parti­cularly, I recently joined the thousands of Chinese students and pensioners who weave in-and-around traffic on electric battery-powered mopeds.  It is a great way to get around the city (even if some of the pensioners have a tendency to cut you off).

The same focus on change arises in the capital markets.  A person who owns or sells a security is presumed to own or sell the financial risk of that security.  By selling shares, for example, the costs and bene­­­fits of those shares—the rise or fall in share price—are understood to run with the instru­­ments being sold.  Changes in the capital markets, how­­ever, have begun to call that pre­sump­tion into question.  Increasingly, market partici­pants can use new trading methods to sell instru­­­­­ments to one person, but transfer their financial risk to someone else.  The result is greater complexity and new chal­lenges to regulation and the regu­lators.

To what extent should the securities laws adjust to reflect those changes?  The answer largely turns on the question of “identity.”  Moving from modern-day Chinato to ancient Greece, the Greek historian Plutarch identified the question in his story of Theseus, the mythical king of Athens.  For many, Theseus is known for slaying the Mino­taur, a half-man, half-bull monster that devoured children sent to Cretein tribute to King Minos.  According to Plutarch, after Theseus returned to Greece, his boat remained in Athensharbor for centuries as a memo­­rial to his bravery.

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Stanford Law Review, 64.6 (2012)

Stanford Law Review

Volume 64 • Issue 6 • June 2012

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Call for Papers: Dodd-Frank

Call for Papers:

Financial Institutions and Consumer Financial Services Section

AALS Annual Meeting – January 2012

Rubber Hits Road: Implementing Dodd-Frank amid Reform Fatigue

This program will take place one and a half years after the Dodd-Frank Act was signed into law. The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture. Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress.

What lessons can we draw from the implementation of Dodd-Frank so far? What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative? What devils have lain hidden in the details of the Federal Register? What aspects of reform have been largely forgotten? What does the path of financial reform say about legislative and regulatory process? What lessons can be drawn from the reform efforts in Europe and elsewhere? Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks?

More ominously, is the crisis truly over? Are we at grave risk of fighting the last war? Has reform missed the mark altogether? This meeting is part of a project to engage the legal academy in sustained theoretical and policy contributions to financial regulation. It also presents an opportunity to look at specific rulemakings in detail, as well as to address larger questions about the course of reform after laws are made.

Call for papers:

Law teachers and other scholars are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Junior faculty members are particularly encouraged to submit manuscripts or abstracts. A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to present their work at the program session in Washington, D.C. in January 2012.

Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Please send manuscripts or abstracts to the Program Chair (Erik Gerding, University of Colorado) at profgerding@gmail.com no later than August 30, 2010. Please place the name and contact information of authors only on the cover page of submissions.

Please forward this Call for Papers to anyone who might be interested.

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Making fair funds fairer

The PENNumbra website (online companion to the Pennsylvania Law Review) is spotlighting a recent article by Adam Zimmerman and David Jaros which proposes building class-action-like protection into the high-profile criminal restitution actions that have dominated the news in recent years. In The Criminal Class Action, Zimmerman and Jaros examine cases such as Bernie Madoff, noting that,

The past decade has witnessed the rise of new, massive settlements forged not out of civil litigation but on the periphery of the criminal justice system. Since 2003, prosecutors have demanded that defendants in a variety of high-profile corporate scandals set up multimillion-dollar restitution funds for victims to settle criminal charges. Yet few rules exist for the prosecutors who create and distribute these complex settlements.

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Targeting Odious Top Pay Contracts

Cross-posted at Harvard Law School’s Corporate Governance blog, this summarizes in some detail my new paper on applying simple contract principles to police odioius executive pay contracts:

Executive pay has skyrocketed in recent decades, in absolute terms and compared to average wages. The area of largest growth has been in stock-based components, including stock options, often tending to focus on the short-term, with associated risks we’ve seen. A vigorous academic debate has run for more than a decade, becoming a popular political discussion amid the financial crisis exposing arcane debate to public scrutiny.

Growth could be laudable, explained as creating proper incentives to align manager interests with shareholder interests and to promote optimal risk taking. In this view, if there is a problem, it is narrow and limited. Critics are skeptical whether this story holds up. They worry that managerial power has strengthened to enable top executives to control setting their own compensation. In this view, the problem is pervasive and warrants a comprehensive response—and proposals abound.

I come down in the middle. There are problems in at least an important number of cases, and current proposals to redress them are unlikely to work. So I seek a new approach—contract unconscionability—to police extreme cases. The proposal must surmount some hurdles but isn’t as radical as it sounds.

A good way to summarize the debate highlights a three-pronged theory that promotes much of prevailing executive compensation, especially stock-based components, and contrasts it with limits on each prong.

First: in optimal contracting theory, boards design manager contracts to minimize agency costs. But when managers dominate the process, the managerial power thesis suggests this ideal may not be met.

Second: with efficient stock markets, stock price is a good proxy for the shareholder interest and a mirror of managerial performance. But stock price can differ from business value for sustained periods, fogging both.

Third: stock-based pay could align managerial incentives with shareholder interests if designed right and markets work well. But otherwise they create perverse effects. Read More

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GW’s Junior Scholars Finalists

Thanks to my colleague, Lisa Fairfax, GW has finalized the program for this year’s Junior Faculty Business and Financial Law Workshop and Prize (detailed here).   Of the more than 100 papers submitted, the following dozen presenters were chosen.  [Commentators appear in brackets; I’ve shortened some paper titles.]  

 The workshop will take place at GW on April 1 and 2, 2011.  We are delighted by the submissions, congratulate those chosen, and stress that making the selections was difficult because of the volume of amazing papers.  We encourage everyone interested to attend and look forward to the weekend.

Adam Leviton (Georgetown), In Defense of Bailouts [George Geis (Virginia) & Art Wilmarth (GW)]

Jodie Kirshner (Cambridge), A Transatlantic Perspective on Regional Dynamics and Societa Eurpoea [Francesca Bignami (GW) & Theresa Gabaldon (GW)]

Alan White (Valparaiso), Welfare Economics and Regulation of Small-Loan Credit: Lessons from Microlending in Developing Nations [Michael Pagano (Villanova) & Lawrence Mitchell (GW)]

Nicola Sharpe (Illinois), Corporate Board Performance and Organizational Strategy [Deborah Demott (Duke) & Michael Abramowicz (GW)]

Julie Hill (Houston), The Rise of Ad Hoc Bank Capital Requirements [Anna Gelpern (American) & John Buchman (E*Trade Bank & GW Adjunct)]

Michael Simkovic (Seton Hall), The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions [Richard Booth (Villanova) & Henry Butler (Mason)]

Michelle Harner (Maryland), Activist Distressed Debtors [Donna Nagy (Indiana Bloomington) & Lisa Fairfax (GW)]

Saule Omarova (UNC), The Federal Reserve Board’s Use of Exemptive Power [Patricia McCoy (Connecticut) & Arthur Wilmarth (GW)]

Heather Hughes (American), Suburban Sprawl, Finance Law and Environmental Harm [Scott Kieff (GW) & Lawrence Cunningham (GW)]

Robert Jackson (Columbia), Private Equity and Executive Compensation [Norman Veasey (Weil Gotshal) & William Bratton (Penn)]

Brian Quinn (BC), Putting Your Money Where Your Mouth Is: Post Closing Price Adjustments in Merger Agreements? [Gordon Smith (BYU) & John Pollack (Schulte Roth)]

Mehrsa Baradaran (BYU), Reconsidering Wal-Mart’s Bank [Heidi Schooner (Catholic) & Renee Jones (BC)]

This is one of many events sponsored by GW’s Center for Law, Economics and Finance.

Hockett on the Financial Crisis

There is a growing consensus that our mortgage markets are fundamentally broken. In a recent article in The American Prospect, Robert Kuttner surveys a number of leading legal academics’ prescriptions for the foreclosure crisis:

Katherine Porter, a law professor at the University of Iowa and an expert in mortgage servicing, recently testified to the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) that according to lawyers for both home-owners and banks, “a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure.” . . . .

One remedy, proposed by professor Adam Levitin of the Georgetown Law Center, would create a new chapter of the bankruptcy code and allow a home-owner to come before a bankruptcy judge and get the mortgage reduced to the present value of the home. The process would also clear the title. Another proposal, by professor Howell Jackson of Harvard Law School, would use government’s power of eminent domain to take securitized mortgages, compensate the holder at the securities’ (much reduced) fair market value, and use the savings to turn the paper back into whole mortgages with steep reductions in interest and principal. This would also allow millions of people to keep their home and help stem the broad decline in housing values.

I think each of these ideas is valuable. I’d also like to see them complement a broad set of proposals articulated by Robert Hockett in a recent piece in the Washington University Law Review. Hockett’s proposals are worth quoting at length, since he keenly grasps the historical dimensions of this crisis:
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