April 2020

In these unprecedented times, the Federal Reserve is opening unprecedented facilities, including its new Municipal Liquidity Facility.  Professor Robert C. Hockett at Cornell Law School has posted a great 3-page paper on this for everyone (like myself) who is interested in quickly learning more about this new Fed program.  Check it out here; Abstract is below.

On April 9th the Fed announced it would be opening an unprecedented new Municipal Liquidity Facility (‘MLF’) for States and their Subdivisions now struggling to address the nation’s COVID-19 pandemic. This is effectively ‘Community QE’ in all but name. Because Community QE will constitute a literal lifeline to States and their Subdivisions, and will in light of its novelty be as unfamiliar as it is essential, this Memorandum briefly summarizes what the new Facility enables now and will likely enable in future. On this basis it then recommends a three-phase ‘Game Plan’ for States and their Subdivisions to put into operation immediately – that is, April 13th.

This week, I’m just plugging my new essay, forthcoming in the Wisconsin Law Review.  It was written for the New Realism in Business Law and Economics symposium, hosted by the University of Minnesota Law School, and here is the abstract:

Beyond Internal and External: A Taxonomy of Mechanisms for Regulating Corporate Conduct

Corporate discourse often distinguishes between internal and external regulation of corporate behavior. The former refers to internal decisionmaking processes within corporations and the relationships between investors and corporate managers, and the latter refers to the substantive mandates and prohibitions that dictate how corporations must behave with respect to the rest of society. At the same time, most commenters would likely agree that these categories are too simplistic; relationships between investors and managers are often regulated with a view toward benefitting other stakeholders.

This Article, written for the New Realism in Business Law and Economics symposium, will seek to develop a taxonomy of tactics available to, and used by, regulators to influence corporate conduct, without regard to their nominal categorization of “external” or “internal” (or “corporate” and “non-corporate”) in order to shed light on how those categories both obscure and misdescribe the existing regulatory framework. By reframing the

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As the weeks pass, we move steadily closer and closer to the June 30th implementation date for Regulation Best Interest.  As I’ve written elsewhere, the new SEC rule does little actually help investors.  The new rule package may also do real harm by collapsing distinctions between brokerage firms and independent registered investment advisers.  In the headline quote for a new white paper from the Institute for the Fiduciary Standard, Professor Tamar Frankel explains how the new package erodes established fiduciary principles

Rostad and Fogarty tell the story that these standards deserve attention because they abandon decades of established principles. They then offer selected remedies to help investors manage in this new era. The Securities and Exchange Commission’s Regulation Best Interest ignores the brokers’ advisory sales-talk and waters-down significantly brokers’ fiduciary duties. In fact little remains. Hopefully, this rule will fail to achieve its purpose or is fixed before it brings true disasters on the securities markets. Otherwise, investors and the securities markets may pay the price.

As the SEC has altered investor protections, states have begun to put their own protections in place.  Nevada stands alone with the first state fiduciary statute.   New Jersey and Massachusetts also have…

The National Center for Public Policy Research has posted an open letter to Blackrock CEO Larry Fink that should be of interest to readers of this blog.  I provide some excerpts below.  The full letter can be found here.

Dear Mr. Fink,

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This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.

…. we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests…. when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.

…. ESG proposals will add an extra-regulatory cost …. This may harm everyday Americans who are invested in these companies through pension funds and retirement plans. While this won’t affect folks in your income bracket, this may be the difference between affording medication, being able to retire, or supporting a family member’s education for many Americans.

There…

This post again comes to us from friend-of-the BLPB Nadia B. Ahmad.  Her offering is in the tradition of similar posts published by my co-bloggers in the past that focus on videos that can be used in teaching various topics relevant to business law.  I remember this post, for example, by Marcia Narine Weldon on blockchain teaching resources.  Again, thanks to Nadia for contributing to our knowledge and our blog.  I hope that others will be encouraged to offer suggestions in the comments below about other helpful online video resources that they know about.

image from cdnimages.barry.edu

Below is a list of online video resources for business law related topics.

  1. Panic: The Untold Story of the 2008 Financial Crisis(1 hour, 35 minutes)

VICE on HBO looks at factors that led to the 2008 financial crisis and the efforts made by then-Treasury Secretary Henry Paulson, Federal Reserve Bank of New York President Timothy Geithner, and Federal Reserve Chair Ben Bernanke to save the United States from an economic collapse. The feature-length documentary explores the challenges these men faced, as well as the consequences of their decisions.

https://www.youtube.com/watch?v=QozGSS7QY_U

  1. To Catch a Trader

PBS Frontline correspondent Martin Smith goes inside the government’s ongoing…

I first blogged about this case back when the Supreme Court’s Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), 573 U.S. 258 (2014) decision was new, and now we finally have some answers. 

In Halliburton II, the Court held that while securities class action plaintiffs get the benefit of a presumption that any material information – including false information – impacts the price of stock that trades in an efficient market, defendants may, at the class certification stage, attempt to rebut that presumption with evidence that there was no such price impact.

The complicating factor in all of this is that, per Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455 (2013) and Erica P. John Fund v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I), defendants cannot rebut that evidence by demonstrating either a lack of materiality or a lack of loss causation.  This, of course, severely ties defendants’ hands, because those are the usual proxies for price impact.  (See prior blog posts for further discussion here and here and here and here.)

The Goldman case has an interesting twist, though.  The basic allegation is that Goldman falsely represented that it behaved with honesty and integrity toward its clients, and its lies were revealed when the SEC filed an enforcement action alleging that Goldman’s transactions involving CDOs were riddled with undisclosed conflicts of interest.  The SEC’s complaint triggered a price drop, and Goldman investors suffered as a result.

Goldman, however, argued it could rebut the presumption of price impact by demonstrating that at multiple times throughout the class period, the media reported on its conflicts, with no market reaction.  Therefore, argued Goldman, it was clear that the initial lies did not impact prices, and the price drop at the end of the class period was not due to the revelation of the truth – all of which was known to the market – but simply due to the SEC’s enforcement action itself.

As I previously argued, much of this was really a disguised attempt to relitigate the materiality of the initial statements, but in a 2018 appeal, the Second Circuit remanded to the district court to give Goldman the opportunity to prove lack of price impact by a preponderance of evidence.  See Ark. Teachers Ret. Sys. v. Goldman Sachs Grp., Inc., 879 F.3d 474 (2d Cir. 2018).  The district court recertified the class, Goldman appealed again, and the Second Circuit’s affirmance, 2-1, issued earlier this week, engages more closely with the substance of Goldman’s argument.

Okay, that sets the stage.  What actually happened here?

(More under the jump)

Iowa’s Greg Shill has a new paper out on Congressional Securities Trading.  As a former congressional staffer, he brings a special appreciation to the issue.

Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler.  The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.

In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading.  He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives.  This approach should help manage ordinary securities transactions by members of Congress and their staff.  He also advocates for limiting Congressional investing to U.S. index funds and treasuries.  This would reduce the incentive to favor one market participant over another.

The proposed reforms would be a substantial improvement over the status quo.  We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy.  We should also not subsidize public service by tolerating Congressional trading on Congressional information.

Of course, we’ll still face some implementation challenges.

The American Business Law Journal (ABLJ) is a triple-blind peer review journal published quarterly “on behalf of the Academy of Legal Studies in Business (ALSB).”  Its articles explore a range of business and corporate law topics, and it is a great resource for academics, industry professionals, and others.  Its “mission is to publish only top quality law review articles that make a scholarly contribution to all areas of law that impact business theory and practice…[and it] search[es] for those articles that articulate a novel research question and make a meaningful contribution directly relevant to scholars and practitioners of business law.”  I’ve previously posted about the journal (here).

The ABLJ has issued an invitation to ALSB members to apply for the position of Articles Editor.  Not currently a member of the ALSB?  No worries, you can easily become a member (here)!  Below is the complete invitation to apply sent from Terence Lau, the ABLJ Managing Editor.  

We invite ALSB members who are interested in serving on the Editorial Board of the American Business Law Journal to apply for the position of Articles Editor. The new Articles Editor will begin serving on the Board in August 2020. Board members…

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It’s been four weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally = 1,426,096; Deaths = 81,865.

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