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Stefan J. Padfield

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Director of the NCPPR's Free Enterprise Project. Prior experience includes 15+ years as a law professor, two federal judicial clerkships, private practice at Cravath, Swaine & Moore, LLP, and 6 years enlisted active duty (US Army). Immigrant (naturalized).

Joel Slawotsky has published The Impact of Geo-Economic Rivalry on U.S. Economic Governance: Will the United States Incorporate Aspects of China’s State-Centric Governance?, 16 Va. L. & Bus. Rev. 559 (2022). An excerpt:

China’s corporate governance model emphasizes an extensive governmental role in the construction of economic markets. The paradigm consists of an economic-political syndicate of collaborative actors creating profit but whose critical core mission is to advance state objectives as defined by the ruling authority, the CCP. Economic interests thus serve political interests pursuant to a template of state direction and partnership with the private sector encompassing share ownership; industrial policies; governmental representatives embedded in the private sector; and discipline imposed for failing to comply with syndicate rules…. [S]ome in the U.S. political establishment are in favor of more governmental control to prevent corporate abuse …. To a remarkable degree, the dissatisfaction is already being manifested by attempts to engender greater government involvement in U.S. central bank policy by expanding the Federal Reserve’s (“the Fed”) mandate to encompass a wider spectrum of goals to address social justice objectives…. Moreover, efforts to expand the Fed’s mandate to encompass social goals should also be viewed in the context of proposals

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A FINRA comment period for a proposed rule to accelerate arbitration proceedings for seriously ill or elderly parties recently expired. The proposal recognizes that the existing voluntary expedited processing for elderly parties has not resulted in swifter resolutions.  The new proposal would allow persons over age 75 or who face some increased medical risk (e.g. cancer diagnosis) to seek expedited processing.  Often, the arbitration panel will need to hear from the customer to make an informed decision.  Dead customers don’t ordinarily testify.

The comments to the proposal reveal real stakeholder concern about the speed with which FINRA has put forward rules to address known problems with the dispute resolution process.  A letter from Steven B. Caruso, a retired former chair of FINRA’s National Arbitration and Mediation Committee (NAMC) makes for a compelling read.  Procedurally, FINRA has put the proposal out for comment on its website.  If it later seeks to advance it, it will need to appear for comment again when it is submitted to the SEC for approval.  Caruso questions why FINRA did not simply send the rule to the SEC for one round of notice and comment.  The rule may eventually make its way through this lengthy process…

The Fifth Circuit recently decided Jarkesy v. Sec. & Exch. Comm’n, No. 20-61007, 2022 WL 1563613, at *1 (5th Cir. May 18, 2022).  The case has significant implications for the SEC’s use of administrative law judges (ALJs).  The majority opinion was written by Judge Elrod and joined by Judge Oldham. Judge Davis penned a dissent.  The majority issued three holdings:

We hold that: (1) the SEC’s in-house adjudication of Petitioners’ case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.

The case involved two hedge funds founded by Jaresky, an investor, businessman, and conservative radio host.  The SEC alleged that Jaresky: (i) misrepresented the identity of the prime broker and auditor; (ii) misrepresented the funds’ investment parameters and safeguards; and (iii) overvalued the funds’ assets to increase the fees collected.  After an evidentiary hearing, an SEC ALJ found that the funds had committed

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After the end-of-semester crunch and a bout with Covid, I’m back to reading Hilary Allen’s Driverless Finance.  Chapter three, focused on Fintech and Capital intermediation seems prophetic today.  In it, she explains how stablecoins could lead to fiat currency runs and fluctuations.  She also explains how concerns about a particular cryptoasset could trigger panics affecting other cryptoassets.

This brings me to our world today.  TerraUSD, a stablecoin, has become unstable.  It aimed to hold its value at $1 per coin to allow crypto enthusiasts to park cryptoassets in TerraUSD, avoiding market fluctuations.  For most of the past year, TerraUSD largely achieved this goal.  But then it didn’t.  As of Wednesday, TerraUSD traded at $0.23.  To help readers see the carnage, check out these charts, first the year and then the last seven days.

TerraUSD 1Y

TerraUSD 7d

Allen predicted that these sorts of things could happen.  The Wall Street Journal described the panic briefly spreading to another stablecoin, explaining that the “collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies, helping drive down the price of bitcoin. Another stablecoin, tether, edged down to as low as 96 cents on Thursday before regaining its peg to the…

AALS Professional Responsibility Section – 2023 Annual Meeting New Voices

The AALS Professional Responsibility Section invites papers for its program “2023 New Voices Workshop.” The goal of this audience interactive workshop is to provide a forum for new voices and new ideas related to professional responsibility (PR), broadly defined. Many scholars might address PR without realizing it. We are interested in your potential contributions whether you are an evidence scholar writing about the attorney-client privilege, a feminist interested in gender dynamics that affect lawyering, a critical race scholar commenting on how power plays out in legal systems, an ethicist exploring the moral foundations of the rules governing lawyering, or something entirely different. Toward that end, we encourage you to submit a proposal even if you are pursuing scholarship on PR for the first time, even if you question whether your ideas really do relate to PR, and even if you are reticent to submit for some other reason. 

The selected papers will be presented at the AALS Annual Meeting in January of 2023

WORKSHOP DESCRIPTION:

The Workshop will be an opportunity to nurture the growth of a broad scholarly community in the field of Professional Responsibility and Legal Ethics. As…

The blog has previously covered the ongoing litigation over California’s director diversity statutes, with Ann contributing this insightful writeup of an earlier Ninth Circuit decision.  The case has returned to the Ninth Circuit on appeal again after the District Court denied a motion for a preliminary injunction.   The case involves a shareholder claim challenging SB 826 on the theory that the law exerts pressure on shareholders to unconstitutionally discriminate when they cast their votes for directors in shareholder elections out of fear that electing a board without enough women will subject the corporation to a fine.

I joined with seventeen other securities and business law scholars to file an amicus brief arguing that the shareholder claim should be classified as a derivative claim.  Many thanks to all who joined and many apologies to Faith Stevelman who joined before the filing deadline and sent thoughtful comments.  In the rush to finalize the brief, I didn’t get her name on the final list of amici.  

This is the summary of the argument:

This shareholder derivative litigation should be decided under ordinary rules for shareholder litigation.  Plaintiff has asserted claims and sought a preliminary injunction as a shareholder of OSI Systems, Inc. (OSI). 

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Glad to join in on the virtual  symposium that launched earlier this week. I come to this with a bit of experience in bar preparation.  I’ve helped put together bar preparation lectures for a bar prep company on business associations topics before.  Business law has been tested as a component of the Multistate Essay Examination (MEE) for some time now.  The outline for the future bar exam looks different from the outline for business law subjects tested on the MEE.  Here are some things that the MEE now includes that the draft outline omits:

  1. Duty of Obedience
  2. Inherent Agency
  3. Limited Partnerships
  4. Limited Liability Partnerships
  5. Cumulative Voting
  6. Financing
  7. Dissolution
  8. Transfer Restrictions

This isn’t a comprehensive list. The outline is generally shorter and covers less than the subjects flagged as being on the MEE.  This of course raises questions about why these areas are not important enough to make the cut.  Some of these I would cut myself, such as the duty of obedience and inherent agency doctrines.  But I would be interested to know how the NCBE arrives at the decision that some of these subject headings merited inclusion on the MEE, but do not merit inclusion on the…

I’m continuing to read my way through Hilary Allen‘s Driverless Finance.  The second chapter examines how fintech now alters how the financial system manages risk.

She begins by breaking down different kinds of risks.  Systemic risk, of course, is the biggest risk of them all.  It’s really about risks to the entire financial system, not just winners and losers within it.  For example, it doesn’t matter how well-diversified your portfolio is if nuclear war breaks out.  That’s systemic risk. Managing systemic risk is primarily a job for regulators and government.

Investors often need to manage other kinds or risks.  Market risk is about what might happen in the marketplace.  When we think about interest rate risk for bonds, it’s a market risk. Credit risk refers to the risk that a counterparty might not pay you.  There are all kinds of risks and substantial research has been done to look at how to build a portfolio to manage risk.  Financial firms now construct complex models to game out these risks.  There’s even model risk; the risk that your model doesn’t accurately capture the risks!

Allen brings our attention to machine learning and risk management.  We now have rapidly…

I’m continuing to read my way through Hilary Allen‘s Driverless Finance.  The first chapter breaks down the need for financial regulators to embrace the precautionary principle. 

At the outset, Allen draws a distinction between measurable and manageable risks and true Knightian uncertainty.  Essentially, Knightian uncertainty refers to those “unknown unknowns” where no real way to evaluate risks exists.  Allen seems correct that an inability to precisely measure risks doesn’t mean we should just trapse forward into the uncertain future without taking reasonable precautions and regulating with an eye toward preserving financial stability.  She details the human costs of financial crises by looking at the widespread harms fairly attributable to the 2008 financial crisis.  These kinds of events wreck economic growth and they wreck lives.  People die.  They die from depression, suicide, foregone preventative medical care, and from other reasons attributable to these crises. Although a financial crisis visits widespread harm across the globe, the damage isn’t spread evenly across society.  The most vulnerable pay the cost. 

Allen convinced me that when we’re evaluating financial innovation, we shouldn’t blindly trust innovators to take systemic risks into account.  Innovators are poorly positioned to think about how competitors and the financial…

Hilary Allen’s new book, Driverless Finance, is out.  I’ve decided to dedicate some blog posts to it as I read my way through to help introduce it to readers.  

It begins with a short prologue set in 2031 and takes the form of a report on the causes of the 2030 financial and economic crisis.  This struck me as a solid way to begin and help people understand the risks.  We’ve had many financial crises.  We will likely have more of them.  It’s important to be thinking now about how the next one might arise.  The report makes a case that the next financial crisis might be tied to the rise of cryptoassets and artificially intelligent trading algorithms.  But the report doesn’t stop there.  It touches on developing risks to payment systems, a general lack of preparedness, corporate governance failures, and failed financial regulation.  Although there is no way to know how the next crisis will play out, the prologue’s 2031 retrospective struck me as fairly plausible from where we are right now.

Allen’s introduction makes a compelling case that we need to pay more attention to what’s happening right now in the financial system before things escalate…