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I am intrigued by this new genre of financial writing that warns (in increasingly apocalyptic terms) that passive investing will lead to increasingly distorted and inefficient markets.

Nevsky Capital, a large hedge fund, noisily shut its doors last year with an investor letter that blamed, among other things, index investing that distorted correlations among stocks.

Sanford C. Bernstein & Co., LLC. recently published a note declaring that passive investing is “worse than Marxism” because at least Marxism allocates capital according to some kind of principle, whereas passive investing allocates capital by the happenstance of inclusion in an index.

And a research analyst recently posted “The Last Active Investor,” a short story that posits a dystopian future in which all market prices are set by a single person performing the world’s only fundamental research.

It’s true that index investing distorts stock prices to some degree, though there has been plenty of pushback to the claim that there’s any real danger of passive investing overtaking the market, especially since the definition of passive investing itself might be somewhat malleable in an age of increasingly sophisticated computerized trading.

But what I’m mostly curious about is what sorts of policy…

This post is mainly for our practicing lawyer readers. If I were to venture back to a law firm, I wouldn’t ask graduating students for recommendations only from their law professors. Instead, if the student was on law review (as most BigLaw applicants are) I would ask for at least one recommendation from a law professor whose article the student edited. 

First, a law professor has less reason to exaggerate or falsely praise a student at another school. Second, a law professor who has worked on an article with a student gets excellent insight into that student’s attention to detail (or lack there of) and attention to deadlines (or lack there of). Third, the law professor/author gets to see the student do work where the rewards are not immediate nor as large as they can be in the studying/grades context. Fourth, the cite checking and editing work done on law review articles is more similar to the work of a junior associate than is (at least a good percentage of) course work. 

Yes, a law professor at another school will have limited interaction with that student and usually only virtual interaction. But a lot of legal work is done virtually…

I have to say, it pains me that this is even news – that price maintenance as a form of fraud on the market should, I believe, be unexceptionable, indeed, necessary for the theory to function properly.

But the idea has been at least somewhat rejected by the Fifth Circuit – see Greenberg v. Crossroads Sys., 364 F.3d 657 (5th Cir. 2004) – and defendants are vigorously disputing the legitimacy of price maintenance elsewhere.

So it comes as something of a relief that in In re Vivendi, S.A. Sec. Litigation, 2016 U.S. App. LEXIS 17566 (2d Cir. Sept. 27, 2016), the Second Circuit has now joined the Eleventh Circuit, see FindWhat Inv’r Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir. 2011), and the Seventh Circuit, see Glickenhaus & Co. v. Household Int’l, Inc., 787 F.3d 408 (7th Cir. 2015), with a full-throated endorsement of the idea that even if a fraudulent statement does not introduce “new” inflation into a stock’s price – even if it simply maintains existing inflation by confirming an earlier false impression – that too violates Section 10(b) and is actionable using the fraud on the market doctrine. 

Beyond this simple holding…

    Every year I teach RUPA (1997) § 404(e), and every year I am confused.  That section states that “[a] partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.”  The comment makes the following observations (emphasis added):

    Subsection (e) is new and deals expressly with a very basic issue on which the UPA is silent.  A partner as such is not a trustee and is not held to the same standards as a trustee.  Subsection (e) makes clear that a partner’s conduct is not deemed to be improper merely because it serves the partner’s own individual interest.

    That admonition has particular application to the duty of loyalty and the obligation of good faith and fair dealing.  It underscores the partner’s rights as an owner and principal in the enterprise, which must always be balanced against his duties and obligations as an agent and fiduciary.  For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.

 I have always found this shopping center example to be…

I’m sure I’m not alone in having followed the spectacular fall of Theranos over the past year.  Elizabeth Holmes was a fairytale come to life – and now, the main question seems to be whether she intentionally defrauded her investors and the public, or whether she was simply in denial about the limitations of her technology.

(I personally don’t see the two as mutually exclusive – many fraudsters lie in the expectation that they can soon turn things around and no one will be any the wiser.  In this case, there’s just too much evidence that Holmes was consciously evasive when questioned about her technology for me to believe that she wasn’t intentionally misleading people)

It’s probably too tempting to try to draw lessons from the Theranos debacle, but there are some interesting issues it raises.

First, I wonder whether Theranos is an argument for or against initiatives like the JOBS Act that make it easier for companies to raise large amounts of capital without holding an IPO.

On the one hand, because Theranos never went public, the fallout was contained; we haven’t seen the spectre of thousands of retail investors directly or indirectly losing their pensions.

On the…

As part of my “scared straight” strategy for teaching insider trading, I like to tell my students horror stories of attorneys who have been caught up in scandals (as well as the collective *facepalm* reaction of the bar, which is as much due to the stupidity of the schemes as to their immorality).

Last year, I recounted the curious case of Robert Schulman and King Pharmaceuticals.

Schulman was an attorney representing King Pharmaceuticals, and he learned that the company would soon be acquired by Pfizer.  He told his friend and investment adviser, Tibor Klein, who promptly purchased King shares for himself and his clients (some of which were allocated to Schulman’s account).  All told, Klein generated about $328K in profits.

The SEC charged Klein with insider trading in 2013.  Interestingly, the SEC did not accuse Schulman of tipping; instead, the SEC’s theory was that Schulman had gotten tipsy at dinner and shot off at the mouth, ultimately blurting out, “It would be nice to be King for a day.”  (When I tell my students this part, I imagine how that might have been said – presumably, with an exaggerated  wink and heavy emphasis on the word “King”).  Klein, having been…