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…

Dear BLPB Readers:

“The American Business Law Journal invites 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 incoming Articles Editor will begin to serve on the Board in August 2022. Board members commit to serve for four years: three years as Articles Editor and one year as Senior Articles Editor. After that, the option is to continue to serve two more years—one as Managing Editor and another as Editor-in-Chief. The ABLJ is widely regarded, nationally and internationally, as a premier peer-reviewed journal and the position provides the opportunity to serve the Academy of Legal Studies in Business and broader academic discipline at the highest levels of service. 

Articles Editors supervise the review of articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. In the case of manuscripts that are accepted, the Articles Editor is responsible for working with the author to oversee changes in both style and substance. In the case of manuscripts that are believed to be publishable but in need of further work, the Articles Editor outlines specific revisions and further lines of research that should be pursued. The Articles Editor’s recommendations for works-in-process are perhaps the most important and creative …

I’ve previously posted about problems in how courts determine whether a complaint pleads scienter under the standards of the PSLRA; last summer, I talked about courts’ unduly narrow use of evidence of insider trading, namely, to consider it only as a pecuniary motive for fraud, rather than as evidence of knowledge of a problem.  Which is why I was very pleased to see the decision in Gelt Trading Ltd. v. Co-Diagnostics Inc., 2022 WL 716653 (D. Utah Mar. 9, 2022).

The claim is that Co-Diagnostics overstated the accuracy of its covid-19 tests, and its stock price fell when the truth was revealed.  The complaint only alleged two false statements; the court dismissed claims based on one, but permitted claims based on a false press release – which was mostly attributed to the company, but also quoted Dr. Satterfield, the company founder/chief science officer – to proceed.

In evaluating the allegations of scienter, the court considered, among other things, that although Dr. Satterfield had not sold stock, others had.  As the court put it:

multiple board members sold significant amounts of stock just as news outlets began to question the accuracy of Co-Diagnostics’ test. This suggests that at least some

…

Dear BLPB Readers:

“The Department of Insurance, Legal Studies and Real Estate in the Terry College of Business at The University of Georgia invites applications for a full-time non-tenure-track faculty position in Legal Studies at the lecturer level, beginning Fall 2022. The position is renewable based on performance and promotion to Senior Lecturer is possible after six years of service. Participation in service activities appropriate to the rank is expected. Salary is competitive and commensurate with qualifications.“

The full job posting is here.

I call your attention this week to Chief Judge Marbley’s opinion in in re FirstEnergy Securities Litigation, 2022 U.S. Dist. LEXIS 39308 (S.D. Ohio Mar. 7, 2022), sustaining the securities fraud complaint against FirstEnergy and various additional defendants.  To some extent, the decision was unsurprising; Chief Judge Marbley sustained similar allegations in a parallel derivative 14(a) claim last year, but there are still some things here I want to highlight.

The basic claim is that FirstEnergy bribed Ohio politicians to secure a public bailout of failing nuclear plants, and lied about it to investors.  When the scandal came to light, the fallout was dramatic, resulting in, among other things, a criminal case against FirstEnergy and a plunge in its stock price.

I’m going to talk about two aspects of the decision.

First, many of the public lies were relatively generic statements to the effect that FirstEnergy’s political donations and lobbying activities complied with all laws, and that the company had a system of internal controls to ensure that this was the case.  (Sidebar: Speaking of generic statements, I assume everyone saw the news that the Second Circuit granted Goldman Sachs’s third 23(f) petition in the Arkansas Teachers case? …

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…

The following comes to us from the Law & Economics Center at Scalia Law.

The Law & Economics Center at Scalia Law to Hold Virtual Panel Discussion Analyzing Reforms to the Bankruptcy Code and Examining Case Law Developments in Mass Tort Bankruptcies Next Week

On Friday, March 18, 2022, from 12:00 PM – 1:00 PM EST, the Law & Economics Center at the George Mason University Antonin Scalia Law School will host a virtual event entitled Bankruptcy and Mass Torts: Examining the Economics, Purposes, and Structure of Bankruptcy Law in Light of Developments in Congress and the Courts. A panel of experts will address the questions and concerns facing Congress as it debates reforms to the Bankruptcy Code and discuss case law developments.

The time-tested law that has developed under the United States Bankruptcy Code creates a sophisticated set of rules, structures, and procedures to preserve value in distressed businesses to protect stakeholders and maximize the return to creditors. Recent uses of legal mechanisms to take advantage of Chapter 11 and other provisions of the Code—including corporate restructuring and divisional mergers by companies facing liabilities from mass tort litigation—have drawn criticism in Congress and challenges in court.

Are these…