Honestly, the most interesting business news I’ve seen during this liminal time between Christmas and New Year’s is this story from my local New Orleans paper.  Four academics – from Tulane, LSU, and the University of New Orleans – joined together to form a … well, a gourmet toothpaste company.  Which apparently became quite popular, recommended by Gwyneth Paltrow and sold in Harrod’s and luxury stores in Dubai. Three of the four founders are now suing the CEO for fraud and misuse of company funds:

the lawsuit says worrying signs were accumulating, including Sadeghpour’s persistent refusal to move operations from his parents’ home on 8th Street in Metairie, a few blocks from the Lakeway business complex, to offices rented in the BioInnovation Center on Canal Street.

When the board members would meet at Sadeghpour’s house on Wednesdays, they started to get uneasy about the fact the company’s sales stagnated after 2018 at the $1 million mark….The lawsuit says the other board members noticed an accumulation in Sadeghpour’s home of Japanese pottery and other high-end art.

The lesson, apparently, is that if you’re the CEO of a small business and you’re spending company funds on personal luxuries, it’s probably best…

In recent years, there’s been a lot of talk about the macro effects of consolidation in the asset management industry, whereby a handful of managers own stock in just about everything.  In particular, several scholars have argued that these massive investors “own the economy,” and therefore internalize any externalities generated by the antisocial behavior of an individual portfolio company.  Therefore, the theory goes, these firms have an interest in reducing sources of systemic risk, like climate change, or potentially racial inequality.  See, e.g., Madison Condon, Externalities and the Common Owner, 95 Wash. L. Rev. 1 (2020); John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk; Jim Hawley & Jon Lukomnik, The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons, 41 Seattle U. L. Rev. 449 (2018).

There were always some kinks in the theory.  Most obviously, concerns have been raised that asset managers encourage less competition among portfolio firms, to the detriment of customers and labor.  See, e.g., Miguel Anton, Florian Elder, Mireia Gine, & Martin C. Schmalz, Common Ownership, Competition, and Top Management Incentives; Zohar Goshen & Doron Levit…

You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one….

Under the Proposed Rule, plan fiduciaries will more often choose ESG investments, employers can serve their political agendas, and investment managers are protected from adverse consequences of their social investment decisions. Indeed, the government may also exert pressure on plan sponsors who do not offer ESG defaults as a way of driving capital to achieve desired social outcomes. But it is the employees and beneficiaries—whose retirement savings are affected—who will

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Julia Y. Lee has published Prosocial Fraud in 2 Seton Hall L. Rev. 199.  Here is an excerpt:

This Article identifies the concept of prosocial fraud–that is, fraud motivated by the desire to help others. The current incentive-based legal framework focuses on deterring rational bad actors who must be constrained from acting on their worst impulses. This overlooks a less sinister, but more endemic species of fraud that is not driven by greed or the desire to take advantage of others. Prosocial fraud is induced by prosocial motives and propagated through cooperative norms. This Article argues that prosocial fraud cannot be effectively deterred through increased sanctions because its moral ambiguity lends itself to self-deception and motivated blindness. The presence of a beneficiary other than the self allows individuals to supplant one source of morality (honesty), with another (benevolence), providing a powerful source of rationalization that weakens the deterrent impact of legal sanctions.

After examining the types of motives that typify prosocial fraud, this Article identifies structural and situational factors–definitional ambiguity, incrementalism, and third-party complicity–that increase its prevalence. Given the cognitive and psychological biases at play, this Article suggests that any efforts to curb prosocially motivated fraud focus less on adjusting…

Today I’m posting to call everyone’s attention to In re Kraft-Heinz Co. Derivative Litigation, decided by Vice Chancellor Will earlier this week.

This is a demand excusal case and there may be a lot that’s interesting about it but I’m focusing on one specific aspect.

Kraft-Heinz was 27% owned by Berkshire Hathaway, 24% owned by 3G (which had operational control), and 49% owned by public shareholders.  Berkshire and 3G each got to nominate 3 members of the 11 member board, and they had a shareholder agreement whereby they promised to vote for each other’s designees, and not take action to “to effect, encourage, or facilitate” the removal of the other’s designees.

Kraft-Heinz started to perform poorly and 3G sold 7% of its stake just before a disappointing earnings announcement.  Shareholders filed a derivative lawsuit alleging that 3G traded on nonpublic information, naming 3G and its board designees as defendants, and the critical question was whether the 11-person board was majority disinterested for demand purposes. That question, in turn, turned on whether Berkshire’s nominees – one of whom was a Berkshire director, one of whom was a director of several Berkshire subsidiaries and the CEO of one  – could objectively…

Whenever I want to complain about my boredom with blogging the latest developments in Arkansas Teachers’ Retirement System v. Goldman, I think to myself, at least I’m not as bored as Judge Crotty of the SDNY.  And Judge Crotty made that clear this week in his opinion re-certifying the class (for a third time).

The history, as I’ve previously blogged, was that plaintiffs alleged Goldman violated Section 10(b) with anodyne statements about its ethics and ability to manage conflicts among its varied client base, and these were revealed to be false in a few financial-crisis-era scandals about conflict-ridden CDO sales.  The plaintiffs’ theory was that Goldman had a reputation for managing its conflicts well, which was baked into the stock price, and these statements maintained its stock price at those inflated levels, until the truth was disclosed and the stock price dropped.  Goldman’s main defense has been that the statements were too vague, generic, content-less, etc to matter to investors.  It tried that argument on a motion to dismiss, and then a motion for reconsideration of the motion to dismiss, and then on a motion for interlocutory appeal of the denial of the motion for reconsideration, and…

Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problem ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939112 ):

The exercise of institutional voting power is by fund managers or governance teams, people who have “little or no economic interest in the shares that they vote,” This “empty voting” has the potential to undermine the legitimacy of the shareholder franchise. It is of particular concern when the assets committed to a broad-based index fund are voted to support initiatives that have the potential to sacrifice economic value in favor of social or societal objectives about which the shareholders invested in that index fund may not agree.

Matteo Gatti & Chrystin D. Ondersma, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies? ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3793732 ):

Because available evidence suggests that corporations will seek to undermine any proposal that meaningfully shifts power and resources to workers, it is unlikely stakeholderism could provide equivalent protections that can actually improve workers’ position; assuming it could, its implementation would be no more feasible than direct regulation. Neither do we believe that stakeholderism can provide a fertile landscape for direct regulation, because corporations are likely to use stakeholderism as a pretext to wield greater political power and to shape the

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