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Yesterday, my weekly SSRN search on the keyword “derivatives” returned a fascinating article: Vincent S.J. Buccola, Jameson K. Mah, and Tai Zhang’s The Myth of Creditor Sabotage (forthcoming in the U. of Chi. L. Rev. 2020). For years now, as researchers in this area know, much speculation has existed about the role of net-short creditors – those creditors for whom “a derivative payoff [as a result of a debtor’s failure would be] more than sufficient to offset a loss on the underlying investment” – potentially play in a debtor’s demise.  Indeed, I’ve posted about Confining Lenders with CDS Positions.  Largely missing from such debates, however, has been discussion of other market participants’ incentives.  Indeed, as the authors state in their Introduction: “The problem with the sabotage story is not that it misapprehends net-short creditors’ incentives, but that it ignores everyone else’s.”  So basic, yet so right.  Thus far, legal scholarship has insufficiently focused on this critical consideration.  In hopes of helping to reverse this shortfall, I highly encourage readers to review this article.  It is posted on SSRN here and an abstract is below:

Since credit derivatives began to substantially influence financial markets a decade ago, rumors have circulated about so-called “net-short” creditors who seek to damage promising albeit financially distressed companies. A recent episode pitting the hedge fund Aurelius against broadband provider Windstream is widely supposed to be a case in point and has at once fueled calls for law reform and yielded an ostensible effigy of Wall Street predation.

This article argues that creditor sabotage is a myth. Net-short strategies work, if at all, by in effect burning money. When therefore an activist creditor shows its cards, as all activists must eventually do, it also reveals an opportunity for others to profit by thwarting the activist’s plans and saving threatened surplus from the ashes. We discuss three sources of liquidity that targeted firms could tap to block a saboteur — “net-long” derivatives speculators, the targets’ own investors, and bankruptcy. We conclude that it is exceedingly difficult for creditors to make money hobbling debtors and that there is little reason to believe anyone tries. We then examine the Windstream case and find, consistent with our theory, that the strongest reason for thinking Aurelius aimed at sabotage, namely that everyone says so, is weak indeed. Our analysis suggests that calls for law reform are addressed to a non-existent or at worst self-correcting problem. Precisely for this reason, however, the persistent appeal of the sabotage myth is a lesson in political rhetoric. A story needn’t be true for some to find it useful.

Given the number of corporate governance functions that can be conducted using blockchains, it seems appropriate to consider how business lawyers should respond to related challenges.  Babson College’s Adam Sulkowski and I undertook to begin to address this concern in an article we wrote for the Wayne Law Review‘s recent symposium, “The Emerging Blockchain and the Law.”  That article, Blockchains, Corporate Governance, and the Lawyer’s Role, was recently released.  An abstract follows.

Significant aspects of firm governance can (and, in coming years, likely will) be conducted on blockchains. This transition has already begun in some respects. The actions of early adopters illustrate that moving governance to blockchains will require legal adaptations. These adaptations are likely to be legislative, regulatory, and judicial. Firm management, policy-makers, and judges will turn to legal counsel for education and guidance.

This article describes blockchains and their potentially expansive use in several aspects of the governance of publicly traded corporations and outlines ways in which blockchain technology affects what business lawyers should know and do—now and in the future. Specifically, this article describes the nature of blockchain technology and ways in which the adoption of that technology may impact shareholder record keeping and voting, insider trading, and disclosure-related considerations. The article then reflects on implications for business lawyers and the practice of law in the context of corporate governance.

In the article, Adam and I do a fair amount of visioning.  Based on the development of blockchain corporate governance we imagine, we conclude that business lawyers must both focus on understanding technology in the context of their clients’ business operations and be proactive in providing legal advice relating to potential uses of the technology.  We conclude that,

[i]n representing business clients, counsel have a critical role in thinking through all the implications of moving any governance function or process to a blockchain-based platform. It is especially important to help clients see, consider, and appreciate certain irrevocable consequences and legal risks, as well as potential opportunities. . . .

There is much for us all to learn in this area.  A number of legal scholars are engaging in work that may be useful in better informing us.  I, for one, try to attend as many of their presentations as possible as a means of better informing myself of what I need to know to teach corporate governance in the blockchain era.  (We note in the article that blockchain corporate governance “impacts the job of legal educators and law schools.”)  I will continue to be on the lookout for additional work on blockchain corporate governance (and lawyering in an increasingly blockchain-driven world) and endeavor to highlight key things I find by posting about them here.

I watched the Netflix documentary American Factory, about the labor relationships at a Chinese-owned auto glass factory in Dayton, Ohio.  (For anyone unaware, the movie was produced by the Obamas).  It’s a fascinating film for anyone interested either in business or labor issues.

The movie begins when the old GM plant is closed in the midst of the financial crisis, throwing thousands of people out of work.  The plant is later purchased by Fuyao, a Chinese company.  They’re hiring, but at much lower wages than the old factory, and they openly state they do not want any unionization.  They are also sending over Chinese workers to work alongside the Americans.  Despite the pay cut, American workers in this economically-depressed area are happy for the job; we can see the transformation made in people’s lives.

At first, the American workers and the Chinese workers bond; the Americans invite the Chinese over to parties, enjoy introducing them to American culture, and so forth.  But the film then depicts something of a culture clash between the Americans and the Chinese. 

The Chinese expect far more obedience from their workforce, longer working hours, and they seem baffled by American regulations – everything from environmental/safety to labor regulation.  They openly state they want to hire younger workers (age discrimination!) and plan to fire labor organizers (labor violation!).  Americans complain about unsafe working conditions and pollution, and obviously feel as that the Chinese supervisors – unfamiliar with American standards – are unsympathetic to their concerns.  At one amusing/painful moment, the Chinese receive instructions from their supervisors about how American workers have unusually delicate sensibilities and need to be flattered into performing.

Later, in a jarring sequence, the American factory supervisors visit China.  Among other things, workers regularly perform dangerous tasks without any safety equipment, and put on demonstrations of obedience and satisfaction, in sharp contrast to the increasing dissatisfaction of the American workers.  Which isn’t to say the Chinese are necessarily any happier than the Americans – some Chinese workers talk about how they almost never get to see their families because of their long hours – but they are expected to put on a display of unity. 

So there certainly are these cultural differences, which the film illustrates.

But. 

It does not actually strike me that in substance the Chinese-owned American factory is, in fact, run very differently than an American factory.  Which is to say, the Chinese clearly are not sensitive to American laws, which is why they admit to extraordinarily illegal actions on camera; an American factory owner would be more savvy.  But American bosses fire labor organizers, and violate safety laws, and demand unpaid overtime, and offer non-union laborers low wages, and replace workers with automation, all the time.  In fact, to fight the labor agitation, the Chinese bring in an American consultant.  Someone snuck a microphone into the meeting that the consultant held with the workers, and we hear all the standard lines from the anti-union playbook; none of this is unique to Chinese factory owners.

So while the framing device here is one of culture clash – and certainly the Americans and the Chinese experience it that way – it’s not clear that the substantive sources of disagreement would be any different no matter who owned the factory.

And that’s ultimately quite sad.  Because we know from the start that the unionization effort is doomed, and the overall picture is one of an economic and legal system that simply is not designed to encourage that every single person be valued, and every single person be given a chance to flourish.   Instead, the assumption underlying the system – in both countries – is that many human beings, perhaps most human beings, will be cogs in a larger machine, mere instruments to allow other people to thrive.  On the American side, though, the rhetoric is at odds with that tragic reality. 

The PIABA Foundation just released a study examining the results of FINRA’s expungment processes.   FINRA’s expungement rules and dispute resolution process allow brokers to obtain arbitration awards recommending the removal of customer complaints and other information from their regulatory records.  The brokers can then take the awards to court and have them confirmed.  A state court order confirming the award results in the removal of unflattering information from the CRD database. 

As this happens more and more, you should trust FINRA’s BrokerCheck system less and less. In theory, BrokerCheck should allow the public to do meaningful due diligence on brokers by looking them up to see if customers have complained. Sadly, many of the complaints customers and state regulators need to evaluate brokers have been washed away through the expungement process. The PIABA Foundation study found that expungment rates have increased dramatically in recent years.  Brokers sought to expurgate 102 complaints in 2015.  The number rose to 300 in 2016 and rose again to 756 in 2017.  Last year, brokers sought to suppress 1,036 complaints. These requests are generally successful and brokers succeed in these efforts over 80% of the time.

I’ve written about how to see if complaints have been suppressed before.  Growing evidence indicates that the expungement process is so fundamentally broken that brokers with expunged complaints may actually be more dangerous than others.  You simply cannot rely on FINRA’s BrokerCheck alone for due diligence any longer because a clean BrokerCheck may only be meaningful if the broker has not also had complaint expunged.

 

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Morgan State University has an open tenure-track position in the business law area.  A short blurb from the posting is below and a link to the posting here:

The Department of Business Administration in the Earl G. Graves School of Business and Management at Morgan State University invites applications for a full-time, tenure-track Assistant Professor appointment in
Business Law. The position will commence Spring/Fall 2020.

The School of Business and Management is AACSB accredited and housed in a beautiful new building with state of the art technology and a Capital Markets and Marketing Lab, as well as have growing programs that engage students and the local/business community. The School of Business and Management faculty are research-active. Therefore, the successful candidate must actively engage in research, as well as teach Business Law courses along with Life and Health Insurance, Real Estate, and Risk Management (as secondary interests).

Two opportunities for business law profs crossed my desk over the past few days.  One comes from Beate Sjåfjell, and the other from Caprice Roberts.  The topics?  Sustainability and SEALS.

Beate advises that there are a few places left at an upcoming conference on Corporate Sustainability Reforms: Securing Market Actors’ Contribution to Global Sustainability.  The conference will be held in Oslo, Norway on October 24, 2019 and features contributions from around the world and across disciplines. She promotes the conference as follows:

We know that we need the contribution of all market actors: business, citizens, investors, and the public sector to achieve sustainability. However, a number of barriers, gaps and incoherencies that prevents market actors from contributing has been identified by the SMART Project. At this conference we will discuss how to facilitate the transition to sustainability, with the aim of identifying concrete proposals.

The conference is open to students, scholars, policy-makers, practitioners, and journalists. The deadline to register is October 17. There is no registration fee, and a lunch and reception are included for all participants.

Caprice wrote to remind me that the submissions portal, https://www.sealslawschools.org/index.php/conference-submissions/, is open for the Southeastern Association of Law Schools (SEALS) 2020 annual meeting and conference at the Marriott Fort Lauderdale July 30 – August 5.  Guidelines are accessible from the same link. SEALS hopes to have a preliminary draft of the program up in early November.
 
I have focused on generating or promoting business law offerings at SEALS for many years.  John Anderson and I are looking to organize a discussion session for the 2020 conference on what motivates insider trading, and a few people have been asking around about some other business law topics.  The more, the merrier.  Let me know if I can help you in generating ideas for discussion sessions or other SEALS programs.

Image result for Abhijit Banerjee, Esther Duflo and Michael Kremer

Congrats to MIT professors Abhijit Banerjee, Esther Duflo and Michael Kremer on their recent Nobel Prize in Economics. 

A few years ago, I completed Professors Banerjee and Duflo’s free online EdX course on “The Challenges of Global Poverty.”

Evidently, they are doing a rerun of that course, starting February 4, 2020. You can sign up here. 

Yesterday, two highly important events occurred in the sports world.  First, OU prevailed in the Red River Showdown.  Boomer Sooner!  But, that’s not what this post is about (so, stay w/me Texas Longhorns fans!).  Second, famed Kenyan marathoner Eliud Kipchoge broke the 2-hour marathon barrier.  Today’s post is my heartfelt way of paying tribute to Kipchoge’s historic moment. 

In June, co-blogger and fellow runner Haskell Murray wrote about inspirational runners exemplifying toughness, self-discipline, humility, and perseverance (here).  In July, I followed suit (here).  In reflecting upon the little I know of Kipchoge’s journey that led to smashing a barrier many thought impossible, it’s clear to me that he has these character traits in abundance.

In November 2016, Nike announced its Breaking2 project.  In a nutshell, it involved years of planning, the assembly of world-class scientists, trainers, runners, and even a new shoe, in the quest for a sub-two hour marathon.  In May 2017, after months of intense preparation, Kipchoge almost achieved this objective.  His time: 2:00:25 (a Nike/National Geographic documentary of the Breaking2 project is: here).  He’d given 100%, but ultimately failed to reach the goal.  Nevertheless, Kipchoge did not quit.  Indeed, in the 2018 Berlin Marathon, he set the current official world marathon record of 2:01:39.

Yesterday, Kipchoge made history.  This required tremendous perseverance, extreme self-discipline, mental toughness, and the humility to risk once again falling short of the goal in the international spotlight.  As I’ve learned more about Kipchoge’s running career through reading and short films like the one released ahead of the 2019 London Marathon of his training camp and philosophies (here), several takeaways and life-lessons for all seem to be:

“[N]o-one is limited”

Never give up.

“If you want to be successful, you need to choose. But to choose well, you must know who you are and what you stand for.  Where you want to go and why you want to get there.”

The importance of sacrifice in achieving success.

Keep it simple and focused.

The importance of taking risks

“In training, it’s teamwork” – “1 percent of the whole team is really more important than 100 percent of yourself.”

“[T]he positivity of sport”

Believe in the impossible!

 [10/15/19 Postscript: Kipchoge won two Olympic medals: bronze (2004) and silver (2008) in the 5000m.  He pivoted to distance running after failing to make the 2012 Kenyan Olympic team (here).  In 2016, he won the Olympic marathon.  Yet one more example of his not letting failure stop him, but instead persevering and turning it into triumph!]