A recent Illinois case uniquely applied the alter ego doctrine in the context of a criminal case.  See People v. Abrams, 47 N.E.3d 295, ¶¶ 57-61, 399 Ill. Dec. 790 (2015) ( slip op. PDF here ).  In my view, not quite right, either.

In the case, the defendant (Abrams) stole $1.87 million from the victim (Lev), which led to a restitution order for that amount and a twelve-year prison sentence for Abrams.  The conviction was for a Class 1 felony, for the the theft of property exceeding $500,000.  Id.¶ 23 (citing 720 Ill. Comp. Stat. Ann. 5/16-1(a(2) (West 2012)).  The statute provides, “Theft of property exceeding $500,000 and not exceeding $1,000,000 in value is a Class 1 non-probationable felony.” 720 Ill. Comp. Stat. Ann. 5/16-1(b)(6.2). 

On appeal, the defendant argued the indictment was wrong in that it stated the money was stolen from Lev, when most of the money actually belonged to Lev’s company, The Fred Lev Company (presumably a corporation, but that is not stated expressly).   Abrams claimed: 

the State did not prove he obtained “unauthorized control” of more than $500,000 of Lev’s property. Abrams recognizes the evidence presented at trial established that over $1.8 million was taken. Abrams contests the finding that the entire amount was taken from Lev and not The Fred Lev Company. 

Abrams, 47 N.E.3d 295 ¶ 57.  The court countered: “This is a distinction without a difference. Two separate doctrines of law guide our decision.” Id. Although I think the court is probably right on the outcome, one of the rationales is wrongly explained.

The court’s first assertion is as follows: 

First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d 166, 173 (1994). “The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2002). In the context of “piercing the corporate veil,” an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party’s relationship to that operation. A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 43. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams’ own testimony confirmed it. 

Id.¶ 58. This is an overreach, as far as I am concerned, and I don’t like the ease with which the court uses veil piercing without a detailed analysis. I believe that veil piercing, if it is to be used, should have some consistency, though I know that’s now how it tends to work (i.e., without consistency).  Here, would the court have pierced the veil if this were a creditor bringing suit directly against Lev because his corporation couldn’t satisfy a judgment? I think it would be wrong to do so on similar facts, so I think it is careless to apply the alter ego doctrine in this manner here.  

The court continues:

Second, the indictments sufficiently apprised Abrams of the charges against him. See People v. Collins, 214 Ill. 2d 206, 219-20 (2005) (any variance was neither material nor prejudicial to defendant). We do not believe that the defendant was in any way prejudiced by the indictments at issue. 

Id.¶ 59. I totally and completely buy this.  And, in addition, the court noted:

Even more convincing is that in opening statements to the jury, defense counsel told the jury that the checking accounts “were not used solely for [Lev’s and Abrams’] corporate work. They didn’t separate the corporation from their personal lives and personal expenses. *** They were using everything that went into that corporate account and writing checks on it for their own personal private, for their own person use. There was a commingling.” Additionally, defense counsel referred to “Fred Lev and Company” as being both Abrams and Lev. In closing argument, defense counsel argued that the company was “a small-time operation” with “one corporate book” that both Lev and Abrams used as “their own personal piggybank.” 

Id.¶ 60.  In the trial, it was determined that the statutory felony monetary amount threshold was met.  And the defendant admitted that he considered the funds to be Lev’s and that he (the defendant) disregarded the entity.  I see no notice problem as to the defendant, and I have no concern that a jury couldn’t understand whether the theft occurred in the amount claimed. I can see an argument, perhaps, that the prosecution should still get it right as to whom the money actually belonged, but it seems to me correct to say the crime was properly analyzed and assessed as to the criminal elements, so the claim is harmless error in this instance. Lev would have been the one to assert the claim for the Company, so it is hard to see how Abrams was harmed. 

I will maintain, though, that the veil piercing rationale is unnecessary and overstated. (I might be comfortable if they used the analogy to explain harmless error, but the way it was done is too much for me.)  Furthermore, as to the judgment for restitution to Lev, it is wrong. That money (or some portion of it) belongs to The Fred Lev Company.  Suppose there are creditors out there who have gone unpaid.  Or they are unpaid down the road.  At a minimum, the funds stolen from the company should go back through the company so it could be clear what funds were there and should have been available. Thus, as to the charges, I think the court probably got it right.  But as to respecting the entity (and protecting creditors now, and in the future), this could have been handled better. 

H/T Prof. Gary Rosin

Call for Panels and Papers

Society of American Law Teachers (SALT) Teaching Conference
in partnership with the
LatCrit-SALT Junior Faculty Development Workshop

SALTlogo

www.saltlaw.org
Friday and Saturday, September 30 and October 1, 2016
The John Marshall Law School, Chicago, Illinois

From the Classroom to the Community: Teaching and Advancing Social Justice

In 2015, law school applications hit a fifteen-year low. The drop reflects a radically changed employment market and a prevailing view that law school is no longer a sound investment. To attract qualified applicants and respond to a changing marketplace, many law schools have embraced experiential learning mandates and other “practice-ready” curricular shifts. The plunge in applications has also prompted law schools to lower admissions standards. In turn, the admission of students with below-average LSAT scores and modest college grade point averages has created new concerns about bar passage, job placement, and prospects for longterm professional success.

In this environment, the legal academy is faced with unprecedented challenges. On one hand, pressure exists to ensure that students are adequately prepared to navigate a courtroom, draft legal documents, and exhibit other “practice-ready” skills upon graduation. At the same time, law professors are urged to cover a wide spectrum of theory, rules, and doctrine to increase prospects for bar passage. In the struggle to achieve both goals, the critical need to integrate social justice teaching into the curriculum is often overlooked, rejected as extraneous, or abandoned in light of time constraints.

To the contrary, social justice teaching plays an essential role in improving legal analysis, enhancing practical skills, and cultivating professional development. Moreover, social justice teaching can help instill passion, commitment, and focus into students burdened with debt and facing an uncertain job market. Most important, as the legal marketplace contracts, access to counsel for lower- and middle-income people continues to grow — creating a pressing need for effective and committed pro bono lawyers.

In response to new educational and professional challenges, law schools and the legal profession must join in a concerted effort to integrate social justice teaching into the classroom and expand social justice throughout the community. This conference will provide opportunities to engage in broad, substantive, and supportive discussions about the role of legal education and the legal profession in teaching students to become effective social justice advocates and the ways faculty can set an example through their own activism.

Suggested topics include, but are not limited to:

1. Innovative methods to incorporate social justice concepts into the law school curriculum.
2. Strategies to encourage students to become more engaged in academic and community activism.
3. Collaborative efforts between law schools and the legal profession to respond to the need for greater
access to legal services.
4. Techniques to help law students and new lawyers develop resilience, stamina, and “grit” to face the
enduring challenges of social justice advocacy.
5. Responses to the ever-increasing cost of legal education and its impact on social justice and access
to justice.

We welcome other related topics and encourage a variety of session formats. You may submit a proposal as an individual speaker, as a panel, or group. Whatever your topic and format, please use the required format as provided below for your proposal.

Please send your proposals to Hugh Mundy (hmundy@jmls.edu) by June 15, 2016.

Other members of the SALT Teaching Conference Committee include Margaret Barry (mbarry@vermontlaw.edu), Emily Benfer (ebenfer@luc.edu), Davida Finger (dfinger@loyno.edu), Allyson Gold (agold@luc.edu), and Aníbal Rosario Lebrón (anibal.rosario.lebron@gmail.com). Please share information about
the Teaching Conference with your colleagues, particularly new and junior faculty, who are not yet members of SALT. Visit www.saltlaw.org for additional details.

Required Format for Proposed Presentations

Please submit all proposals by using the bolded headings set forth below.

1. Title of proposed presentation

2. Presenter name and contact information

Submit contact information for each individual who will participate in the presentation; however, you must identify one person to serve as the primary contact person. The contact person is responsible for receiving and transmitting information about the SALT conference to the other members of the panel.

Contact person:

Presenter’s school (as listed in the AALS Directory) and mailing address
E-mail
Office phone number
Mobile phone number
Fax number

Other panel members (if applicable):

Presenter’s school (as listed in the AALS Directory)
E-mail

3. Summary of the proposed presentation.

The description or narrative portion of the proposal should accurately and succinctly describe the content, format, and anticipated duration of the presentation. The ideal length of the summary is approximately one page of double-spaced text.

4. Related papers or documents (if applicable).

We do not expect all submissions to include related scholarship or documents- especially at this early point in the process; however, if you have any related documents that help to support or illustrate your proposed presentation, feel free to attach them to your submission.

The Central States Law Schools Association 2016 Scholarship Conference will be held on Friday, September 23 and Saturday, September 24 at the University of North Dakota School of Law in Grand Forks, ND.  

CSLSA is an organization of law schools dedicated to providing a forum for conversation and collaboration among law school academics. The CSLSA Annual Conference is an opportunity for legal scholars, especially more junior scholars, to present working papers or finished articles on any law-related topic in a relaxed and supportive setting where junior and senior scholars from various disciplines are available to comment. More mature scholars have an opportunity to test new ideas in a less formal setting than is generally available for their work. Scholars from member and nonmember schools are invited to attend. 

Registration will formally open in July. Hotel rooms are already available, and more information about the CSLSA conference can be found on our website at www.cslsa.us.

This is not a pipe dream!  I honestly believe that in the fall of 2017, this will be a reality for me.  (I typically teach Business Associations in the fall semester to a large number of students who understand “cases,” not “deals.”)

The reason for my good spirits and honest belief in the positive change in my students?  Our new 1L curriculum, which is rolling out this fall.  No doubt, we will find some changes that need to be made as we implement our relatively bold plan.  But I am truly excited that the new first-year curriculum exposes every student to a transactional experience in the first year of law school.  

There are many reasons for implementing this kind of change, of course.  Among other things, this new approach to the first year at UT Law responds to suggestions that we got from our students and represents an effort to better connect the 1L year to our upper division curriculum (on which we have spent a lot of time over the years).  The new 1L transactional offering is part of a larger plan constructed by a College of Law committee, chaired by my colleague (and e-discovery queen) Paula Schaefer, that spent several years looking at our overall curriculum and that of many other schools before fashioning a number of alternative options for the faculty to review.  

The implementation involves a lot of work.  Many colleagues are chipping in to construct new courses and re-fashion existing courses to meet the new curricular requirements.  It takes a village.  I am grateful for all of the work being put in.  I work with a great bunch of folks.

An article in the National Jurist last week describes the new 1L curriculum in general.  Our academic policies, however, add some detail.  I quote from them below, with some reformatting for easier reading in this space.

For students entering in or after Fall 2016, the first-year curriculum is as follows:

First Semester
Civil Procedure I* (3)
Contracts I (3)
Criminal Law (3)
Lawyering & Professionalism (1) Legal Process I (3)
Torts I* (3)

Second Semester
Civil Procedure II (3)
Contracts II (3)
Legal Process II (3)
Property (4)
Torts II (2)
Transactional Lawyering Lab (1)

*First-year students enroll in an experiential section of either Civil Procedure I or Torts I. The experiential sections include three graded, simulation-based assignments. Each simulation places students in the role of lawyer, raises professionalism issues, requires students to perform a lawyering skill, and results in a written and/or oral work product. In addition to a final examination, the course also includes a midterm exam that includes at least one essay question.

We are pretty excited to get this new curricular show on the road.  I look forward to sharing more with you as we see how students react in the short term and long term.  But my UT Law colleagues and I are very hopeful that this new approach to the first year will lay a strong foundation for upper division academic work and for practice.

 

A few days ago, the Eighth Circuit became the first appellate court to interpret Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II), relying on that case to reverse a district court’s class certification order in IBEW Local 98 Pension Fund v. Best Buy Co.

The case is interesting because it has an unusually clean fact pattern for analyzing some basic dilemmas in the law governing Section 10(b) actions.

The facts are these:

On the morning of September 14, 2010, before the market opened, Best Buy issued a press release that increased its full-year earnings guidance.  By the time of the opening, its stock price was up 7.5% from the prior day’s close.  Two hours after the press release issued, Best Buy held a conference call with market analysts, during which the CFO stated that the company was “on track to deliver and exceed” its EPS guidance. 

On December 14, 2010, Best Buy issued a press release announcing a decline in sales and reduction in EPS guidance, causing a stock price decline.

The plaintiffs alleged that both the September 14 press release, and the subsequent conference call, were fraudulent.  The district court held that the press release was immunized as a forward-looking statement, accompanied by sufficient cautionary language, under the PSLRA’s safe harbor.  However, the court held that the “on track” representation was not forward looking, and claims based on that statement could proceed.

The problem, however, as the plaintiffs’ own expert eventually opined, was that Best Buy’s stock price increased after the immunized press release, and did not appear to react to the earnings conference call.  The plaintiffs’ expert also opined that the conference call conveyed information that was “virtually the same” as the information in the press release. 

The plaintiffs offered two theories to explain how the conference call may have impacted Best Buy’s stock price.  First, they claimed that the conference call caused an upward earnings drift over the next several weeks.  And second, they claimed that the “on track” confirmatory statements served to maintain Best Buy’s stock price, already boosted by the press release.  Accepting this evidence, the district court certified the class.

On appeal, the Eighth Circuit reversed.  It concluded that, in accordance with Halliburton II, the defendants had rebutted the presumption that the conference call impacted Best Buy’s price.  In the Eighth Circuit’s view, because the plaintiffs’ own expert agreed that the stock price had only increased in response to the immunized press release, and agreed the conference call conveyed no new information, the conference call could not have had an effect.  The court rejected the “earnings drift” theory as contrary to the efficient market hypothesis, but did not – in explicit terms – weigh in on the plaintiffs’ price maintenance theory, except to say that this was unlike situations where a third-party confirms an earlier corporate statement.

Judge Murphy, in dissent, faulted the majority for failing to directly confront the plaintiffs’ price maintenance theory – which, she believed, had not been rebutted.

There are several interesting things to comment on here.

[More under the jump]

Continue Reading It’s a reversal! Our First Appellate Interpretation of Halliburton II Has Arrived

I’m at the MALSB Conference in Chicago, but saw Anita Krug’s recently posted book chapter entitled Toward Better Mutual Fund Governance. Worth reading. Abstract below.

————–

This chapter evaluates the implications of an emerging model of mutual fund governance for effective oversight and regulation. As in the traditional model, in which a board of directors or trustees serves as the board of multiple discrete funds managed by a single investment adviser, this alternative model similarly contemplates the creation of multiple funds, but it eschews a single investment adviser charged with managing each fund’s assets. Rather, there are numerous advisers, each managing one or a small number of funds within the group. Although the new model may portend an improvement over the traditional model in some respects, questions arise as to whether it introduces concerns of its own and whether those concerns are more or less manageable than those to which the traditional model gives rise. The chapter contends that, although the new model produces risks not associated with the traditional model, there are reasons to believe, at least preliminarily, that it is at least as effective as the traditional model.

Today in my Business and Human Rights class I thought about Ann’s recent post where she noted that socially responsible investor Calpers was rethinking its decision to divest from tobacco stocks. My class has recently been discussing the human rights impacts of mega sporting events and whether companies such as Rio Tinto (the medal makers), Omega (the time keepers), Coca Cola (sponsor), McDonalds (sponsor), FIFA (a nonprofit that runs worldwide soccer) and the International Olympic Committee (another corporation) are in any way complicit with state actions including the displacement of indigenous peoples in Brazil, the use of slavery in Qatar, human trafficking, and environmental degradation. I asked my students the tough question of whether they would stop eating McDonalds food or wearing Nike shoes because they were sponsors of these events. I required them to consider a number of factors to decide whether corporate sponsors should continue their relationships with FIFA and the IOC. I also asked whether the US should refuse to send athletes to compete in countries with significant human rights violations. 

Because we are in Miami, we also discussed the topic du jour, Carnival Cruise line’s controversial decision to follow Cuban law, which prohibits certain Cuban-born citizens from traveling back to Cuba on sea vessels, while permitting them to return to the island by air. Here in Miami, this is big news with the Mayor calling it a human rights violation by Carnival, a County contractor. A class action lawsuit has been filed  seeking injunctive relief. This afternoon, Secretary of State John Kerry weighed in saying Carnival should not discriminate and calling upon Cuba to change its rules. 

So back to Ann’s post. In an informal poll in which I told all students to assume they would cruise, only one of my Business and Human Rights students said they would definitely boycott Carnival because of its compliance with Cuban law. Many, who are foreign born, saw it as an issue of sovereignty of a foreign government. About 25% of my Civil Procedure students would boycott (note that more of them are of Cuban descent, but many of the non-Cuban students would also boycott). These numbers didn’t surprise me because as I have written before, I think that consumers focus on convenience, price, and quality- or in this case, whether they really like the cruise itinerary rather than the ethics of the product or service. 

Tomorrow morning (Friday), I will be speaking on a panel with Jennifer Diaz of Diaz Trade Law, two members of the US government, and Cortney Morgan of Husch Blackwell discussing Cuba at the ABA International Law Section Spring Meeting in New York. If you’re at the meeting and you read this before 9 am, pass by our session because I will be polling our audience members too. And stay tuned to the Cuba issue. I’m not sure that the Carnival case will disprove my thesis about the ineffectiveness of consumer pressure because if the Secretary of State has weighed in and the Communist Party of Cuba is already meeting next week, it’s possible that change could happen that gets Carnival off the hook and the consumer clamor may have just been background noise. In the meantime, Carnival declared a 17% dividend hike earlier today and its stock was only down 11 cents in the midst of this public relations imbroglio. Notably, after hours, the stock was trading up.

Today (April 13, 2016), the SEC made public a much anticipated concept release regarding financial disclosures in form S-K.  The release seeks public comment on “modernizing certain business and financial disclosure requirements in Regulation S-K.”  The comment period is open for the next 90 days. 

The release is 341 pages, so needless to say, I haven’t gotten through the document. In it’s entirety at least.  By my initial count there are over 35 substantive issues in the release and many more technical/procedures ones. I’ve highlighted 3 issues that are relevant to prior BLPB discussions:  Risk, Reporting Frequency and Sustainability.

Risk management and risk reporting in item 503(c) and 305 are addressed starting on page 146.

“[W]e consider whether requiring additional disclosure of management’s approach to risk and risk management and consolidating risk-related disclosure would, on balance, be beneficial to investors and registrants. We also seek to better understand how our disclosure requirements could be updated to enhance investors’ ability to evaluate a registrant’s risk exposures. We are especially interested in feedback on how we can improve the content and readability of the risk factors included in a filing as well as the potential advantages and disadvantages of different approaches to risk-related disclosure.”

Reporting frequency as a component of the investor time horizons (aka short/long term investment) are discussed on page 280.  The Commission questioned the frequency of financial reporting noting the adoption of semi-annual reporting in 1955 and quarterly reporting in 1970. Summarizing the current debate on quarterly reporting, the Commission states:

“The value of quarterly financial reporting has been the subject of debate. Opponents of quarterly reporting argue that frequent financial reporting may lead management to focus on short-term results to meet or beat earnings targets rather than on long-term strategies. Consequently, some have argued that quarterly reports should be discontinued or made voluntary in the United States.

Continue Reading SEC Concept Release on Financial Disclosures in form S-K: Risk, Reporting Frequency and Sustainability

There are those I-need-to-pinch-myself moments in life that come along every once in a while.  I was lucky enough to have one last week.  I was invited to attend a conference and comment on two interesting draft papers written by two law faculty colleagues whose work I have long admired and who are lovely people.  And the location was Miami Beach.  Does it get any better than that for a law professor who likes the beach?  I think not.

The event was the annual conference for the Institute for Law and Economic Policy (ILEP).  The conference theme was “Vindicating Virtuous Claims.”  The papers will be published in the Duke Law Journal, which co-sponsored the program. 

I will save details on the papers for later (when the papers are finalized).  But I will briefly describe each here.  The first paper on which I commented, written by Rutheford B (“Biff”) Campbell (University of Kentucky College of Law), argues for federal preemption of state securities regulation governing the offer and sale of securities, since federal preemption would be more efficient.  The second paper, written by James D. (“Jim”) Cox (Duke University School of Law, who was honored at the event and received the most amazing tribute from his Dean, David Levi, at the closing dinner), argues for attaching more value to the normative effects of judicial decisions arising out of indeterminate doctrine (using materiality and the business judgment rule as core examples).  I know that last part is a mouthful, but read it again, and I think you’ll get it . . . .

Both papers were intellectually stimulating, and both scholars were quite engaging in their presentations.  The other invited commentators were interesting and thought-provoking.  And the day was filled overall with other interesting academic paper panels and a lively keynote lunch speaker.  Together with the panel discussion on the evolution of Rule 23 and dinner the night before, it was an action-packed, invigorating conference!

 . . . And then there was the time I spent after the conference recollecting myself (and writing student bar recommendation letters).  The weather was cooperative (downright sunny and warm), and the surroundings at the hotel (food, accommodations, etc.) were fabulous.  My Facebook friends got tired of my colorful photos and happy posts, especially since many of those folks were in locales further North and to the East in which it was cold and snowing on Saturday or Sunday.

So, I am taking this opportunity to note and celebrate my good fortune on, and to offer thanks for, being invited to the ILEP conference to comment on the forthcoming scholarly work of two great business law colleagues.  I met some fascinating, pleasant new people among the conference constituents (from the bench, bar, and academy).  And I enjoyed time on a chaise lounge.  [sigh]  But now, it’s back to the reality of the final few weeks of the semester.  I wish everyone the best in pushing through.