Haskell Murray had an interesting post on Friday about businesses buying fake reviews, followers, or friends online.  That post led me to think about another issue—if a company did that, could it be liable under Rule 10b-5 for securities fraud?

Consider this scenario: An investor is thinking about investing in a company called Ebusiness, Inc. She carefully reviews the company’s online presence and sees that Ebusiness has more followers and friends than anyone else in the industry. The reviews of its products are overwhelmingly positive. She concludes that Ebusiness is destined for greatness and buys its stock.

Later, the press discloses that most of Ebusiness’s followers and friends, and most of its online product reviews, are fake. Ebusiness paid someone else to produce them. The price of Ebusiness’s stock drops precipitously. Would Ebusiness be liable under Rule 10b-5?

Rule 10b-5 makes it unlawful “to make any untrue statement of a material fact . . . in connecton with the purchase or sale of any security. There’s no question that Ebusiness, through its paid agent, made fraudulent statements. There’s also no question that the investor relied on those fraudulent statements and suffered a loss when the truth became known. The real issue is whether those fraudulent statements were “in connection with the purchase or sale of any security,” as required by Rule 10b-5.

The courts have read the “in connection with” requirement broadly, but its meaning is still far from clear. The Second Circuit has indicated that the false statement must be disseminated “in a manner reasonably calculated to influence the investing public.” SEC v. Texas Gulf Sulphur Co. 401 F.2d 833, 862 (2d Cir. 1968). The false statements do not have to be directed specifically at investors, as long as the statement is of a sort that reasonable investors would rely on. In Re Carter-Wallace, Inc. Securities Litigation, 150 F.3d 153, 156 (2d Cir. 1998). The Carter-Wallace case held that product advertisements in medical journals could be covered by Rule 10b-5, although the primary goal of advertising is to influence consumers, not investors.

The same can be said of false “likes” and product reviews. Their primary goal is to influence consumers, not to convince investors to buy the company’s stock. A reasonable investor certainly would not rely on a single “like” or product review. But, given the importance of a company’s Internet presence, a reasonable investor might rely on the overall weight of likes and product reviews. Such use by an investor is certainly reasonable foreseeable.

Given the uncertainty of the case law, a definite conclusion is impossible. But it is at least possible that fraudulent product reviews or Facebook “likes” could trigger liability under Rule 10b-5. It’s probably just a matter of time before an ambitious plaintiff’s lawyer tries.

I just completed the unit on partnerships in my Business class, and we covered Page v. Page, 55 Cal. 2d 192 (Cal. 1961), the case of the warring brothers who ran a linen supply partnership.  This is a semi-famous case – not as fundamental as Meinhard v. Salmon, but included in several business casebooks and discussed in many law review articles.

The opinion itself is maddeningly short on details of the relationship between the brothers, and how it is that this family dispute came to end up in a courtroom.

What we know from the California Supreme Court is this:

George Page was the sole owner of a corporation that supplies linen and machinery for the operation of industrial linen businesses.

George entered into an oral partnership agreement with his brother, H.B., in 1949.  That partnership was to operate a linen supply business serving Santa Maria.  Each brother contributed $43,000 of capital to the business that apparently went to purchase a few basic assets.  Day to day operations, however, depended on services and materials supplied by George’s corporation.  The partnership was unprofitable for its 10 years of existence, and ultimately came to owe George’s corporation $47,000 for the materials it supplied.

When the Vandenberg Air Force base was established in Santa Maria, the partnership finally began to turn a profit.  Only a few months later, however, George proclaimed that he wanted to dissolve the partnership, and sought declaratory judgment that the partnership was at-will, giving him free rights of withdrawal.  H.B. opposed, arguing that the partnership was intended to last until all obligations were paid, and that George was only trying to dissolve now so that he could take sole advantage of the opportunities afforded by the air force base.  Among other things, H.B. pointed out that a previous partnership between him and George explicitly provided it was to terminate only when obligations were paid off, and therefore this partnership should be interpreted similarly.

Ultimately, the court concluded that the partnership was at-will, but allowed that H.B. might be able to demonstrate a breach of fiduciary duty if George intended to appropriate for himself benefits properly allocated to the partnership.

The opinion offers no further insight into the George/H.B. arrangement, which leaves it to teacher’s manuals to speculate – and two in particular offer wildly divergent interpretations.

[More under the cut]

Continue Reading The Curious Case of Page v. Page

For many businesses a good online reputation can significantly increase revenue.

Kashmir Hill, who I know from my time in NYC, has done some interesting reporting on businesses buying a good online reputation.

Earlier this week Kashmir posted the results of her undercover investigation into the problem of fake reviews, followers, and friends. When asking questions as a journalist, those selling online reviews insisted they only did real reviews on products they actually tested.

Kashmir then created a make-believe mobile karaoke business, Freakin’ Awesome Karaoke Express (a/k/a F.A.K.E), and found how easy it was to artificially inflate one’s online reputation. She writes:

For $5, I could get 200 Facebook fans, or 6,000 Twitter followers, or I could get @SMExpertsBiz to tweet about the truck to the account’s 26,000 Twitter fans. A Lincoln could get me a Facebook review, a Google review, an Amazon review, or, less easily, a Yelp review.

All of this for a fake business that the reviewers had, obviously, never frequented. Some of the purchased fake reviews were surprisingly specific. In a time when many of us rely on online reviews, at least in part, this was a sobering story. It was somewhat encouraging, however, to see Yelp’s recent efforts to combat fake reviews, albeit after a 2015 article by professors from Harvard Business School and Boston University showed roughly 16% of the Yelp reviews to be suspicious or fake.

Go read Kashmir’s entire article, it will make you even more skeptical of reviews you read online and small businesses with tens of thousands of friends/followers.

The Georgetown Institute for the Study of Markets and Ethics (GISME), located in Georgetown University’s McDonough School of Business, invites applications for the 2015 Junior Faculty Manuscript Workshop. The aim of the workshop is to provide critical feedback to junior scholars (i.e., junior faculty members, postdocs, or non-tenure-track professors) who are working on book-length manuscripts that address important normative issues related to the functioning of contemporary market societies. A limited number of applicants will be invited to Washington in the Spring 2016 semester for a day-long workshop devoted to their manuscript and will work with GISME to identify 2-4 senior scholars to act as discussants. Each workshop will consist of several sessions dedicated to discussion of the author’s manuscript. Sessions will begin with a critical commentary on a section of the manuscript by an invited participant. The author will then have the chance to respond and subsequently open up the floor for further commentary and discussion. The format is designed to maximize feedback for the author.

Interested applicants should submit the following material via email to Michael Kates at mk1501@georgetown.edu with “GISME Junior Faculty Manuscript Workshop” in the subject line: -a CV; -a manuscript abstract (no more than two pages); -an introductory or representative chapter; and -a paragraph describing the current state of the manuscript.

Applications are due by November 15 and selected manuscripts will be notified no later than January 15. Please note that applicants must have a complete or nearly complete draft of the manuscript ready to present at the workshop. GISME will reimburse the costs of travel and accommodation. 

Last month, a colleague of mine received a request from a law review (one unaffiliated with her or our institution) to perform a peer review of an article that the law review was considering for publication.  The period for the requested review was short–about a week–and arrived with no prior notice two weeks before classes started.  No compensation was offered.  While she (an acknowledged expert in the overall field and on the specific topic covered in the article) was, indeed, flattered by the request and very interested in the article, she had to turn the request down given the nature and extent of her commitments here.  

She wondered, and I did, too, how prevalent these kinds of requests are from law reviews.  I have performed peer reviews of articles for our journals here at UT Law from time to time and have considered it part of my service to the institution.  But the only other peer reviews I have done have been of books or book proposals for publishers, for which I have received some (not a lot of) compensation for my trouble.  So (given that I know I sometimes have blinders on and miss things that are going on outside my narrow span of activity), I asked around . . . .  My co-bloggers and other colleagues contributed to the facts and ideas I share here.

Continue Reading Peer Review for Law Reviews: What’s Up with That?

The New York Times reports that Facebook may add a “dislike” button. I am with the many people (probably now all or mostly over 35) who use Facebook and have thought a dislike button would be a nice option.  

“Just had a car accident.”  “Lovely dog just passed.” “Kids barfing wildly.”  Dislike. 

But I assume Facebook has skipped this for a reason. That is, it could be used in a terrible manner. 

“Proud to announce we’re engaged.” “Welcome to our new baby boy.” “This is my new painting.” Dislike. 

I understand the desire for symmetry, but dislike is probably not the button for a good experience with Facebook.  Maybe an “I’m sorry” or “That’s too bad” button, would work better.  I don’t know, but when I put this blog post on Facebook, a little part of me will be happy there’s no dislike button.

Not that the lack of such a button ever stopped a snarky comment or six.  

A student of mine studying peer-to-peer lending ran across an interesting provision in the securities filings of Prosper Marketplace,  one of the two main peer-to-peer lending sites. (The other is Lending Club.) 

Here is one of the risk factors in Prosper’s filings:

In the unlikely event that PFL receives payments on the Borrower Loan corresponding to an investor’s Note after the final maturity date, such investor will not receive payments on that Note after maturity.

Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding Borrower Loan remain due and payable to PFL upon the initial maturity date, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding Borrower Loan still due and owing to PFL on the final maturity date, PFL will have no further obligation to make payments on the related Notes, even if it receives payments on the corresponding Borrower Loan after such date.

To understand how this works, you need to understand a little about how the Prosper site works. When a loan is funded by the peer-to-peer lenders on Prosper’s site, the borrower signs a note payable to Prosper. Prosper, in turn, issues notes to the peer-to-peer lenders, but Prosper promises to make payments only to the extent that the underlying borrowers pay their notes to Prosper. In other words, Prosper is essentially just passing through any payments made by the peer-to-peer borrowers, with no additional recourse against Prosper. But, because of the limitation quoted above, Prosper won’t even pass through all loan payments. It’s free to keep any payments made after the final maturity date.

Prosper is, of course, free to structure its contracts in any way it wants, and I can understand why a provision like this would be useful. Prosper does not want to maintain records on these loans and lenders in perpetuity, and the final maturity date is a convenient cut-off point.

However, this limitation produces a potential windfall to Prosper. Payment after the final maturity date may be unlikely, but surely some borrowers will make payments after that point. If a conscientious borrower decides to pay later, Prosper pockets all of the money.

I would think the peer-to-peer lending sites, eager to attract the “crowd” to their sites, would bend over backwards to demonstrate their fairness to potential lenders, even if it does increase their administrative costs. Apparently not.

Further to Joan’s and Steve’s posts regarding the value that transactional lawyers can add to deals, Elisabeth de Fontenay at Duke has recently posted an article to SSRN, Law Firm Selection and the Value of Transactional Lawyering, which explores a new dimension along which lawyers can add value for clients: their unique, experience-based knowledge of deal terms.

de Fontenay’s argument is that for complex deals, it may not be readily apparent what the value or cost is for each term, and that lack of transparency impedes bargaining.  Experienced transactional lawyers have a unique knowledge base from which to draw upon, allowing parties to learn of new deal possibilities and value their alternatives.  de Fontenay points out, however, that this model is in tension with traditional notions of client confidentiality, because the lawyer’s value to the client is a function of the lawyer’s ability to pool knowledge drawn from other engagements.  The model also explains why elite law firms continue to be able to charge a premium for their services, and why they have combined into such large organizations: their size allows them to grow their knowledge base, and elite firms, by virtue of their experience, are able to perpetuate their informational advantages.