Readers, I was contacted by a securities attorney whom I know from practice regarding a potential pro bono appeal. 

The substantive issue involves securities disclosure violations by an Investment Advisor.  The Investment Advisor didn’t tell clients that he received compensation from a fund in which clients invested resulting in violations of the Investment Advisors Act Sections 206(1) and (2) for material misstatements, Section 207 (false and misleading Form ADP statements), and Section 204 (failure to amend Form ADP). 

The heart of the appeal, however goes to a 180 time period established by Section 929U of Dodd Frank, codified as Section 4E(a) of the Exchange Act ( Download Section 4E(a) Exchange Act), for the SEC to initiate a proceeding after sending a written warning.  The SEC filed the action 7 days late.  The SEC took steps to obtain an internal extension, but did not make a separate complexity determination (statutory extensions are authorized for “complex” cases).  The respondent has unsuccessfully challenged the SEC’s authority to bring the action outside of the 180 window ( Download SEC-Opinion).  At issue is whether the180 day time window is jurisdictionally determinative (meaning outside of it the SEC has no authority to bring the action).  Two prior Supreme Court cases have held that in the absence of consequences for a failure to comply with the time period, then the window is NOT jurisdictionally determinative.  Respondent takes issue with the precedent on the grounds the statute does contain a consequence (no action) and that it requires a complexity determination.  The Eastern District Court of New York addressed a similar issue (authority to bring enforcement action outside of 180 window) in 2013 and ruled that the SEC had authority to bring such an action.  The 2013 decision is available here

I raise these issues for 2 reasons, the first is practical.  The client is out of money to fund an appeal the attorney would like to identify pro bono collaborators interested in these issues.  The second, is that the case (and those like it) raise pretty interesting securities litigation (and administrative law) questions.  In a bizzaro world where your plate isn’t full for the summer and you are interested in these issues, feel free to contact Tony Cochran at alc@cclblaw.com  

-Anne Tucker

Midwest Law and Economic Association Conference Call for Papers

Conference Dates: 10/10-11/14

Call for Papers:  Closes June 30.  Submit to  to ngeorgak@iu.edu (Nicholas Georgakopoulos) with “MLEA Submission” in the subject line.  

From the organizers:  “Priority will be given to newer scholars at Midwestern institutions, then newer scholars at any North American institution, then the usual suspects. As in the past, we welcome early drafts.”

I attended this conference several years ago and found it be a great and welcoming group of scholars. I got excellent feedback on an early piece and learned a tremendous amount in 2 short days– you really can’t ask for a better endorsement for a conference, especially as a junior scholar.

-AT

 

The Louisiana Supreme Court recently denied the state’s attempt to collect sales tax on the sale of an RV to a Montana LLC. Thomas v. Bridges, No. 2013-C-1855 (La. 2014).  The LLC was formed for the sole purpose of avoiding RV sales tax (saving the buyer as much as $47,000).  The state argued that the LLC veil should be pierced and the tax should be assessed to the LLC’s sole member claiming fraud. The court disagreed, explaining that “taking actions to avoid sales tax does not constitute fraud. Although tax evasion is illegal, tax avoidance is not.” 

There were problems with the state’s attempt from the outset.  First, the sale occurred  in Louisiana, but the RV was housed in Mississippi.  Even if the LLC were to be disregarded, Mississippi, it seems to me, would be the state that should be asserting the claim.  Second, the state attempted to collect from the LLC’s member before ever trying to collect from the LLC.  Thus,  the veil-piercing claim was being used as a post hoc justification for the attempt to recover from the LLC’s member and was not properly raised below.  

This “legal loophole” (which is redundant because if it’s a loophole, it’s legal and if not, it’s fraud), can be fixed by legislation, as Justice Guidry concurred, 

While I concur in the majority analysis and result, I write additionally to encourage the legislature to revisit this area of the law on foreign limited liability corporations formed solely for the purpose of sales tax avoidance on purchases made in Louisiana. As the facts of this case suggest, the law may be susceptible to abuse.

 Justice Clark’s concurrence goes a step further:

Because I see no actual violation of the letter of the law in this matter, I concur with the result reached by the majority. However, I am concerned that the spirit of the law is not being protected. The potential for abuse in allowing the creation of sham entities to avoid the payment of taxes has policy implications that are worthy of the legislature’s attention.

I agree with Justice Guidry, but I think Justice Clark goes too far. I just don’t see this as a sham entity. It does seem a bit shady, I admit, but shady does not equal a sham.  The entity here is a tax avoidance vehicle, but the entity is real, and the entity was apparently properly formed.  There was no allegation that the entity was not real, not disclosed, or otherwise used to perpetrate fraud. There are other ways to try to ensure taxes are paid in a state where the RV is housed.  (As a side note, though, one should always be sure to make it very clear that one is signing for the entity and not in one’s individual capacity.)

And like the competition for entity formation, states often compete for business in a variety of ways. Maine, for example, has long-term leasing for trailers, including 8-, 12-, 20- and 25-year terms, that latter of which requires registration of at least 30,000 trailers.  

Other states choose to charge annual personal property taxes on vehicles like my home state of West Virginia. Similarly, the State of Virginia assesses personal property tax on vehicles kept by non-residents in the state, as long as the tax is paid somewhere:

Any person domiciled in another state, whose motor vehicle is principally garaged or parked in this Commonwealth during the tax year, shall not be subject to a personal property tax on such vehicle upon a showing of sufficient evidence that such person has paid a personal property tax on the vehicle in the state in which he is domiciled.

Va. Code  § 58.1-3511.

It seems Montana is using entity law to make a few dollars on state LLC formations, but that the benefit will likely be short lived.  I would expect many states will respond to reduce the effectiveness of this behavior.  The more interesting response, though, would be if Montana were to pass an annual RV property tax on entities (not individuals) that own such vehicles.  Montana natural persons, of course, don’t need entities to avoid RV sales tax, so the tax would only (or mostly) impact out-of-state individuals who would have to pay taxes for their Montana entity. Because these nonresidents can’t vote in the state, it would be hard for these folks to raise too much of a ruckus. 

Whether it is Montana or the location the RV is stored, the loopholes may start to close quickly. That, though, is a cost of doing business, even if the only business the entity tries to conduct is tax avoidance. 

Thanks for the warm welcome to the Business Law Prof Blog, Stefan et al.  Having avoided a regular blogging gig for many years now (little known fact: I was the first guest blogger on The Conglomerate – or at least the first one formally listed as a guest – back in 2005), I recently determined that I should sign on to work with this band of thieves scholars on a regular basis.  I appreciate the invitation to do so.

I already feel right at home, given that my post for today, like Steve Bradford’s, is on mandatory disclosure.  Unlike Steve, however, my focus is on the creep of mandatory disclosure rules in U.S. securities regulation into policy areas outside the scope of securities regulation.  I think we all know what “creep” means in this context.  But just to clarify, my definition of “creep” for these purposes is: “to move slowly and quietly especially in order to not be noticed.”  I participated in a discussion roundtable in which I raised this subject at the Law and Society Association annual meeting and conference last week.

My concerns about this issue were well expressed by Securities and Exchange Commission Chair Mary Jo White back in early October 2013 in her remarks at the 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture at Fordham Law School:

When disclosure gets to be too much or strays from its core purposes, it can lead to “information overload” – a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets.

To safeguard the benefits of this “signature mandate,” the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements.

For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission.  But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.

She goes on to note that some recent disclosure rules mandated by Congress:

. . . seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.

That is not to say that the goals of such mandates are not laudable.  Indeed, most are.  Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share.

But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.  

Parts of these remarks—those on information overload—were echoed in a speech that Chair White gave to the National Association of Corporate Directors Leadership Conference.  

Chair White’s words ring true to me.  I derive from them two main contestable points for thought and commentary.

Continue Reading Pondering Disclosure “Creep”

About a month ago, I noted several books that looked interesting. One of them was More than You Wanted to Know: The Failure of Mandated Disclosure, by Omri Ben-Shahar and Carl E. Schneider. I have now had an opportunity to read it, and it is a must-read for anyone interested in disclosure requirements of any kind—consumer disclosure, securities disclosure, or whatever.

Ben-Shahar and Schneider focus primarily on consumer disclosure—the dozens of pages we must sign when we buy a house; all the warning labels on products (Do not dry your hair while sitting in water); the click-through licenses we all ignore on the Internet. For many reasons, they argue, that mandatory disclosure is unlikely to provide much protection to consumers. It is “a failed regulatory method,” typically used, not because it works, but because it allows legislatures to respond to calls for action at little cost to government.

They don’t discuss securities regulation in any detail, although they do refer to it from time to time. But the book is obviously relevant to securities law. Ben-Shahar’s and Schneider’s discussion goes far beyond the well-known Easterbrook and Fischel argument against mandatory disclosure. [Frank H. Easterbrook and Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669 (1984)]

Whether you agree with their thesis or not, this book is definitely worth reading. And, surprise of surprises, it is written by two law professors who actually know how to write well. None of the usual turgid law-review prose. I enjoyed reading this book.

We here at the BLPB are thrilled to have Joan Heminway, W.P. Toms Distinguished Professor of Law at the University of Tennessee College of Law, join our team of weekly contributing editors. For most of our readers, no introduction will really be necessary because Joan is one of the most highly regarded and visible members of the corporate law community. In fact, I still harbor some suspicions that she may actually have figured out a way to clone herself — but that is likely just to make myself feel better when I review her productivity. Not only is she a tremendous scholar, but I know I am one of many who consider her a mentor, and her willingness to give of her time is truly inspirational. I will, as usual, leave the bulk of the introduction to her, but here is a brief excerpt from Prof. Heminway’s bio (you can read the full bio here):

Professor Heminway brought nearly 15 years of corporate practice experience when she joined the faculty of the UT College of Law in 2000. She was an attorney in the Boston office of the firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1985 through 2000 working in the areas of public offerings, private placements, mergers, acquisitions, dispositions, and restructurings…. In her research and writing, Professor Heminway focuses most closely on disclosure regulation and policy under federal securities (including insider trading) law and state entity (especially corporate) law. She is best known for her recent work involving crowdfunding and, before that, for a series of articles relating to the insider trading and criminal securities fraud actions against Martha Stewart. She also has … coauthored a number of annotated merger and acquisition agreements and related ancillary documents for Transactions: The Tennessee Journal of Business Law. Professor Heminway is a member of the American Law Institute and is a Research Fellow of the UT Center for Corporate Governance, the UT Center for Business and Economic Research, and the UT Center for the Study of Social Justice.

A couple of weeks ago, I posted about the Delaware Supreme Court’s recent decision in ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., which held that nonstock corporations may adopt bylaws that require unsuccessful plaintiffs engaged in intracorporate litigation to pay the defense’s attorneys fees.  Though the decision did not technically apply to stock corporations, nothing in the decision suggested the analysis for stock corporations would be any different.

The decision prompted an immediate, somewhat panicked response from the Delaware plaintiffs’ bar, while some defense attorneys counseled their clients to adopt such bylaws to discourage merger litigation.

Though, as the previous link shows, Steven Davidoff, at least, is skeptical that these provisions would become popular with publicly traded corporations, there has been a quick push to have the Delaware legislature amend the DGCL to overrule ATP.  The Delaware Corporation Law Council has proposed new legislation that will be considered by the Delaware legislature by June 30.

Last year, Harvard Business School Professor Clayton Christensen said “15 years from now half of US universities may be in bankruptcy.”  

So, I guess half of our schools have about 14 more years to go, according to Christensen.

At least part of the reason for Clayton Christensen’s prediction is the rise of online education, including so-called “massive open online courses” or “MOOCs.”

Recently, I completed a few MOOCs, mostly because I wanted to learn about MOOCs first-hand.  I also picked subjects that interested me.

The courses I took were:

Yale – Game Theory (Ben Polak)

MIT – The Challenges of Global Poverty (Abhijit Banerjee and Esther Duflo)

Northwestern – Law and the Entrepreneur (Esther Barron and Steve Reed)

I will share some of my thoughts on MOOCs during my normal Friday posting slot, in three installments: (1) Effective MOOCs? (2) MOOCs v. In-Person Courses, and (3) MOOCs and the Future of Higher Education. 

Institutional Shareholder Services (ISS) has always had a lot of influence – some think too much- and it’s also received quite a bit of press this week. First, the Wall Street Journal reported that the proxy advisory firm slammed Wal-Mart’s board for lack of independence regarding its executive pay practices in particular how compensation is (un)affected by declining company performance. ISS also raised concerns about the company’s ongoing FCPA troubles and how or whether executives will be held accountable. ISS called for more board independence. Given the fact that the Walton family owns 50% of the company stock, it’s not likely that ISS’ recommendations will have much weight, but it’s still noteworthy nonetheless.

This morning, the press reported that ISS took aim at another troubled company, Target. In addition to its revenue declines, Target also reported a massive data breach last year, which led to numerous shareholder derivative suits. ISS recommended that seven of the ten board members lose their seats for failing to adequately monitor the risk. Target has already made a number of significant management changes. This recommendation from ISS may be an even bigger wake up call to board members (including those outside of Target) about their Caremark duties, even if Target shareholders do not follow the ISS recommendation.

I will stay tuned and will be sure to save these articles for next semester’s business associations class.

 

Greetings from the Law and Society conference. Tomorrow I serve as the discussant on a panel entitled Theorizing the Corporation at Legal Intersections with Professors Charlotte Garden of Seattle, Sarah Haan of Idaho and Elizabeth Pollman of Loyola, Los Angeles. We will debate/discuss corporate personhood and how Citizens United has affected elections in ways that people might not expect. I’ll explain more about that and other panel discussions in next week’s blog.

If you’re at the conference or Minneapolis, swing by the University of St. Thomas, Room MSL 458 at 12:45 on Friday.