Category: Corporate Law


Judging Securities Law

Steve Bainbridge has a new post up on the Supreme Court’s securities law “jurisprudence.” He seeks to rebut the arguments contained in Mark Loewenstein’s draft article (on SSRN here) to the effect that the Supreme Court’s “much-heralded ‘new federalism’ philosophy of the Supreme Court is not a factor in securities law cases or in business cases generally.” I’ve just downloaded the paper (but haven’t yet read it), so my reactions here are just to Bainbridge’s argument.

Basically, Bainbridge says that the Supreme Court should not be expected to demonstrate a coherent federalist philosophy in its securities cases. Indeed, expecting any coherent philosophy would be a surprise: (a) such cases come before the court rarely because the court believes them to be boring and therefore not cert-worthy; and therefore (b) the court doesn’t get the repeat-player experience or know how that would polish their work . (This summary flows from Steve’s article, co-authored with Mitu Gulati, on the bounded rationality of securities decision making. I have recently criticized this view, arguing that securities law, at least in the lower federal courts, does “push” a coherent model of “good” shareholder behavior.)

However, I do agree that the Supreme Court is institutionally pretty weakly positioned to govern federal securities law. This institutional weakness arises, however, not just out of a lack of interest by the justices. Supreme Court clerks and Supreme Court practitioners both are traditionally conlaw folks, not experts in behavioral finance, comparative financial regulation and accounting, state blue sky laws, or any of the other hot issues likely to be litigated before the court in the next decade. Even “easy” issues, like materiality, can thus be made into a mess. See Basic v. Levinson (sheesh).

But criticisms of the Court’s work in securities cases may give its work in constitutional, criminal, tax and federal statutory cases too much credit. It is my experience, listening to colleagues who live with (i.e., teach) these cases on a daily basis, that the problems of incoherence, inattention to future consequences, lack of expertise in the foundational material, and triumph of rhetoric over craft that corporate scholars see in the Court’s work are quite common. Indeed, the federalism rhetoric that Bainbridge discusses is itself an example of a missing coherence, at least according to folks like Randy Barnett. So, what makes securities law exceptional? Is it just that the cases have more at stake in dollar terms, and are not, on first glance, as politically charged?


The Enron Trial Stinks

chocolat.jpgI really can’t believe I beat Christine Hurt to this nugget.

According to the indispensable Enron Trial Blog, Friday’s proceedings were interrupted by a five minute break called by Judge Lake. Although the audience were told there were scheduling problems, in fact:

[T}hat five minutes was so Skilling’s lawyer Daniel Petrocelli could scrub off his cologne. Apparently a juror in the front row found it overwhelming during his cross-examination of witness Mark Koenig this morning. She said she was gagging from the scent. She felt strongly enough to ask the court for an attorney fragrance correction.

The cologne allegedly was Chocolat. And Matt Bodie thought this would be an uninteresting trial!


Litigation Lessons at the Enron Trial

bates.jpgToday’s testimony in Houston involved an emotional breakdown and some lessons about discovery. Surprisingly, one had nothing to do with the other. On the discovery matter, Judge Lake told the jury that:

“Years ago they gave you a stamp, like a checker uses to stamp a can of peas with,” Judge Lake told the jurors. “I guess the original stamp was named for a Mr. Bates.”

“Now you know more than you ever wanted to know about this,” the judge said as he ended his instructional aside.

Commentators over at the Enron Trial Blog suggested that the Judge was wrong:, “Bates stamps” were really named for the Bates Manufacturing Company (pictured to the right). But the Company was founded by a Norman Benjamin Bates, so I think Judge Lake deserves a break. Thus, the many appellate lawyers watching the trial looking for errors will have to keep looking. Sitting Juror #11, on the other hand, well that’s a different story.


Is Apple Exploiting Consumer Irrationality?

John Nocera’s Sunday column ($$) attacks Apple for its business practices. Two in particular raise Nocera’s ire: (1) hiding Apple’s customer support number; and (2) building iPods that have relatively short usable lifespans. Nocera notes that Apple will repair iPods that die within the good’s one-year warranty, but suggests (through a source) that the device’s natural life is “just a hair longer than the warranty.”

Nocera claims that customers expect their devices to last a “good long time,” and we are “just not conditioned to believe that a $300 or $400 device is disposable.” But he admits having bought six iPods in the last five years, three of which were replacements, suggesting that at least one customer has been conditioned as to the device’s disposability. My own experience (3 iPods purchase; 2 replacements; 1 repair under warranty) are similar. I imagine that there are millions of Americans who are gradually learning that when you stuff increasing numbers of gizmos into increasingly smaller gadgets, friction makes for trouble in the motherboard.

But Nocera might be right in his implied argument that consumers are behaving irrationally by ignoring evidence like this, which would explain Apple’s growing market strength. The optimism bias is among the most robust of the cognitive tics exposed by experimental behavioral law and economics literature. We consistently underestimate the likelihood of bad things happening to us. So, although Apple’s one-year warranty suggests a steep product failure curve at month 13, we discount that risk in our purchase decision. This optimism is no doubt enhanced by Apple’s careful packaging, which makes it look like they’ve taken a swiss-like level of care in their manufacturing process, and iPod’s high-price, which suggests quality. That is, iPod’s effective life is a classic example of an experience good. Consumers are unable to determine the life of an iPod by looking at Apple advertisements (cf. price, design) and therefore they turn to Apple’s brand value to determine how long the iPod will last.

This analysis suggests that so long as Apple retains its brand – expensive, low-defect, attention to detail – it will continue to convince consumers to buy products with lower-than-expected lives. Competitors would be well advised to directly attack this brand. Why haven’t they succeeded?

Nocera thinks that one explanation is that folks are locked into iTunes, having spent time and money building a proprietary library through the software. This sounds like the beginning of a tying claim to me (although they better file quick, while patent-tying is still a strong antitrust theory.) But is a strange argument, because as I see it, iTunes has triumphed by virtue of its superior product characteristics, over an alternative format (WMP) that was supported by a titular monopolist! (I imagine that folks have thought about bringing an an implied UCC warranty claim for failure to serve a particular purpose – i.e., long term use – but that claim would be a stretch, at least on first glance.)

I obviously have mixed feelings about Nocera’s column. On the one hand, I concede that consumers are vulnerable to being misled about the life of the iPod. On the other hand, I love my iPod, even though I know it is not long for the world, and will buy another when it dies.

[UPDATE: Josh Wright responds here. Shorter version: the market will clear.]


Why Enron Still Matters


Matt Bodie has a provocative post up on Prawfs titled “The Enron Trial: Reasons Not to Watch“. Explaining that he doesn’t find the trial all that interesting, Matt argues that Enron is an overexposed story, Skilling and Lay aren’t the real “bad guys”, and the jury is likely to decide the case on factors other than the underlying factual guilt. The first objection is fair (my colleague Jonathan Lipson has pointed out that ““[t]he Enron case has already spawned a cottage industry among legal academics.” ). However, Matt and I part ways on his second and third objections.

Matt argues that :

Like many criminal conspiracies, the worst offenders have pled, leaving trials for those who have the best case for innocence. Lay and Skilling may or may not have really known what was going on. Sure, even not knowing is bad, given their positions of authority. And creating a culture of noncompliance is also wrong.

I’d guess that the reason Skilling and Lay have not pled and Fastow has is demographics. Fastow is a young(ish) man, who can serve significant time and still emerge with earning power. Lay and Skilling don’t have the years left to do the time that the government (apparently) would find appropriate. But more importantly, take a look at the indictment. I think it is right to be hesitant about conflating all crime with evil, but I don’t know why Lay and Skilling should be described as merely knowingly lazy at the helm. The government is charging, rather, that they personally profited from a conspiracy that they designed. The purpose of that conspiracy was to defraud thousands of investors. (Yes, I recognize that this is all contested and contestable, and you can make this a story about criminalizing agency costs. Moreover, as Larry Ribstein has observed, “the moral force of the criminal law should be reserved for the cases that deserve it.” But I think that the case is going to turn on the perceived truthfulness of the defendants on the stand, which by all accounts is a core jury competency.) Fastow, by contrast, self-dealt to the company’s detriment: a crime whose impact on the securities markets was more indirect, although ultimately catastrophic. In any event, if Skilling and Lay are guilty of the knowledge and purpose charged by the indictment, they are evil. Maybe less evil than, say, murderers, but that is a distinction I leave for other folks to make.

As for the jury point, I agree that this trial may not be resolved based on an application of cold logic to clear facts – but I don’t think that the morality play we’re seeing in Houston is noticeably different in that dimension from any other criminal trial. Criminal adjudications create norms for relevant potential offender communities – – here corporate CEOs – – and it is that process of norm creation that drives my interest in the story.

Plus, just check out the stories the attorneys told today. On one side, we’ve got the prosecution, spinning the jury a familiar tale about greedy, lying executives. In my view, they’ve got the worse of the case on the facts, which is why I’m with Gordon and Christine in betting on a partial or full acquittal. On the other side, the defense has to rehabilitate not just their clients but a corporate law system that may diverge from ordinary intuitions about responsibility:

‘Ken Lay has, does and will continue to accept responsibility for the bankruptcy of Enron. He was the man in control … But failure is not a crime. Bankruptcy is not a crime. If it were we’d have to turn Oklahoma back into a penal colony because there would be so many people we’d have to lock up,” Lay’s lawyer Mike Ramsey told the jury this afternoon.

I understand Matt’s Enron-overload. But I guess I’m not there yet. I can’t wait for tomorrow!


Liveblogging the Enron Trial

Via Christine Hurt, I found the Houston Chronicle’s weblog of the Lay/Skilling trial. The first day, for a certain type of person (read: corporate law nerd) was a must-read. My favorite part was the human touch from Judge Lake at the end:

The judge extensively warned the jurors not to talk to friends and family about the case and warned that media reports are not evidence.

He said they will be supplied muffins for breakfast; he noted that the banana nut go fast and the medicinal-tasting cranberry never get eaten.

First thought: so supply and demand are out of whack? Sounds like the opportunity for a little creative trading to me! Second thought: tomorrow, the prosection and defense jointly fund a trip to starbucks for sixteen blueberry muffins. Not the non-fat version, the ones that make the next five trips to the gym dead weight loss.


Families, Corporations, and the Blackberry

BlackBerry.gif11D has an interesting post on the pressure that her husband has been getting to carry a Blackberry around with him and go to the bar with the “team” from work on Friday nights. 11D summarizes her anger thus:

Let me get this straight. He’s gone from the house for 60 hours per week. He sees his kids for an hour per day. And now he’s supposed to be checking his e-mail, while he watches his kid’s soccer game. The people that he spends 10 hours a day with are making him spend more time in the evening with them, so they can do jello shots and pat each other on the back for closing all those deals. As he’s pounding shots and head butting the other guys, the kids and I are supposed to amuse ourselves.

After I processed this information, I arranged the words, words shit, fuck and damn, in all sorts of unique combinations.

As well she might. (In particular, the notion that one gets pressure to socialize with co-workers rather than going home to your family strikes me as a bit ludicrous). The pithy conclusion to her expletive studded outrage is that “Corporate life is the enemy of the modern family.”

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Trump’s Net Worth


This article press release details Donald Trump’s new defamation suit against New York Times reporter Timothy L. O’Brien and Warner Books, Inc., for, saying that Trump was not a billionaire in the book The Art of Being the Donald:

The lawsuit alleges that in publishing these false statements, O’Brien and Warner deliberately chose to ignore, among other things, voluminous and comprehensive financial information that Trump made available to them prior to the publication of the book, which confirmed conclusively that Trump’s net worth is in the billions of dollars. Indeed, Forbes Magazine rigorously analyzed the very same books and records and other financial data that O’Brien and Warner chose to ignore, and concluded that Trump’s net worth conservatively is at least $2.7 billion.

What I know about the topic of Trump’s net worth comes largely from O’Brien’s NYT articles on the topic, which (not incidentally) were quite skeptical of Forbes’ approach to valuation. I also am surprised that Trump would be interested in exposing his books to public scrunity, which (presumably) O’Brien and Warner could insist on as a part of their defense. Shucks, as a plaintiff, Trump might not even be able to obtain a protective order in N.J. State Court. [Being unfamiliar with local practice, this is just a guess, but Trump’s privacy claim is weaker than it would be if he had been forced to court as a defendant.]

Nevertheless, you’ve got to give Trump style points for being willing to double-down his bets:

The lawsuit, which was filed in state court in Camden, New Jersey, seeks $2.5 billion in compensatory damages and $2.5 billion in punitive damages….


The Gorilla Award for 2005


It’s award season. Not a suprise. The end of the year encourages thoughts of reflection and rankings.

I thought it might be fun to institute an award for the corporate news story that won’t make anyone’s list of top events this year: the 2005 Gorilla Award. The award is named for a famous video testing “inattentional blindness.” As professors who teach Enron are fond of relating, experimenters asked students to watch a video of folks playing basketball and to to count the total number of times that the people wearing white pass the basketball, while not counting the passes of folks wearing black.

Go ahead, click on the video and perform the test. Then come back.

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