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Securities and Exchange Commission

Are you surprised? Study finds “that politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC.” [Maria Correia, SSRN via Jeffrey Miron, Cato]

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  • Furor grows over Obama administration’s Operation Chokepoint program chilling bank access for legal but disfavored groups [Iain Murray, Elizabeth Nolan Brown, FDIC list (not just payday lenders but also lawful purveyors of pills, guns, ammunition, and much more), Hans Bader] Parallel, though not happening under same program: JP Morgan abruptly closes accounts of former Colombia finance minister who is a renowned international economist, apparently because he made it onto a list of diplomats and other “politically exposed persons” statistically associated with legal risks and high compliance costs [Business Insider] Update via Nolan followup: Dana Liebelson at Mother Jones quotes anonymous bank officials as claiming that some account closures are wrongly being attributed to the program, but even in defending it concedes that should banks opt for continuing to service clients in disfavored lines of business they will shoulder distinctive (maybe decisive) compliance costs from “manag[ing] these relationships and risks,” engaging in due diligence, etc. Also, lawmakers like Sens. Jeff Merkley (D-Ore.) and Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) back the program; besides, this isn’t “the first time that feds have asked banks to keep an eye on their customers” since the Know Your Customer program goes back some years. So that’s comforting!
  • “Court: Standard & Poor’s is entitled to discovery supporting its ‘selective prosecution’ claim” [Volokh, earlier here and here]
  • “Plaintiff? Is That Really Necessary In A Class Action?” [Daniel Fisher on ZymoGenetics case]
  • Backed by hedge fund, lawyers exploit anti-terror law to squeeze global banks [Norman Lamont, New York Post]
  • “CEO facial masculinity predicts firm’s likelihood of being subject to SEC enforcement action” [Jia, Van Lent, and Zeng, SSRN via @brucecarton]
  • “Reflections on High Frequency Trading” [Robert Levy, Cato]
  • Banks finally lay to rest long-running litigation under Missouri second-mortgage law (MSMLA), though only after one Kansas City law firm ran up more than $600 million in settlements [Litigation Daily]

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  • Following vindication, Mark Cuban begins transcribing transcripts of other SEC trials on his blog [Blog Maverick, background] “Why Settling With The SEC Can Be Worse Than Losing At Trial” [John J. Carney, David Choi and Francesca Harker]
  • Congress needs to investigate whether administration browbeat Standard & Poor’s over sovereign debt rating [John McGinnis]
  • As regs squeeze banks out of small business lending, will we like non-bank alternatives as well? [John Cochrane] More: Kevin Funnell;
  • Cash business can’t bank its proceeds: “Robber gangs terrorize Colorado pot shops” [NBC News]
  • “Will Plaintiff Lawyers Cut Down On The Choices In Your 401(k)?” [Daniel Fisher]
  • Does Delaware have an incentive to keep securities lawyers happy with big fees? [Bainbridge]
  • “It’s Time To Grill the Federal Reserve About Bitcoin” [Ira Stoll]
  • Still money left in that piggy bank: Justice Department shakes $1.7 billion out of J.P. Morgan because its custody wing kept handling a primary Bernie Madoff account while a distant equity desk grew suspicious of him, in what “looks a bit like a tax on bigness and integration” [Matt Levine, Bloomberg; NPR].
  • Legacy of TARP one of cronyism and lawlessness [Mark Calabria, USA Today]
  • NYT assails a couple of academics as mouthpieces for Wall Street, Felix Salmon has a bit to say about that [Reuters, EconBrowser, Bainbridge, Pirrong] Daniel Fisher on a possible tie-in with Times reporter David Kocieniewski’s earlier piece flaying Goldman Sachs over aluminum warehousing [Forbes]
  • “Court Receptive to Overturning SEC’s Conflict Minerals Disclosure Rule” [Fed Soc Blog]
  • “Target Breach — Are Dodd-Frank ‘Swipe Fee’ Price Controls to Blame?” [John Berlau, CEI "Open Market"] “Volcker Rule Overshoots Wall Street to Hit Utah” [same]
  • “CFPB and Disparate Impact” [Hester Peirce, Point of Law]
  • “It might cost you $39K to crowdfund $100K under the SEC’s new rules” [Sherwood Neiss, VentureBeat via @jerrybrito]
  • Here’s a novel proposal for corporate governance: use the rules agreed upon by the original parties to the transaction [Hodak]

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Politics roundup

by Walter Olson on December 11, 2013

  • “Who’s Afraid of Political Speech?” (spoiler: incumbents) [Roger Pilon, Cato] “None of this was perceived as a major problem so long as the 501(c)(4) category was dominated by the political left” [Brad Smith, WSJ]
  • Texas trial lawyers not all of one mind over extent of political involvements [Texas Tribune, Southeast Texas Record]
  • Sen. Mark Pryor, a key architect of the terrible, horrible, no-good, very bad CPSIA law, faces tough re-election race in Arkansas [Politico]
  • RNC asked to take stand for Americans overseas hurt by FATCA tax law [McClatchy]
  • Richard Epstein recalls Chris Christie’s unlovely tactics as a prosecutor [Ira Stoll, Future of Capitalism]
  • That time Texas politico Wendy Davis sued the Fort Worth paper over its coverage of her campaign [Andrew Stiles, NRO]
  • “Low political knowledge levels mainly due to lack of demand for info, not lack of supply” [Ilya Somin, Jack Shafer]
  • SEC backs off plan to expose companies to harassment over outlays to politically oriented nonprofits, and NYT (thinking only of shareholders’ welfare of course) is sad about that [Marc Hodak, David Silvers/CEI, NYT] Sen. Warren seems to enjoy new capacity to use position, Durbin-like, to punish political foes [David Henderson]

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Having defied the Securities and Exchange Commission and beaten its inside trading allegations in court, the investor and team owner is not through giving them a piece of his mind: “I think they exemplify what type of organization you should expect when you have nothing but attorneys and in particular former prosecutors running the show. …There is a culture of trying to win, not trying to find justice.” In the absence of bright-line rules, notes Cuban, the commission resorts to “regulation through litigation,” trying to ram through doubtful legal interpretations by way of sheer vehemence of enforcement. [Kevin Funnell/Bank Lawyer's Blog, Alexander Cohen/Business Rights Center, earlier] Attorney Lyle Roberts, who represented Cuban, will also be known to some of our readers for his blogging at The 10b-5 Daily.

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Fantasy football

by Walter Olson on November 15, 2013

Could it be a federal crime? And what is its connection to insider trading law, and to recent commercial efforts (Fantex Holdings) to “securitize sports” by enabling investment in individual athletes’ personal brands? [Justin V. Shur, Eric R. Nitz and Justin M. Ellis, Corporate Counsel]

I’ve now got a guest column at PointOfLaw.com on the Securities and Exchange Commission’s proposed rule (earlier) requiring public companies to calculate and make public the ratio between chief executive officer (CEO) pay and the pay of a median worker. For companies with international operations in particular, the calculation may be quite difficult (it might depend on assumed exchange rates, for example, to say nothing of noncash benefits) and it might also depend on the ability to gather in one place certain types of data whose export is forbidden by some privacy-sensitive foreign laws. And all for what, aside from stoking demagogy? Or was that the point of the Dodd-Frank mandate that the SEC is now implementing?

I have fond memories of launching Point of Law during my years at the Manhattan Institute, and I was its primary writer for many years, so it is especially rewarding to contribute a guest column there. Under the leadership of MI’s Jim Copland, the site (and MI in general) has become especially active in corporate governance, shareholder and SEC controversies.

Jury acquits Mark Cuban

by Walter Olson on October 18, 2013

“A federal jury in Dallas yesterday rejected SEC claims that [Dallas Mavericks owner] Cuban engaged in insider trading when he sold his stake in a Canadian Internet company nine years ago to avoid a $750,000 loss. Jurors found the information Cuban acted on wasn’t confidential and that he hadn’t promised not to trade on it.” [Bloomberg Business Week, Bainbridge] Bonus: Jonathan Macey (Yale) on inside trading [video at Bainbridge, discusses Cuban case]

“U.S. corporations will need to disclose how the paychecks of their chief executive officers compare with those of their workers under a new proposal released [in September] by a sharply divided U.S. Securities and Exchange Commission.” [Reuters] The measure, pushed by labor advocates, was prescribed as part of the maximalist-regulation Dodd-Frank law, but opponents say the SEC majority is requiring needlessly costly compliance methods: “Proponents have acknowledged the sole objective of the pay ratio is to shame CEOs, but the shame from this rule should not be put on CEOS- it should be put on the five of us,” said Republican commissioner Michael Piwowar. “Shame on us for putting special interests ahead of investors.” [Towers Watson/MarketWatch] Because of the high expected cost of compliance, “we are almost certain to see quite a few companies paying more than they actually pay their CEO to figure out how much more their CEO makes than their median worker. If this rule was really being implemented for the benefit of the shareholders, then Congress could have let each company’s shareholders opt in or opt out of this disclosure regime. Clearly, the people pushing this ratio had no interest in giving actual shareholders a veto over this racket.” [Marc Hodak] More: Prof. Bainbridge, Keith Paul Bishop, Michael Greve, Jeffrey Miron on FBN. The agency is taking public comments through December 2.

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… when regulatory/enforcement agencies generate their own budget from fines, notes Michael Greve, reflecting on the J.P. Morgan “London Whale” settlement and other matters:

Here’s where the $920 million [from the Morgan settlement] went: OCC, $300 million; SEC, $200 million; the Fed, $200 million. (The remainder went to the British authorities.) That much money, in a single action, raises the alarming prospect of agencies that become self-funding and, moreover, profit centers for a cash-starved Congress — through their enforcement activities. Here’s the blazingly obvious problem: most of the laws on the books are stupid and, when fully enforced, would land half of us in jail and the rest of us in bankruptcy. A principal way to check that problem is the appropriations process, which limits the enforcers’ budgets (and may influence their enforcement choices, for good or ill). When the money starts flowing in the other direction, all bets are off: you’re living under a NAFI regime.

NAFI is a term of art: it means “Non-Appropriated Funds Agencies”—outfits that are part of the government but financed not through congressional appropriations but through their own operations and revolving funds. The U.S. Mint is a NAFI. So is the Federal Reserve: it finances its budget from its earnings and then kicks the rest over to the Treasury. The CFPB has strong NAFI features: it simply sends a demand letter to the Fed, telling it how much money it wants (up to a certain percentage of the Fed’s earnings—above that level, the CFPB may receive appropriations). As noted, the Fed’s earnings don’t initially go into the Treasury and therefore aren’t appropriated from it.

The Securities and Exchange Commission hasn’t reached NAFI status yet, Greve writes, but not for want of trying.

Roger Parloff makes the story clearer and more understandable than I’ve seen it anywhere else. [Fortune cover story]

New SEC chairman Mary Jo White shows better sense about it than some newspaper editorialists that could be named [Louise Bennetts, Cato]

  • “The Dodd-Frank Say-on-Pay Cases Are on the Brink of Death” [Kevin LaCroix]
  • Kevin Funnell of Bank Lawyers Blog interviewed [Crystal Gimesh via BLB]
  • How taxpayer lending props up business model of banks, fast-food franchisors [Dayton Daily News on SBA via Tad DeHaven]
  • Independent currency = money laundering? “How Bitcoin Dies” [Econ Policy Journal] Or death by trial lawyer? [Coyote, Andrew Sullivan]
  • Nose of the camel: Obama budget plans to limit IRAs to $3 million [Politico]
  • How Swiss bank secrecy protected freedom [Daniel Fisher]
  • Sure, what could go wrong? Obama push for more mortgage lending to borrowers with weaker credit [Gideon Kanner, Coyote] More: Arnold Kling testifies before Congress on housing finance, and feels a resulting “need to scream” [ASKBlog, more]
  • More: Per NYT’s expert, “Shareholders have been demanding” disclosure on corporate political spending. Well, 18% of shareholders anyway [Jim Copland]
  • After bank trespass, Occupy Philadelphia benefits from jury nullification and a cordial judge [Kevin Funnell]
  • Cato commentaries on Cyprus crisis [Steve Hanke and more, Dan Mitchell, Richard Rahn podcast]
  • “NY Court Reinstates Foreclosure, Chides Judge For `Robosigning’ Sanctions” [Daniel Fisher] “Impeding Foreclosure Hurts Homeowners As Well As Lenders” [Funnell]
  • SEC charging Illinois with pension misrepresentation? Call it a stunt [Prof. Bainbridge]
  • “Plaintiff Lawyers Seek Their Cut On Virtually All Big Mergers, Study Shows” [Fisher] As mergers draw suits, D&O underwriting scrutiny escalates [Funnell] “Courts beginning to reject M&A strike suits” [Ted Frank]
  • Will Dodd-Frank conflict minerals rules actually help folks in places like Congo? [Marcia Narine, Regent U. L. Rev. via Bainbridge, earlier here]
  • “Securities Lawyers Gave To Detroit Mayor’s Slush Fund”; city served as plaintiff for Bernstein Litowitz [Fisher]

Yesterday by a 9-0 vote the Supreme Court agreed with a Cato amicus brief that the Securities and Exchange Commission has no power to seek fines or penalties after the statute of limitations has expired on challenged conduct by arguing that it did not discover the conduct until recently. I’ve got a discussion at Cato at Liberty. (& SCOTUSBlog, which also hosts this opinion analysis by Jonathan Macey)

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