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Securities and Exchange Commission

Banking and finance roundup

by Walter Olson on December 17, 2014

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[reposted from Cato at Liberty]

Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.

Congress added the provisions to Dodd-Frank in a fit of moral self-congratulation over making sure Americans had the chance to be ethical and thoughtful consumers of such products as jewelry and cellphones (as well as thousands of other products, as it turned out, from auto parts to the foil in food packaging). Publicly held companies would be required to report on their supply connections to “conflict minerals” such as tin, tungsten, and gold mined in war-torn areas of the Democratic Republic of the Congo. Lawmakers assigned enforcement of the law to the Securities and Exchange Commission – a body with scant discernible expertise in either African geopolitics or metallurgy – and barbed it with stringent penalties for disclosure violations, to which are added possible liability in class-action shareholder lawsuits.

Reactions to this morning’s Post account frequently employ words like “unintended” or “tragic” to describe the effect on miners of the law, which people in the Congo soon came to call “Loi Obama” – “Obama’s law”.  Unintended and tragic? Maybe. But not unforeseen, because the signs that the law would backfire this way have been in plain sight for years now – as in this 2011 account by Prof. Laura Seay (via) of how “electronics companies now have a strong incentive to source minerals elsewhere, leaving Congolese miners unemployed.” Or this 2011 account by David Aronson in the New York Times of the “unintended and devastating consequences” that he “saw firsthand on a trip to eastern Congo.” Or this more recent paper by law professor Marcia Narine.

But although the evidence has been there for years, the will to believe in the law was too strong – a will fueled by anti-corporate campaigners who take it on faith that when brutalities in the underdeveloped world occur within two or three degrees of separation of the activities of multinational businesses, the right answer must be to blame and shame the businesses.

You might call it an expensive lesson for Americans too, if you assume that anything has been learned. A recent Tulane calculation found that the costs in business compliance have already topped $700 million, with billions more ahead should nothing change. Just this September, the U.S. government conceded that it “does not have the ability to distinguish” which refiners and smelters around the globe are tainted by a connection to militia groups. That is to say, the government has demanded of business a degree of certainty that it cannot achieve itself.  Courtesy of UCLA corporate law professor Stephen Bainbridge, here’s a flowchart of what complying might involve for a given business.

If the new Republican Congress wants to be taken seriously about fixing counterproductive regulation, it should make the repeal of this law an early priority. (& Bader)

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Banking and finance roundup

by Walter Olson on November 17, 2014

  • “How Operation Choke Point Hurts the Unbanked” [former FDIC chairman William Isaac, American Banker]
  • A nation of snitches: “U.S. rules would expand white collar crime informers” [Reuters]
  • Courts should stop giving deference to agency interpretations of criminal law: “Justice Scalia’s shot across the SEC’s bow re insider trading” [Bainbridge] Judge Rakoff criticizes SEC for bringing so many enforcement proceedings to in-house adjudicators [Reuters, earlier]
  • Monitor envy: “The biggest U.S. banks have 100 or more on-site examiners from an array of regulators” and now New York’s financial regulator wants to get into the act [WSJ]
  • Seventh Circuit finds Bank of America entitled to ask loan applicants about expected continuing entitlement to disability benefits, but in the mean time bank agrees in DoJ settlement to cease such inquiries [Easterbrook opinion in Wigginton v. Bank of America, see last page]
  • Two SEC commissioners warn that campaigned-for “fair fund” to compensate investors in CR Intrinsic inside trading case “likely to benefit only class-action attorneys and the fund’s administrators” [Daniel Gallagher and Michael Piwowar, WSJ]
  • “U.S. veterans sue [major European] banks, claim they should pay for Iraq attacks” [Alison Frankel, Reuters]

Prof. Bainbridge flags this disturbing Wall Street Journal piece:

The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges, who found in its favor in every verdict for the 12 months through September, rather than taking them to federal court.

Previously, the agency had tended to use the ALJs (administrative law judges) for relatively cut-and-dried enforcement actions, while taking more complex or cutting-edge disputes to federal court. Now, following the Dodd-Frank expansion of its powers, it prefers ALJs even for many complex and demanding cases arising from charges such as insider trading. Defendants enjoy a range of protections in federal court that are not provided in administrative litigation, including juries as well as the presence of federal judges who are independent of agency control, held to a more demanding ethical code, and drawn generally from higher and more sophisticated circles within the legal profession. Read the entire Bainbridge commentary, with followups linking Henry Manne (adjudicatory actions are ways to avoid the more demanding process of rulemaking) and Keith Bishop (current system open to constitutional challenge?).

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Banking and finance roundup

by Walter Olson on September 21, 2014

  • SEC regs suppress small business capital formation and that’s a shame [Commissioner Daniel Gallagher via Bainbridge]
  • Federally sponsored gripe site for financial institutions not likely to end well [Hester Peirce and Vera Soliman, Mercatus via Kevin Funnell]
  • Alleged terror payments “routed through” sued bank also went through major New York banks, which shouldn’t be surprising [Fisher]
  • Did mid-level managers in securitized mortgage finance know they were in a housing bubble but cynically go ahead? Evidence against [Cheng et al., American Economic Review via MR]
  • Shareholder litigation: “New ‘loser pays’ standard could curb abusive lawsuits” [Examiner editorial] Delaware take note: corporate by-law changes that cut off fee-seeking opportunism deserve acclaim [Keith Paul Bishop via Bainbridge]
  • NYT was hot on “Goldman Sachs manipulated aluminum market” allegations but judge wasn’t [Reuters, July 2013 NYT]
  • CFPB might shrug off discrimination and retaliation charges, but many of the firms it regulates could not afford to [Hans Bader]

“The agency is dodging the courts by turning to its own administrative law judges to decide its cases.” [Russell Ryan (King & Spalding), WSJ op-ed, paywalled]

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]