May 10, 2010

On April 27, 2010, the Second Circuit held (in Pacific Investment Management Company LLC v. Mayer Brown LLP, "Refco") that the defendant secondary actors, ie professional advisors to an issuer accused of securities fraud, were not primarily liable under US securities laws for misleading statements in that issuer's public documents because those statements could not be “explicitly attributed” to them. In the Second Circuit, this creates  a bright-line, pro-defendant test that will make it almost impossible for plaintiffs alleging fraudulent statements by secondary actors to survive a motion to dismiss unless they can plausibly argue that those statements are explicitly attributable to the defendant secondary actors.

This is unlikely, however, to be the end of the story from the perspective of professional advisors looking to limit personal and partnership liability. The SEC, in an amicus brief, has argued that the existing "attribution standard" should be jettisoned in favor of a "creator standard" which would result in liability for secondary actors who supply false or misleading information (or cause a false or misleading statement to be made) regardless of whether there is an explicit link between an advisor and a public statement. The SEC may have lost this round (the Second Circuit has rejected the creator standard), but it is probably neither unduly distraught nor giving up the chase. This was arguably a win-win for the SEC, with a courtroom victory the less likely of the two "wins." The SEC is now armed with a courtroom defeat in a particularly egregious case (the partner at the center of the allegations has been convicted of fraud and is serving a seven year sentence) with which to woo legislative champions in a legislative environment that is generally hostile to aggressive financial actors and their professional advisors. Legislators are also not likely to be moved by the Second Circuit's Refco rationale that a brightline, attribution rule makes it easier for companies to access capital markets and that the creator standard would "generate securities litigation against the professional." Market-based rationales for precluding investor recourse against fraudulent issuers and their advisors is something of a red flag to a bull.

This is a victory of sorts for advisors, but more because it buys them some extra time than because it provides a solid barrier against would-be plaintiffs. We doubt that there is a single large law or accountancy firm that advises US issuers that is not re-examining its procedures for signing off on transactions like those in Refco and wondering whether those procedures would have caught a rogue partner before it was too late. Until the issues underlying Refco are definitively resolved, professional advisors have to anticipate a day when their secondary actor status exposes them to primary liability. That will mean more issuer diligence, painful line-by-line management reviews of issuer disclosure documents in the British tradition, more explicit issuer responsibility for those documents at the highest levels, tightened opinion procedures at law firms and heightened, intrusive oversight of law & accountancy firm partners. Boring, stressful and expensive for all involved.

Background

The Refco litigation stems from the collapse of Refco Inc., at one time one of the world’s largest broker-dealers in derivatives, currency and futures, and revelations that Refco had been been concealing large amounts of debt through sham balance sheet transactions. To hide the fact that its customers could not repay hundreds of millions of dollars borrowed on margin, Refco moved this uncollectable debt off its balance sheet (to an entity controlled by Refco's CEO) just prior to the end  of quarterly and annual financial periods (only to move it back onto the Refco balance sheet at the beginning of each new financial period). Allegedly at the center of this fraud was Joseph Collins, the then Mayer Brown partner in charge of the Refco account. According to the plaintiffs, Collins and his firm (i) drafted the documentation in respect of these bogus round-trip loans (there were 17 such transactions) and (ii) participated in creating false statements that were included in three public documents; on Offering Memorandum for high-yield debt, a subsequent Registration Statement in respect of that debt and a Registration Statement in respect of Refco's 2005 IPO. Its fair to say that had the debt been accounted for and reported correctly, the Refco debt and equity offerings would have been received quite differently by investors. Significantly, although the public offering materials mention Mayer Brown's representation of Refco, there is nothing in any of the documentation that specifically attributes their contents to either Collins or Mayer Brown.

Following exposure of the scam and Refco's collapse in 2005, investors sued the defendants alleging that their involvement in the sham transactions and drafting of public disclosure documents (i) violated Section 10(b) of the Exchange Act and (ii) created "scheme liability" under Rule 10b-5 of that Act. In respect of each of these allegations, the district court granted defendants' motion to dismiss. In respect of the Section 10(b) claims, the court ruled that the defendants could not be held liable for statements that were not attributed to them when the statements were disseminated and in respect of the “scheme liability” claims, the court ruled that the Supreme Court’s Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. decision squarely addressed and rejected the possibility that a plaintiff could have relied on a defendant's misconduct where it had no knowledge "either actual or presumed, of [defendants’] deceptive acts during ...

May 6, 2010

On April 27, 2010, the Supreme Court (in Merck & Co., Inc. v Reynolds) held that the statute of limitations in a private securities fraud action brought pursuant to Section 10(b) of the Securities Exchange Act of 1934 does not begin to run until a plaintiff (i) discovers or (ii) reasonably should have discovered "the facts constituting the violation—whichever comes first;” including the "fact" that a defendant acted with "scienter" (i.e., with a fraudulent state of mind). In arriving at its decision, the Supreme Court rejected the argument that a limitations period begins to run when a plaintiff is put on “inquiry notice” that a violation has occurred and settled a longstanding disagreement amongst lower courts.

Background

Merck involves claims brought by investors against pharmaceutical company Merck alleging that Merck had committed securities fraud by knowingly misrepresenting the risks of heart attacks associated with its Vioxx painkiller drug; claims that Merck attempted to have dismissed as time-barred. Under U.S. securities laws, a private claim alleging securities fraud must be brought within (i) 2 years after the discovery of the facts constituting the violation (the “discovery rule”) or (ii) 5 years after such violation (NB: only the discovery rule was at issue in Merck).  The original complaint against Merck was filed on November 6, 2003 and the question at the heart of the litigation was whether the plaintiffs knew (or should have known) the facts of the violation more than two years before the filing, ie prior to November 6, 2001.

A district court dismissed the claims after finding that certain events prior to November 6, 2001 (including publication of research suggesting cardiovascular risk, an FDA warning letter and some Vioxx-centered litigation) should have put plaintiffs on notice that fraud may have occurred. The Third Circuit reversed, holding that while those events may have constituted “storm warnings,” they were not suggestive of scienter. Noting that Merck had consistently dismissed the allegations of cardiovascular risk and ascribed the results of the research in question to an alternative theory, the Third Circuit held that plaintiffs had not been put on the necesary “inquiry notice,” ie on notice to investigate further.
 
The Supreme Court Ruling

The Supreme Court has now held (i) that "discovery" means actual discovery of facts giving rise to the cause of action, or a showing that a diligent plaintiff should have discovered those facts; (ii) that “facts constituting the violation” includes facts giving rise to a strong inference of scienter, ie that scienter is both a "fact" and necessary to start the clock; and (iii) that the concept of “inquiry notice” is to be jettisoned.

Discovery of Facts

The Supreme Court has held that Section 1658(b)(1), which triggers the "discovery rule", “refers not only to a plaintiff’s actual discovery of certain facts, but also to the facts that a reasonably diligent plaintiff would have discovered.” As to the latter "constructive" discovery, the Court held that “[g]iven the history and precedent surrounding the use of the word ‘discovery’ in the limitations context generally as well as in this provision in particular,” the statute covers both actual and constructive discovery.

Scienter

The Supreme Court has rejected Merck’s argument that the statute does not require “discovery” of scienter-related “facts,” holding that scienter is "assuredly a fact" and that "facts showing scienter are among those that constitute the violation." Reasoning that a “plaintiff cannot recover without proving that a defendant made a material misstatement with an intent to deceive” (ie without proving scienter), the Court found that it would be unfair to start the clock on a plaintiff before he even had a chance at possessing the facts necessary to prevail in a legal challenge. The Court observed: “It would therefore frustrate the very purpose of the discovery rule in this provision . . . if the limitations period began to run regardless of whether a plaintiff had discovered any facts suggesting scienter.”

Having lost the argument as to whether scienter should be included in the group of facts necessary to be discovered, Merck looked to chip away at the threshold for establishing scienter. Merck argued that “facts that tend to show a materially false or misleading statement (or material omission) are ordinarily sufficient to show scienter as well.” The Court rejected this argument too, reasoning that the relationship between a statement’s falsity and the speaker’s state of mind depends on context; in other words that a materially false or misleading statement/omission could theoretically be the result of a simple mistake, ie lack scienter. Sometimes, the statute “may require ‘discovery’ of scienter-related facts beyond the facts that show a statement (or omission) to be materially false or misleading.” By way of example, the Court noted that “an incorrect prediction about a firm’s future earnings, by itself, does not automatically tell us whether the speaker deliberately lied or just made an innocent . . . error.”

Inquiry Notice

The Supreme Court has rejected the concept of “inquiry notice,” i.e. a "...

May 5, 2010

On April 27, 2010, the Supreme Court held (in Stolt-Nielsen S.A. v. Animalfeeds International Corp) that imposing class arbitration on parties that had not consented to it is inconsistent with Section 10(a)(4) of the Federal Arbitration Act (“FAA”). Interpretting the FAA as requiring the explicit consent of parties on such an important issue, the Court has unambiguously held that contractual silence as to class arbitration precludes an arbitration panel from ordering class arbitration of a dispute. In short, class arbitration, like arbitration in general "is a matter of consent, not coercion."

Background

Stolt-Nielsen stems from an alleged price-fixing action brought by buyers of parcel-tanker shipping services against a group of shipping companies and a Second Circuit holding that the dispute should be referred to the American Arbitration Association ("AAA") for arbitration pursuant to arbitration clauses contained in the relevant contracts.  The AAA’s Supplementary Rules for Class Arbitrations require that before turning to the underlying merits of a dispute, an arbitrator should first determine whether the contracts at issue were intended to provide for class arbitration. Agreeing that the contract was “silent” on the issue of whether or not class arbitration was permitted, the parties asked the arbitration panel to resolve the point. After a protracted process, the arbitration panel, relying on a consensus of arbitral decisions interpreting “a wide variety of clauses in a wide variety of settings” but significantly not citing the FAA or any state or maritime law, concluded that the arbitration clause did in fact allow for class arbitration.

Supreme Court Holding

The Supreme Court has now (i) reversed a Second Circuit holding that the arbitration panel's partial award should not be vacated and (ii) held that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

As to vacating the award, Justice Alito, writing for a 5-3 majority, held that the arbitral panel had “exceeded its powers” in imposing “its own policy preference” for class action arbitration and not giving effect to the contractual ageement of the parties. The FAA provides four grounds on which a court may vacate an arbitral award; one of which is “where the arbitrators exceeded their powers.” The Court reasoned that once the parties had stipulated that the arbitration clause was “silent” on class arbitration, the panel’s only job was to determine the appropriate “default rule” under the FAA or applicable maritime or New York state law. Given that the panel had paid no more than lip service to efforts to identify relevant law, the Court ruled that the panel's decision could not be seen as anything but a policy preference; and in putting its own views in front a statutory interpretation of a contractual agreement, the panel had “exceeded its powers.”

Having found a head of steam, the Court decided to push on and address the question that was originally referred to the panel. Citing Section 10(b) of the FAA as giving it the authority to do so, and noting that there was “only one possible outcome on the facts before us,” the Court did the job that the panel had failed to do, ie to look at statute (here, the FAA) and find that class arbitration was prohibitted given the silence of the arbitration agreement. In scolding the arbitration panel (and the Second Circuit) for a decision "fundamentally at war with [that] foundational FAA principle [that arbitration]...is a matter of consent, not coercion," the Court placed a significant amount of weight on the fact that class arbitration differs dramatically from bilateral arbitration in both form and economics. Class arbitration exposes corporate defendants to an unpredictable and potentially enormous litigation liability and differs from bilateral arbitration to such a degree that businesses cannot be presumed to have agreed to class arbitration just because they have agreed to submit disputes to an arbitrator.

Rejecting the possibility that the FAA could presume agreement on such a significant issue, the Court found that the FAA forbids a panel from authorizing class arbitration in the absence of the parties’ consent. As the Court put it, "an arbitrator derives his or her powers from the parties' agreement to forgo the legal process and submit their disputes to private dispute resolution....a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

The Takeaways:

From Skadden: "The Stolt-Nielsen decision also arrives at a time when arbitration has been the subject of renewed Congressional debate. Already in both houses of Congress, there are circulating various drafts of a so-called “Arbitration Fairness Act” which, if enacted, would either abolish or greatly curtail ...

May 3, 2010

"The Week That Was" looks back at the ten legal topics that got the most law firm coverage last week. Below you will find brief, readable summaries of the ten topics and some of the key "takeaways" offered up by the covering law firms. The links to the left will take you to the summaries (you will have to click on "Read More" first) & those to the right will take you to the "Alerts."   

1.   Stolt-Nielson & Class Arbitration under FAA

On April 27, 2010, the Supreme Court held (in Stolt-Nielsen S.A. v. Animalfeeds International Corp) that imposing class arbitration on parties that had not ...

April 26, 2010 (Skip to list, you will have to click on "Read More" first)

"The Week That Was" looks back at the ten legal topics that got the most law firm coverage last week. Below you will find brief, readable summaries of the ten topics and some of the key "takeaways" offered up by the covering law firms.

1.    Health Care Reform Becomes Law

Law firm coverage of health care reform continued to dominate for yet another week, with Alerts on HCR comprising @ half of everything we posted on the site. We now have more than 20 categories of Alerts on health care reform from the esoteric (eg the economic substance doctrine) to the mundane (breaks for nursing mothers). Are there many better (free or otherwise) resources on the Internet than that provided by the dozens of law firms that have covered the subject? We don't think so.

2.    DOJ & FTC Issue Revised Horizontal Merger Guidelines

On April 20, 2010, the Federal Trade Commission (FTC) and the Department of Justice's Antitrust Division (DOJ) published for comment their substantially revised "Horizontal Merger Guidelines" which outline the basic analytical framework that these agencies (the Agencies) use in reviewing mergers and acquisitions involving competitors and in determining whether to challenge a merger under U.S. antitrust law. The existing guidelines were last overhauled in 1992 (with modest revisions in 1997) and are now largely viewed as out of step with both existing Agency practices and the more active roles that the Agencies envisage for themselves in regulating merger conduct. Significantly, the existing guidelines are also routinely used by courts in their assessment of the legality of a particular business combination under Section 7 of the Clayton Act. It will take time, but the new guidelines will eventually be wound into the fabric of case precedent and they are undoubtedly drafted by the Agencies with a view to eventually making their efforts in the court room that much more fruitful. The guidelines may not have force of law, but they are, as FTC Chairman Jon Leibowitz aptly puts it, “one of the most cited documents in modern antitrust."

The Agencies generally examine mergers for violations of Section 7 of the Clayton Act, which prohibits business combinations that are likely to substantially lessen competition or tend toward the creation of a monopoly in a particular line of commerce or geographical area. Recent Agency experience has demonstrated that the old guidelines, which embraced a structured, step-by-step analysis that focused on definitions of relevant product and geographic markets, could be more of a hindrance than a help. As Davis Polk puts it, "In recent years, the government's biggest court losses in horizontal merger cases (Arch Coal/Triton; Oracle/ People Soft; and—at the district court level—Whole Foods/Wild Oats) have turned on market definition issues." The Agencies are undoubtedly tired of finding themselves boxed into a corner by their own guidelines and companies are likewise tired of not knowing what to expect from their regulators. 

Significant changes included in the densely-packed 34 pages of guidance include:

1.   A shift from the old five step-by-step approach (which started with defining the market and ended with determining the ease of entry and efficiencies) to a holistic, flexible and fact-based approach. The Agencies note that “[M]erger analysis does not consist of uniform application of a single methodology. Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.”

2.   A reduced significance of market definition, market share and market concentration in a merger analysis in favor of a larger set of analytical tools. With Whole Foods fresh in mind, the Agencies note that direct evidence of anticompetitive effects trumps the need, or obligation, to define markets; As the Agencies explained “[m]arket definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition...[t]he Agencies’ analysis need not start with market definition...[which] ...is useful [only] to the extent it illuminates the merger’s likely competitive effects.”

The significance of market share and market concentration as benchmarking tools has also been reduced. These analytical tools join many others enumerated in a new "Evidence of Adverse Competitive Effects" section to the guidelines which includes assessments based on actual effects arising from consummated mergers, direct comparisons based on experience, the existence of direct head-to-head competition and whether one of the merging parties is a "maverick, ie a firm that plays a disruptive role in the market to the benefit of customers.

3. &...

April 20, 2010

On April 8, 2010, the UK Bribery Act (the "Act") received Royal Assent, the UK's equivalent of a Presidential signature (although the Queen, God Bless Her, rarely says no). The Bribery Act is getting a considerable amount of attention on both sides of the Atlantic for very good reason; it is a very broad, tough anti-corruption bill (tougher than the FCPA, in that it covers domestic as well as international conduct, private as well as public conduct, and does not include a "grease" payments exception) being introduced into an historically lax regulatory environment. In a zealous rush to shout down some fairly embarrasing commentary from the Continent and to appear to be addressing shortcomings exposed by the financial crisis, it eschews not only Victorian era law but also modern-day American and European models in favor of a precedent setting "gold standard." As enacted, its principal enforcers, the Serious Fraud Office and the Crown Prosecution Service, will be given enormous discretion but neither entity presently has very much experience in policing corruption. This is in part due to an historic lack of interest in policing corporate behavior, a criticism leveled particularly at the SFO, but also because there has technically been very little to police. You can't police what isn't against the law and much of what has (or will become) illegal conduct was not previously covered by the Byzantine patchwork of anti-corruption legislation. Add to this enormous regulatory leap from puppy to pitbull, the fact that the UK is in a fragile recovery and is heavily dependent on just several key business sectors; and the difficulties as to implementation and enforcement of the Act are patently enormous.

Just how deep would problems be for the UK if the financial services sector shipped off to Mumbai or Dubai (or any other inviting bay with a more attractive regulatory and meteorological climate)? What would happen if a competitor in the UK's other critical sector, defence, was barred from bidding on contracts as the result of a bribery conviction (BAE having barely avoided this fate)?  The Bribery Act is going to be an enormously tricky piece of legislation to implement; if the UK Government is perceived as being overly zealous it may further alienate the already jittery financial services sector or fatally wound a player in the defence sector; if it isn't and takes a more traditional laissez-faire approach, it may end up a laughing stock.

And while it is hard not to feel sorry for any group of politicians/regulators who attempt to find the balance/finesse necessary to pull off this re-invention of British corporate culture without causing too much damage, it is corporate Britain that will bear the brunt of the change and anxiety that accompany the Act; and it needs to expect and prepare for the worst. When the Act goes "live" it is likely to come hard and fast as the UK Government tries to establish it as a meaningful/credible deterrent and in a maddeningly unpredicatble fashion as regulators try to cope with a neurosis-inducing change in their roles.

This is only partly psycho-babble. There is one reason, and one alone, that the UK did not have something equivalent to the Bribery Act (or at least the FCPA) years ago: There was no legislative or commercial appetite for it. The UK may have nominally leap-frogged into first place in the anti-corruption stakes, but it will be a while before the business mindset catches up with the ideal. It was only three years ago that Tony Blair unabashedly called off the SFO's investigation into secret payments by BAE to Saudi Arabia's Prince Bandar. Asked by the then leader of the Liberal Democrats, "Whatever happened to Robin Cook's ethical foreign policy?", Blair replied ""It's cloud-cuckoo-land ... the natural habitat of the Liberal Democrats." Fast forward three years to February of this year and BAE gets given a slap on the wrist (and absolution) by the UK Government for the very same transgressions jauntily dismissed by the former Prime Minister. Just two months later, the Bribery Act was rushed into existence (Clifford Chance superbly summing up its passage with, "[L]ike a long, circumspect courtship ending in one night of fumbled passion, the Bribery Bill was in the end rushed through Parliament in just under 5 months, after 30 years of dithering, deferring and delaying by governments of different persuasions").

This is not a criticism of business mores in the UK,  just the recognition that things have been done differently in London, Washington D.C. and Riyadh. In truth, there is very little that is black and white about the ethics of currying favor or winning business with payments of cash; and BAE is a great example of how divergent perceptions as to propriety can be. Is the payment of 1 or 2% of the value of a transaction (even if that payment is over a $1 billion) to an official representative of an absolute monarchy which otherwise provides critical oil supplies to the payor's country, provides critical support to that country's defence sector (not to mention strategic interests) and creates thousands of jobs for that country's citizens a crime? Tony Blair didn't think so, the Saudi monarchy didn't think so and in all likelihood parts of the Bush Administration didn't think so. The culture of business payments varies the world over, is often relative and almost always occurs in shades of gray.

The fact remains that the ...

April 19, 2010 (Skip to list, you will have to click on "Read More" first)

"The Week That Was" looks back at the ten legal topics that got the most law firm coverage last week. Below you will find brief, readable summaries of the ten topics and some of the key "takeaways" offered up by the covering law firms.

1.    Health Care Reform Becomes Law

In a week that had no new developments amongst our top ten topics (Congress, courts, schools and large parts of law firms being in recess), health care reform continued to dominate, with law firms getting increasingly granular in their coverage and the flow of Alerts on HCR comprising @ half of everything we posted on the site. We now have more than 20 categories of Alerts on health care reform from the esoteric (eg the economic substance doctrine) to the mundane (breaks for nursing mothers). Are there many better (free or otherwise) resources on the Internet than that provided by the dozens of law firms that have covered the subject? We don't think so.

2.     The UK Bribery Act

Just how deep would problems be for the UK if the financial services sector shipped off to Mumbai or Dubai (or any other inviting bay with a more attractive regulatory and meteorological climate)? What would happen if a competitor in the UK's other critical sector, defence, was barred from bidding on contracts as the result of a bribery conviction (BAE having barely avoided this fate)?  The Bribery Act is going to be an enormously tricky piece of legislation to implement; if the UK Government is perceived as being overly zealous it may further alienate the already jittery financial services sector or fatally wound a player in the defence sector; if it isn't and takes a more traditional laissez-faire approach, it may end up a laughing stock.

And while it is hard not to feel sorry for any group of politicians/regulators who attempt to find the balance/finesse necessary to pull off this re-invention of British corporate culture without causing too much damage, it is corporate Britain that will bear the brunt of the change and anxiety that accompany the Act; and it needs to expect and prepare for the worst. When the Act goes "live" it is likely to come hard and fast as the UK Government tries to establish it as a meaningful/credible deterrent and in a maddeningly unpredicatble fashion as regulators try to cope with a neurosis-inducing change in their roles.

This is only partly psycho-babble. There is one reason, and one alone, that the UK did not have something equivalent to the Bribery Act (or at least the FCPA) years ago: There was no legislative or commercial appetite for it. The UK may have nominally leap-frogged into first place in the anti-corruption stakes, but it will be a while before the business mindset catches up with the ideal. It was only three years ago that Tony Blair unabashedly called off the SFO's investigation into secret payments by BAE to Saudi Arabia's Prince Bandar. Asked by the then leader of the Liberal Democrats, "Whatever happened to Robin Cook's ethical foreign policy?", Blair replied ""It's cloud-cuckoo-land ... the natural habitat of the Liberal Democrats." Fast forward three years to February of this year and BAE gets given a slap on the wrist (and absolution) by the UK Government for ...

April 12, 2010 (Skip to list, you will have to click on "Read More" first)

"The Week That Was" looks back at the ten legal topics that got the most law firm coverage last week. Below you will find brief, readable summaries of the ten topics and some of the key "takeaways" offered up by the covering law firms.

1.    Health Care Reform Becomes Law

At a White House press conference announcing the most hard-fought piece of mega legislation in recent memory, Vice-President Biden aptly, if not eruditely, reduced this mountain of a Bill to a truism for the ages:  Mr. President, "this is a big f*** deal." Indeed, and for our money one of the finest, premeditated pieces of political profanity ever. It is also frankly pointless to attempt a summary of such a wide-reaching piece of legislation (yes, partly a punt, but we have not been completely work-shy; having divided the deluge of health care reform Alerts into 9 categories); historic in its content, historic in its evolution/process & historic in its passing. Presidents (and their wives) have sacrificed enormous political capital in previous and unsuccesful attempts to scale the health care reform summit; attempts that have come from both sides, with President Nixon (who warmly welcomed the f-word to the confines of the Oval Office) and Teddy Roosevelt amongst earlier Republican champions. We are, however, extremely pleased with the health care reform content on the site. One of the areas where legal content aggregation really gets to shine is in the collection of materials on enormous, unwieldy subjects like this. What law firms have together produced has been just [expletive deleted] great. Cast an eye down the health care reform Alerts on the site; no one law firm (or small group of firms) can match the diverse approaches to this legislation provided by aggregation.  Together, however, they provide excellent (and fast) coverage of the legislation's impact on key industries, human resources, fraud, tax, and yes even the provision of health care. Are there many better (free) resources on the Internet than that provided by the dozens of law firms that have covered the subject?

2.     SEC's Proposed Rules Re: Asset-Backed Securities (ABS)

On April 7, 2010, the SEC proposed rules that "would revise the disclosure, reporting and offering process for asset-backed securities (ABS) to better protect investors in the securitization market." The changes are substantial and are intended to revive a market that has remained wounded since the height of the financial crisis by ramping up regulation. As Chairman Schapiro put it, the proposed rules release “represents a fundamental revision to the way in which the ABS market would be regulated ... [with the proposed changes] ... both necessary and critical components of restoring investor confidence.” Like much of the securities regulation spawned by the financial crisis, the proposed rules try to protect investors from themselves (ie from making poor investments) by placing further responsibilities on issuers. The premise that purchasers of ABS are sophisticated investors that should understand and price risk is largely discarded in favor of a view that even nominal professionials quickly get out of their depth and need a lifeguard around at all times. Commenting on lessons from the financial crisis, Chairman Schapiro noted "that investors and other participants in the securitization market did not have the necessary tools to be able to fully understand the risk underlying those securities and did not value those securities properly or accurately." Those "other participants" including rating agencies, the lawyers who signed off on 10,000's of ABS transactions and the pre-Obama era SEC. Is this the SEC being overly patronizing or were the "big boys" of the ABS market not very grown up?

What are ABS?

Asset-backed securities are securities issued by an entity (usually especially created for the purpose and called a "special purpose vehicle or "SPV") that has bought and then bundled a group of outstanding loans (eg mortgages or credit card receivables, you often hear this referred to as a "pool" of assets) and has then offered investors an opportunity to buy a piece of the action (in the form of a note or some other type of debt instrument). The investor usually gets an interest payment in respect of its investment and this is generally financed by the interest paid on the underlying loan (eg the interest a homeowner pays to the new holder of his mortgage, the SPV, or the credit card interest paid by a credit card holder). Simply put the SPV collects interest from the original borrower and uses it to make payments to investors. It is "asset-backed" because the investor has a right ...

April 9, 2010

Our guess is that 1,700 blog entries at Legal Blog Watch and eight years at LawSites started to feel a bit like a desk job felt  to those “aw shucks” test pilots of yesteryear. Journalists need a great story, tech junkies need “we don’t quite have a word for that yet” novelty, and defenders of the legal faith need to be repelling ideas that could undermine the integrity of the profession.  Bob Ambrogi, who combines an old-world, media lawyer’s penchant for the virtuous fight and the just strap that Terabyte of RAM to my backside and light the fuse curiosity of an internaut, wants to be out front, marshalling resources to triage the onslaught of change occurring at the interstices (or fault lines) of LMT.

Several years ago in a blog piece Bob commented: “Some question the value of professional networking sites, given that a critical mass has yet to join them. To my mind, avoiding social networking until it becomes widespread makes no more sense than waiting to launch a blog until everyone else has one. Would you rather lead the pack or trail behind it?” Given the pace of LMT change, a lot of leadership has to occur at the front; although being at the front and leading are two completely different things. Leading is not about finding yourself in front of the “pack,” it’s about finding a way to leverage that pack to further a set of goals.  What Bob has managed to do, over and over again, is to leverage his experience as a lawyer and journalist (in effect his understanding of both legal content and the media available to deliver that content) to steer people and ideas.

In the LMT context, that has meant advocating technological change where it works and shooting it down where it doesn’t, always (and in our minds this is key given the nascent and chaotic world of LMT) with a normative, almost idealistic view of the legal profession. The fantastic thing about this latter point is that Bob’s sense of right is often echoed by the growing group of early LMT champions/experts. Notwithstanding a tendency of this group to evidence a social conscience, it is not a given that it assigns itself a watchdog role, especially as it inevitably shifts into the moneyed mainstream.

Thanks to the Internet and its dizzying array of networking and communications tools, ideas absolutely fly around the ether; bouncing, evolving, crashing, coalescing in an astounding iterative Hegelian dialectic. There are lots of reasons, however, to worry about the latent power of this idea-generating machine. In the LMT context, there are still only a handful of people who blend an affinity for technology and an understanding of the legal profession; it is unclear how their efforts are to be funded (ie who will influence them) and they are vastly outnumbered by the commercialized forces of technology that want to tap into the $billion legal market (and implicitly to co-opt them). If the technological powers at their disposal are to be correctly funneled/marshaled to meet challenges, there needs to be an intellectual backbone to their efforts, a structure to create an agenda and manage processes.

Enter Bob.  

Robert J. Ambrogi has been both a lawyer and a journalist for his entire career. He is not a lawyer with a media-based practice or a journalist writing about the law, ie he does not simply bring one profession to bear on the other. He has integrated the two for decades and at the highest levels. This professional dualism has been overlaid with a third calling; Bob is also a self-professed “gadget freak,” an avocation which has become over time a third vocation.  Law, media and technology.  There is some irony that although law is generally the subject matter of all three vocations, it is the journalism which sets ...

April 5, 2010 (Skip to list)

"The Week That Was" looks back at the ten legal topics that got the most law firm coverage last week. Below you will find brief, readable summaries of the ten topics and some of the key "takeaways" offered up by the covering law firms.

1.    Health Care Reform Becomes Law

At a White House press conference announcing the most hard-fought piece of mega legislation in recent memory, Vice-President Biden aptly, if not eruditely, reduced this mountain of a Bill to a truism for the ages:  Mr. President, "this is a big f*** deal." Indeed, and for our money one of the finest, premeditated pieces of political profanity ever. It is also frankly pointless to attempt a summary of such a wide-reaching piece of legislation (yes, partly a punt, but we have not been completely work-shy; having divided the deluge of health care reform Alerts into 9 categories); historic in its content, historic in its evolution/process & historic in its passing. Presidents (and their wives) have sacrificed enormous political capital in previous and unsuccesful attempts to scale the health care reform summit; attempts that have come from both sides, with President Nixon (who warmly welcomed the f-word to the confines of the Oval Office) and Teddy Roosevelt amongst earlier Republican champions. We are, however, extremely pleased with the health care reform content on the site. One of the areas where legal content aggregation really gets to shine is in the collection of materials on enormous, unwieldy subjects like this. What law firms have together produced has been just [expletive deleted] great. Cast an eye down the health care reform Alerts on the site; no one law firm (or small group of firms) can match the diverse approaches to this legislation provided by aggregation.  Together, however, they provide excellent (and fast) coverage of the legislation's impact on key industries, human resources, fraud, tax, and yes even the provision of health care. Are there many better (free) resources on the Internet than that provided by the dozens of law firms that have covered the subject?

2.    Jones v Harris Associates & Excessive Investment Adviser Fees

On March 30, 2010, the Supreme Court unanimously voted (in Jones et al. v. Harris Associates L.P.) to reaffirm the standard set out in Gartenberg v. Merrill Lynch Asset Management, Inc. as to what constitute excessive mutual fund management fees under Section 36(b) of the Investment Company Act of 1940 ("the Act").  Summing things up, Justice Alito found that Gartenberg "was correct in its basic formulation of what Section 36(b) requires: to face liability under Section 36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." The Supreme court also provided guidance as to factors that a court (and therefore an investment company board) should consider in determining whether a board has satisfied its duties under the Act's Section 15(c) in evaluating the legality of an adviser’s compensation.

Jones has taken on a particular interest in part because its novel replacement for the Gartenberg standard has been accompanied by a spat between two prominent Seventh Circuit Judges (and lions of the law and economics school) Frank Easterbrook and Richard Posner. Easterbrook, writing for the Seventh Circuit majority, had rejected Gartenberg because it “relies too little on markets” and Posner had retorted in a vehement dissent that this markets-based view was premised “mainly on an economic analysis that is ripe for reexamination.” In what may be perceived as a rebuke to Easterbrook and Posner for highjacking a judicial process to debate economic theory, the Supreme Court noted that the Seventh Circuit debate as to the economic underpinnings of Section 36(b) was “a matter for Congress, not the courts.”

Section 36(b) provides that investment advisers to a mutual fund have a fiduciary duty with respect to their receipt of advisory fees and authorizes civil actions by the SEC and mutual fund shareholders for breach of that duty and for the recovery of excessive advisory fees.

In Jones, the plaintiffs alleged that advisory fees charged by advisers in respect of a mutual fund were excessive as compared to fees charged to its institutional clients and that fund directors charged with approving the fee arrangement were not truly "independent." The district court, applying Gartenberg, granted the defendant investment adviser's motion for summary judgment. On appeal to the Seventh Circuit, the summary judgment was affirmed but with Gartenberg's "reasonable relationship" standard jettisoned in favor of one that relied on a properly functioning market to produce acceptable results. As Easterbrook put it, as long as a fiduciary (eg a fund adviser) "make[s] full disclosure and play[s] ...