feldman-frondorf

Patent Trolls and IPOs: A Perfect Moment to Strike

In a recent episode of HBO’s Silicon Valley,[1] the show’s fictional startup team encounters a setback when they’re sued just before their company is about to receive a major venture funding round. As the news of the suit spreads, once-interested VC firms back away, leaving the future of the company in doubt.

“A young startup with an IP lawsuit hanging over its head? I wouldn’t want to be part of that team,” says the company’s lawyer.

“Yeah… it just sounds really expensive,” the founder responds, reeling at the cost of fighting the suit.

“Welcome to the business, Richie.”… Read more

Robert Jackson and Gillian Metzger

Brief of 15 Professors of Law and Finance in MetLife v. FSOC

Last week, along with our co-authors Kate Andrias and Michael Barr of the University of Michigan Law School, we filed an amicus brief on behalf of fifteen professors of law and finance in MetLife v. Financial Stability Oversight Council. MetLife has challenged the FSOC’s determination that the company’s distress could threaten U.S. financial stability—and, thus, that MetLife should be subject to Federal Reserve supervision. The case, which is currently before the federal trial court in Washington D.C., represents the first major challenge to an FSOC designation. Our brief explains why the court should reject this challenge.

Our brief reflects … Read more

McDermott discusses SEC’s Large Payouts to Compliance-Officer Whistleblowers

On April 22, 2015, the U.S. Securities and Exchange Commission (SEC) announced that it had awarded $1.4 million–$1.6 million to a compliance officer-turned-whistleblower who aided the SEC in an enforcement action against the officer’s employer. This marks the second time an employee with an internal audit or compliance function—who does not typically qualify under whistleblower rules—received an award under the SEC’s whistleblower program dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under SEC rules, disclosures of misconduct by those whose principal duties are related to compliance or internal auditing do not qualify as “original information” eligible for … Read more

Bill Wang

Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping

After the Supreme Court’s unanimous decision in Carpenter v. United States,[1] the federal mail and wire fraud statutes became potent prosecutorial weapons against insider trading when the information-owner is the victim. This post examines how criminal liability under the federal mail and wire fraud statutes supplements traditional SEC authority to pursue insider trading. SEC Rules 14e-3 and 10b-5 cover a great deal of stock market insider trading and tipping, but certainly not all. For instance, Rule 14e-3 is confined to the tender offer context.

As illustrated by the recent case of United States v. Newman,[2] the Rule 10b-5 … Read more

Morrison Foerster discusses FINRA’s Revised Sanction Guidelines: Higher, Tougher, Fairer?

FINRA’s newly revised Sanction Guidelines, effective immediately, signal that the upward trend in sanctions against broker-dealers is likely to continue.

The Sanction Guidelines, which establish the range of sanctions that FINRA may impose in formal disciplinary proceedings, affect several specific types of violations, as well as the principles behind levying sanctions and the overall levels of monetary sanctions. The Guidelines are also meant to catch up to the sanctions that FINRA actually is levying; as FINRA stated, in revising the guidelines, it is seeking to “harmonize the Sanction Guidelines with the current state of the cases in this area.”… Read more

David Yermack

Donor Governance and Financial Management in Prominent Art Museums

Donations play a fundamental (and increasing) role in supporting art museums and other nonprofit corporations. However, donations are often not freely given and may come at the price of certain restrictions upon the donation’s use and expropriation. This practice, termed here as “donor governance,” represents a form of corporate governance for nonprofits—the “restrictive covenants” on the donation’s use limit nonprofit managers’ ability to freely use the funding.

Donor governance manifests itself particularly strongly in the art-museum context. Many art museums suffer from recurring encounters with financial distress and self-perpetuating boards of trustees, incentivizing donors to be wary of donating without … Read more

Roe Vatiero

Corporate Governance and its Political Economy

To fully understand the modern corporation’s ownership, shape, and distribution of authority, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. Interest groups often seek to obtain via politics both … Read more

Sarah Light

The New Insider Trading: Environmental Markets within the Firm

Global climate change is the most pressing environmental problem of our time. This fact has led legal scholars and policymakers to debate the relative environmental effectiveness, efficiency, and justice of different public policy instruments such as carbon taxes, cap-and-trade systems, and prescriptive regulation. Such scholarship tends to assume that the government is the key (or only) player setting and enforcing environmental standards against private firms, which are regulatory targets.

In a recent article, entitled, The New Insider Trading: Environmental Markets within the Firm,[1] (available here) I challenge these assumptions through a close examination of British Petroleum’s (BP’s) … Read more

Simpson Thacher discusses SEC and FINRA Report on Cybersecurity Sweep Examinations and SEC’s Cybersecurity Guidance Update

The SEC issued a National Exam Program risk alert summarizing OCIE’s cybersecurity examination sweep of advisers and broker-dealers on February 3, 2015 (SEC Risk Alert). On the same day, FINRA issued its report on cybersecurity practices of broker-dealers, based on its own sweep examination (FINRA Report). Neither the SEC Risk Alert nor the FINRA Report creates any new rules or legal obligations, but each provides insight into current industry practice.

Many commentators have interpreted the reported results as a sign that the industry is on top of cybersecurity issues, but OCIE specifically included cybersecurity controls among its examination priorities for … Read more

Sullivan & Cromwell discusses NAIC Private Equity Issues Working Group Guidance for State Insurance Regulators in Considering Change of Control Approval Filings

On March 29, 2015, the National Association of Insurance Commissioners (the “NAIC”) Private Equity Issues Working Group (the “PEI Working Group”) adopted a new section to be added to the NAIC’s Financial Analysis Handbook that provides a narrative guidance to state insurance regulators considering an application seeking approval to acquire control of a domestic insurance company (the “Guidance”). The Guidance draws from many of the practices that have recently been used by states such as New York and Iowa in approving the acquisition of control of domestic insurers by private equity firms, and, in the case of New York, recently … Read more

Aguilar_Luis_200x200

Commissioner Aguilar discusses U.S. Equity Market Structure: Making Our Markets Work Better for Investors

The following public comments were released by Commissioner Luis A. Aguilar, U.S. Securities and Exchange Commission (SEC)[1] on May 11, 2015.  A copy of them appears on the SEC website, here.

I. Introduction

It is well known that the Commission needs to undertake a holistic review of our current equity market structure. In fact, the Commission has formed an advisory committee to assist that review.[2] In furtherance of that process, the following is intended to focus on certain issues that any serious review should consider—such as the various issues that have arisen from our markets’ increasingly fragmented … Read more

Akin Gump discusses SDNY Decision Allowing SEC Insider Trading Case to Proceed, Distinguishing Newman

A recent decision from the United States District Court for the Southern District of New York allowing a U.S. Securities and Exchange Commission (SEC) civil enforcement action to proceed against two former stockbrokers for alleged insider trading violations sheds additional light on application of the 2nd Circuit’s decision in United States v. Newman, No. 13-1837-cr(L) (2d Cir. Dec. 10, 2014). In the new decision, SEC v. Payton, No. 14 Civ. 4644 (S.D.N.Y. Apr. 6, 2015), Judge Jed S. Rakoff upheld the SEC’s allegations that traders Daryl Payton and Benjamin Durant III of Euro Pacific Capital improperly traded software … Read more

Key Speakers At Seminars At The IMF & World Bank Annual Meetings

Chair Yellen discusses Finance and Society

Let me begin by thanking the organizers for inviting me to participate in this important dialogue on the role of finance in society. The financial sector is vital to the economy.  A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.

Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and … Read more

fox-glosten-rauterberg-2

The New Stock Market: Sense and Nonsense

Over the last few decades, how stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded electronically on up to sixty competing venues where a computer matches incoming orders. A majority of quotes are now posted by high-frequency traders (HFTs), making them the market makers that are the preponderant source of liquidity in the new market.

This new stock market has spawned a bewildering number of controversies. From the quoting practices of HFTs, to the rise of so-called dark … Read more

Paul Hastings describes how CFPB’s Public Complaint Database Is Likely to Amplify Consumer Voice But Muffle Effective Provider Responses

The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) recently issued its final policy statement (the “Policy Statement”) enabling consumers to post on the CFPB’s web-based public consumer complaint database (the “Database”) complaints about consumer financial services in narrative format. [1] While the CFPB has maintained the Database since 2012, under the Policy Statement, consumers would be able to submit detailed descriptions of their experiences in dealing with providers of consumer financial products and services. Once a complaining consumer consents to publication, the CFPB would remove personally identifying information and then feature the consumer’s full complaint in narrative … Read more

mary jo white

Chair White discusses the SEC as the Whistleblower’s Advocate

Thank you, David, for that kind introduction. I am very honored to address the Garrett Institute, one of the most important programs in the country for corporate and securities lawyers, and to be in David’s home territory of Northwestern Law School where he served as Dean before going on to serve as a very distinguished Chairman of the SEC in the late 1980s.

Although the Garrett Institute was established 35 years ago to honor former SEC Chairman Ray Garrett, Jr., I really first came to learn about him when I did a bit of research for a speech I gave … Read more

Andreou, Andrikopoulos and Christos

The Politics of Sovereign Debt in Greece: Crisis and Realism

The Greek crisis emerged as an offspring of the financial crisis of 2007, the institutional and fiscal problems of the Greek economy, the institutional structure of the Eurozone and, crucially, the failed political management in the last months that led to the European Financial Stability Facility (EFSF) and the bailout agreement in May 2010. Since then, the Greek governments, along with the creditors, designed and implemented a program of fiscal austerity and institutional reform which lead to some positive fiscal results but also to an unprecedented crisis of liquidity, orientation and cohesion in Greek economy and society.

The financial crisis … Read more

Wachtell Lipton explains Some Lessons from DuPont-Trian

The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients.  Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.

ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.

Trian Fund Management and its … Read more

More on Navinder Singh Sarao, the Alleged Market Manipulator with Responsibility for the Flash Crash

For those interested in the allegations against Navinder Singh Sarao and Nav Sarao Futures Limited PLC, which implicate them in extensive market manipulation and the “Flash Crash” of 2010, here are the complaints from the DOJ and CFTC as well as an ex parte order obtained by the CFTC against the defendants: United States of America v. Navinder Singh Sarao; CFTC v. Navinder Singh Sarao and NAV Sarao Futures Limited PLC; and Ex Parte Statutory Restraining Order, Navinder Singh Sarao and NAV Sarao Futures Limited PLC.… Read more

John Crawford

The Moral Hazard Paradox of Financial Safety Nets

Financial panics are pernicious, but they can be countered with government guarantees of panic-prone debt. In the wake of the crisis, however, Congress has stripped regulators of this sort of guarantee power, motivated in large part by concerns that such powers could exacerbate moral hazard. In a new article, The Moral Hazard Paradox of Financial Safety Nets, I suggest that the moral hazard impact of guarantee authorities in the current system is ambiguous – indeed, it is plausible that guarantee authorities could reduce the (net) cost of moral hazard arising from expectations of government intervention. This supports the view … Read more

Moorhead and Vaughan

The Ethical Challenges of Legal Risk

General Motors’ tardy response to ignition switch problems; Standard Chartered Bank’s wire-stripping of Iranian funds; and the News of the World’s misleading ‘lone wolf’ defence of hacking are all illustrations of the increasingly controversial role that the management of legal risk by in-house legal functions can play.  Standard Chartered Bank’s in-house legal team advised on how they could ‘enforcement proof’ wire-stripping Iranian identifiers from transfers of funds into the US (and advised their organisation to clear these funds through a competitor bank) – they took a monumental risk with the commercial and reputational interests of the Bank.  They apparently did … Read more

Ariel Ezrachi and Maurice Stucke

From Smoke-Filled Rooms to Computer Algorithms — The Evolution of Collusion

The development of self-learning and independent computers has long captured our imagination. The HAL 9000 computer, in the 1968 film, 2001: A Space Odyssey, for example, assured, “I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.” Today businesses (and governments) are increasingly relying on big data and big analytics. As the cost of storing and analyzing data drops, companies are investing in developing ‘smart’ and ‘self-learning’ machines to assist in pricing decisions, planning, trade, and logistics. With the Internet of Things, more of our daily … Read more

Adam Badawi

Lobbying in the Boardroom

Understanding why firms exist has long been a preoccupation of economists. The leading answers—the ones that have won people Nobel prizes or put them on the short list[1]—focus on the ability of firms to get things done by asserting authority rather than relying on contracts or formal dispute resolution. To put it simply, if the boss tells you to stay late to finish a project, you don’t start a lawsuit, you just do it.

In the modern corporation, the board of directors is the ultimate source of this authority.[2] That authority gives the board the power to … Read more

Joanna C. Schwartz

The Cost of Suing Business

To listen to the Chamber of Commerce, one would think that class actions are the most significant scourge on business ever conjured up by man. In brief after brief to the Supreme Court, the Chamber of Commerce and other business amici tell the same story: Meritless class actions, filed by rapacious plaintiffs’ attorneys, are so devastatingly expensive to defend against, and threaten such financial ruin if plaintiffs prevail, that corporate defendants cannot help but accept “blackmail settlements” that harm both businesses’ bottom lines and society at large.

The Supreme Court appears to have premised several recent civil procedure decisions—including Twombly, Read more

Fried Frank discusses U.S. DOL Re-Proposes ERISA Fiduciary Rule

Roughly four and a half years after its first attempt, the U.S. Department of Labor today again proposed to redefine the term “fiduciary” as it applies in the investment advice context. The DOL withdrew the 2010 Proposed Rule following blistering criticism from the regulated community and Congress. Since the withdrawal, however, heated debate among stakeholders has continued. Earlier this year, President Obama publicly expressed his support for the 2015 Proposed Rule. Further complicating matters, SEC Chairman Mary Jo White recently committed the SEC to proposing a fiduciary standard for brokers who recommend financial products to clients—regardless of whether the clients … Read more

John Morley

Why Law Firms Collapse

Law firms don’t just go bankrupt – they collapse. Dewey & LeBoeuf; Heller Ehrman; Howrey; Thelen. All of these firms and many others have disappeared with extraordinary swiftness and finality. Large law firms often go from apparent health to liquidation in just a few months – sometimes even weeks or days. And none has ever managed to reorganize its debts in Chapter 11 bankruptcy and survive. This pattern of swift and complete collapse is puzzling, because it is strangely out of proportion to law firms’ actual financial distress. Most collapsed firms have remained profitable up through the days they dissolved.… Read more

PwC discusses Cyber-security: Think Risk Not IT

Despite millions of dollars spent on enhancements, cybersecurity remains the area of risk management with the largest gap between threat and preparedness. As the frequency and sophistication of cyber attacks have increased significantly in recent years, counter measures have failed to keep pace.

This gap is especially important for financial institutions, which by our estimate are over 30% more likely to be targeted by cyber crime. While the biggest banks have been dealing with cyber threats for years, they and their smaller peers are largely responding to threats reactively. More specifically, banks continue to address past issues rather than responding … Read more