A new type of warfare is upon us. In this new mode of war, finance is the most powerful weapon, bullets are not fired, financial institutions are the targets, and almost everyone is at risk. Instead of smart bombs, improvised explosives, and unmanned drones –– economic sanctions, financial restrictions, and cyber programs are the weapons of choice. This is the new reality of modern financial warfare.
The armaments of modern financial warfare are as vast, diverse, and important as the myriad of ways to raise and move money. Broadly, the financial weapons of war can be divided into analog weapons … Read more
In the wake of its release on May 17, 2016 of updated Compliance and Disclosure Interpretations (“CDIs”) relating to the disclosure of non-GAAP financial measures, the SEC’s Division of Corporation Finance has indicated in no uncertain terms that now is the time for companies to review their non-GAAP measures and make any revisions called for by the new guidance.
With the new and revised CDIs, the SEC has delivered the latest in a series of increasingly strong warnings – previously made in remarks by the SEC Chair and senior Staff accountants – about the perceived misuse of non-GAAP measures. Commenting … Read more
Academics who profess expertise in corporate governance sometimes find themselves on very strange turf. That has been my status for the last two years, serving as an adviser to the U.S. Commerce Department in connection with the Obama Administration’s efforts to “privatize” the Internet Corporation for Assigned Names and Numbers (“ICANN”). ICANN is the non-profit entity that essentially manages the Internet’s domain name functions and oversees much of its internal plumbing. This privatization effort has now been challenged in Congress by Senator Ted Cruz and others, and political fireworks are likely. But let’s start at the beginning. In March … Read more
As we have previously observed, private fund advisers face a difficult challenge when SEC guidance (in the form of a speech or a public enforcement order) indicates that certain long-standing practices may be contrary to the securities laws. What does an adviser do when its past practices appear, in hindsight, to have fallen short?
While there are a number of potential “fixes”, including rebating fees, amending the fund documents, amending the Form ADV, and changing prospective practices, doing nothing is a particularly bad strategy. These situations are potential whistleblower events, even if the adviser is not yet aware of any … Read more
Reinsurance can be understood as simply insurer’s insurance. Under an insurance contract, a policyholder is protected from loss by transferring risk to an insurer; analogously, under a reinsurance contract, an insurer (the cedent or ceding company) is protected from exposure by transferring risk to a reinsurer. Insurers have an increasing demand for more financial capacity when underwriting catastrophic risks. The Cologne Reinsurance Company was the first professional reinsurance company, founded in 1842 following a catastrophic fire in Hamburg the same year. For over a century, reinsurance has been the preferred vehicle to shed primary insurers’ catastrophe risk exposure. For example, … Read more
On July 13, 2016, the Securities and Exchange Commission (“SEC”) adopted important amendments updating its rules of practice governing its administrative proceedings. These changes concern, among other things, the timing of hearings in administrative proceedings, depositions, summary disposition, the contents of an answer, admissibility of evidence and expert disclosures and the procedure for appeals. The amendments are intended to update the rules and introduce additional flexibility into administrative proceedings, while continuing to provide for the timely and efficient resolution of the proceedings. The amendments will become effective sixty days after publication in the Federal Register and will apply … Read more
Last week, news emerged that China had hacked the FDIC on several occasions during the past few years. This revelation renews concerns about the security of America’s financial institutions and comes on the heels of the third bank hacking through the Swift global payments network in the past year alone. What’s truly scary is that there may be further breaches of which we are simply unaware.
It’s possible to think of even more terrifying possibilities. What if hackers infiltrated the information systems of the San Francisco Federal Reserve Bank or the Federal Reserve Board of Governors rather than those of … Read more
On June 16, 2016, the US Securities and Exchange Commission (“SEC”) issued a proposed rule (available here), which, if adopted, would result in a revamp of its disclosure requirements for mining company issuers. The proposed rule is intended to harmonize the SEC’s mining property disclosure requirements with current industry and global regulatory practices and standards. The SEC is seeking comments on all aspects of the proposal. Initial comments are due 60 days after the proposed rule is published in the Federal Register.
The key changes proposed for mining companies are:
- requiring the disclosure of mineral resources (currently prohibited under
… Read more
The Securities and Exchange Commission proposed Regulation Fair Disclosure (Reg FD) on December 20, 1999. The motivation behind the proposal was concern that an informational advantage provided by selective disclosures to certain market participants was resulting in a loss of confidence in the integrity of capital markets. Thus, the SEC’s stated intention with Reg FD was to “level the playing field” for all market participants.
The proposal was met with a strong reaction by market participants, with over 6,000 comment letters issued in response, and the reaction was mixed. On the one hand, individual investors generally supported the proposal, expressing … Read more
Attackers last February reportedly stole $81 million from the Bangladesh Central Bank by obtaining and exploiting the bank’s credentials for the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. The attack – one of the biggest bank robberies in history – exploited weaknesses in cyber, fraud, and possibly insider threat controls, illustrating the need for banks to combine financial crime risk areas that were previously either siloed, or at best tenuously connected.
Specifically, the attackers exploited cyber weaknesses by designing custom malware tailored to bypass controls and network logging systems used by the Bangladesh Central Bank. The attackers also … Read more
Despite substantial judicial and public scrutiny, non-prosecution agreements (“NPA”) and deferred prosecution agreements (“DPA”) have retained their prominence as vehicles to resolve complicated corporate investigations, particularly for companies operating in regulatory environments. In the first half of this year, NPAs and DPAs remain in common use. We do not expect this trend to change. Thanks in part to a D.C. Circuit opinion affirming the critical independence and discretion that the U.S. Department of Justice (“DOJ”) has in crafting the terms of DPAs, we expect use of such agreements to remain widespread. Finally, tacitly acknowledging the utility of the U.S. DPA/NPA … Read more
A recent enforcement action reflects the CFTC’s expanded jurisdiction and provides further clarity on what constitutes “actual delivery” in cryptocurrency trading.
On June 2, 2016, the US Commodity Futures Trading Commission (CFTC) issued an order (the Bitfinex Order) filing, and simultaneously settling, charges against Hong Kong-based BFXNA, Inc., d/b/a Bitfinex (Bitfinex), in connection with Bitfinex’s operation of an online cryptocurrency trading platform (the Platform). Specifically, the Bitfinex Order finds that Bitfinex facilitated the execution of illegal, off-exchange commodity transactions in violation of the Commodity Exchange Act (the CEA) by (i) permitting retail and non-retail users to engage in financed … Read more
Much has been written and spoken in the immediate aftermath of the UK’s EU referendum about what the UK must do to leave the EU. We look at the key questions in this area, such as whether the UK has yet decided to withdraw, what it must do to withdraw, whether it can change its mind, and the position of Scotland.
What is the mechanism for leaving the EU?
The mechanism for the UK’s leaving the EU is set out in article 50 of the Treaty on European Union (see Box 1, overleaf). For withdrawal, article 50 requires:
… Read more
The Brent and WTI prices of crude oil fell by 60% between June 2014 and January 2015, marking one of the fastest and largest declines in oil history. Several potential factors (related to oil supply and demand) which could have influenced this oil price decline were discussed in an extensive World Bank policy research note by Baffes, Kose, Ohnsorge, and Stocker (2015). However, Tokic (2015) and a Bank of International Settlements report (Domanski, Kearns, Lombardi, and Shin, 2015) showed that production and consumption alone are not sufficient for a fully satisfactory explanation of the collapse in oil prices. Particularly, Domanski, … Read more
The UK voters’ decision to exit the EU came as a surprise to many observers, as well as the markets, with the “Leave” campaign even hinting at defeat as the polls closed. The Wall Street echo chamber view that it would make no sense in the end for the UK to leave was just that. The vote has unleashed political, economic, and financial uncertainty that will play out over the months ahead with attendant risk premia rising for affected currencies, equity and fixed income markets, sectors, and individual firms. Market values for banks, insurance companies, and asset managers dropped Friday … Read more
Entrepreneurship—a process of organizing, managing, and assuming the risks of a business or enterprise—has long been viewed as important for sustained economic activity. But the state of the economy, especially booms and downturns referred to business cycles, can itself affect entrepreneurship. A better understanding of the nexus between the two can, therefore, help improve public policy towards entrepreneurship and generate benefits for society.
A key challenge for the analysis is that entrepreneurship cannot be easily captured by a single measure. One could, for example, use business ownership as a measure but it does not distinguish between growth-oriented highly innovative activity … Read more
Months after the end of World War II, a 28-year old Brooklyn lawyer recently discharged as an Army officer took a job with a fledgling New Deal alphabet-soup agency, the Securities and Exchange Commission. The SEC then operated from its wartime quarters at the Philadelphia Athletic Club, and it had adopted its core antifraud rule, Rule 10b-5, only four years earlier.
The lawyer, Irving Meyer Pollack, went on to become more than an SEC legend. Indeed, he became one of the most – perhaps the most – distinguished enforcement lawyer in the SEC’s now 82-year history. As briefly outlined below, … Read more
It’s been almost seven years since the Delaware chancery court issued its initial opinion in the Trados litigation and instigated a flood of law firm memos, law review articles, and changes to the way deals get done in Silicon Valley. The dust still hasn’t settled.
By way of review, Trados involved claims against the board of a startup company that was sold in a merger transaction. Plaintiffs, who held common stock of the company, alleged that board members affiliated with the company’s VC investors were conflicted in approving the transaction. The VC investors held preferred stock that provided for a … Read more
Corporate expatriations – transactions that lead a U.S. company to become the subsidiary of a foreign parent – present two problems for the U.S. Internal Revenue Service (I.R.S.). First, they give expatriated companies the opportunity to use tax minimization strategies to avoid taxes; second, they erode the U.S. corporate tax base. Though both actions are driven by idiosyncrasies in U.S. tax treatment of foreign income, they spring from different motivations, and lead to different kinds of harm. Tax minimization involves exploiting differences in national tax laws to shield income from arguably legitimate U.S. tax obligations, while tax base erosion involves … Read more
Moody’s, S&P and Fitch represent an oligopoly in the credit rating business, accounting for 94 percent of the global market (Candelon et al., 2014) and for about 96.5 percent of all the outstanding ratings in U.S. The three agencies are key players in financial markets as they assess the credit worthiness of almost any debt issuer including governments, firms, municipalities and financial institutions. Moody’s, S&P and Fitch heavily affect corporate financing through ratings assigned to corporate debt. The economic literature has shown that bond ratings are strongly correlated with private bond yields (Hand et al., 1992; Hite and Warga, … Read more
Following the 2008 financial crisis, more and more countries have begun to embrace whistleblower protections as a tool to change corporate cultures. Such provisions may give whistleblowers the protections they need to raise their voices, and draw attention to undesired and sometimes even illegal activities, in situations when they would otherwise remain silent. After all, many people will hesitate to point out questionable conduct if they know they might face retaliation.
In the United States, Congress authorized the SEC to go further than other whistleblower provisions by authorizing a bounty program—allowing the SEC to reward whistleblowers for particularly valuable tips. … Read more
Controversy surrounding the role of corporations in public life has not abated in the six years since the Justices decided, in Citizens United v. FEC, that corporations have political-speech rights secured by the First Amendment. If anything, the Court’s judgment in Burwell v. Hobby Lobby, Inc., although far less significant in practical terms, magnified discontent in some quarters. Doomed calls for constitutional amendment are still a frequent refrain. At least one presidential candidate has reportedly proposed a litmus test to Supreme Court nominations based on a commitment to overturning Citizens United. And so on. … Read more
Target firms typically employ either an auction or a negotiation method during merger negotiations. In auction deals, the pre-public takeover process involves contacting several potential bidders, signing confidentiality/standstill agreements and accepting private bids. In negotiation deals however, the target engages with only one bidder in the pre-public takeover process. Using either selling method, the target board negotiates with the bidder(s) and if an acceptable price is obtained from a bidder, a definitive merger agreement is signed and a public announcement is made. Typically, after the public announcement of a merger agreement, target boards do not actively solicit new bids although … Read more
There has been tension between the legal academy and the practising profession ever since law was first taught in university law schools in the 19th century. The sense of unease arose because of uncertainty as to whether the primary role of a law school was to train lawyers for practice or to ensure that law was accepted as an independent scholarly discipline appropriate for a university, like history or philosophy. Universities feared that law schools might turn out to be mere trade schools while practitioners feared that an exclusive focus on liberal education would fail to produce skilled practitioners.… Read more
Why do sophisticated parties litigate under clouds of (easily resolvable) jurisdictional uncertainty?
In our recent essay available here, we argue that some sophisticated litigants do not raise obvious jurisdictional defects so that they can use jurisdictional uncertainty as a litigation strategy. Our paper examines, in particular, federal statutory interpleader disputes involving securitized financial instruments (SFIs).
In a federal statutory interpleader action, a custodian of money or property can bring multiple parties into federal court to sort out competing claims. In order for federal courts to have subject matter jurisdiction over these actions, parties must deposit the disputed amount with … Read more
“And we played the Hustle music. There were, you know, printed materials passed out,” with dance steps so “ideally we could all perform the Hustle in precision,” recalled the former Countrywide first vice president. “There was a lot of excitement. There was a lot of fanfare. It was fun.” He was describing events in the summer of 2007, when Countrywide decide to speed up its process for approving loans, using a program called the “High Speed Swim Lane,” or “HSSL” (or “Hustle”). The music stopped after the global financial crisis. Bank of America bought out the failing Countrywide Financial. In … Read more
In recent decades, it seems the only reason one flavor of corporate or financial misbehavior falls out of the public discourse is because a newer one has taken its place. Following the widespread corporate frauds of the 1990s, the unscrupulous acts of bankers that contributed to the financial crisis, and the Ponzi scheme orchestrated by Bernie Madoff, to name a few, the thoughtful observer must be left anticipating the next scandalous headline. Given the steady flow of reprehensible actions by business professionals, a considerable amount of attention has been focused on understanding, and perhaps mitigating, egregious behaviors in the business … Read more
Concerns about the governance of public corporations have taken center stage in recent years. Part of the debate on how to improve corporate governance has focused on policies that will give large shareholders (typically institutional investors) greater influence over corporate decisions. Indeed some theoretical and empirical papers support the governance role of large shareholders.
The underlying view is that large shareholders have both the ability and incentive to maximize the value of all shareholders. Large shareholders may improve governance either through active monitoring or through passive selling and both activities are expected to improve governance.
In this paper, we propose … Read more
While it is illegal for insiders to trade on material, non-public information, the SEC has created a safe harbor Rule 10b5-1 since October 2000, by allowing insiders to set up trading plans in advance of actual trading. Since these planned trades are set up in advance of subsequent trading, they allow insiders to buy and sell shares despite possessing material non-public information at the time of the trade, and consequently, they can serve as an affirmative defense in case of litigation. However, these plans are not foolproof. There is growing suspicion among both finance and legal experts that significant … Read more
EU financial policymakers appear to be once more in a deadlock situation over proposals to limit the sovereign risk exposure of European banks. The strong exposure of some banks in the southern European periphery in their national sovereign’s debt was seen by many as one of the contributing factors to the ongoing sovereign debt crisis (Acharya et al. 2014, Beltratti & Stulz 2015; Brunnermeier et al. 2016). Powerful incentives have encouraged financial institutions to buy and hold government bonds in the past (Gros 2013). In fact, this was the intellectual background for the policy framework known as the Banking Union, … Read more
Customers sure love Uber. If you ask them to describe their experience with the ride-share firm, most Uber passengers will gladly tick off a long list of superlatives: Innovative! Economical! Revolutionary!
But a less-flattering picture of Uber has recently surfaced in courtrooms across the country. Told by aggrieved drivers, this countervailing narrative depicts Uber as a company that cheats its workers out of wages and denies them basic workplace rights. In fact, earlier this year, Uber agreed to pay upwards of $100 million to drivers in California and Massachusetts for alleged employment law violations.
So which is it? Is Uber … Read more
Unlike most other countries, the U.S. taxes corporations on earnings generated anywhere in the world. This means that U.S. corporations have a strong tax incentive to renounce their U.S. incorporation and redomicile in a foreign country. Enter the inversion, a legal maneuver that has become increasingly popular and politicized in recent years, most notably with the announcement of Pfizer’s plan to move to Ireland as part of its acquisition of Allergan. Although recent rule changes by the Treasury has caused Pfizer to abandon this plan for the moment, inversions will continue to occur because of the tax benefits to the … Read more
Since the Volkswagen story first broke in September 2015, most observers have just scratched their heads and muttered to themselves in amazement: “What were they thinking? How could you place ‘defeat devices’ in 11 million cars worldwide and expect that you were going to escape detection for long?” There is, however, an answer to this question—one that says much about what is wrong with current priorities and practices for the enforcement of white collar crime. This column begins with an assessment of the Volkswagen case and then turns to an analysis of white collar crime strategies. Finally, it proposes remedies … Read more
On Monday, LendingClub Corp., a leader in the growing online lending space, announced the surprise resignation of its founder and CEO, Renaud Laplanche. Laplanche resigned in response to a board investigation that revealed a number of internal control failures, including the sale of more than $20 million in loans that failed to conform to the requirements imposed by the acquiring investors and the doctoring of dates on loan applications to cover up noncompliance with respect to $3 million in loans sold. These developments triggered a massive decline in LendingClub’s stock price, but also contribute to a growing cacophony of questions … Read more
The corporate board is commonly seen as a crucial governance device that operates to both monitor corporate management and provide strategic advice. Recent corporate governance research has discovered a broad range of evidence of internal board monitoring and advisory activities; but relatively little on the impact of the board’s interactions and connections with different external agents on firm value and corporate decisions. Yet, board members are typically experienced and powerful businessmen, and well embedded in the center of important business and social networks. Does it matter?
Yes, substantially. In our recent paper “Directors as Connectors: The Impact of the External … Read more
In an article recently posted on SSRN.com, I explain why the law requires agents to act with single-minded devotion to their principals. For example, a lawyer must do what is best for a client and may not subordinate a client’s interest to that of anyone else. This is true even when a lawful act beneficial to a client would subject a third party to serious harm. When representing a landlord who wants a derelict tenant evicted, for example, a lawyer must prosecute the eviction expeditiously even if the tenant has nowhere else to go.
In the parlance of legal … Read more