John C. Coffee, Jr.: The Blaszczak Bombshell and What It Will Mean

United States v. Blaszczak[1] has long been a one-off case that did not fit the mold of the traditional insider trading prosecution, but now — following a 2-1 decision of the Second Circuit in December, reversing most of the convictions in the case — it may destabilize the law on insider trading for some time to come. Such reversals are rare, and Blaszczak has multiple implications, some ominous and some ironic.

At the outset, it must be understood that Blaszczak was distinctive in two important respects:

First, it involved the leaking of confidential information by gossipy government bureaucrats to … Read more

A Beginner’s Guide to the SBF Prosecution: Where the Legal Issues Lie

The spectacle of a shambling billionaire with an adolescent personality, an inconsistent memory, a fondness for using his depositors’ funds for his own personal purposes, and an eagerness to talk in self-destructive ways to the press has fascinated everyone. This column will leave to psychiatrists and journalists the assessment of Samuel Bankman-Fried’s (“SBF”) character, but important legal issues lurk in his case that are central to the field of white collar crime and that have seldom been explored adequately by appellate courts.

Let’s begin by looking at what has happened so far. The Southern District of New York’s U.S. Attorney’s … Read more

Proxy Tactics Are Changing: Can Advance Notice Bylaws Do What Poison Pills Cannot?

Military strategy and takeover strategy share a few things in common. At some point, generals and M&A lawyers each must recognize that the old technology no longer works as it did in the past and can no longer dominate the battlefield. For example, in the Ukraine war, it has become obvious that battle tanks are vulnerable and do not reign supreme. Correspondingly, in the takeover war, the poison pill is no longer the absolute showstopper it once was and can be outflanked by activist hedge funds seeking to run a proxy contest — even if only for a minority of … Read more

A New Twist in Twitter: Can Musk “Rely” on Zatko?

As we get closer to the October 17th scheduled trial date for the Twitter lawsuit to compel Elon Musk to complete his proposed $44 billion acquisition of Twitter, the charges and allegations are getting wilder and woolier. Once, this was a case in which the party seeking to escape the merger agreement (i.e., Musk) asserted that the percentage of Twitter accounts that were “bots” (or fake) amounted to a “material adverse change” that permitted the buyer to back away. Given both Delaware’s strong commitment to deal certainty and Musk’s seemingly reckless indifference to due diligence, most law professors saw Musk … Read more

Twitter v. Musk: Where Are the Arbs?

Every pundit and commentator has by now analyzed the ongoing battle between Elon Musk and Twitter over Musk’s attempt to walk away from their deal. Almost all of these evaluations have rated Twitter as having a considerably stronger case, because (among other reasons) Musk did no due diligence, was well aware of the “bot” (or fake user) problem, negotiated no contractual protections directly addressed to these risks, and generally behaved inequitably, disparaging Twitter and toying with the SEC’s rules. Okay, but that raises an interesting puzzle: If the facts favor Twitter, and if Musk’s offer was for $54.20 a share … Read more

The Two-Front War on the Administrative State: How Far Will the Supreme Court Go?

The hostility of at least a plurality of the Supreme Court to the Administrative State has become increasingly evident. This faction has been pursuing a two-front war: First, it has significantly curbed (or seems about to curb) the enforcement powers of administrative agencies. Initially, it did this by finding that administrative law judges (“ALJs”) must be appointed by someone under presidential control[1]; more recently, it granted certiorari on the issue of whether ALJs must also be subject to a corresponding presidential removal power.[2] Second, it seems intent on overruling a longstanding “implied preclusion” doctrine under which defendants … Read more

Predicting the Unpredictable: What Will Musk Do Next?

What did business journalists do before the arrival of Elon Musk? In those by-gone days, their page in the newspaper was gray, dull, and strewn with statistics. Now, it is filled with a continuing soap opera, as exciting as the sports page because it has drama, intrigue, and high emotion. The trash-talking that one hears in the NBA playoffs pales in comparison with Musk’s daily name-calling.

Currently, it appears that Musk wants to re-negotiate his $54.20 share price for Twitter because he offered a price well over Twitter’s peak value in an overheated market. That market is no longer overheated … Read more

Unpacking the SEC’s Climate-Related Disclosures: A Quick Tour of the Issues

[Editor’s Note: We present this and the following two pieces as a symposium on the U.S. Securities and Exchange Commission’s proposed climate-disclosure rules released on March 21, 2022.]

After a considerable delay, the SEC finally told us last week in SEC Release No. 33-11042[1] where it is going on climate-risk disclosures. The business community’s reaction was predictable and seemingly orchestrated: “We are shocked and dismayed!” “The costs are enormous!” The Wall Street Journal described the SEC as the pawn of the “left-leaning” BlackRock (ignoring that it is hard for radicals to attract the nearly $10 trillion in assets that … Read more

The Most Dangerous Branch: Is the Supreme Court Dismantling the Administrative State?

At first glance, the question posed above may sound slightly paranoid. Still, sometimes a measure of paranoia may be justified. In any event, this column is less a prediction of the future than a review of what is actually happening, particularly over the last month. Consider the following three cases:

Case 1: The press is now focusing on West Virginia v. EPA,[1] which was argued before the Supreme Court last week. West Virginia and the coal industry have appealed a lower court decision that upheld the EPA’s authority under the Clean Air Act to regulate greenhouse gasses … Read more

Climate-Risk Disclosures and “Dirty Energy” Transfers: “Progress” Through Evasion

At first glance, recent progress towards transparency in corporate climate-risk disclosures seems exceptional. Over 2,000 companies now publish annual reports showing their carbon emissions data (although most self-interestedly omit Scope 3 data). Many (including most recently ExxonMobil) have made a pledge to move to “net zero” carbon emissions by a given date (usually 2050, but some much sooner). We are awaiting SEC rules that will make ESG disclosures mandatory and likely compel U.S. issuers to use common metrics (and thereby make issuer-specific reports relatively comparable). The Financial Stability Oversight Council’s October 2021 report stressed that climate risk represents a serious … Read more

Jack Weinstein: Last of the Mohicans?

This is a speech that Professor Coffee is scheduled to deliver today as part of a webinar program that will pay tribute to Judge Jack Weinstein and will be presented jointly by Columbia Law School and the Institute of Judicial Administration at New York University School of Law.

We all know that Jack Weinstein is often described as the Father of Mass Tort Class Actions. That title has been bestowed on him by virtually everyone who has studied this field. But the larger, sadder question is whether his descendants in this field have died out? Is the field moribund? … Read more

Congress and the Insider Trading Prohibition Act: “Can’t Anybody Here Play This Game?”*

Last week, the House of Representatives passed the “Insider Trading Prohibition Act” (“ITPA”).[1] Proponents are hailing it as a triumph of bipartisan cooperation. Conversely, critics are calling it the “Insider Trading Protection Act.” This is because the bill codifies in statutory law the “personal benefit” requirement under which the tippee can only be convicted if that person paid or promised some benefit (tangible or even intangible and reputational) to the tipper. That requirement had resulted in many convictions being overturned (and even more prosecutions probably not being commenced in the first place). In the Second Circuit, this doctrine had … Read more

The Underside of Hedge Fund Activism: Looting the Pension Fund

Hedge fund activism is a topic on which most law professors have closed their minds. They learned in student days that activist hedge funds are excellent agents of change that efficiently discipline managements at targeted firms and increase shareholder wealth. Maybe that generally happens, but we cannot stop there.

Even if activism increases shareholder wealth, that still leaves open the question of where these wealth increases come from. The standard view is that activists increase firm productivity, force the “deconglomeratization” of stagnant firms, and expose others to efficient takeovers. Of course, that does happen — sometimes. But the rival view … Read more

Game Over: How Best to Regulate Betting on Wall Street

What a difference a week makes! Almost two weeks ago, the frenzied discussion of GameStop assumed that a proletarian revolution was in progress, that the masses had organized themselves through Reddit and Robinhood, and that they were marching on the bastions of the evil short sellers, who had long held these serfs in subjugation. “Investors of the World Unite! You have nothing to lose but your chains,” proclaimed the zealots on WallStreetBets. A week later, it was clear that the revolution had failed. GameStop had fallen from well over $400 a share to the low $60s on Thursday — much … Read more

Biden and the SEC: Some Possible Agendas

This is the gossip season, and almost everyone has heard a rumor about who will be the next chair of the SEC. Although I was interviewed by the Biden transition team (for my views, not as a candidate), my sources are no better than those of others. Nonetheless, they all tell me that the next chair will be Gary Gensler, the former chair of the Commodity Futures Trading Commission and current chair of the Transition Taskforce for Financial Regulation for President-elect Biden. In my view, he is probably the optimal choice — experienced, tough at enforcement, and well versed in … Read more

The European Commission Considers “Short-Termism” (and “What Do You Mean by That?”)

The European Commission retained Ernst & Young (“EY”) to undertake a detailed study of “short-termism” and, implicitly, to report whether it was a major roadblock to more sustainable corporate governance. Their study was then presented at a three day international conference at Oxford on November 11-13. Professor Mark Roe of Harvard Law School and I were asked to make presentations. Professor Roe’s statement ran last week on this blog, here, and a summary of my statement appears below.

In a nutshell, the EY “Study on directors’ duties and sustainable corporate governance” for the European Commission describes a … Read more

ESG, Common Ownership, and Systematic Risk: How They Intersect

This brief column will assert that three developments that seem unrelated are in fact closely related and may soon impact U.S. corporate governance with the force of a freight train. This column summarizes a longer article just posted by this author on SSRN.[1]

Development No. 1: Stock ownership in the U.S. has now reached an extraordinary level of concentration. The Big Three — BlackRock, Inc., State Street Global Advisors, and Vanguard Group — now hold collectively over 20% of S&P companies, vote 25% of the shares voted, and, according to Lucian Bebchuk, will eventually hold 40%.[2]Read more

Disgorgement After Liu v. SEC: The Game Is On!

Experienced litigators know that an adverse appellate decision (even from the U.S. Supreme Court) rarely ends their case. The question is instead: What is the next move? What defenses do we fall back on? So it is likely to be with Liu v. SEC,[1] which, by an 8-1 margin, resolved that the SEC does have the authority to order disgorgement. Still, the Court subjected this authority to the important qualifications that: (1) the ill-gotten gains consist only of the net gains (with all “legitimate expenses” being deducted); (2) the recovery is returned to the injured investors (and thus not … Read more

Activist Short Selling Today: The Two Sides of the Coin

Two extraordinary accounting scandals — one at Luckin Coffee Inc. in China and the other at Wirecard AG, the German digital payments firm — have revealed brazen and bankrupting frauds, directed by the most senior executives at each firm. Together, they tend to support three conclusions:

  • Stealing candy from a baby appears to be harder than getting fraudulent financial statements past a Big 4 accounting firm;
  • If you want to detect fraud, forget the accountants and contact your local short sellers; they are the real detectives today; and
  • When the fraud is really egregious, we often find that the regulator

Read more

Wall Street CARES!: Who Gets the Hidden Subsidies Under the CARES Act?

The CARES Act was passed under intense pressure and with minimal transparency. The consequence of this opaque process is that there are some surprising windfalls. No criticism is here expressed of the act’s purpose, but Wall Street knows one thing about federal subsidies: Charity begins at home.

The centerpiece of the CARES Act is Section 1102’s “Paycheck protection program,” which will make available some $349 billion to be lent to small businesses in loans guaranteed by the Small Business Administration (“SBA”).[1] These loans will carry a very low 1% interest rate, and the expectation is that most of the … Read more