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May 2013 Archives

On Wednesday, the Securities and Exchange Commission announced a settlement with NASDAQ for the exchange's mishandling of last year's Facebook initial public offering. NASDAQ's preparations for the high-stakes Facebook offering proved inadequate. The intense volume of orders overwhelmed NASDAQ's technological capabilities, many traders were left uncertain about whether their trades had gone through, and the IPO was widely panned as a failure. Even absent the SEC action, NASDAQ would have faced market pressure to demonstrate that the troubles of the Facebook IPO would not be repeated. Now that the SEC has worked out a settlement with NASDAQ, it should look at its own role in the Facebook incident and other recent exchange issues.

by Steve Eide
Senior Fellow, Manhattan Institute's Center for State and Local Leadership

This entry is cross-posted at publicsectorinc.org, where Steve Eide is a regular contributor.

American states differ, but generally not so much in how they operate their pension systems. Consensus reins over investment allocations and benefit structures. Most trustees and administrators don't believe radical pension reform is necessary, regardless of if they hail from a rich or poor state or red state or blue state. Shareholder activism is an exception. A few blue state pension funds, particularly in New York, adopt a highly activist posture during proxy voting season, while most funds are barely active at all. Proxy Monitor, a project of the Manhattan Institute's Center for Legal Policy, lays out the details in a new report.

Shareholder activism can take various forms. Public pension funds are particularly keen to advance "agenda[s] unrelated to share value" which attempt to "mobilize the power of the capital markets for public purpose" (that's former California state treasurer Phil Angelides speaking).

Public-employee pension funds...have generally been much more likely to sponsor proposals related to social or public-policy issues unrelated to corporate governance or executive compensation--such as those involving the environment, corporate political spending or lobbying, and human rights--than have other shareholders. Social and policy issues have been the focus of only 38 percent of shareholder proposals sponsored by investors generally dating back to 2006 but 64 percent of all shareholder proposals sponsored by state and local employee pension funds.

And public pension funds have been increasingly active, putting forth even more proposals this year than private union funds, traditionally the leading source of shareholder activism.

But mostly just in New York (see charts).
Proxy Post Chart #1 (fixed).png

Proxy Post Chart #2.png

Even CalPERS, despite its vocal commitment to socially responsible investing, has not been anywhere near as active on the proxy front as the New York City and State funds. According to Proxy Monitor, CalPERS' few recent proposals have focused on corporate governance issues with at least an arguable connection to shareholder value. By contrast, the New York funds' proxy agendas are unabashedly social. In addition to going after companies for failing to toe the line on gender identity and the environment, Comptroller DiNapoli, trustee of the $160 billion New York State Common Retirement Fund, has employed the proxy process to harass companies for giving money to Republicans and for lending support to public collective bargaining reform. Among the 119 shareholder proposals the New York City pension funds have sponsored since 2006, 89 have been about "social or policy issues." (Nearly all have been voted down by shareholders.)

Here's the problem. Public pensions' shareholder activism tends to advance a very partisan understanding of taxpayer/shareholder interests, and it politicizes a government function--pension fund management--that should be purely administrative. There's no smoking gun evidence that New York funds' activism have caused the funds to lose value. But using pension funds to advance a social agenda aggrandizes pension policy, which already consumes far too much public attention. The dreamers among us yearn for a time in which public officials may devote their attention exclusively to matters that may yield some benefit to the public, such as how to improve park service, snow removal, or the schools. Pensions, by contrast, should be a minor administrative responsibility guided only by the humble principle of stewardship: don't lose the money, and make a small return with it. Elected comptrollers and treasurers should stick to their knitting. We elect them to collect revenues, not advance social agendas.

At Forbes.com, I expand on my earlier post on Sears v. Butler:

Front-loading machines use less water and energy than traditional top-loaders. But because the rubber door gasket is on the side of the machine instead of the top, water can collect around it; if a user does not wipe the door clean between uses, or does not use bleach in his most recent washes, mold can develop and give off what Consumer Reports has called a "musty" smell. The problem affects less than three percent of washers. Even with this possible side effect, Consumer Reports has rated this class of machines "best all around," and notes that users can prevent any mold problems with simple precautionary cleaning.

Nevertheless, Whirlpool has been targeted in an unfairly expansive group of class action lawsuits. The plaintiffs allege that the very fact that any mold reveals itself at all demonstrates the product is defective and that every washing-machine owner is entitled to damages, whether or not they've encountered mold. The claim that Whirlpool has done something wrong becomes substantially less sympathetic when one realizes that every major washing-machine manufacturer is facing a similar class action. Trial lawyers are seeking to profit off of manufacturers' efforts to produce environmentally-friendly machines.

Read the whole thing.. Compare and contrast Andrew Trask's discussion of a Louisiana federal court's rejection of a similar lawsuit, Duvio v. Viking Range Corp., where plaintiffs made a vague kitchen-sink (ahem) set of product-defect allegations against the entire product line produced by Viking Range.

This week, the inspector general of the Commodity Futures Trading Commission released his report on the CFTC's regulatory oversight of MF Global, the financial firm that collapsed in October 2011 and had a shortfall of approximately $1.6 billion of customer funds in the process. The report, which came in response to a request by Senator Richard Shelby looked at (i) the CFTC's oversight leading up to MF Global's collapse, and (ii) CFTC Chairman Gensler's initial involvement in MF Global matters and subsequent recusal because of his prior working relationship with MF Global head Jon Corzine. The report provides a number of lessons for the CFTC as it begins to wield its massive new Dodd-Frank powers.

In pre-market trading, Procter & Gamble market cap is up $7 billion on the return of A.G. Lafley to the CEO's chair—more if you consider that the market as a whole is down. Either the collective wisdom of the market is en masse making a huge mistake in valuing the difference an executive makes to shareholder value, or Mr. Lafley's $2 million base salary is a bargain. If a company I held stock in could make an investment with a 350,000% return, I'd sure want them to do it.

Support.com offered a free "checkup" of computer safety; according to plaintiffs who sued, this was a scam that overstated the dangers and computer errors in a system to induce people to buy $29 software or a $4.99/month subscription service. LaGarde v. Support.com quickly settled for $10 a class member. Whatever the claims process was, it didn't impress the class: less than 0.2% of class members made claims. For the same reason that no one brings an individual claim for $29, no one objected to the settlement. After the parties boosted the claim value to $25 (without any notice to class members who might have taken the trouble to ask for $25 when it wasn't worth their time to ask for $10) and throwing in $200,000 to cy pres, the district court rubber-stamped the settlement and fee petition when no one objected. That $700,000 was 1.4 times what was likely an inflated lodestar of $500,000, so the attorneys suffered no consequences for freezing out 99.8% of the class, who got nothing. And Support.com got rid of consumer-fraud claims for the low low price of about $1.25 a class member, the vast majority of which went to attorneys. Consumer Watchdog, an organization that purports to be consumer advocates, seems not to complain that it received $100,000, more than three times as much as the consumers it purports to advocate for.

Sears v Butler

Coming up on the Supreme Court class action docket next week: the certiorari petition in Sears v. Butler. In yet another class action over alleged defects causing biofilm in washing machines, a Judge Posner opinion took the position that the class-action mechanism was appropriate to resolve a single issue, following the Whirlpool v. Glazer decision we criticized earlier, and which the Supreme Court GVR'd in the wake of Comcast v. Behrend.

As the opposition to certiorari notes, the case is in a strange procedural posture: there is no class certification order as of yet (though the Seventh Circuit's ruling would seem to all but dictate one on remand). The Supreme Court has yet to grant certiorari on a Rule 23(f) remand decision, but nothing precludes them from doing so, and this may well be a good case to re-assert Rule 23(b)(3) predominance standards. Related: Washington Times.

(This post was corrected: it originally read "23(f) decision," when it should have said "23(f) remand decision.")

One of the targets of the Class Action Fairness Act was coupon settlements, the problematic class-action settlement device where the attorneys would receive millions, and the class members would receive coupons of little or no value that were often indistinguishable from what the defendant would use to market itself to non-class members anyway. Under 28 U.S.C § 1712(a), if a court is to value coupons in a coupon settlement, it has to use the value of the "redeemed" coupons, not some hypothetical valuation.

The coupons issued by HP in the HP Inkjet Litigation case were especially appalling: a few dollars only good at HP.com, and not stackable with other coupons. HP looked to make money on the coupons, because they would receive full retail price (minus a few dollars) for things like paper and ink cartridges instead of wholesale price if consumers purchased the goods (often at lower prices) at Staples or Amazon. The Center for Class Action Fairness objected to a settlement that looked to pay the attorneys $2.9 million, but the class only worthless coupons. The district court approved the settlement, while reducing the Rule 23(h) award to $2.1 million, even though class members only claimed about 30% of the coupons available: the $800,000 and remainder of the coupon "fund" reverted to HP. We appealed the district court's failure to follow § 1712(a). As Larry Schonbrun recently complained in the American Thinker, many courts had been evading CAFA's requirement by looking at a provision that permitted the use of lodestar for non-coupon relief.

In a split 2-1 decision that was the first published appellate decision to interpret § 1712, the Ninth Circuit agreed. We were especially pleased by the following language endorsing a principle that has motivated many Center objections:

Of course, one might argue that the fees award in this hypothetical case is "attributable to" the work of class counsel on the action, rather than the coupons. But one would be mistaken. Attorney's fees are never "attributable to" an attorney's work on the action. They are "attributable to" the relief obtained for the class. See Class Plaintiffs v. Jaffe & Schlesinger, P.A., 19 F.3d 1306, 1308 (9th Cir. 1994). An attorney who works incredibly hard, but obtains nothing for the class, is not entitled to fees calculated by any method.
For although class counsel's hard work on an action is presumably a necessary condition to obtaining attorney's
fees, it is never a sufficient condition. Plaintiffs attorneys don't get paid simply for working; they get paid for obtaining results. Because it is the class relief that is both a necessary and a sufficient condition to an award of attorney's fees, it follows that an attorney's fees award can only be "attributable to," or the consequence of, the class relief, not the attorney's hard work.

The dissent, however, which was willing to read the "redeemed" requirement right out of the statute, and affirm a settlement approval where the attorneys recovered more than even the face value of the coupons, shows how difficult it is to legislate reform.

More: Trask; law.com (upgrading me from "gadfly" to "class action titan"); Reuters; Zieve; Jacobson/Monaghan; Bashman; Law360 ($).

A big victory for the Center, its third appellate victory this year. (The Center is not affiliated with the Manhattan Institute.)

In a blog entry published on the Heritage Foundation's The Foundry, Daniel Dew cleverly uses the example of the recent scandals plaguing the Obama administration to point out the vast scope and inherent unfairness of the Responsible Corporate Officer Doctrine.

The Responsible Corporate Officer Doctrine allows federal prosecutors to criminally prosecute business owners and officers for the criminal activity of their businesses, regardless of whether they had knowledge of the illegal activity. The only requirement for criminal liability is "some relationship between the executive's supervisory responsibilities and the underlying misconduct." Put another way, in order to obtain a conviction, the government need only prove (1) illegal conduct occurred, and (2) the corporate officer had authority to exercise control over the activity.

The DOJ has used the Responsible Corporate Officer Doctrine to make criminals out of many well-meaning business people. In United States v. Park, the Food and Drug Administration (FDA) prosecuted the president of a corporation under the theory that his subordinates committed violations of the Food, Drug, and Cosmetic Act that the president had the ability to prevent or correct. Park, the company president, had delegated responsibility to correct the violations to one of his employees, who, regrettably for Park, did not follow through on his responsibilities. Park was convicted for FDA violations that he did not commit, order committed, or conspire to commit.

Just to be clear, there is no evidence in the recent Obama Administration scandals that criminal behavior took place, but the executive branch should stick to one definition of "responsible." The DOJ definition of "responsible" is especially troubling in the context of a criminal prosecution where a person's individual liberty is at stake--not just news stories that make the President look bad.

Heritage senior fellow, Paul Larkin, invokes a similar analogy in his latest paper and expands further.

The question is a serious one, why the double standard?

A US Chamber Institute for Legal Reform study by NERA finds (no surprise) that the US legal system is the most costly in the world, even when one accounts for the difference in social-insurance programs between American and Europe. Of interesting note: UK legal expenses are up 47% in the last three years, though still substantially cheaper than the US. More: Fisher @ Forbes; Sunday Times ($); related: Zywicki @ Volokh on auto safety.

I'd like to see the full report, because even the figure of an extra 1% of GDP going to excess legal expenses relative to Europe is likely an understatement. A 2011 edition of a similar report by NERA didn't include the expense of securities litigation, where much of the money goes to attorneys (and a disproportionate share of the proceeds goes to institutional investors at the expense of small shareholders). (Update: here it is, and, indeed, the 0.82 to 1.03% estimate is very definitely an underestimate.)

While the trial bar argues the expense of the liability system as a deterrent to make medicine and consumer products safer, I'm not aware of any evidence that Europe is less safe than the US. For example, though Germany has both an Autobahn without speed limits and a much higher percentage of mini cars like the "Smart," in 2005, their auto fatality rate was 7.8 deaths per billion km travelled versus 9.1 in the United States the same year. New Zealand has no medical-malpractice cause of action at all, and there is no evidence that patients there are being butchered as a result. And fear of liability and overcautious pharmaceutical regulation is likely costing lives at the margin.

This morning, the Manhattan Institute released my latest finding in the Proxy Monitor series: 2013 Proxy Season Underway: JPMorgan Chase Chairman vote looms large in busy May proxy season. As of May 3, 175 of America's 250 largest publicly traded companies, tracked in the ProxyMonitor database, had filed proxy documents and 72 of these had held annual meetings. In addition to summarizing proxy submission and voting results to date, I look at JPMorgan Chase's looming --and widely publicized--May 21 annual meeting, in which shareholders will consider a proposal sponsored by the pension fund of the American Federation of State, County, and Municipal Employees (AFSCME) to separate the bank's chairman and CEO positions, which the market may read as a referendum on the leadership of incumbent chairman and CEO Jamie Dimon--and which may, if the board reacts to the vote by stripping him of his chairmanship, prompt Dimon to leave the bank he steered ably through the financial storm.

Key statistics on filings to date include:

Speculating on Bitcoin
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Bitcoin, the burgeoning virtual currency, lately has been the subject of much speculation--in every sense of the word. Lots of people have been speculating about what it is and whether it has a future. Some people have been speculating on its future by purchasing the currency in hopes that its price will rise and they can cash in. The regulators have been speculating too--speculating about whether and how they can regulate the currency.

A recent study, Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs, claims that investors on popular crowdfunding websites focus on many of the same qualities and indicia of potential success as venture capitalists.

According to an analysis published by the CrowdFund Intermediary Regulatory Advocates (cfira.org) this study "casts doubt [on the claims of critics] that crowdfund donors are an unsophisticated lot".

The study, led by Wharton School of Business Professor Ethan R. Mollick, reviewed 2,101 crowdfunded projects on Kickstarter. The study reviewed the history of success of a project, the influence of endorsements on a crowdfund project, the level of preparation demonstrated by an entrepreneur, quality, social networks, geographic outcomes and gender. The study concluded that crowdfunders act much like venture capitalists in making predictions on the success of a project, focusing on factors like the quality of the product, the resume of the team members and the likelihood of success.

According to Professor Mollick, "the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders. This bolsters the validity of these signals as indicators of start-up potential, but also suggests that crowdfunding has the ability to distinguish quality potential projects from less promising ones."

This is an important conclusion Critics of the crowdfunding provisions of the 2012 JOBS Act claim that it is likely to increase levels of fraud, by permitting business promoters to pitch investment opportunities directly to non-accredited investors. If, as Professor Mollick's study suggests, crowdfund investors consider the same signals of quality as professional venture capitalists, the potential for fraud seems overblown.

In the past several days, there has been news of the forging of a long-awaited compromise among the commissioners at the Commodity Futures Trading Commission (CFTC). The potential deal, which will be discussed at a meeting next Thursday, relates to the rules governing swap execution facilities (SEFs). SEFs are the new swap trading venues created by Dodd-Frank. The CFTC's proposal was perceived by many to be unworkable.

Even if the CFTC successfully crafts a better final set of rules for SEFs, SEFs may not attract much business. Last month, Bloomberg--a would-be SEF operator--sued the CFTC over a Dodd-Frank rule that Bloomberg alleges will create a competitive disadvantage for SEFs. The challenged rule relates to margin, which is money that a clearinghouse collects to protect itself from the risks associated with the swaps and futures that it clears. In determining how much margin to collect, a clearinghouse considers, among other factors, how long it would take to liquidate the particular swap or future. Bloomberg is arguing that the CFTC violated its requirements under the Administrative Procedure Act and its statutory obligations to conduct benefit-cost analysis. At issue is a directive that clearinghouses use a 5-day minimum liquidation time for financial swaps and only a 1-day minimum for other types of swaps and futures. As a consequence, margin requirements for financial swaps will be higher than for comparable futures.

The distinction matters, because market participants, who quite naturally prefer to make smaller margin payments, will favor futures--which do not trade on SEFs--to swaps. That spells trouble for SEFs. Futures that are effective substitutes for swaps are already cropping up, although margin differences are not the only reason for this trend.

The signals coming out of the CFTC regarding a potentially revamped SEF rule are positive, but the SEF battles will continue. As discussed in an earlier post, Dodd-Frank has set up some fierce competitive battles, into which the CFTC and courts are being dragged because of the CFTC's failure to follow sound rulemaking procedures.

Johnson & Johnson (through a wholly-owned subsidiary) manufactures Benecol Regular and Benecol Light Spreads. J&J has had to defend against multiple suits, including one by a Thomas Young, who filed a consumer fraud class action against alleging that Benecol's labeling was false and misleading In particular, the complaint focused on Benecol's claims, on its packaging, that Benecol was: (1) "Proven to Reduce Cholesterol"; and contained (2) "NO TRANS FAT."

In fact, Benecol does contain a tiny amount of partially hydrogenated oil (aka trans fat): an amount that FDA called "insignificant." As for the "Proven to Reduce Cholesterol" claim, Young asserted that it must be false too, because Benecol is allegedly rendered so unhealthy by virtue of containing "dangerous, non-nutritious, unhealthy partially hydrogenated oil" that the cholesterol claim is misleading. So Young sued, invoking New York and New Jersey consumer laws.

In April 2012, the federal district court granted Johnson & Johnson's motion to dismiss the complaint, ruling inter alia that Young's claims were expressly preempted by the Federal Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. § 301 et seq., which (since the adoption of the Nutrition Labeling and Education Act (NLEA) in 1990) expressly preempts any state law "requirement" regarding food labeling "that is not identical to the requirement[s]" imposed by federal law. FDA regulations "require that trans fat levels less than 0.5 grams per serving 'shall be expressed as zero.'" Thus, even if the trans fat claims were misleading under New York and New Jersey statutes, these laws could not be enforced. Young disagreed and appealed to the Third Circuit, arguing that his state consumer protection claims were not preempted because they were "not inconsistent" with FDA regulations. The alert reader has doubtless noted, however, that the statutory test is not whether state requirements are "consistent" with FDA requirements;, but whether they are "identical." Thus did the Third Circuit today affirm that NLEA pre-empts state consumer laws as regards food product labeling.

Another victory for common labeling standards for goods marketed nationally, and for amicus Washington Legal Foundation, which filed a persuasive brief for the winning side!

The Epstein/Landes/Posner methodology has been refuted numerous times, but it's still getting play as they release a new paper repeating their earlier methodological errors and concluding that the current Supreme Court is more "pro-business" than any other. (Why not conclude that the Ninth Circuit is more anti-business than any other American appellate court in history, and that has resulted in a greater degree of error correction?) Jonathan Adler @ Volokh and Greve take up the cudgel again. More: January 2012 (with earlier links).

A new study's abstract says that it finds that a "physician's years in practice and previous paid claims history had no effect on the odds" of a payout of more than a million dollars to a plaintiff—supporting my contention that, at the margin, the status quo medical malpractice system is largely random and does more to deter practice than malpractice. The authors don't seem to realize this implication of their finding, but only the abstract is available publicly. [JHQ via Torts Prof]

Related on POL: January 2005; April 2011.

My friend Dara Albright sums up the importance of Google's investment in Lending Club (prior post):

Although momentous for the consumer credit sector, many have been wondering how P2P's triumphs relate to securities-based crowdfunding. The fact is, because P2P lending is the precursor to securities-based crowdfunding, its achievements are not only dramatically impacting the emerging crowdfunding industry, they are helping shape it. Securities-based crowdfunding or "Peer-to-Business (P2B)" is simply the next iteration of P2P. However, instead of peers providing personal loans to its peers, securities-based crowdfunding will allow peers to invest in the businesses of its fellow peers in exchange for equity or debt. By demonstrating that people are more efficient at financing each other through the use of social media than with conventional banking intermediaries, P2P has effectively validated the "crowdfinance" model for the entire industry, even compelling the financial establishment to enter the fray.

The Heritage Foundation's The Foundry blog reported today that the House Committee on the Judiciary created the bipartisan Over-Criminalization Task Force of 2013. The goal of the task force is to "conduct hearings and investigations relating to over-criminalization issues within the Committee." The task force, will be chaired by Representative James Sensenbrenner (R-WI) and will consist of five Democrats and five Republicans.

The formation of this task force publicizes both the acknowledgment by Congress that the problem of overcriminalization is real and that the House Judiciary is willing to take active steps to address the alarming criminal law trends which depart from traditional common law norms and threaten individual and economic liberty.

Bowman v. Sunoco, a very interesting decision on tort liability waivers, was rendered by a divided Pennsylvania Supreme Court on April 25.

Here's the factual backdrop. P signs on as a security guard for Acme, a firm that sends guards to protect the operations of clients. P's contract with Acme specifies that P is an employee of Acme, not of the client firms where P may work on any individual day. In case of injury, P will be able to benefit from the Workers' Compensation policy paid for (pursuant to its legal obligation) by Acme.

Now, additional recovery by injured workers has been the bane of many a liability insurer. Perhaps 25% of all products liability suits are filed by workers injured on the job. The latter collect their workers' compensation benefits, cannot sue their employers (that is the statutory quid pro quo for workers' comp), but then turn around and sue the manufacturer of the tool that injured them, on the grounds that said tool was imperfect ("defective") in some way.

In the instant case, the additional suit would not be against a product manufacturer, but against the client, for some alleged negligence. Obviously clients might be disgruntled to be sued in such instances. So Acme added a clause to its employment contract, according to which P waived

"any and all rights I may have to:

-make a claim, or
-commence a lawsuit, or
-recover damages or losses

from or against any customer (and the employees of any customer) of [Acme] to which I may be assigned, arising from or related to injuries which are covered under the Workers' Compensation statutes."

P was injured while guarding a Sunoco refinery, and sued Sunoco for negligence after collecting his workers' compensation benefits from Acme. Sunoco invoked P's contract with Acme, and obtained summary judgment at trial and in the intermediate appellate court. P appealed, and challenged the waiver clause on several grounds, most importantly on the grounds that it was prohibited by Pennsylvania public policy. For § 204(a) of the Pennsylvania Workers' Compensation Act reads in pertinent part as follows:

(a) No agreement, composition, or release of damages made before the
date of any injury shall be valid or shall bar a claim for damages resulting
therefrom; and any such agreement is declared to be against the public
policy of this Commonwealth.

But a majority of the Pennsylvania Supreme Court disagreed with P's statement that the plain meaning of § 204(a) invalidated the waiver. The court pointed out that the article read in its entirety applied clearly only to waivers of the employer's liability, not to waivers of liability to third parties. The court added that waivers of liability for future negligence are in principle possible in Pennsylvania (unlike many other states). The court cited to friendly case-law in two other jurisdictions:

"As the Appeals Court of Massachusetts found in Horner v. Boston Edison Company, 695 N.E.2d 1093 (Mass. App. Ct. 1998), the disclaimer here "extinguishes only the employee's right to recover additional amounts as a result of a work-related injury for which the employee has already received workers' compensation benefits." Id., at 1095. Similarly, the Supreme Court of Arkansas found, with facts nearly identical to the present case, a similar disclaimer did not violate public policy because it did not indicate the employer was "attempting to escape liability entirely, but [was] instead, attempting to shield its clients from separate tort liability for those injuries that are covered by workers' compensation ...." Edgin v. Entergy Operations, Inc., 961 S.W.2d 724, 727 (Ark. 1998)."

The tantalizing question is whether a Pennsylvania employer could similarly contract with its employees to waive liability claims against too manufacturers for workplace injuries. It's hard to see why the same rationale would not obtain. Tool manufacturers would presumably give employers a better deal on tool sales in consideration for such a waiver, were it enforceable.....

In Litigation magazine
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I'm profiled on pages 11-12 of the Spring 2013 issue of American Lawyer's Litigation magazine.

Dahlia Lithwick makes a good living writing Supreme Court commentary where she utterly misrepresents conservative justices' positions and knocks down the strawmen. That she got a National Magazine Award for three such columns about the health-care cases says more about the National Magazine Award than Lithwick's work. Ramesh Ponnuru's takedown of one of the columns should have been disqualifying by itself; we earlier noted other devastating criticism of the columns, and have had no shortage of other Lithwick critiques, though I've largely stopped reading her for the sake of my blood pressure.

Internet giant Google (NASDAQ: GOOG) last week announced that it was buying a stake in peer-to-peer financing platform Lending Club.

The transaction, which effectively values Lending Club at around $1.55 billion, validates much of the thinking around crowdfunding.

The central premise of crowdfunding is that a large group of people, with access to transparent information and the ability to communicate in real time, will make efficient decisions with their own money. It was for this reason that Congress amended the Securities Act of 1933 in the 2012 JOBS Act to open the doors to crowdfunding in the U.S. (Prior post).

Lending Club is not a crowdfunding portal, as envisioned by the JOBS Act. Rather, Lending Club collects loan applications from a large number of borrowers. Members of the Lending Club website have the ability to fund loans to those applicants. The loans themselves are made via Lending Club, which bundles the loans into separate securities which are sold to the Lending Club members. As a result, while members decision which borrowers to whom they will loan money, the loan is made indirectly through a Lending Club subsidiary.

In contrast, the JOBS Act created a legal entity called a "crowdfunding portal" which is supposed to facilitate direct investments in securities from individual companies (or "issuers") and individual investors. Although the Lending Club relies on the crowdfunding theory of marketplace efficiency, its legal structure is different from that contemplated by the JOBS Act.

The importance of Google's investment is that it validates the theory behind crowdfunding. Google chose to invest $125 million in Lending Club because it believes that technology is making it possible to derive value from the efficient decisions that crowds can make. Congress chose to unlock that potential to investors as well through the JOBS Act. the SEC, however, has failed to do its job by issuing the regulations that were required by the Act to make securities-based crowdfunding legal.

Data Repository Rage
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The latest Dodd-Frank lawsuit was filed yesterday against the Commodity Futures Trading Commission by the DTCC Data Repository. It is a front in the fight between competitors for control of a market created by Dodd-Frank--the market for collecting data about swaps transactions. The CFTC is standing very uncomfortably in the middle of this fight because of its undisciplined process for setting the rules of the game.

CCAF filed an opening brief in October; after many many delays, the reply brief is now on file. The case presents the question whether a district court can rubber-stamp a settlement that pays the attorneys more than four times what the class received without making any reasoned response to the objections. It also presents the question of whether one can assert that injunctive relief that merely continues a customer-service program that preexisted the litigation can be counted as a settlement benefit, and what procedural rights a district court and appellee has in trying to deter appeals through punitive appeal-bond orders. Our objection to the odd claims process—whereby Apple laptop owners were required to download information from the settlement website, print it out and fill out paperwork by hand, and then manually mail it in—designed to deter claims will surely be helped by the Baby Products precedent. (As always, the Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

CCAF has filed an objection on behalf of a class member in the Southwest Drink Voucher coupon settlement, which I discussed here in January, and was covered in Legal Newsline. (CCAF is not affiliated with the Manhattan Institute.)

The Center for Class Action Fairness filed an objection on Sam Kazman's and my behalf yesterday. The settlement would pay attorneys $7.5 million, and give some class members the opportunity to claim up to $10 from a net fund of about $9M to $10M—except the number of claims is likely to be high enough to preclude any class distribution at all. We've objected, inter alia, to the excessive fee request and to the Rule 23(a)(4) problems presented by class certification. We've been talking about this cy pres settlement for a year on Point of Law.

Public Citizen has also objected on overlapping, but different grounds. Amusingly, another objector, represented by an attorney who's been practicing for 25 years, filed a brief cut and paste from a several-year-old CCAF brief, so missed the opportunity to cite some more recent cases.

(CCAF is not affiliated with the Manhattan Institute.)



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.