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July 2013 Archives

An April Corporate Counsel article notes courts' increasing, if inconsistent, scrutiny of attorney-fee awards in settlements of M&A litigation where there's no discernable benefit to shareholders. The article mentions my victory in Kazman v. Frontier Corp..

Joe Nocera nails it
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In today's New York Times:

Yes, there are certainly times when the court system provides the appropriate forum to address corporate wrongdoing. But just as often -- more often, in my view -- plaintiffs' lawyers gin up cases because, well, that's what they do. Like the corporations they sue, big-time plaintiffs' lawyers have a business model. Theirs requires them to constantly seek out cases that can be blown up into giant mass torts, as they're called, which can then be used to extract billions from companies.

I've seen mass torts where the actual plaintiffs get coupons while the lawyers reap millions. Mass torts where the connection between the product and the harm is illusory. Mass torts built on fraud (silicosis). Complex litigation settled for billions even when the government implies that consumers are responsible (Toyota sudden acceleration). I've also seen cases where some victims hit the jackpot with a giant jury verdict and other victims come up empty. Or where a corporation really has done harm but pays off the lawyers instead of the victims. Over the years, I've thought: There's got to be a better way.

Hans A. von Spakovsky of Heritage has released the white paper "The Unfair Attack on Arbitration: Harming Consumers by Eliminating a Proven Dispute Resolution System." It cites some of my work on the issue, including my recent Manhattan Institute white paper.

Speaking of self-dealing cy pres...

I was researching a $0 settlement of a Google class action that would provide cy pres to Larry Lessig's Center on Internet and Society at Stanford Law School. I wasn't especially surprised to see that Google—whose founders are from Stanford, and whose business model aligns with Lessig's antipathy to broad applications of copyright law—is already a major donor to CIS—so much so, that CIS feels it a conflict of interest to participate in litigation where Google is a party. When a cy pres settlement donates money to a charity that the defendant was giving money to anyway, the indirect benefit to the class of a cy pres award is even more illusory: all that's really happening is a change in accounting entries. There isn't even the pathetic excuse of "deterrence" as a rationale for cy pres awards that some academics use.

But I was genuinely offended by the list of donors that CIS thanks, which included:

KamberLaw, LLC (result of a cy pres settlement)
Lerach Coughlin Stoia Geller Rudman & Robins LLP (result of a cy pres settlement)
Perkins Cole LLP (result of a cy pres settlement)

Wait a second. If CIS got money from a cy pres settlement, they got the class's money, or, at a minimum, money of the defendant who paid the settlement. Defense firm Perkins Coie certainly didn't give CIS that money: they never had possession of it. And KamberLaw and Lerach Coughlin not only did not give CIS that money, but they almost certainly got paid a giant commission in attorneys' fees for steering the money to Stanford instead of their own clients. To then take credit for that profitable diversion is adding insult to injury—and does much to further prove CCAF's point that cy pres is all too often just another form of class counsel self-dealing.

The other three beneficiaries of the proposed Google settlement are similarly offensive, either because they reflect recipients that Google gives money to, or reflect ideologically charged organizations that would be controversial among members of the class—which include me.

The case is In re Google Header Referral Litigation, Case No. 5:10-cv-04809-EJD (N.D. Cal.). CCAF (which is not affiliated with the Manhattan Institute) likely will not have time to file an amicus brief opposing preliminary approval, but if preliminary approval is granted, we will almost certainly object.

We discussed earlier the surprisingly bad Ninth Circuit split decision affirming a $0 settlement where the only beneficiaries were the attorneys who received double lodestar and a brand new cy pres charity controlled by the defendant. With the able assistance of lawyers who litigated in the Ninth Circuit below and with BakerHostetler's fine Supreme Court practice, the Center for Class Action Fairness filed a petition for certiorari on Friday asking the Supreme Court to resolve the numerous competing strands of cy pres jurisprudence among the appellate courts. A number of reporters have expressed interest, and I'll update this post with that coverage.

(CCAF is not affiliated with the Manhattan Institute.)

Hello PointofLaw Community,

Firstly, thank you for your readership, support and constructive feedback which has helped turn PointofLaw into the valuable resource it is today. The PoL team strives daily to return the favor by providing unique, insightful and timely commentary on a diverse range of legal topics such as civil justice reform, criminal law and prosecution, corporate governance, financial regulation to name a few. We now have an opportunity to make our legal blog even better for our readers, but we need your help!

Here's How:

The American Bar Association is currently accepting nominations for their annual list of the 100 best legal blogs. We know that a vast majority of our readers are extremely busy, but we ask that you please take a couple of minutes to fill out a very brief nomination form in order to include PoL on that prestigious list for 2013. PoL cannot make the cut without your nominations.

Here's Why:

PoL is fortunate to feature numerous legal scholars and intellectuals who have led truly distinguished careers. These top-flight legal minds use our forum to share their knowledge and vast experience with you, our readers, while also contributing to legal scholarship and public discourse. A few of these scholars include:

- Ted Frank, adjunct fellow for the Manhattan Institute's Center for Legal Policy, and Editor-in-Chief of PoL. In addition to these roles, Mr. Frank is the president and founder of the Center for Class Action Fairness; he has written on various issues such as class action reform, litigation reform, medical malpractice, and products liability. Mr. Frank has previously been named by the Wall Street Journal as a "leading tort-reform advocate."

- Richard Epstein, Laurence A. Tisch professor of law at New York University and senior fellow at the Hoover Institution. Mr. Epstein pens regular columns original to PoL on issues involving law and economics, property rights, intellectual property, tort law, constitutional law, communications law, employment law, and health law and policy. He has been named one of the most cited legal professors in the country in a myriad of categories (including taking top honors in the field of law and economics).

- Hester Peirce, senior research fellow at the Mercatus Center at George Mason University. Ms. Peirce's research areas include consumer protection, financial crises and regulation, and financial markets. She has served as senior counsel for Senator Richard Shelby's staff on the Senate Banking, Housing, and Urban Affairs committee; in this capacity, she worked on financial reform following the 2008 crash and oversaw the implementation of the Dodd-Frank Act.

- Jonathan Wilson, attorney in the corporate & business practice group of the Atlanta firm of Taylor English Duma, LLP. Mr. Wilson has experience in corporate securities, corporate finance and governance, M&A and intellectual property law. He is the former general counsel of two NASDAQ companies.

We want to add to that impressive roster, expand our coverage, and diversify our content in order to improve the readers' experience. Additionally, in the past, we have hosted lively debates on our featured discussions and podcasts pages which flesh out multiple perspectives on breaking legal news. We'd like to increase the frequency of those PoL debates and discussions. ABA recognition of PoL as among the top legal blogs has the potential to significantly boost our exposure which can take our content and presentation to the next level and help us meet all of the aforementioned goals.

It is in this spirit that we ask that you please take a few minutes to nominate us for the ABA's top 100 legal blogs. Clicking here will take you to the nominating instructions. As always, we thank you for taking the time to visit PointofLaw.com and hope you will continue to find it a valuable and insightful resource.

Yesterday, a federal district judge upheld the Securities and Exchange Commission's conflict minerals rule, which had been challenged on Administrative Procedure Act and constitutional grounds. In doing so, the court called into question the scope of the SEC's statutory cost-benefit requirement. This decision serves, therefore, as another call to revise and strengthen the regulatory analysis requirements applicable to the SEC and other financial regulators.

Friday was a big day for the Securities and Exchange Commission. First, the securities regulator finally managed to name Steven Cohen, the owner of the legendary SAC. hedge fund adviser, in an enforcement action related to alleged trading on leaked inside information. Second, the SEC suffered an information leak of its own when details regarding the Commission's deliberation about, and rejection of, a proposed settlement with Philip Falcone's Harbinger Capital made their way into press reports. The two enforcement cases should cause the SEC to rethink some of its policies.

The Cohen case suggests it is time for the SEC to set logically-grounded boundaries around insider trading, rather than stumbling awkwardly from case to case without a clear articulation of the type of behavior it is trying to stop. As a staff speech highlighted on the SEC's insider trading webpage explains, "the development of insider trading law has not progressed with logical precision." The SEC's case against Mr. Cohen seems to suggest that even facts that can't be fit into this illogical progression will nevertheless be pursued. As has been widely reported, the SEC didn't make the case that Mr. Cohen's own trades were unlawful, but alleges only that Mr. Cohen failed adequately to supervise his employees in order to prevent their unlawful insider trading. Failure to supervise charges certainly have their place, but shouldn't be used as a substitute charge when the SEC can't prove its insider trading case.

The Harbinger case suggests it is time for the SEC to reinstate the practice of having the Commission give guidance to its enforcement staff before the staff embarks on settlement negotiations. That practice most recently employed under Chairman Cox enabled commissioners to help shape settlements involving corporate penalties before they were finalized. Had that happened in the Harbinger case, the SEC could have saved itself and Harbinger a lot of time and effort. Harbinger, a public company, had previously disclosed the settlement it had worked out with the staff, albeit with the caveat that "[t]here can be no assurance that the Commissioners or the court will approve the settlement on the terms described." A policy that allows the SEC commissioners to express their concerns before settlement talks begin in earnest would smooth the process of negotiating settlements and reporting them to the public.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Lately, the issue of federal "overcriminalization" has taken center stage in our national discourse. Chad Readler, a partner at Jones Day in Columbus, Ohio, recently penned an op-ed for the Cleveland Plain Dealer in which he detailed the detrimental effects of federal overcriminalization on the states' abilities to fashion their criminal codes towards the normative consensus reached within their local communities. He cites the example of Ohio:

Federal overcriminalization, however, presents a second concern: It undermines Ohio's ability to enforce its own values and interests. The criminal code is, at bottom, a reflection of community norms. As Ohioans, we may prefer not to criminalize some conduct or to provide for less significant punishment for that conduct than does federal law. But Ohio's choices matter little when federal prosecutors can also prosecute conduct of a largely local nature.

Within this context, Mr. Readler then highlights the dangers of setting potentially-harmful precedents in state criminal law:

A bill pending in the Ohio House illustrates a third concern: Federal law can provide an ill-advised model for Ohio to follow. The federal False Claims Act (FCA) allows for the recovery of money defrauded from the federal government. While the FCA technically provides for civil liability, it is considered a quasi-criminal law because the penalties it imposes can far exceed any damages caused by the fraud. To prove liability, the government need only prove that a person submitted information to the government "in reckless disregard of the truth or falsity of the information"; it need not prove that the person intended to defraud the government.

No one condones intentional fraud. And the FCA, to be sure, has recovered taxpayer money from intentional fraudsters. But the statute has also come under criticism for ensnaring people who may not have entirely understood certain federal rules or regulations.

Ultimately, Mr. Readler is speaking to the very nature of our country's constitutional structure on two distinct levels; specifically, 1) the historic delegation of criminal law to the states as a police power, and 2) the practicality inherent in allowing the states to cater their laws towards the ideological sentiments of their communities. Without the former, the nation's federalist structure gets overwhelmed by an ever-increasing federal criminal code; without the latter, the states wither as the country's flexible and autonomous "laboratories of democracy." Mr. Readler has certainly shed light on a national issue of the utmost importance.

In some recent posts I've covered the rules that the SEC is required to issue under the JOBS Act to implement interstate securities-based crowdfunding as well as the rules the SEC issued under Title II of the JOBS Act to remove the ban on general solicitation and general advertising for certain private placements under Rule 506 of Regulation D.

The concepts of crowdfunding and private placements work together but also have an interesting conflict in their underlying public policies.

The Securities Act of 1933 and the Securities Exchange Act of 1934 were both Congressional reactions to the great stock market crash of 1929. The thinking at the time was that the markets had become overheated, in part, because of an influx of new, small investors who had been solicited by unscrupulous brokers. Among the other reforms contained in the 1933 Act and the 1934 Act was a general prohibition on sales of securities unless those securities had been registered with the SEC or were subject to an exemption.

The statutory exemptions to the general obligation to register securities are primarily set forth in Sections 3 and 4 of the 1933 Act. Statutory exemptions include everything from sales of stock in certain banks to sales of stock in purely intrastate transactions (i.e., Section 3(a)(11)) of the 1933 Act). Section 4(2) of the 1933 Act exempts sales of securities in a transaction that does not involve a public offering.

This last exemption is somewhat vague, since the statute does not define "public offering". To eliminate the ambiguity, the SEC eventually adopted Regulation D, a set of regulations that provide clarity as to what is a "public offering" and that create safe harbors for certain kinds of non-public transactions. Among those safe harbors is a safe harbor for private sales of securities to an "accredited investors" who is defined in Rule 501 of Regulation D to include an individual person with either (a) income of $200,000 or more for two or more consecutive years ($300,000 if married and filing jointly) and with the expectation of achieving at least that level of income in the current year, or (b) a net worth of $1 million or more (excluding the individual's primary residence).

The paternalism in this definition is obvious. Individuals who meet the income test or the net worth test are free to invest in unregistered offerings, Others are not. The policy behind this definition is that millionaires and high income-earnings are capable of making investment decisions (or capable of bearing the risk of bad decisions) but others are not.

In the Dodd-Frank Wall Street Reform Act Congress directed the SEC to take another look at its definition of "accredited investor" and commissioned the Government Accountability Office to study the definition and alternative means of determining an accredited investor. The GAO issued its report last week.

The GAO's report is underwhelming. It is primarily a survey of the beliefs of market participants on what criteria should be used to define "accredited investor". In conducting this survey the GAO interviewed a grand total of 31 market participants, that were either attorneys with experience in private placements, accredited investors, other investors who were not accredited, and broker/dealers. That's right, just 31 participants. You could walk into a bar in Manhattan at 5pm on most business days and run into more than 31 investors, broker/dealers and securities lawyers.

And what was the conclusion of the GAO's report? It concluded that the SEC should "consider alternative criteria" for meeting the accredited investor standard. It cited remarks by some survey participants (a handful of folks out of the 31 surveyed) who thought it would be better to look at an individual's liquid investments.

Wow. How much did we spend (in tax dollars) for this piece of insight? A far more meaningful study would have examined (a) why it is that high income or net worth should be a pre-condition for the right to invest, and (b) whether education or professional experience should be an alternative criteria for the right to invest.

Compare, for example, the kinds of transactions that individuals often enter into without any inquiry as to their experience, knowledge or ability to tolerate financial risk. Individuals may buy a house, borrow money to purchase a house, buy gold or silver as an investment, buy cars, artwork and other items as an investment, and purchase life insurance, open an IRA or stock brokerage account, all without having to demonstrate their ability to understand what they are doing or their ability to handle the financial risk they are taking.

What makes investing in a private placement more risky that taking down a mortgage loan to buy a house? In 2008 and 2009 the news was full of stories of individuals who had been flipping single family homes on a leveraged basis who lost their shirts when the housing market hit bottom. I don't remember any stories of individuals who were bankrupted because their investment in a private placement went bad.

The idea behind crowdfunding, as expressed in Title III of the JOBS Act, is a rejection of the paternalism behind the accredited investor definition and the way it has been institutionalized in Regulation D. Crowdfunding was intended to empower individuals to make their own investment decisions in unregistered offerings of securities based on the availability of information over the Internet. As crowdfunding develops, the conflict between the policy behind it and the paternalistic policy behind the idea of "accredited investors" will become even more apparent and even harder to justify.

The trendy thing to say, post-George Zimmerman acquittal, is that the criminal justice system is biased against African-Americans. Is it so? Heather Mac Donald disputes:

A 1994 Justice Department survey of felony cases from the country's 75 largest urban areas discovered that blacks actually had a lower chance of prosecution following a felony than whites did and that they were less likely to be found guilty at trial. Alfred Blumstein has found that blacks are underrepresented in prison for homicide compared with their arrest rates. A meta-analysis of charging and sentencing studies showed that "large racial differences in criminal offending," not racism, explained why more blacks were in prison proportionately than whites and for longer terms, according to criminologists Robert Sampson and Janet Lauritsen. ...

In fact, if a black parent wants to radically reduce his son's chance of getting shot, he should live in a white neighborhood. New York's crime profile is typical of urban-crime disparities across the country. The per capita shooting rate in predominantly black Brownsville, Brooklyn, is 81 times higher than that of predominantly white and Asian Bay Ridge, Brooklyn, according to the New York Police Department. Blacks in 2012 committed about 75 percent of all shootings in New York, and whites a little over 2 percent, though blacks are 23 percent of the city's population and whites 35 percent. Blacks are 60 percent of the city's homicide victims. Their killers? They aren't white.

The picture is the same nationally. Black males between the ages of 14 and 24 committed homicide at ten times the rate of white and Hispanic males combined in the same age category in 2008, resulting in a homicide victimization rate nearly as disproportionate. As for interracial crime, black homicide offenders in 2010 had nearly three times the absolute number of white and Hispanic victims as there were black victims of white and Hispanic homicide offenders, despite blacks' much lower population numbers.

Michal Benari
Summer Intern, Manhattan Institute's Center for Legal Policy

A third federal appeals court declared President Obama's recess appointments to the National Labor Relations Board (NLRB), a 5-member board which referees labor-management disputes and oversees union elections, to be unconstitutional, on the grounds that the Senate was not officially in recess during the extended holiday break in January 2012 when these three contentious vacancies were filled. The significance of the ruling was depicted on Wednesday, as the Fourth Circuit refused to enforce two NLRB decisions, together with the dissent in federal appeals courts in both Philadelphia and the District of Columbia. Subsequently, the U.S. Supreme Court has granted cert. to hear the D.C. case.

Significantly however, Obama may have achieved a political resolution to this legal dispute, as the president has nominated two new NLRB appointees to replace those opposed by the Senate Republicans, namely union lawyer Richard Griffin and Deputy Labor Secretary Sharon Block, to be replaced by former AFL-CIO lawyer Nancy Schiffer and Kent Hirozawa. Obama has thereby (tactically) cleared the way for a confirmation vote next week and perhaps rendered the Supreme Court's appraisal moot.

Crucially, this was not the only controversy to preoccupy the Senate this week, as the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau, was confirmed on Tuesday afternoon with a vote of 66 in favor and 34 opposed. Cordray's appointment too occurred during the questioned January recess of 2012. Moreover, a series of compromises are to proceed this week, as it is reported that Senate Republicans will allow votes to proceed for President Obama's top choices to run the Labor Department, Environmental Protection Agency, and Export-Import Bank of the United States.

Senate Majority Leader Harry Reid [D-Nev] said "I think we get what we want, they get what they want. Not a bad deal."

Please visit our past discussions on recess appointments for a history of the arguments that preceded this latest compromise.

On Thursday, July 18, Texas Republican Congressman Jeb Hensarling will hold hearings on his "Protecting American Taxpayers & Homeowners Act." The PATH Act contains many forward looking proposals, on which I have no comment. But on this occasion, I want to focus on one key feature of the Act, which is only obliquely revealed by the statutory title. Mr. Hensarling shows great solicitude for American taxpayers and homeowners. But in a telling omission, he gives the back-of-the-hand treatment to the preferred and common shareholders of Fannie Mae and Freddie Mac, (commonly called Government Sponsored Entities or GSEs). In the interest of full disclosure, let me state for the record that I have advised several hedge funds on the merits of the PATH Act, and on the parallel bipartisan legislation that Tennessee Republican Senator Bob Corker called the Housing Finance Reform and Taxpayer Protection Act of 2013, both of which are designed to wind down the operations of Fannie and Freddie.

Liquidating Fannie and Freddie The source of my concern with Mr. Hensarling's proposed legislation involve sections 103 and 104 of the Act, which, according to its legislative summary provides for "Termination of Conservatorship," such that "Five years following the date of enactment mandates the appointment of the Federal Housing Finance Agency (FHFA) director to act as receiver for each Enterprise (i.e. Fannie Mae and Freddie Mac) and carry out receivership authority." Section 104 then provides for declining maximum amounts that GSEs shall be entitled to own over the five-year transitional period before these entities are liquidated.

In one sense, the demise of Fannie and Freddie should not be lamented, after the long and sorry history of massive government intervention in their internal affairs that created serious dislocations in the marketplace in 2008, including, most notably, the Congressional insistence in 2007 that Fannie and Freddie issue some $40 billion in subprime loans. As a result of these actions, both GSEs suffered major losses during the early part of 2008, not unlike those suffered by other private companies. The nature of these actions are outlined in a complaint attacking the various government actions filed in Washington Federal v. U.S. in June 2013.

King Richard
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British royal-watchers are eagerly awaiting the birth of their future queen or king, which is reportedly likely to happen sometime this week. It looks as if we beat them. The Senate voted today to confirm Richard Cordray to be director of the Bureau of Consumer Financial Protection. In taking that step, the Senate formally entrusted him with powers that would make many a king jealous. He has free reign during his five-year term to apply, enforce, and interpret a wide body of consumer law as he sees fit. Courts are directed to defer to his interpretation. How he chooses to interpret the law will affect the daily lives of many Americans, including whether they can get a mortgage and whether they will have access to banking services. His decisions also will play a large role in determining the prospects and profitability of providers of financial products. He presides over a half billion dollar budget, without having to ask permission from Congress before he spends the money or explain in detail how he spent it. He has broad powers to demand detailed information from banks and nonbanks. Concentrating this sort of power in one person sets a bad precedent for the future.

Comp-trolling for Power
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Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

It appears as if the 'Sheriff of Wall Street' is back with both six-shooters fully loaded. In true Wyatt Earp fashion, former governor and current NYC comptroller candidate Eliot Spitzer is planning to utilize his entire cadre of resources to strike against the renegade corporate marauders, euphemistically known as the "U.S. Chamber of Commerce." The Washington Examiner has published an op-ed by the Manhattan Institute's and Point of Law's own Isaac Gorodetski detailing Mr. Spitzer's plan to transform this typically administrative position through use of "aggressive" pension investing:

The comptroller serves as the principal auditor of city agencies and acts as the managing trustee and investment adviser of the five pension funds investing city workers' retirement assets -- currently valued at over $130 billion. As comptroller, Spitzer would sit on each of the boards overseeing these funds.

When asked how he envisions his potential role, Spitzer responded candidly. He said the position "is ripe for greater and more exciting use of the office's jurisdiction."

We've seen this play before. As New York attorney general from 1999-2006, Spitzer turned the traditionally behind-the-scenes role into a national media platform by pressuring, investigating, and prosecuting corporations under the little-known Martin Act. Any "underutilized potential" that Spitzer sees in the comptroller's office should alarm both America's corporate boards and New York City's public employees and taxpayers.

We don't have to speculate about how Comptroller Spitzer would use the office's powers. In 2009, he penned an op-ed for the online magazine Slate titled, "Chamber of Horrors: The U.S. Chamber of Commerce must be stopped. Here's how to do it."

After lambasting the U.S. Chamber as an "unabashed voice for the libertarian worldview that caused the most catastrophic meltdown since the Great Depression" and for being on the wrong side of "virtually every major public-policy issue of the past decade," Spitzer explicitly called on city and state comptrollers to "flex their political muscle" in order to combat the Chamber. Presumably, Comptroller Spitzer would target any and all groups or individuals voicing positions he finds distasteful.

Spitzer justified his call for aggressive activism by comptrollers by claiming that the U.S. Chamber spends "our money" on lobbying. By "our money," he meant the financial contributions of the Chamber's corporate members.

The shocking irony here is that Mr. Spitzer seems to be endorsing two fundamental principles opposed to the democratic chord he is trying to strike; namely, 1) that all people invested in a pension fund share the same political viewpoints (Chamber bad, pension activism good) and 2) that those people would wish to see their political ends carried out through the strong-arm tactics of an administrator charged with the singular task of maximizing the value of the funds he oversees.

Using this line of logic, Mr. Spitzer would have to acknowledge that he believes increased shareholder activism would lead to a concomitant increase in pension value. But wait, Isaac writes:

According to research conducted by the Manhattan Institute's Proxy Monitor project, which tracks shareholder activity for the largest 250 U.S. public companies, the New York City pension funds and comptroller's office have historically played an activist role, sponsoring an absolute majority of all shareholder proposals introduced by state and municipal pension funds.

Yet that activism has not added to share value for city workers: New York City's largest pension funds posted dismal 1.9 percent and 1.3 percent returns in the most recent fiscal year and have trailed their benchmarks over three- and five-year windows.

If shareholder activism has not led to increases in pension value in the past, New Yorkers have the right to ask ol' Sheriff Spitzer why he has his guns pointed firmly at the U.S. Chamber of Commerce.

We've previously discussed the abusive coupon settlement in In re EasySaver Rewards Litigation. In February, the district court approved the settlement and an $8.85M attorney award, and the Center for Class Action Fairness filed an appeal on behalf of its objector client. Friday, we filed our opening brief, with the following issues presented:

1. The Class Action Fairness Act ("CAFA") expressly contemplates and sets forth rules for coupon settlements that include relief other than coupons. 28 U.S.C. §1712. Did the district court err as a matter of law in holding that CAFA did not apply to a coupon settlement because it also paid class members a total of about $225,000 in cash?

2(a). 28 U.S.C. §1712 requires that a court calculating an attorney fee for a "proposed settlement in a class action [that] provides for a recovery of coupons to a class member" to value the coupons "based on the value to class members of the coupons that are redeemed." Accord In re HP Inkjet Printer Litig., No. 11-16097, -- F.3d --, 2013 WL 1986396 (9th Cir. May 15, 2013). Did the district court commit an error of law in determining attorneys' fees without determining the "value to class members of the coupons that are redeemed" and ascribing a $20 value to a coupon that was not stackable with already existing discounts?

2(b). In the alternative, if the Class Action Fairness Act does not apply, did the district court commit clear error in finding that the value of the settlement was $38 million and awarding $8.85 million in attorney awards, when the class would receive only about $225,000 in cash plus coupons that were unlikely to be redeemed and even less likely to be redeemed in such a manner to provide the full face value to class members?

3. Nachshin v. AOL, LLC, 663 F.3d 1034 (9th Cir. 2011), held that it was error for cy pres to favor local charities when there was a national class, and criticized the possibility of conflicts of interest between class counsel and cy pres recipients. Did the district court commit an error of law or abuse its discretion in approving a cy pres component of a settlement involving a national class that favored the alma mater of class counsel, and only distributed funds to local San Diego-area institutions?

4(a). Under Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468 (5th Cir. 2011), a settlement fund "belongs solely to the class members." Did the district court err as a matter of law in approving a settlement that provided over $3 million for cy pres but only about $225,000 for class members when there were class members who had not been fully compensated and 99.8% of the class had not made claims?

4(b). In the alternative, if Klier does not apply, In re Baby Products Antitrust Litig., 708 F.3d 163 (3d Cir. 2013), requires a district court to consider the ratio of cy pres to actual class recovery when evaluating the fairness of a settlement. Did the district court err as a matter of law in rejecting Perryman's request that this factor be considered where cy pres recipients would receive more than ten times as much cash as the class would and class counsel would receive more than forty times as much?

As always, the Center is not affiliated with the Manhattan Institute.

I've repeatedly noted that arguments to abolish the death penalty because of the increased cost of litigation it engenders are tendentious. The activists who raise the expense of the death penalty by devoting waves of litigation (often subsidized by BigLaw pro bono programs) on behalf of convicts on death row aren't going to disappear if the death penalty does; they'll simply move their next target to the supposed unfairness of life without parole, and government penal systems will still face large legal expenses, just shifted to a different set of prisoners. If anything, the expenses might be larger because so many more prisoners have de jure or de facto life sentences, and the precedential effects would be greater.

Additional support for this hypothesis is now found in the European Union, where the "European Court of Human Rights has issued a disturbing ruling that life without parole is 'inhuman and degrading' treatment forbidden by Article 3 of the European Convention on Human Rights." [Bader]

Twenty years from now, how many justices will say that evolving standards of decency have changed the meaning of the Eighth Amendment in this regard? It really depends who gets appointed to the bench to replace the current justices.

You may recall that the Center for Class Action Fairness won a big victory in May shutting down a tendentious interpretation of the Class Action Fairness Act that evaded the statute's intent in limiting coupon settlements to those that actually produced usable coupons. (As always, CCAF is not affiliated with the Manhattan Institute.)

The panel decision was 2-1, and that encouraged en banc petitions. We opposed the en banc petition, and Ninth Circuit denied the motion Monday, with only one judge (the dissent, Judge Berzon) requesting en banc rehearing.

We're encouraged, and the victory will likely help us in two or three other pending Ninth Circuit appeals we have, as well as a case in the Northern District of Illinois.

But the victory does little good if district courts and settling parties continue to ignore the plain language of CAFA. Take, for instance, the settlement in Redman v. Radio Shack Corp., No. 11-cv-06741 (N.D. Ill.). The settlement provides $1M in attorneys' fees and $10 coupons to the class, without any mechanism to track redemptions. Of course, there will be nowhere near the hundreds of thousands of claims comprising "settlement value," so the settlement also provide cy pres of leftover coupons. Except Section 1712(e) of the Class Action Fairness Act explicitly prohibits the use of cy pres coupons for calculating fee awards.

The settlement class is defined as

"All persons who, between August 24, 2010 and November 21, 2011, paid by credit or debit card for products or services and received an electronically-printed receipt from any Store that contained the expiration date of the person's credit or debit card.

"Excluded from the Settlement Class are Defendant, its officers, employees, and attorneys; transactions conducted with business credit or debit cards; and transactions made with RadioShack-branded debit or credit cards, as those cards do not contain expiration dates."

One hopes a class member aggrieved by this lawyers-first settlement will contact a non-profit attorney willing to help them object to such an unfair settlement.

The SEC yesterday adopted proposed rules that would implement Title II of the JOBS Act and implement significant changes in the way entrepreneurs and small businesses raise capital in private equity transactions. (Prior post)

Among other things the new rules:

  • Lift the ban on general solicitation of investors in Regulation D offerings;
  • Modify the rules regarding when amendments must be filed to an issuer's Form D information statement;
  • Require written general solicitation materials used in a Rule 506(c) offering to include certain legends and other disclosures;
  • Require the submission of written general solicitation materials used in Rule 506(c) offerings to the SEC; and
  • Adopt "bad boy" disqualification rules that would bar an issuer from relying on Rule 506 for one year if the issuer, or any predecessor or affiliate of the issuer, did not comply with the Form D filing requirements in a Rule 506 offering during the preceding five years.

Practitioners are still digesting the SEC's 185-page document but this appears to presage the SEC's action on crowdfunding and other changes involving private equity under the JOBS Act.

Recklessly Jailing Bankers
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The belief that bankers haven't paid an adequate price for their role in the financial crisis has been an important factor in policy debates here and abroad. Many people want to see big fines and preferably prison sentences for financial industry participants. People who intentionally broke the law should be held responsible, but the government's cases need to be grounded in good facts and solid legal theories. Moreover, reform measures designed to toughen sanctions need to be considered with care. Lawmakers should consider the ramifications those measures will have on the ability of banks to innovate and serve their customers.

The United Kingdom runs the risk of going too far in upcoming legislation. Based on recommendations from its Parliamentary Commission on Banking Standards, the government plans to impose "criminal sanctions for reckless misconduct in the management of a bank" in order to "sharpen directors' focus on their personal responsibilities and duties in respect of the firm." In addition, the government plans to shift the burden of proof for senior bank officials. "Bank bosses" will be responsible for "prudential and conduct failures" unless they can "demonstrate that they took all reasonable steps to prevent the contravention occurring or continuing in the part of the business for which they have responsibility." That makes it a lot easier for the government to win cases.

These changes--depending, of course, on how they are crafted--could make it very difficult for honest bankers to run their businesses with an eye towards meeting consumer needs. Far from sharpening their focus, the legislative changes could shift bankers' focus to avoiding future personal liability. The high stakes of making a business mistake could impede bankers' day-to-day work without contributing to the financial system's safety.

Michal Benari
Summer Intern, Manhattan Institute's Center for Legal Policy

In February, the Tennessee legislature approved a constitutional amendment (subject to voter approval in 2014) to end the state's use of the Missouri Plan to select state judges. Under the existing plan, a non-partisan Judicial Nominating Commission reviews and recommends judicial candidates for the governor's selection. The Commission was allowed to expire at the end of June and the legislature's amendment, if passed by voters, would make that change permanent. Thereby, the governor will have the independent duty and discretion to appoint appellate court judges. The transition is consistent with Tennessee's intention to move to a federal model of judicial appointment, whereby the governor's appointments are to be subject to confirmation by the legislature.

The amendment has generated backlash from advocates of the Missouri Plan, especially with a vacancy looming in the Tennessee Supreme Court, as Justice Janice Holder is retiring in August 2014. According to Colin Levy, Democrats and trial lawyers are claiming the absence of a Commission, renders the state without a method to fill the vacancy. Yet crucially, Levy declares that these groups are "angling to get the Missouri Plan reinstated on a 'temporary' basis" in the hopes of achieving its permanent restoration. Vanderbilt University law professor, Brian Fitzpatrick, points out that there has been an effective appointment process since 2009 and the governor is authorized to act independently when the Commission fails to submit a list of candidates. Fitzpatrick cites:

[I]f the judicial nominating commission does not furnish a list of three (3) nominees to the governor within sixty (60) days after receipt of written notice from the governor that vacancy has occurred, then the governor may fill the vacancy by appointing any person who is duly licensed to practice in this state and who is fully qualified under the constitution and statutes of this state to fill the office.

The SEC has announced that it will hold a meeting on July 10, 2013 to:

  • Consider whether to adopt amendments to eliminate the prohibition against general solicitation and general advertising in certain securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act;
  • Consider whether to propose amendments to Regulation D, Form D and Rule 156 under the Securities Act. The proposed amendments are intended to enhance the Commission's ability to evaluate changes in the market and to address the development of practices in Rule 506 offerings; and
  • Consider whether to adopt amendments to disqualify securities offerings involving certain "felons and other 'bad actors'" from reliance on the exemption from Securities Act registration pursuant to Rule 506 as mandated by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

These proposed rules implement Title II of the JOBS Act and would move forward the implementation of the Dodd-Frank Act but would not implement securities-based crowdfunding (as that would requirement the implementation of rules under Title III of the JOBS Act).

In a related development, FINRA has announced that it will consider adopting rules to govern crowdfunding portals as contemplated by the JOBS Act. FINRA will likely be the "self-regulatory organization" (or "SRO") selected by the SEC to govern crowdfunding portals as required by Title III of the JOBS Act. FINRA's action to adopt rules also represents a step forward towards the implementation of securities-based crowdfunding.

Michal Benari
Summer Intern, Manhattan Institute's Center for Legal Policy

It is commonly presumed that one must be a lawyer in order to present an argument before the U.S. Supreme Court; yet until this week, this was a mere convention. On Monday, the Supreme Court revised its 80-page rule book, and established this principle as a legal requirement. This is the first revision since 2010, which dealt with the practice of amicus curiae briefs under Rule 37.3(a). The constraint was inscribed in Rule 28.8, which the Court described as simply codifying a "long-standing practice."

It has been more than three decades since a non-lawyer argued before the Justices, the last of which was Samuel H. Sloan, who represented himself in 1978. Sloan declared that his independence was not "an ego thing," but rather he felt he had the means to succeed, which was later affirmed by his 9-0 victory.

This rule aims to protect and enhance the best interests of the litigant, as Stephen M. Shapiro, a veteran of 30 arguments before the Court and co-author of Supreme Court Practice, emphasizes that experience, qualifications and knowledge are required to successfully present a case and that without such benefits it "would be a very difficult chore." Richard Lazarus, a Harvard Law professor, expressed his disapproval of the notion to appear before the Court independent of counsel to be "a stupid, crazy idea."

Sloan conversely argues that "the Supreme Court should remain, in principle, open to everybody," thereby echoing the sentiments of many who oppose this law and view it as an infringement of civil liberties. The new rule, opponents argue, could seemingly create disparities, and render those less financially secure with no alternative but to acquire council, even if they could have successfully argued autonomously.

In practice however, this rule has invoked limited change.

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

In the June 30th letters to the editor section of the New York Times, Lisa A. Rickard, president of the U.S. Chamber of Commerce's Institute for Legal Reform, made her feelings clear about a June 19th editorial entitled "One-Sided Bill on Asbestos Injuries":

There is plain evidence that fraud and abuse already exist in the trusts set up by companies to pay asbestos claims.

A 2012 House Judiciary Committee report detailed highly questionable claims, citing numerous examples. In March, The Wall Street Journal chronicled thousands of highly questionable trust claims in a major front-page article.

The Furthering Asbestos Claim Transparency Act simply requires the trusts to make public information that they already collect about who has made claims against what trusts. And we believe that it places zero burden on claimants.

Most asbestos trusts have recently lowered their payouts to claimants because they are running out of money because of increased claims. Those who are indeed pro-claimant should support legislation that will ensure money for legitimate future claimants. Those defending the status quo are really supporting the current cash machine system that primarily enriches plaintiffs' lawyers.

Before concluding that a bill is "one-sided," the NYT may find it prudent to scrutinize the compendium of information available on both sides of the issue to ensure they are not advocating against the interests of the very claimants they profess to be protecting.

Last Friday, the Financial Industry Regulatory Authority (FINRA), the frontline regulator of securities firms, reported a $10.5 million profit for 2012. As the profit suggests, FINRA is not a typical regulatory agency. It is quasi-private, which means it can do things like bank its profits and pay its CEO $2.25 million. It's good that FINRA is not losing millions, as it did in 2008 when it lost nearly $700 million largely because of losses on its risky investment portfolio. Nevertheless, FINRA's profits and losses remind us that it should not enjoy the same liberties that a government regulator does.

Bloomberg is reporting that two nominees to the Securities and Exchange Commission are both vowing to swiftly conclude pending rule-makings under Dodd-Frank and the 2012 JOBS Act.

Kara M. Stein, a Democrat, and Michael Piwowar, a Republican, told the Senate Banking Committee the SEC must complete the required rulemaking, notwithstanding other priorities.

"We need to pursue all of those things at one time," said Stein, a former policy aide to Senator Jack Reed of Rhode Island.

Stein and Piwowar would join the SEC as it adapts to a new agenda under Chairman Mary Jo White, who says the agency's rulemaking priorities are prescribed by the Dodd-Frank Act of 2010 and the Jumpstart Our Business Startups Act of 2012.

Regulations under the JOBS Act would allow allow equity crowdfunding and advertising for investors by hedge funds. The absence of regulations due to SEC inaction to date has effectively stalled implementation of the law.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.