Results matching “state attorney general”

Equalizing Markets - PointOfLaw Forum

New York Attorney General Eric Schneiderman took the latest step in his "Insider Trading 2.0" initiative to reshape the securities markets. On Wednesday, the attorney general announced an agreement with PR Newswire, a company that distributes corporate news releases. Pursuant to that agreement, PR Newswire will require direct recipients of its information to certify that they will not use it for high-frequency trading purposes. Attorney General Schneiderman has made similar pacts with other news distributors and entered into an agreement with Thompson Reuters, pursuant to which the company agreed to stop selling early access to the University of Michigan consumer sentiment survey. The attorney general is on a mission to ensure--as he said in a recent speech--that the United States is "a little more equal than the rest of the world." But equality based upon prohibiting people from investing in speed, technology, and legal access to information is a foreign concept in American markets. Freely functioning markets allow people to express the value they place on something. A long-term investor is not willing to pay anything for a short-term trading advantage, but a frequent trader may find a two-second information advantage so useful that she is willing to pay for it. The frequent trader's choice to buy something that the long-term investor does not want or need is not a sign of inequality; it is a reflection of different preferences. It's not the government's job to equalize market participants' preferences.

Opposing FCPA Overcriminalization - PointOfLaw Forum

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

As the overcriminalization problem has garnered more and more attention, the calls for reform have become increasingly audible in various aspects of federal, state, and local governments. The latest example comes to us from the Texas Public Policy Foundation. Vikrant Reddy, TPPF's Senior Policy Analyst for the Center for Effective Justice, has just released a report detailing salient changes that should be made to the Foreign Corrupt Practices Act to make it more reliable and efficient. Ostensibly, the purpose of the statute is to minimize U.S. complicity in international corruption, but its ancillary effects tend to stifle any beneficial effects of the additional regulation:

The act is emblematic of all the worst aspects of creeping federal overcriminalization, the tendency of Congress to use criminal law to regulate behavior not traditionally considered criminal. The FCPA's most important terms are vague and provide limited guidance for potential defendants; it is enforced in a way that limits critical mens rea protections; and the law does not provide for a "compliance defense" that would allow corporations to demonstrate that violations were a result of rogue employees, rather than inadequate compliance regimes.

The general problem stems from the fact that the premise of the legislation does not account for the creation of a skewed incentive structure. In theory, the FCPA will deter U.S. corporations from using potentially illegitimate means to court business in countries that are deemed "high risk" by using the threat of exorbitant fines and penalties. In order for this linear-style logic to hold, legislators either did not consider the negative externalities involved, or simply deemed them minimal in relation to the benefits of the legislation. Either way, the FCPA has proven to cause significant problems in terms of increasing the uncertainty involved in a given investment, and thus diverting U.S. resources from economically and socially productive uses:

Ironically, in fact, there is evidence that the FCPA has had the counter-productive effect of discouraging American firms from investing in impoverished nations. There is also evidence that the FCPA has stunted the growth of U.S. companies by forcing them to maintain costly compliance regimes. Ironically, these regimes may not even be useful becasue prosecution ultimately depends on how a particular U.S. Attorney will choose to interpret a particular term.

An improved piece of legislation would take into account these proven negative effects, while maintaining the core corruption-preventing purpose of the FCPA.

In other overcrim news, the Manhattan Institute's Center for Legal Policy will soon be releasing a report detailing the changing nature of Deferred and Non-Prosecution Agreements, especially in relation to the increasing number of agreements being utilized by the DOJ and, recently, the SEC. It will also examine the scope and adequacy of judicial review over these agreements.

Protecting Proportionate Justice - PointOfLaw Forum

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

The purpose of allowing the people to petition their government for a redress of grievances is to ensure that those who have been wronged have the means to obtain compensation for the harm caused. Within this context, the debate over what constitutes "fair" compensation generally turns on two general considerations; namely, 1) whether the plaintiffs who seek a redress have legitimate claims and 2) if so, whether their accrued compensation is justified on the facts and circumstances of the case. Increasingly, the legislative and judicial systems have experienced burgeoning problems in dealing with the legitimacy of both factors.

To this end, Mark Behrens, Cary Silverman, and Christopher Appel of the legal firm Shook, Hardy, & Bacon L.L.P. have authored two important pieces. In terms of whether plaintiffs have legitimate claims, Behrens and Appel write in an op-ed for the National Law Journal that medical monitoring claims have increasingly been utilized by plaintiffs to try and obtain redress without the requisite injury-in-fact necessary to have standing. They laud courts that have attempted to restrict payments for injuries that may or may not occur, often at the expense of those truly harmed:

Suppose you have been exposed to a product that may increase your risk of a disease. You presently have no injury, but you are concerned that you could develop a disease in the future. Should the person who created the situation or made the product associated with the risk pay for you to obtain periodic medical testing?

Courts have come to different conclusions. Most courts over the past 20 years have said no to medical monitoring claims. Since 2000, these include the Supreme Courts of Alabama, Kentucky, Michigan, Mississippi, Nevada and Oregon. A few courts, however, recently have allowed medical monitoring claims in some situations, including the highest courts of Missouri in 2007, Massachusetts in 2009 and Maryland last year.

To the surprise of many in the plaintiffs' bar, a majority of New York's highest court recently joined the list of courts that have said no to medical monitoring for asymptomatic claimants. The New York Court of Appeals said that awarding medical monitoring to those individuals can threaten recoveries for the truly sick and lead to administrative nightmares and public policy judgments that are better left to the legislature.

The New York Court of Appeals reached the right conclusion. For over 200 years, one of the fundamental principles of tort law has been that a plaintiff cannot recover without proof of a physical injury. This bright-line rule may seem harsh in some cases, but it is the best filter courts have developed to prevent a flood of claims, provide faster access to courts for those with reliable and serious claims, and ensure that the sick will not have to compete with the nonsick for compensation.

As to the legitimacy of accrued compensation, Behrens, Silverman, and Appel write in the Wake Forest Law Review that courts are misrepresenting the ratio of actual or potential damage to punitive damages by including extra-compensatory damages that skew the ratio downwards, ostensibly making it seem valid:

Whether extracompensatory damages are considered in the ratio calculation has constitutional and practical significance. For example, if a jury awards a modest $50,000 in actual damages but $1 million in punitive damages, the resulting 20:1 ratio would far exceed the presumptive single-digit ratio limit expressed by the U.S. Supreme Court. But, if the court adds an additional $200,000 in attorney fees to the compensatory damages denominator, the double-digit ratio drops to 4:1 and is less constitutionally suspicious. Inclusion of prejudgment interest, which is set at statutory rates in some states that far exceed inflation, can have an even more significant effect on the constitutional calculus. For example, an Oklahoma appellate court upheld a $53.6 million punitive damage award where actual damages were $750,000; the award included $12.5 million in prejudgment interest to reach a 4:1 ratio. Without prejudgment interest, the 70:1 ratio between the punitive and actual harm damages should have led to a different result.

They theorize that the true ratios (minus the extra-compensatory damages) may be a presumptive violation of due process. If we accept these issues as inherently dangerous to the health of the judicial system, then there needs to be action taken in terms of mitigating the potential damage to defendants. If no action is taken, the chances of truly-deserving plaintiffs receiving compensation goes down and the administrative costs on the court and defendants go up. If defendants are then unable to cover the cost of legitimate claims, the result is no redress for the plaintiff and significant financial harm or bankruptcy for the defendant. It becomes self-evident, then, that if the scales of justice tip increasingly in favor of one party, both parties ultimately suffer.

Bureau of Consumer Financial Protection as State AG - PointOfLaw Forum

Earlier this week, the Bureau of Consumer Financial Protection filed its first lawsuit against an online lender. The alleged offense was making loans in violation of state usury and licensing laws. The Bureau alleges that, because the loans were illegal under state law, making them and collecting them violated the federal prohibition against unfair, deceptive, and abusive acts and practices. Some state attorneys general have filed their own suits on the same facts. This move by the Bureau raises a number of questions. Should the Bureau target high-cost consumer financial products even if the costs are disclosed? The loans in question come with very high interest rates, but the Bureau's complaint reproduces a table from the offending lender's website that clearly sets out how high those rates are, how many payments will have to be made, and what the amount of each payment will be. Is it the role of the new federal consumer finance regulator to enforce state laws designed to prevent consumers from taking out certain types of loans? States presumably adopted those laws with the view that the prohibitions were of sufficient importance for the states to dedicate the necessary resources to enforce them. But should a federal agency's resources be spent on enforcing consumer lending limits the merits of which it has not considered? Even well-intentioned caps constrain credit availability to consumers, which may lead to more serious financial consequences to the consumers than paying high interest rates would have. Before championing these laws, the Bureau ought to undertake the necessary analysis to determine whether they hurt or harm consumers.

Judge Sanctions Porn Troll - PointOfLaw Forum

In a victory for corporate defendants that often face baseless suits intended to extort a quick settlement, a judge this week imposed sanctions on so-called "porn troll" Prenda.

Prenda had filed multiple suits against Comcast, AT&T and other internet service providers, claiming copyright infringement arising from the downloading of copywritten pornographic materials. The defendants claimed that the claims were baseless and that Prenda had brought the claims in hopes of extorting a quick settlement from corporations looking to avoid an association with pornography.

U.S. District Judge Patrick Murphy did not mince words:

"These men have shown a relentless willingness to lie to the court on paper and in person, despite being on notice that they were facing sanctions in this court, being sanctioned by other courts and being referred to state and federal bars, the United States Attorney in at least two districts, one state attorney general and the Internal Revenue Service."

Judge Murphy ordered Prenda to pay more than $260,000 in attorneys' fees and litigation costs to the defendants. Earlier this year a federal judge in California also ordered Prenda to pay defendants' attorneys' fees based on similar reasoning.

Because of the high cost of defending litigation, plaintiffs willing to aggressively plead cases can often extort settlements from defendants who are willing to settle at a price they think will be less than their cost of litigation. I covered this phenomenon and described the high economic costs resulting from the practice in my 2005 book, Out of Balance.

Update on BAMN - PointOfLaw Forum

Earlier this year I posted a blog about the case the Supreme Court was set to hear concerning Michigan's ban on affirmative action, pointing out what I viewed as some significant flaws in the plaintiffs' arguments. Moreover, I analyzed the issues in a more thorough manner in a recent law journal article here. On October 15th of this year, the Supreme Court heard oral arguments in that case, under the title Schuette, Attny. Gen of Mich., v. BAMN, et al. Central to the BAMN case is the assertion that Michigan's Proposal 2, which amended the state constitution to outlaw affirmative action, inter alia, at the state universities, set up a different political process for lobbying for racial preferences than the process for lobbying preferences based on alumni status, athletic ability, etc. Thus, under the Hunter/Seattle line of cases, Proposal 2 arguably violates the federal Equal Protection Clause.

As is often the case, both listening to the oral arguments, and reading the transcripts thereof, provides the observer with a very brief glance at what the attorneys presenting consider the most important aspects of the case. Actually, what the transcripts probably show is the issues that the competing attorneys think are both central to the issue, and on which certain Justices are still persuadable. They only have a brief time, the issues are very complex, and so choices of time and energy must be made.

The written briefs, along with briefs from amici, lay out the arguments in more detail. They show that Justice Kennedy, once again, is perceived as the swing vote, as arguments in the briefs are clearly designed to convince him, not so subtly, often reminding him of his own words from other cases. But despite this strategy, Shuette, who as Michigan's Attorney General was defending Proposal 2, spent most of his time answering questions by Justices Ginsburg & Sotomayor. In contrast, and perhaps not surprisingly, the attorneys for the two defendant groups were grilled pretty thoroughly by Justices Roberts, Scalia, and Alito. With all the usual cautionary caveats about predicting what the Court will do, the interactions with Justices Kennedy and Breyer may be most relevant. Both seemed somewhat skeptical of the defendants' arguments. Obviously, only time will tell how the Court will rule. But based on the arguments expounded in the oral arguments, it would be difficult if not impossible for the Court to rule in favor of the defendants. Otherwise, as Justice Scalia suggested, the federal Equal protection clause would contradict itself.

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

The Justice Department likes to proclaim itself to be an advocate for ensuring equality of opportunity across the entire socioeconomic spectrum of America. In terms of education, it likes to claim that universal access to education for the disadvantaged is the key to maintaining a stable democracy and a generally-inclusive civic society. Ostensibly, this is certainly a salutary position, and certainly a noble policy aim.

There always seems to be, however, a disconnect that constantly emerges with the stated ends and the desired means of reaching this goal. The latest example comes to us in the form of a lawsuit aimed at halting Louisiana's voucher program. Attorney General Eric Holder is asking a federal court to halt the use of vouchers, pursuant to the mandates of a case called Brumfield v. Dodd. The stated reason is that the racial balance of schools will get altered in contravention of the desegregation orders laid out in Brumfield, and that the state should have to seek federal approval for each district in which it wishes to utilize vouchers.

Even before analyzing the legal missteps, the Justice Department's logic implicitly admits two things: 1) That racial balancing should take precedence over educational opportunity for low-income students and 2) that the chance of vouchers not meeting the Brumfield racial balancing standard is enough to repudiate the entire voucher program. If equality of educational opportunity is indeed the desired end, then this approach does not seem to be the most efficient means of reaching it.

Moreover, the Justice Department is misapplying the legal standard. Clint Bolick, vice president for litigation at the Goldwater Institute and advocate for the Louisiana chapter of the Black Alliance for Educational Options, recently wrote about the myriad misapplications:

Curiously, the Justice Department did not file its motion in any of the ongoing Louisiana desegregation cases. Instead, it seeks an injunction in Brumfield v. Dodd , a case filed nearly 40 years ago challenging a program that provided state funding for textbooks and transportation for private "segregation academies," to which white students were fleeing to avoid integration. Since 1975, private schools have had to demonstrate that they do not discriminate in order to participate in that program.

The Louisiana Student Scholarships for Educational Excellence Program restricts participation to private schools that meet the Brumfield nondiscrimination requirements. The program further requires private schools to admit students on a random basis. Thus the program clearly complies with Brumfield. And the Brumfield court has no jurisdiction over the desegregation decrees to which the Justice Department seeks to subject the voucher program.

Nor can any court properly force the state to seek advance approval from the Justice Department for a clearly nondiscriminatory program that advances the education of black children. As the Supreme Court ruled earlier this year in Shelby County, Alabama v. Holder, when it struck down the "pre-clearance" formula of the 1965 Voting Rights Act regarding federal approval for electoral changes, states cannot be forced to submit their decisions to federal oversight "based on 40-year-old facts having no logical relationship to the present day."

It does not seem like too much of a stretch to assume that, when the proffered means run so afoul of the stated ends, there is some sort of variable intervening between the point A to point B relationship. This interference generally takes the form of some sort of special interest or political motive that ends up taking precedence over the general welfare. In this case, there seems to be a symbiotic relationship between the Justice Department (which does not want to cede power over enforcing desegregation decrees) and the local school districts (which obtain federal funds in connection with these decrees). As long as the political class favors power perpetuation over the welfare of its constituents, we will continue to see the advocacy of mutated means towards empty ends.

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

Recently, the Manhattan Institute released its latest Trial Lawyers, Inc. publication on patent "trolling," a practice that involves companies accumulating the rights to large patent portfolios and suing those who engage in unlicensed usage. One of the major problems with this practice has been that these so-called Patent Assertion Entities have been able to acquire patents on some of the most basic technological innovations, and thus stifle the ability of others in the industry to innovate and improve upon the technology.

Now, Congress itself is in danger of stifling technological innovation. Derek Khanna, in an article for Slate Magazine, has discussed a proposed change to Section 230 of the Communications Decency Act. This change, signed on to by 47 state attorneys general, would amend Section 230 to grant state criminal statutes immunity from the federal mandates of the section. Ostensibly, this proposed alteration would allow states to hold host websites liable if user-generated content propagated illicit activity, like ads for sex trafficking on Craigslist.

The problem is that this amendment would allow state attorneys general the broad power to prosecute the host website owners for user-generated content. This would in turn make website owners wary of allowing users to post on their sites, and therefore effectively remove potentially important dialogue and feedback from being placed on the site. Moreover, the national scope of many Internet companies compounds the fear of being potentially prosecuted under 50 different penal codes.

Khanna offers a telling example of the benefits of Section 230 in its current form:

Let's say Section 230 was never implemented, and Reddit's future founders arranged a meeting with their members of Congress to propose changing the law to facilitate their market model for a message board on the Internet. Assuming they didn't ask the member of Congress who referred to the Internet as "a series of tubes," it is likely that the politicians would respond, "This is such a small market, and a silly idea, so why would we bother changing the law for you?" And yet, today Reddit is a billion-dollar company and according, to one study, 6 percent of adults on the Internet are Reddit users (including me).

Section 230 is simple and intuitive to entrepreneurs, and it doesn't require a lawyer to implement. It's essentially a permission slip telling the Internet: "Go innovate." And entrepreneurs, such as Alexis Ohanian, co-founder of Reddit, responded by launching a diverse array of websites with user-generated content. Facebook--which currently has 1.2 billion users, or one-eighth of the world's population--would have been impossible without Section 230. Ben Huh, CEO of the Section 230-enabled Cheezburger Network, told me: "Section 230 is one of the hidden pillars of the free speech of the Internet."

If Section 230 is opened up to state criminal sanctions, the entire innovation-enhancing purpose behind the section's enactment will be destroyed. While the regulation of user-generated illicit activity is an important end, the means presented by the state attorneys general are not narrowly-tailored enough to prevent the creation of a considerable disincentive for Internet companies to grow and expand, as well as a disincentive to allow public forums in which users can offer suggestions as to how the company can improve its products and services.

Congress needs to maintain a free public sphere in which companies can feel comfortable in allowing user-generated content on their websites. Anything else would constitute a stifling of those animal spirits of innovation which have allowed the Internet to be placed at the vanguard of societal progress.

A better solution to prison overcrowding - PointOfLaw Forum

On Monday, Attorney General Eric Holder announced proposed prison reforms aimed at reducing the population of the nation's overflowing ­federal prisons. Holder cited figures that show the federal prison population has grown almost 800 percent since 1980. "With an outsized, unnecessarily large prison population, we need to ensure that incarceration is used to punish, deter and rehabilitate, not merely to warehouse and forget," he said.

Holder's solution? Stop prosecuting federal crimes. Holder directed all federal prosecutors across the country to stop charging low-level, nonviolent drug offenders with offenses that impose severe mandatory sentences. But there is a far more effective way to reduce the prison population: slash the number of federal crimes. Yes, mandatory sentencing is part of the problem, but the larger culprit is the explosive growth of federal criminal laws. There are 4,500 federal crimes on the books, with new ones being added at a rate of about 500 a year. The laws are deliberately vague, giving prosecutors maximum discretion "to intimidate decent people," as syndicated columnist George Will has observed.

Until relatively recently, ordinary criminal law was almost exclusively the province of state authorities. And with good reason: under the U.S. Constitution, the federal government has only limited power over crime, generally covering things like treason, piracy, and counterfeiting.

How the federal government managed to expand its criminal jurisdiction would come as a surprise to most Americans. Most federal criminal laws are justified under Congress's power to regulate interstate commerce. And so, for example, the courts have allowed the federal government to prosecute arson cases involving apartment buildings on the grounds that the real estate market is part of interstate commerce. But of course the use of the commerce clause is the merest pretext: nobody thinks that Congress was trying to regulate the real estate market by making arson a federal crime.

The Founders did not establish our two-level federal system on a whim. They did it to protect individual liberty. In Federalist 51, Madison argued that federalism (along with separation of powers) would create "a double security . . . to the rights of the people." Constitutional scholar Akhil Reed Amar has argued that the states can "act as a remedial cavalry" by riding to the rescue of citizens victimized by federal power. That's true in a general sense, but given the supremacy of federal law, the states are powerless to help those citizens prosecuted under federal statutes. The nearly un-checked power of federal prosecutors has led, inevitably, to abuse.

Consider the 2002 conviction of Arthur Andersen, which put tens of thousands of innocent people out of work, only to be overturned on appeal. In 1994, a Michigan property developer was arrested for having contractors excavate some sand and place it in a ditch--all on his property--without seeking approval from the Army Corps of Engineers. For this dastardly crime, federal prosecutors sought a sentence of sixty-three months--more than five years. The trial judge flatly refused to put a man behind bars for "mov[ing] some sand." The government appealed, and the case was ultimately settled.

It's true that Holder cannot unilaterally take federal laws off the books -- only Congress can do that. But neither Holder not his boss, President Obama, seem troubled by the unconstitutional breadth of federal criminal law today. Instead, they blame prison overcrowding on racism.

In a speech at the annual meeting of the American Bar Association in San Francisco, Holder cited a recent "deeply troubling report" indicating that black male offenders have received sentences nearly 20 percent longer than those imposed on white males convicted of similar crimes. That is troubling - but it's not the root cause of overcrowding; besides by taking aim at mandatory sentences, Holder is targeting the one part of the justice system that is necessarily color-blind. We won't improve the sorry state of federal prisons while this administration refuses to concede that the real cause of prison overcrowding is rampant over-criminalization.

This post was originally published on

Paternalism and Securities Laws - PointOfLaw Forum

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.

Comp-trolling for Power - PointOfLaw Forum

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.

Aaron Hernandez and obstruction of justice? - PointOfLaw Forum

To recap the latest criminal investigation of a football player that has been leading sports news: 23-year-old New England Patriots star tight end Aaron Hernandez was seen with his 27-year-old friend (and boyfriend of his girlfriend's sister) Odin Lloyd Sunday night and early Monday morning. Later Monday, Lloyd was discovered dead of a bullet to the head near a rental car rented by Hernandez. When the police investigated and searched Hernandez's home, both his security system and his cell phone had been smashed into pieces. Also, he'd hired a cleaning crew on short notice.

Meanwhile, his attorney, Michael Fee, issued an odd statement: "It has been widely reported in the media that the state police have searched the home of our client, Aaron Hernandez, as part of an ongoing investigation. Out of respect for that process, neither we nor Aaron will have any comment about the substance of that investigation until it has come to a conclusion." That sort of attorney statement disserves the client and is worse than no statement whatsoever: you can make a statement, but you can't even bring yourself to say "My client didn't shoot his friend in the back of the head"? It would be different if Fee had said "I have a policy of never speaking to the press about ongoing investigations." But that isn't what he said, and Fee does speak about investigations of other clients notwithstanding respect for the process. What should we infer from that? (We can infer that Fee isn't willing to lie for his clients. Good for him for observing ethical rules rarely enforced, but then be more quiet.)

Reported rumor has it that police are about to issue an arrest warrant for "obstruction of justice" against Hernandez, presumably over the smashed security system. ESPN's legal analyst Roger Cossack stated "There's a federal statute in every state that you cannot knowingly destroy evidence" and that soundbite has been quoted for three days of ESPN coverage. Except it may not be that simple.

We'll start off by noting that Cossack probably misspoke. There's no such thing as a "federal statute in every state"; there's a federal statute, or there isn't. And while there's a federal statute for obstruction of justice, 18 U.S.C. §§ 1501 ff., it only applies to federal investigations, so has no bearing on the investigation by local police in Massachusetts. We need to look to Massachusetts state law.

In 1997, the Massachusetts Supreme Court interpreted the scope of criminal law with respect to obstruction of justice in the case of Commonwealth v. Triplett, 426 Mass. 26. Triplett had told a witness not to speak to the state police or the Attorney General's office, and was indicted and convicted for obstruction of justice. The Supreme Court reversed, holding that the common-law crime of obstruction of justice only applied to a witness at a criminal trial. In the absence of a statute, one couldn't go beyond that—even if the defendant did something like "remov[e] fingerprints from a knife."

As best I can tell, Triplett is still good law; as best I can tell, there is still no specific statute for destruction of evidence as an independent crime. If so (and I might have missed something, though I haven't seen any commentary basing "obstruction of justice" on something else), then no legal arrest warrant can issue against Aaron Hernandez for obstruction of justice. He may be guilty of a crime, but it isn't obstruction of justice.

That isn't to say that Hernandez could have destroyed the security tapes with impunity. Destroying security tapes is pretty damning circumstantial evidence, and the maids who cleaned Hernandez's house will likely remember if they were picking up itty-bitty pieces of skull. If it turns out a mutual friend killed Lloyd, Hernandez could be charged with being an accessory after the fact. And when Lloyd's next of kin inevitably sues Hernandez for millions in a civil suit, as they have every right to, they can ask a jury to draw the adverse inference from his conduct.

(Disclosure: I've played poker with Cossack, though he probably doesn't remember me.)

Courts beginning to reject M&A strike suits - PointOfLaw Forum

96% of mergers result in litigation alleging breach of fiduciary duty. This isn't because there are widespread breaches of fiduciary duty; it's because strike suits threatening to generate litigation expenses relating to the merger are highly profitable. The case settles with a tweak to the disclosures, and the attorneys walk away with over $1000/hour for agreeing to stop trying to hold up the merger. Courts are beginning to see through this.

Today, the Center for Class Action Fairness won a victory in the Texas Court of Appeals: the appellate court zeroed out attorneys' fees in a shareholder derivative suit settlement that added largely meaningless disclosures to the proxy statement in Kazman v. Frontier Oil. I argued the case, but D. Wade Carvell, our pro bono local counsel, really deserves the credit as the principal author of the briefs and the man who came up with the winning argument. We discussed the case on January 18 and October 10. It's CCAF's sixth appellate victory. (CCAF is not affiliated with the Manhattan Institute.)

(Update: Reuters press coverage.)

And earlier this week, the Ninth Circuit affirmed an award of sanctions against Joseph Alioto for violating 28 U.S.C. § 1927 in challenging a merger of Southwest Airlines. Alioto is unrepentant. [Reuters] Little wonder: the $67 thousand sanction isn't even 1% of the $308 million requested in the pending LCD settlement, two to three times the normal rate for settlements of that size. Sadly, the attorneys general participating in the litigation are failing to protect their citizens and have not objected to the outsized fee.

Gabelli v. SEC - PointOfLaw Forum

Last week's unanimous Supreme Court opinion in Gabelli v. Securities and Exchange Commission marks the agency's latest judicial reprimand. Many of the agency's most notable recent court losses have come in the context of rulemaking, but this case was an enforcement matter. It dealt with mutual fund market timing, a widespread practice in the fund industry. Sophisticated mutual fund shareholders had figured out how--sometimes with the help or purposeful blindness of fund managers--to make mutual funds' once-a-day-pricing work in their favor at the expense of other shareholders. The practice came to light a decade ago and resulted in a string of cases by the SEC and state attorneys general.

The SEC waited until April 2008 to bring its action against Gabelli. The SEC entered into a settlement with Gabelli Funds, which agreed to pay $16 million, and sued two individuals, Marc Gabelli and Bruce Alpert. In district court, these individuals successfully moved to dismiss the civil penalties portion of their case on statute of limitations grounds, but the Second Circuit reversed. The SEC argued that "the limitations period in a suit for fraud does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence could have discovered, the facts underlying his claim." The Supreme Court distinguished the SEC--with its mission of "root[ing] out" fraud and its "many legal tools at hand to aid in that pursuit"--from everyday people who "do not typically spend our days looking for evidence that we were lied to or defrauded." The fraud discovery rule applies to the latter category, not to civil penalty actions brought by government agencies like the SEC.

The Supreme Court's decision was an important reminder to the SEC of the importance of carrying out its enforcement mission within the confines of established and predictable rules of law. Only by doing so will the agency be able to build a reputation as a regulator that holds the industry--and itself--to high standards.

In a newly released legal policy report, "Class Actions, Arbitration, and Consumer Rights: Why Concepcion is a Pro-Consumer Decision," Ted Frank, adjunct fellow with the Manhattan Institute's Center for Legal Policy and editor of Point of Law, outlines why fears of the effects of pro-arbitration rulings are overstated. Arbitration agreements and the Supreme Court's endorsement of freedom of contract is a benefit to consumers. Recent decisions will not end the class action, and consumer advocates would be better off working to end the abuse of class actions that benefit attorneys at the expense of consumers, rather than fighting arbitration agreements that consumers would prefer ex ante.

On February 27, 2013, the Supreme Court will hold oral arguments in American Express Co. v. Italian Colors Restaurant. Like the Court's 2011 decision in AT&T Mobility v. Concepcion, Italian Colors involves the intersection of two mechanisms for resolving legal disputes not easily handled by high-cost individually filed lawsuits: arbitration and class action litigation.

In class action litigation, similarly situated legal claims are aggregated under a single lawsuit. Given the cost of litigation, class action suits can be efficient mechanisms for resolving large numbers of relatively low-dollar claims, but they also can enrich lawyers at legitimate claimants' expense because such lawsuits' low value to individual plaintiffs reduces the incentive for any plaintiff to monitor the lawyers handling the claim.

Arbitration, a form of dispute resolution outside the courts, involves imposing as legally binding and enforceable the decision of a third party, typically specified in advance in contracts. Arbitration is generally favored and enforceable under federal law, through the 1925 Federal Arbitration Act (FAA). Potential corporate defendants have sought to use mandatory arbitration clauses to avoid the expense of class actions. The trial bar and allies in the legal academy criticized such clauses as "anticonsumer" and, for years, had success, particularly in California state court, in obtaining judicial rulings finding the clauses unenforceable, notwithstanding the language of the FAA.

Read The Full Report

Facebook Disappointments - PointOfLaw Forum

Everything about the Facebook initial public offering was disappointing. This week's action by the Massachusetts securities regulator is no exception. Massachusetts entered into a $5 million settlement with Morgan Stanley, the lead underwriter of the Facebook IPO. The basis for the settlement was Morgan Stanley's alleged violation of the terms of the 2003 Global Research Analyst Settlement. The 2003 settlement--entered into with the Securities and Exchange Commission, the New York Attorney General and other regulators--involved research analyst conflicts of interest at ten Wall Street firms. There were concerns that research analysts were doing the bidding of investment bankers.

As part of the settlement, the firms agreed to a number of undertakings that fundamentally changed research analysis about companies. In an unfortunate instance of backdoor rulemaking, the regulators changed the industry's regulatory structure without going through the procedures required for agencies conducting rulemaking.

Morgan Stanley allegedly broke the undertakings it agreed to in 2003 when the investment banker managing the Facebook IPO apparently got too involved in the company's discussions with research analysts. As a result of those discussions, research analysts modified their forecasts for Facebook revenue downwards. Regardless of what one thinks of the 2003 settlement, an investment banker's attempt to get updated information to research analysts so they could appropriately downgrade their revenue forecasts in advance of the IPO does not seem to be the type of scenario the settlement was intended to cover.

O'Quinn silicosis clients sue - PointOfLaw Forum

I was the first to report when John O'Quinn's breast-implant clients successfully sued his firm for tens of millions of dollars of improper overbilling. [April 2007; June 2007; July 2007; Olson follow-up December 2009]

Now a group of O'Quinn's silicosis mass-tort clients allege similar overbilling and double-billing, including the pass-along to clients of referral fees paid to medical testing companies; document destruction and coverup is also alleged. A former O'Quinn partner denies everything, and claims a state probate court already rejected the allegations. [Alison Frankel @ Reuters]

Garance Franke-Ruta has a rule regarding married politicians' affairs: paraphrased, it's "It's never two. It's either one, or many." It would seem probable that the same principle is true for mass-tort lawyers: why would an attorney who skims tens of millions of dollars of recovery from breast-implant clients suddenly turn ethical and fastidious when it comes to similarly situated silicosis clients? And if the silicosis allegations are true, perhaps fen-phen and asbestos clients of O'Quinn's might want to look at their bills a bit more carefully? Another question that comes to mind is whether O'Quinn was especially aggressive when it comes to mass-tort billing, or whether other mass-tort settlements from other attorneys have similar skimming. Every once in a while there's a news story that suggests this could be a fruitful line of inquiry. Dickie Scruggs was reckless enough to attempt to bribe judges to get an upper hand in fee-splitting disputes with fellow attorneys; is it possible that he also took advantage of less-sophisticated clients in easier-to-hide ways? And the thing that has surprised me most in my work with the Center for Class Action Fairness is how the Ted Frank of five years ago wasn't cynical enough in anticipating the ways class action counsel unfairly treat their clients. Scrutinizing the recovery of mass-tort settlement plaintiffs seems like it would be a potentially profitable niche for entrepreneurial attorneys. Though, in general, the legal system protects its own.

Whirlpool v. Glazer - PointOfLaw Forum

The Sixth Circuit, in a decision that pays only lip service to Wal-Mart v. Dukes while ignoring its requirements for finding commonality, affirmed the certification of a single Ohio class in a consumer-fraud class action against Whirlpool over 21 different models of front-loading washers over a nine-year class period. Like every other environmentally-friendly energy-and-water-saving front-loading washer, Whirlpool washers, if not properly maintained, have a small percentage chance (and a slightly larger chance than for the old technology of top-loading washers) of generating unpleasant odors from laundry residue: does that create compensable injury for purchasers who never suffered this problem? Of course, as in many class actions, the attorneys are less interested in consumer redress for nonexistent harms, so much as imposing litigation expense that would prompt a settlement payment to the attorneys. In a Washington Times op-ed, Tiger Joyce complains "Beyond the urgent question of class certification, the 6th Circuit's opinion being appealed also establishes a radical new theory of product liability. In essence, it says that even if just one buyer of a manufactured product might one day become dissatisfied with the product, even if proper product maintenance would have prevented that dissatisfaction, and even if the product is otherwise widely and enthusiastically embraced in the marketplace, everyone who ever bought the product has, by definition, been overcharged and can be joined in a class action against the manufacturer." The theory is analogous to a fraud-on-the-market theory in securities law transposed to consumer law. Of course, one buys securities to make money, while one buys washing machines to wash clothes. If your clothes are washed satisfactorily, have you really been injured any more than by the fact that you mistakenly failed to buy your washer at Sears instead of Best Buy and inadvertently paid too much?

Of course, this particular question of Ohio law and public policy isn't before the Supreme Court, which generally doesn't intervene in error-correction of federal interpretations of state law, though there is an attempt to resuscitate the First American Federal question of class standing that the Supreme Court chose not to resolve last year in the cert brief itself. This case does not seem like the best of vehicles to make that stand.

But the commonality issue certainly seems cert-worthy, and even GVR-worthy. In terms of the certification, it's hard to see a common issue, given the different designs and different states of manufacturer and consumer knowledge over that time, and the Sixth Circuit opinion doesn't even try to distinguish Dukes. How is Whirlpool supposed to defend itself in a trial over such a wide-ranging class? Note that, while this is "just" a class action over Ohio consumers and Whirlpool washers, the same sort of case is being brought against every washer manufacturer.

I don't quite understand Joyce's reasoning in claiming "the future of all manufacturing in the United States hangs in the balance"—foreign manufacturers selling here will get sued just the same as American manufacturers will. It is, however, a litigation tax on consumers who face higher prices to compensate for the expense of lawsuits like this, and thus a wealth transfer from middle-class consumers to wealthy lawyers.

More: cert petition; Chamber amicus; PLAC amicus; PLF amicus; Wajert; PLF; Karlsgodt. The matter (No. 12-322) was to come up for conference Friday, but the Court has requested a response from the respondents, which is a better-than-average, though not dispositive, sign.

On Friday, a state court judge in Wisconsin struck down virtually all of Scott Walker's collective bargaining reform as a violation of both the US and Wisconsin constitutions.

The decision is a thinly veiled piece of judicial activism by Judge Juan Colas, who was appointed by the former Democratic Governor, Jim Doyle. How exactly does Governor Walker's reform infringe the "associational and speech rights" of municipal union members? Well, it prohibits municipal unions from collectively bargaining on non-wage benefits (they can still bargain on wages); it prohibits unions from forcing non-union members to pay part of the union's expenses (for the privilege of being represented by a union they want no part of), and it prohibits unions from automatically deducting union dues from payrolls. Got that? It's a violation of free speech to make the union ask its members for their dues.

I confess, I had to read Judge Colas' opinion several times to discover his rationale. The heart of the decision appears to be this single sentence on page 15: "Although the statutes do not prohibit speech or associational activities, the statutes do impose burdens on employees' exercise of those rights when they do so for the purpose of recognition of their association as an exclusive bargaining agent."

What a gloriously convoluted sentence! The reality is: the law dethrones municipal unions in Wisconsin from their former status as all-powerful closed shops, and finally gives employees the freedom to join, or not, municipal unions. Judge Colas casts this not as a burden on the unions, but on employees' right to associate for the purpose of forming an "exclusive bargaining agent." By this logic, every "right to work" law in the country violates the First Amendment. Judge Colas also held that the reform law violates the Equal Protection clause of the Fourteenth Amendment, but that holding was predicated on the asserted First Amendment violation.

This decision (and another recent one by an Obama-appointed federal court overturning parts of the Wisconsin law) are desperate rearguard actions by Democratic partisans. Under Walker's reforms, more than half of the Wisconsin members of the American Federation of State, County and Municipal Employees union have dropped out. So have a third of the American Federation of Teachers members in the state. This is terrible news for the Democratic Party. According to the National Right to Work Legal Defense Foundation, compulsory unionism allows unions to collect $4.5 billion annually in dues "and funnel much of it into unreported campaign operations." And now, those employees who have been forced to subsidize Democratic campaigns are heading for the exits.

The idea that Walker has violated workers' rights by giving them a real choice as to whether to join a union is preposterous. The Wisconsin Attorney General has vowed to appeal this decision -- let's hope reason prevails in the higher courts.

The case is Madison Teachers, Inc. v. Scott Walker:

Sen. Graham's curious praise for the ABA - PointOfLaw Forum

Jarrett Dieterle
Legal Intern, Manhattan Institute's Center for Legal Policy

Who says cozying up to pro-attorney interest groups can't be a bipartisan exercise? The Wall Street Journal picked up on some curious words by Republican Senator Lindsey Graham during a keynote speech at the ABA's recent annual meeting:

Mr. Graham, who serves on the Senate Judiciary Committee praised the group's work vetting judicial nominees. "That service you provide the United States Senate is invaluable because in these politically charged times in which we live," he said, "you are a filter, sort of a wall, between people who are politically connected and somebody who should be on the bench."

This politically charged environment, Mr. Graham maintains, is the result of the Senate's broken process. "I'm really worried about how we're doing confirmations. They're turning into political events," the South Carolina Republican said. "I'm not worried about judicial activism, I'm worried about Senate activism."

Sen. Graham went on to claim that judicial nominees, regardless of ideology, "are entitled to be confirmed as long as they're qualified." Such comments by Sen. Graham would seem to fly in the face of his actions on the Senate floor, where the Senator has voted to block several Obama nominees that were rated as "well qualified" by the ABA.

More controversial, however, is the ABA's vetting process itself. Far from creating a "filter" or "wall" between politics and qualifications as Sen. Graham suggested, the ABA's judicial evaluations appear to be heavily influenced by politics given the ABA's preference for liberal nominees over conservative nominees. [See also on POL]. The most frequently cited example of bias is the ABA's sparkling rating ("well qualified") for Obama's recent Ninth Circuit nominee Goodwin Liu compared to its lukewarm rating ("qualified/not qualified") for Reagan's Seventh Circuit nominee Frank Easterbrook. For perspective, at the time of his nomination Easterbrook's curriculum vitae (former judicial clerk, assistant to the Solicitor General, Deputy Solicitor General, 20 cases argued before Supreme Court, career in academia) dwarfed Goodwin Liu's credentials (former clerk and academic, no cases argued before the Supreme Court).

The bias of the ABA led the Bush Administration to exclude it from the process of evaluating judicial nominees. Undeterred, the ABA further inserted itself into the political arena during Obama's time in office by openly lobbying the Senate to schedule votes on Obama nominees. In light of the ABA's politicized history - and Sen. Graham's own voting record - the Senator's comments to the ABA were curious indeed.

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