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September 2013 Archives

FINRA & MSRB Embrace Economics
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September was a big month for economic analysis by financial regulators. On September 19, 2013, the Financial Industry Regulatory Authority--a quasi-governmental regulatory organization--issued a statement on "economic impact assessment for proposed rulemaking." A week later, the Municipal Securities Rulemaking Board--another quasi-governmental regulator--announced that it had adopted a "policy for integrating economic analysis in rulemaking process." These announcements are important because, to date, neither regulator has made systematic use of economic analysis in its rulemaking.

FINRA, which is the front-line regulator for securities firms, has pledged to ask a series of questions in connection with "significant" proposed rules. Specifically, it will try to identify the reason for taking regulatory action, the objective of the proposal, the baseline against which to measure the effects of the proposed regulation, how the proposed rule will work, reasonable alternatives to the proposal, and the economic impacts of the different options. The MSRB, which is the front-line regulator for the municipal securities markets, will take a similar, although not identical, approach. Both approaches are broadly modeled on the staff guidance now used by the Securities and Exchange Commission in its rulemakings. The SEC, in turn, relies--albeit with some modifications--on the guidelines that govern economic analysis by executive branch agencies.

Judging from the SEC's experience, embracing economic analysis can be a slow, difficult, and uncomfortable process. Nevertheless, the fact that these two quasi-governmental regulators have taken a step towards employing this common-sense tool in their rulemaking is positive. It will enable the SEC to conduct its approval process for FINRA and MSRB rules in a manner that is consistent with the SEC's legal responsibility to consider the effect of rules on efficiency, competition, and capital formation. Other financial regulators should follow the lead of the SEC, FINRA, and the MSRB and formally incorporate economic analysis into their rulemaking.

Citing a "large amount of public interest" the SEC has extended the comment period by an additional thirty days (counting from the date the notice of the extension is published in the federal register).

Publication in the federal register generally takes a few business days, so the extended comment period will probably run until sometime in early November.

An informal survey of the comments submitted so far can be summarized as "339 opposed, 9 in favor and 30 irrelevant or incomprehensible."

The extended comment period (probably intended to buy the SEC more time to figure what to do with the mess it has created) will unfortunately tend to increase the confusion already present in the market place. For those keeping score, there were three related releases on July 23rd, two became effective on September 23rd and the third (regarding amendments to Form D) has had its comment period extended. So, if you are an issuer engaged in a Rule 506 offering you need to think through the decision to stay private (Rule 506(b)) or engage in public solicitations (Rule 506(c)).

If you opt for public solicitations, you should expect that the SEC is going to require you to do something on your Form D, but, because those rules are not yet adopted, we can't know for certain what that will be.

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.

Stockpiling Penalties
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U.S. and U.K. regulators brought home a whale of a trophy last week--a combined $920 million fine against megabank JPMorgan. That number pales in comparison to the $11 billion settlement figure being tossed around this week for bad mortgages made by JPMorgan and the banks it acquired during the crisis, but is nevertheless substantial. The violations to which JPMorgan confessed last week, while indicative of needed changes at the bank, are not sufficiently grave to warrant the massive penalty that was levied against the firm's shareholders.

The underlying sin was losing $6 billion of the bank's own money by making some very big--and, as it turned out, very bad--trades. It probably didn't help that fellow traders had nick-named the JPMorgan employee making the huge trades that caused the loss "the whale." It also didn't help that the investments were made by a part of JPMorgan that was supposed to be in the business of protecting the bank from risk, not exposing it to additional risk. The regulators, in imposing their fines, cited JPMorgan's poor risk monitoring, flawed internal controls over financial reporting, poor valuation procedures, and inadequate processes for escalating problems within the company and for keeping the board and regulators apprised.

The SEC's co-head of enforcement, George Canellos, acknowledged that the $200 million it demanded from JPMorgan was "unprecedented for an internal controls case and is one of the largest penalties in the history of the SEC." He went on to explain that "[t]he penalty reflects the SEC's assessment of the gravity of the control failures and the risks to which they exposed the firm and investors." What he fails to mention is that the company's shareholders are going to be paying that penalty, which will then be distributed back to some of them.

Losing the kind of money that JP Morgan did in this incident ought to be enough to get the attention of JPMorgan's shareholders and its board of directors. It's not clear that an enforcement action, let alone one carrying a $920 million price tag for the company's shareholders who have already lost $6 billion, was the right way to bring pressure on JPMorgan senior management to clean up their act.

Sexting, the act of sending sexually explicit messages or pictures via text message is not criminal, and rightly so. What consenting adults choose to text one another should be of little concern to society or lawmakers with limited and clearly defined exceptions such as national security and criminal investigations. However, when these sexually explicit messages are exchanged between minors it becomes an issue of serious concern ripe for legislative action and the inevitable overcriminalization that follows.

Although overcriminalization has many causes it often rears its ugly head in the form of hastily enacted legislation that is a direct response to current events. In the past few years this troubling pattern has played out in response to teen sexting. The impulse behind these laws is usually some form of 'if there is a problem, make it a crime.' Unfortunately laws passed in this fashion are rarely well thought out, effective, or reasonable. These problems are further exacerbated when the subject matter involves technology and emerging issues like sexting. Lawmakers rarely take the time to understand the issues because political concerns demand immediate action. The result is broad laws that criminally punish acts that don't amount to criminal behavior.

Like all potentially criminal activity instances of teen sexting fall into a range, from not criminal to clearly criminal. There have been wildly publicized occurrences of sexting on both ends of the spectrum, from two teens mutually agreeing to share pictures of one another to large scale trading of images between dozens of people and the malicious distribution of images against the will of the image's subject. The existing laws used to punish minor sexting as well as those laws newly created in response to its growing prevalence are classic examples of overcriminalization. The problem is the over the top responses to small scale instances of teen sexting and the writing of laws that target all sexting as if it is the most heinous version of the crime.

The first type of overreaction usually involves the use of existing child pornography distribution and possession laws to punish one-off instances of sexting. Prosecutors go after the subject of the image for distribution, the recipient for possession and in one recent case the assistant principal who discovered the image and retained a copy as evidence. Overzealous prosecutors push for maximum penalties, unsurprising given the subject matter, and rigid laws that were not designed for this type of behavior are applied. The result of which is disproportionate punishment in the form of branding teenagers as felons and sex offenders.

The second type of overreaction necessarily follows from the first. Feeling the political pressure to act and seeing that existing laws don't appropriately deal with these behaviors lawmakers enact overreaching and overbroad statutes to punish all forms of minor sexting as if they are worst offenses. Instead of measured and deliberate legislative action the public gets rush jobs that make even first time offenses felonies. Once again making sex offenders and felons out of teens that could well have been dealt with through diversion, fines and counseling.

None of this is to say that these issues are not of serious concern to the community or that they do not merit a legislative response. But as with all issues of overcriminalization careful attention must be paid to the breadth of the statutes enacted and the severity of the penalties that are mandated. A thoughtful and proportionate response is required in this case given the seriousness of the issue. The 'it's a problem, make it a crime' mentality simply won't cut it here.

Luckily for those teens who find themselves on the wrong side of these laws there are hopeful signs coming from the states. Several legislatures have revised their sexting laws, or are working on proposed legislation that reduce criminal penalties for first time offenders, or employ non-criminal punishments for less severe instances of sexting. However the overall trend is still towards passing more of these laws, and the majority are much further reaching than necessary.

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.

One of the strangest pieces in Dodd-Frank--and that is saying something--is a little provision that requires companies to disclose the ratio of the median pay of a company's employees to the pay of the company's CEO. Today, the Securities and Exchange Commission took the first step towards implementing the provision. From the perspective of the investors, it was a misstep.

The Manhattan Institute's Center for Legal Policy released its third annual survey of shareholder proposals at Fortune 250 companies today. This report draws on the Proxy Monitor database to examine shareholder activism in which investors attempt to influence corporate management through the shareholder voting process. The report suggests that the shareholder-proposal process is dominated by a small subset of investors, particularly labor-affiliated pension funds, whose interest may be adverse to the typical shareholder's.

The report discusses several key trends in the 2013 proxy season, including:

• The number of shareholder proposals introduced has increased, but support for these proposals has declined.
• Just 1 percent of shareholder proposals were sponsored by institutional investors unaffiliated with organized labor or a social, religious, or public-policy purpose.
• Labor-affiliated shareholder activism appears to target companies that are more politically active, especially those more supportive of Republicans.
• Shareholder proposals related to corporations' political spending or lobbying were the most common type of proposal but attracted little support.

The full report is available for download here.

In related news, Lucian Bebchuk co-authored a response to Wachtell Lipton's strong criticism of his recent empirical study on the long-term effects of hedge fund activism. The Wachtell, Lipton memos, co-authored by Martin Lipton and several other senior lawyers in the firm, are available here and here. Professor Bebchuk's post is also available on the Harvard Law School Forum here and as a PDF here.

FACTA—which calls for statutory damages for printing too much information on credit card receipts—is perhaps the statute with the most abusive class action settlements, because notice rarely reaches class members and thus no one objects when the attorneys rip off the class. If a district court doesn't engage in its duty to protect class members, attorneys can walk away with windfalls while accomplishing next to nothing for their putative clients.

In Albright v. Bi-State Dev. Agency, a St. Louis federal case, here's how the settlement shook out:

$742.50 in cash and face value of tickets (surely mostly all tickets) to class members
$2,500 each to two class reps
$190,000 in attorneys' fees and expenses.

And the attorneys—Armstrong Law Firm, Bock Law Firm, LLC, and Chant and Co.—had the temerity to request over $400,000 in fees before the judge reduced it to something more than 200 times the class benefit. The class representatives got nearly seven times what the class got.

The case is Albright v. Bi-State Dev. Agency, 2013 U.S. Dist. LEXIS 129579 (E.D. Mo. Sept. 11, 2013).

Dry Max Pampers Litigation update
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Procter & Gamble (but not the plaintiffs) filed an en banc petition seeking further review of the 2-1 decision striking down the ludicrous attorney-benefit-only settlement in Dry Max Pampers. CCAF filed its opposition yesterday. I'm optimistic that the petition will be denied; it relies too heavily on a dissent that simply ignored precedent and problems with the settlement and class certification. But perhaps we'll get a certiorari petition, too.

Treasury's Coloring Book
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This week, the Treasury Department put out a colorful brochure, which is entitled "The Financial Crisis Five Years Later: Response, Reform, and Progress." The brochure looks a lot like the slick documents that the Bureau of Consumer Financial Protection produces. Despite its attractive look, much of the substance of the brochure, which celebrates crisis-era emergency programs and the Dodd-Frank Act, is disappointing.

James Copland discusses the effects of over-criminalization and the over-federalization of the criminal law on Ohio with Chad Readler of Jones Day as a follow up to Chad's op-ed on the same topic.

The Manhattan Institute's Center for Legal Policy will continue tracking the impact of these alarming criminal-law trends in Ohio and other states in an effort to raise awareness of this grave threat to individual liberty and states' rights.

The Federal Deposit Insurance Corporation should be commended for the sentiment behind its decision on Tuesday to clarify that deposit insurance does not cover deposits held in foreign branches of U.S. banks even if those deposits are payable in the United States. The FDIC's decision, however, demonstrates the difficult international comity issues associated with deposit insurance.

At first glance, the Korean Air Passenger Settlement looks pretty good: $50 million in cash for class members. You have to dive very deep in the papers to find out that the attorneys are going to ask for $21.5 million of that cash. They justify this by valuing coupons with face value of $36 million at $36 million, but we know from the Class Action Fairness Act and In re HP Inkjet Printer Litig. that you're not allowed to do that. Tsk, tsk. (And, of course, 25% is likely excessive even if the settlement was worth $86 million, given that the lawsuit just piggybacked on a government antitrust investigation. But, of course, the court is never going to hear that unless a class member comes forward and objects, or retains counsel (perhaps pro bono counsel?) to represent them at the fairness hearing.

The class consists of:

All persons and entities (excluding governmental entities, Defendants, and Defendants' respective predecessors, subsidiaries, and affiliates) who purchased Passenger Air Transportation on [Korean Air or Asiana Airlines], or any predecessor, subsidiary, or affiliate of the Defendants, at any time
during the time period January 1, 2000 through August 1, 2007. As used in this definition, "affiliates" means entities controlling, controlled by, or under common control with a Defendant [and does not include travel agents]. "Passenger Air Transportation" means passenger air transportation service purchased in the United States for flights originating in the United States and ending in the Republic of Korea ("Korea") or flights originating in Korea and
ending in the United States.

There is a claim form online if you want your cash and coupons; class members should get formal notice shortly.

One of the lead class counsel is Jeff Westerman, who you might remember from his Milberg days for his role in the NVIDIA settlement bait-and-switch where he hired an expert witness to testify against letting class members recover what the settlement notice told them they'd recover. So one is skeptical when one reads in the settlement that "Korean Air and Class Counsel shall set the maximum coupon redemption value per ticket by mutual agreement."

Ramseyer on product liability in Japan
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J. Mark Ramseyer, Liability for Defective Products: Comparative Hypotheses and Evidence from Japan, 61 Am. J. Comparative L. 617 (2013):

Americans file 80,000 product liability suits a year; Japanese file perhaps 100-300; and most countries more closely resemble Japan than the United States. Based on reports and articles from forty-five countries, Mathias Reimann has advanced several thoughtful and subtle hypotheses about this contrast. In this article, I apply Reimann's hypotheses to Japan and explore what they might tell us about law in the two countries. As Reimann suggested, the reason for the Japanese-American contrast does not lie in legal doctrine: on the substantive law of products liability, the United States and Japan are quite close. Instead, the reasons for the contrast seem to turn on aspects of American procedure that encourage meritless demands. Litigation rates are not lower in Japan because the law prevents victims from recovering their damages; Japanese law does not deter valid claims. Instead, the rates are higher in the United States because American law helps claimants collect amounts to which they are not legally entitled.

Facebook and (disappointingly) Public Citizen tell the Supreme Court that there's no dispute about cy pres in the courts that merits Supreme Court intervention. (Earlier.)

I wish the district courts knew that. In EasySaver, the district court thought nothing about awarding $3 million to local universities (including class counsel's alma mater) in a national class action, even though the class was receiving only $225,000 and worthless coupons.

And just this summer, a district court made an appalling cy pres award in BankAmerica Corp. Securities Litigation. Though the class of shareholders received less than a nickel on the dollar for their alleged damages (and claimants ended up being paid less than a dime on the dollar), the Missouri district court refused to distribute $2.7 million to the class, instead ordering that a local legal aid society that serves only the St. Louis area get the money. CCAF wasn't involved at the district court level, but the class representative retained us as appellate counsel, and last week, we filed a brief in the Eighth Circuit appealing the decision. If the law of cy pres were clear, this wouldn't be remotely a close case, but the district court rejected the correct result out of hand.

At least Cato filed a strong amicus brief in the Facebook case. And some district courts are getting it right: the Northern District of California refused to approve problematic cy pres in a problematic settlement; a Kansas federal court demanded that cy pres recipients be identified in the class notice—something the Third Circuit refused to do in Baby Products.

Wisconsin Crowdfunding Bill
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Following the lead of Georgia and Kansas, lawmakers in Wisconsin have proposed a bill that would adopt a form of intrastate securities-based crowdfunding in that state. Wisconsin Crowdfunding Bill

Assembly Bill 350, known as the Crowdfunding Securities Exemptions for JOBS Act (or "CASE for JOBS Act") aims to bypass the delay caused by the SEC's failure to implement regulations to permit crowdfunding as required by the federal JOBS Act passed by Congress in 2012. While nationwide interstate crowdfunding remains stuck behind the SEC's inaction, states like Georgia and Kansas have leapt ahead with intrastate rules that permit crowdfunding by companies organized in their states to investors residing in their states.

The Wisconsin bill would combine many of the features of the Georgia and Kansas rules (which are nearly identical) with some of the features of crowdfunding as envisioned by the federal JOBS Act.

Like Georgia and Kansas, the Wisconsin bill would exempt securities issued in purely intrastate transactions in Wisconsin where both the issuer and the investor were residents in that state.

Also like Georgia and Kansas, the Wisconsin bill would allow investments by non-accredited investors up to a maximum dollar amount per issue ($5,000). Accredited investors, however, could invest any amount.

In a strange twist, however, the Wisconsin bill would adopt a unique definition of "accredited investor" (which is generally defined under Rule 501 of the SEC's Regulation D as either (i) an individual with $200,000 or more in adjusted gross income ($300,000 if married filing jointly) for each of the past two years (and the reasonable expectation of achieving the same outcome in the current year), or (ii) an individual with a net worth of $1 million or more (excluding the individual's principal residence). Under the Wisconsin bill, however, the income prong of the definition would be reduced to $100,000 (for single investors) and $150,000 (for married investors) while the net worth prong would be reduced to $750,000. The proponents of the bill have said that this twist is for the purpose of sweeping more Wisconsin residents into the accredited investors definition.

The Wisconsin bill is also noteworthy because it would require its crowdfunded offerings to take place on licensed web portals, much in the way contemplated by the federal JOBS Act. (In contrast, the Georgia and Kansas rule have no provision for licensing crowdfunding web portals.)

The Wisconsin bill would exempt intrastate offerings of up to $1 million (increasing to $2 million if the issuer has audited financial statements). Issuers are required to make a notice filing with the Wisconsin Department of Financial Institutions.

As of this writing the bill has been introduced but not yet acted upon.

Dennis v. Kellogg on remand
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You may recall the Ninth Circuit throwing out a bad settlement (in an opinion later modified) over Frosted Mini-Wheats that paid $800,000 to consumers, $2 million to lawyers, and some unknown figure to unknown cy pres. On remand, the parties set up a $4 million settlement fund—but $900,000 or so is earmarked for settlement administration. Is that a $4 million settlement, or is it really a $3.1 million settlement, because that's all the class can hope to get? Class counsel is "only" seeking $1 million this time, which is still disproportionate to actual class relief; meanwhile, the objectors who turned the $800,000 in class relief into over $2 million of class relief aren't being given anything. This morning, I'll be at the fairness hearing in San Diego, presenting the CCAF objection of Chicago Law professor Todd Henderson. (As always, CCAF is not affiliated with the Manhattan Institute.)

I write in the Washington Examiner:

Eighteen-year-old Kyle Best was driving his pickup on a New Jersey road in 2009 when he crossed a double yellow line and sideswiped a motorcycle. The married couple he hit, Linda and David Kubert, each lost part of a leg.

Best was texting moments before the accident. The Kuberts sued not only Best, but also Shannon Colonna, a 17 year-old girl who had sent Best one text during his drive.

A New Jersey court held that Colonna was not liable, because there was no evidence she knew Best was driving when she texted him. That should have ended the inquiry, but two of the three judges went further and established a new legal rule for future New Jersey cases: A remote sender of text could be liable if he or she knew the recipient was driving at the time the text was sent.

Read the whole thing to see why it's a bad idea on multiple levels. More: Overlawyered; Tabarrok.

The citizens of Louisiana, through their elected representatives, have chosen to fund educational opportunity for students primarily through traditional public schools. In addition, in situations where those public schools prove to be insufficient, they have offered to a small percentage of parents the opportunity to try an alternative-a private school experience at taxpayer expense (at least partially). But the Louisiana Supreme Court recently held the portion of the voucher law that took funding from public schools to give to parents for use at private schools invalid under the state constitution. Following this setback, the legislature was confronted with the task of finding alternative funding for the voucher program.

Regardless of what one thinks of the merits of the Louisiana voucher program, it appears the state Supreme Court did its job, construing the statute strictly, and recognizing that it is the legislature who is responsible for changing the funding mechanism of the state's schooling options, not the court's. But to make an already difficult situation even more so, the U.S. Department of Justice is now engaged in a law suit against the State of Louisiana in an attempt to restrict or stop the voucher program. The justification for DOJ's position is stated as an attempt to enforce compliance with decades-old desegregation orders. While there may be some technical legal merit to the argument, I find myself skeptical that Justice cares more about integration than it does about protecting the interests of the public education lobby. Notably, the beneficiaries of these voucher programs are by statutory requirement poor, and stuck in failing schools, and are de facto overwhelmingly minority. Moreover, in the absence of evidence of de jure discrimination, the U.S. Supreme Court has repeatedly held racial balancing per se in K-12 schools to be unconstitutional. Thankfully, the discrimination that led to the decades-old desegregation orders in Louisiana is a thing of the past, and DOJ invoking them now seems a cynical move.

The DOJ, coupled with teacher union lawsuits, are not the only threats to Louisiana's voucher program, however. Political advocates of public schools are on the attack as well, sometimes advancing reasonable arguments, though not especially convincing ones, in my view. But a recent piece in Slate by Allison Benedict showed the ugly side of the anti-voucher movement. The title of the article itself (If You Send Your Kid to a Private School, You are a Bad Person: a manifesto) is almost a caricature. But sadly, the author seems to be in earnest. In the Public Discourse, Tollefsen lampooned the Benedict article, making some good points in the process. But having limited space, he left out a few things that his perceptive intellect would have doubtless treated were he addressing the topic at length. I'll try to fill a couple of gaps.

First, Tollefsen rightly notes that Benedict suggests that parents sacrifice their own children to failing public schools for some alleged benefit that might accrue to future generations. But Benedict's underlying assumption is an even more dangerous one-that the individual ought to subordinate oneself, and one's children, to the state, however destructive the arm of the state requiring sacrifice may be to those children. She baldly asserts that to do otherwise makes one "bad." This idea conflicts directly with the enlightenment principle that organized society exists to protect inherent rights of persons; persons do not exist to protect the interests of organized society. The U.S. Supreme Court, in more enlightened times, honored this principle:

"The fundamental theory of liberty upon which all governments in this Union repose excludes any general power of the State to standardize its children by forcing them to accept instruction from public teachers only. The child is not the mere creature of the State."

While Benedict, to give her some credit, concedes that she prefers moral arm-twisting to government force in this case, she does so while admitting she is not an educational policy wonk. Though I didn't brag to the cool kids in high school that I wanted to become one, I kind of am. At least I'm enough of one to recognize that in addition to her passionate plea to parents to force their children to take one for the team, Benedict seems to have gone out of her way to undercut her own thesis. She intentionally highlights her own ignorance, complete with illuminating examples, and attributes this state to her attendance of "crappy" public schools. In addition to her self-diagnosed lack of knowledge, she might have noted the gap in her preparation regarding the use of vulgar, scatological references to people she is trying to win over to her side. Perhaps a more values-centered private school could have helped her there. A better educational experience might also have helped her understand that the relationship between her public school experience and her ignorance does not necessarily imply causation.

But despite her self-professed ignorance and judgmental character, Benedict does offer reassurance. She wants the reader to know that she is "doing fine" in spite of it. In his piece referenced above, Tollefsen does a good job convincing us that Benedict is not, in fact, doing fine. But if we assume for the sake of argument that she is, her argument for universal public schooling loses all force. She wants everyone to send their children to public schools so that they will all insist that public schools be improved. But based on her own narrative, why should her readers care? If one can do "just fine" after attending a bad public school, why should any additional resources be expended to improve them? Why should anyone sacrifice their own children for some speculative future improvement?

However bad the public school Benedict attended, I am guessing it was not as bad as some of the shockingly dishonest, ineffective, and dangerous public schools attended by some would-be beneficiaries of voucher systems. I am willing to bet I could easily find many public schools to which she would not willingly send any child she loves, or even marginally values. Perhaps I'm wrong on this point, but I hope not.

We've previously discussed the problems of the Obama administration's theory of disparate impact in housing law: e.g., Sep. 2012; Nov. 2011; July 2011; May 2011. A pending Supreme Court case, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., squarely addresses the issue whether color-blind laws like the Fair Housing Act are actually race-conscious quota laws barring "disparate impact." CEI, Cato, and PLF argue no in an amicus brief. Hans Bader has details.

More: Overlawyered; Shapiro @ Cato.

I am happy to announce that my new book, "Easy Guide to Intrastate Crowdfunding Through the Invest Georgia Exemption" is now available for free downloading from Sterling Funder.

With the recent surge in use of crowdfunding by entrepreneurs and small businesses to raise capital, the book seeks to clarify the ways in which crowdfunding can be used as an investment tool, and to provide practice steps for a certain type of crowdfunding that is now possible for small businesses located in Georgia and for investors who are Georgia residents.

The book takes an in-depth look at the basics of crowdfunding, including how it relates to securities law, private offering exemptions, the JOBS Act and the Invest Georgia Exemption. In the book I offer some thoughts for entrepreneurs and small business owners on preparing and managing their offerings in a transparent and professional manner in order to increase their own chances of success but also to help ensure the success of crowdfunding for all users.

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

Since the issue of racial-preferences in college admissions became part of the popular lexicon after the Bakke ruling, various propositions have been put forth in support and opposition to its implementation. Unfortunately, this critical debate has been distorted by those seeking to advance a specific policy agenda. This has done a considerable disservice to the quality of rhetoric offered by those on both sides of the issue.

Fortunately, there are some scholars out there making substantive contributions towards advancing the debate. Stuart Taylor Jr., a nonresident senior fellow at the Brookings Institution, recently reviewed a new book for the Wall Street Journal called "For Discrimination" by Harvard Law professor Randall Kennedy.

In a rarity for the partisan environment in which these arguments generally take place, as Mr. Taylor notes, Mr. Kennedy acknowledges that affirmative action policies can have negative consequences for those it is intended to benefit, even though he ultimately agrees with these policies on balance:

The meatiest part of the book is a chapter focusing on "the key arguments pro and con" regarding affirmative action. To his credit, Mr. Kennedy provides a crisp, devastating summary of the "arguments con" before explaining why he embraces affirmative action anyway. Criticizing President Obama for pretending that racial preferences needn't involve "diminishing opportunities for white students," Mr. Kennedy makes it clear that affirmative action "does favor . . . some racial minorities over whites with superior records. It does generate stigma and resentment" by "calling into question the ability . . . of putative beneficiaries."

In a very intellectually-honest move, Mr. Kennedy broadens the scope of the discussion to analyze the disconnect between the admissions problem and the proffered remedy:

More specifically, the author concedes that there is much truth in critics' complaints that "the whites burdened by affirmative action are not responsible for the wrongs suffered by minorities"; that many "hail from poorer, more vulnerable families than their wealthier and secure white peers"; that most "beneficiaries of affirmative action are not themselves actual victims of the past racial wrongs" and are "relatively privileged"; and that preferences for well-off blacks and Hispanics siphon "attention and energy that would otherwise be more available to benefit lower-class racial minorities."

In agreeing with affirmative action, Mr. Kennedy must be lauded for laying the framework for his arguments in strong legal and policy terms. In addition to his above points, Mr. Kennedy argues that the Framers of the 14th Amendment did not intend to create a color-blind Constitution, but instead one that pushed for black social justice; he cites the legislative history of the Amendment and the fact that the Framers pursued additional legislation after passing the Amendment that specifically targeted blacks.

In his review, Mr. Taylor attempts to systematically refute each of Mr. Kennedy's arguments for affirmative action. In response to Mr. Kennedy's assertion that reparations should be due to the current generation of blacks for the injustices incurred by their ancestors, Mr. Taylor cites the fact that affirmative action policies have done nothing to curtail the achievement gap between blacks and whites in all stages of education, which remains as wide as it was 25 years ago. Therefore, affirmative action policies are doing nothing to offer reparations to the black community; they do not stem the tide of racial inequality in America, and in fact disincentivize blacks from working harder to get into college by exacerbating the moral hazard problem (i.e. we don't need to work as hard to get in).

Mr. Kennedy then cites the diversity rationale propagated first by Justice Powell in the Bakke decision, but himself doubts the benefits of this manufactured diversity versus the costs of potential stigmatization from resentful, non-preferred classmates. He then claims that affirmative action increases access to the benefits of civic integration for blacks, which Mr. Taylor finds a compelling rationale; however, Mr. Taylor claims that America is naturally integrating well and that those who struggle with integrating into America's civic culture are not the ones receiving the benefits of affirmative action, once again exposing the disconnect between the problem and the remedy.

Finally, Mr. Kennedy claims that affirmative action serves as a "prophylactic" measure designed to make up for potentially impotent anti-discrimination laws. But Mr. Taylor cites numerous data demonstrating the detriment of over-utilization of this stratagem:

Undisputed studies show that black applicants often receive an admissions "bonus" of more than 400 SAT points relative to Asians--the biggest losers in the preference game--and more than 300 points relative to whites, with Hispanics receiving smaller preferences. Studies also show that half of black students rank in the bottom 20% of their classes at most selective colleges and the bottom 10% at most selective law schools. Disproportionate numbers of those aspiring to careers in science, medicine and other challenging fields end up fleeing tough courses for soft majors that are much less attractive to employers. Blacks tend on average to fall further behind their classmates while in college.
A pioneering 1996 study by Dartmouth psychologists Rogers Elliott and A.C. Strenta of 5,000 students at four of the nation's most elite private colleges showed that 45% of entering black freshmen wanted to pursue STEM (science, technology, engineering or math) majors, compared with 41% of whites. Once at college, however, most of the blacks got such low grades in STEM courses that they were slightly more than half as likely as whites to finish with a STEM degree. Subsequent studies have reached similar conclusions. All this does much to reinforce--and, among African-American students, to internalize--the stereotype that blacks are intellectually subpar.

While reasonable people may disagree as to the emphasis or relative worth that should be given to any one of these arguments, these two scholars have undoubtedly done a great national service in offering their well-reasoned contributions to the American public. On an issue that has such long-term implications for the country, the public deserves nothing less.

One of the most frequent questions I am asked is, "When will the SEC issue regulations to make crowdfunding possible?"

I have no idea what the SEC's internal deliberations are, but an in-house lawyer blog (TheCorporateCounsel.net) caused a bit of a panic last week in an article that speculated that crowdfunding regulations wouldn't be finalized until late 2014:

"As this Washington Post article notes, the SEC Staff has indicated that crowdfunding rules can be expected sometime this fall, however these would presumably be proposed rules, meaning that final rules could not be expected until well into 2014 at the earliest when you factor in the need for FINRA to also create a regulatory system for funding portals. As a result, the ability to do exempt crowdfunding offerings remains limited, except that many are anticipating the ability to do more accredited investor-only crowdfunding offerings once general solicitation is permitted under Rule 506 after the September 23, 2013 effective date of those JOBS Act mandated rule changes."

While this is persuasive reasoning, some of the crowdfunding insiders I spoke to reached different conclusions. While it takes time for the issue to issue proposed regulations, absorb comments and then finalize rules, much of that process has already been ongoing, some professionals will argue.

I tend to be pessimistic when it comes to government's ability to do things. Any proposed SEC rules on crowdfunding will draw fire from all sides. Some commenters will argue that the rules are too restrictive and will slow down fundraising. Others will argue that the rules are too loose and will permit too much fraud. Whatever position the SEC ultimately takes will almost certainly require a companion rule-making on the part of FINRA, as FINRA will be the self-regulatory organization ("SRO") anointed by the SEC to managing the licensing process for crowdfunding portals.

As my colleague Dianne Trenholm pointed out in a recent online discussion, FINRA's licensing process for broker-dealers can often take seven or eight months, from the collecting of documents to fielding questions from FINRA examiners. Because the crowdfunding portal licensing process will be new and untested, it would not be unreasonable to expect that it would take just as long.

In addition, the SEC is also facing deadlines to complete rule-makings relating to Dodd-Frank and a new rule-making regarding market stability as a result of the recent NASDAQ outage.

So, to speculate further, let's imagine the SEC issues proposed rules in October, 2013 (which some would say is optimistic). The SEC will give 60 days for comment, running to the end of 2013. Assuming a brief 45-days interim period before issuing final rules in February, 2014, FINRA might be able to announce its own rules 90 days later, in May or June of 2014. If that happened the earliest that FINRA would authorize anyone to
act as a crowdfund portal would be no sooner than the third quarter (or more likely the fourth quarter) of 2014.

Again, this is nothing but educated speculation but if you think the process will wind up sooner than that I would love to hear how that's going to happen.

And now some editorializing.

How sad and pathetic it is that a Congressional action, adopted by a bipartisan majority in both houses of Congress in April 2012 and signed by the President days later, takes more than two years to implement. The whole idea behind the JOBS Act was to "jump-start" the employment market by dramatically accelerating the ability of start-ups and small businesses to raise funds. It seems that even when our political parties come together in agreement to take swift action the bureaucratic arm of government conspires to slow the process down to a glacial speed. Regardless of what you might think of crowdfunding, the SEC's administration of the JOBS Act is a stark illustration of the power of the federal government's massive bureaucracy to work its will despite the announced will of the elected government.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.