Truth on the Market

Academic commentary on law, business, economics and more

Archive for May, 2006

Martha Stewart to Fight Civil Insider Trading Charges

Posted by Bill Sjostrom on May 26, 2006

As Lisa Fairfax notes over at the Glom (see here), Martha Stewart has decided to fight the civil insider trading charges filed against her by the SEC in June 2003 (more here). The complaint had been stayed pending resolution of the related criminal proceedings. With those proceedings resolved, the SEC lifted the stay last month. The complaint also named Stewart’s Merrill Lynch broker, Peter Baconovic, as a defendant. While from Stewart’s perspective there is not a lot of money at stake (the SEC alleges she avoided losses of $45,673 by engaging in insider trading), in addition to disgorgement of losses avoided and civil penalties, the complaint seeks an order barring Stewart from “acting as a director of, and limiting her activities as an officer of,� any public company.

The SEC is trying to nail Stewart as a tippee under the misappropriation theory of insider trading. Under this theory, the SEC has to prove, among other things, that: Read the rest of this entry »

Posted in 10b-5, insider trading | Comments Off

Lay *and* Skilling Found Guilty

Posted by Elizabeth Nowicki on May 25, 2006

See here! Skilling was found guilty of 19 counts (incl. conspiracy, fraud, false statements and insider trading). Lay was found guilty on 6 counts (fraud and conspiracy).

I imagine both men will make model prisoners, although Lay might be the better prisoner, since he is very good at closing his eyes to bad things and ignoring signs of trouble. (We are talking about potentially *decades* in jail, as we all know. I will be curious to see how that plays out. For the record, I do not think inmate attire is fitted for cuff-links, such that Lay might want to leave his trademark ‘links at home. Or perhaps he will pawn them to pay for his appeals. . .or fines of some sort . . . or recompense to his investors. . . .)

John Hueston, the prosecutor, made a statement a short while ago in which he said two things in particular that caught my attention:

1. He said something about the verdict proving that a CEO cannot just *not* ask questions. (Forgive the double negative, but one of the compelling points for the jury, in the prosecutor’s eyes, was that Lay failed, in part, by not pushing for information – not asking questions – ignoring the red flag information that was right in his lap – not acting in good faith! See here and here for my “Not in Good Faith” manifesto. Who would have thought that the same sort of the fundamental failings that trouble me about director behavior would translate so well (relatively speaking) to the criminal context when dealing with officers?)

2. In addition, Mr. Hueston emphasized that it is no longer acceptable to hide behind lawyers and accountants. I sure *hope* so! I wonder how long it will be before we have multiple sets of outside lawyers and accountants reviewing financials to ensure that nobody is hiding behind anyone. I see this as akin to when Boards started demanding their own counsel, apart from the GC and apart from the outside corporate counsel. I, for one, would be DELIGHTED if multiple layers of accounting and legal review turn out to be a short-term impact of today’s verdict. Even if the costs are duplicative and significant, those costs are still LESS than the cost to investors of another Enron-esque catastrophe.

Posted in securities litigation | 5 Comments »

Vonage IPO flop magnifies FWP snafu.

Posted by Bill Sjostrom on May 24, 2006

As you’ve probably heard, Vonage’s IPO was a flop. It closed down 12.6% from its IPO price of $17. This represented the weakest first day performance of an IPO in nearly two years. It also greatly magnifies the apparent technical violations of the Securities Act I blogged about yesterday (see here). As Voange disclosed in its prospectus, it failed to comply with Rule 433 for its email blast and Rule 134 for its voicemail blast, and as a result these “could be determined to be . . . illegal offer[s] in violation of Section 5 of the Securities Act, in which case recipients could seek to recover damages or seek to require us to repurchase their shares at the IPO price.�

For Vonage, the best “defenseâ€? to any claimed violation would have been a nice first day pop followed by the stock staying above its IPO price until the one year statute of limitations ran. In such an event, there would have been no economic motivation for any investor to bring a lawsuit. Alas, that didn’t happen. If Vonage gets sued, it’s prospectus indicates it will rely on an “insignificant deviationâ€? defense. Per its prospectus: Read the rest of this entry »

Posted in IPOs, securities litigation | Comments Off

Lawyer Licensing: Where's the Data?

Posted by Josh Wright on May 24, 2006

Larry Ribstein and Jonathan Wilson are discussing the merits of lawyer licensing at Point of Law. I am especially interested in the discussion of whether lawyer licensing actually protects consumers of legal services from dishonest and incompetent lawyers. Wilson argues that removal of lawyer licensing may well result in lower prices for legal services, but will also the lower the quality of services provided to those without independent means to verify quality. In his own words:

The impact will be greatest on those who cannot afford lawyers now, the poor and the middle class. Today they rely on Legal Aid, legal clinics, friends, neighbors, relatives and self-help. They’ll still rely on these old standbys in a deregulated future, but they’ll also be tempted to try unlicensed alternatives and here is where the mischief will be made.

Online services and other unlicensed individuals will setup shop to sell legal services that they are prohibited from selling today. Their contributions to the legal “marketplace� will have no effect on the price of legal services to corporations, who will continue to buy top shelf lawyering, but they will sell their services to the poor and the middle class. To the extent their unlicensed services are deficient; it is the poor and the middle class who will feel the brunt of those failures. Will some unlicensed practitioners supply a need that is unmet today? Probably so. And so would the unlicensed doctor who might provide unlicensed healthcare at a cut rate with 90% accuracy. The problem will come from the 10% error rate.

Wilson’s argument begs the question of the state of evidence regarding the consequences of relaxing lawyer licensing restrictions. The testable implication of Wilson’s theory is that relaxations of lawyer licensing requirements should lead to lower quality services relative to those states with highly restrictive environments. Larry argues that there is no empirical support for Wilson’s predictions:

“[T]he exhaustive research that I did for Lawyers as Lawmakers: A Theory of Lawyer Licensing, 69 Mo. L. Rev. 299 (2004) revealed no credible arguments or data in support of the client protection rationale for lawyer licensing. Of course legal training provides important skills, as Jonathan argues in his recent post, and as I said in my post. But that doesn’t support licensing. Clients could be protected by markets, including certification by private organizations.

I am curious as to the state of the empirical evidence with respect to lawyer licensing and its impact on consumers. If I recall, the Federal Trade Commission has recently been involved in some advocacy efforts in favor of limiting the scope of unauthorized practice of law statutes. My sense is that a number of states must have relaxed unauthorized practice of law restrictions (I think Arizona is one), or similarly relaxed restrictions on lawyer licensing, such that one could directly test the impact of these restrictions on consumers in terms of prices and quality of service. There must be work on this somewhere. My quick Google search did not return anything right away, butdoes anybody know of empirical work in this area?

Posted in economics, law and economics, markets, regulation | 1 Comment »

Update on Majority Voting for the Election of Directors

Posted by Bill Sjostrom on May 24, 2006

Following up on two earlier posts (here and here), the proposed changes to the Delaware Code re: majority voting are now available here. Also, the Chicago law firm Neal Gerber LLP has updated its majority voting survey of companies (see here).

Posted in corporate governance, corporate law | Comments Off

Some Reactions to FTC Report on "Gouging"

Posted by Josh Wright on May 23, 2006

I posted on the FTC Report findings earlier. In sum, the FTC was able to identify only isolated and sporadic incidences of pricing behavior which were not explained by changes in supply and demand conditions at the local, regional, and national level. In addition, the FTC investigation did not reveal any antitrust violations. The reactions to the FTC’s findings exhibit the expected variance from political pandering, to accusations that the FTC “whitewashed” its report, to boredom from economists (to whom terms like “price gouging” and “unconscionable prices” are foreign). Here are a few examples of what I was able to find in print:

  • “So we’re likelier to see Elvis than gouging on gasoline? That’s good news for everybody, isn’t it? Maybe we’ll keep an eye out, though.” Larry Neal, spokesperson for House Energy and Commerce Committee Chairman Joe Barton (Houston Chronicle).
  • “The Bush administration is uniquely handicapped when it comes to defending the public from price gouging because it doesn’t want to embarrass its friends in Big Oil. This administration’s high-prices-are-good-for-you energy policy depends on leaving Big Oil alone to charge whatever Big Oil has decided to charge.â€? Rep. Edward Markey (D-Malden) (Boston Herald)
  • “Our evidence and common sense suggest a vastly different picture of unconscionable profiteering by Big Oil. The FTC has barely found the tip of the iceberg,” Connecticut’s AG Richard Blumenthal (Washington Post).

  • “Asking the FTC to determine when firms have exercised market power is not likely to yield anything very definitive, and this study hasn’t. It’s not that they’ve concluded with certainty that firms have not exercised market power, only that that is no evidence of it. It is hard to distinguish in this industry between real scarcity and artificial scarcity created by the firms.” Severin Borenstein (Berkeley Economics) (Washington Post).

  • Barbara Boxer said the findings about the refinery “fly in the face of reality,” and that “[t]his report proves that this administration is owned and operated by big oil.” (SF Chronicle).

  • Greg Mankiw (check out his great blog) notes that neither the report findings, nor the reaction by politicians should be very surprising. See also Mankiw’s previous posts on price gouging here and here.

I find the accusations of industry capture thrown at the FTC disturbing. Apparently, these folks do not have any objections as to the merits of the report. Perhaps such objections are are forthcoming, but I’m not holding my breath. It should also be noted several states investigating post-hurricane pricing behavior also concluded that market forces were responsible for the price increases (see, e.g., n. 18 in FTC Commissioner Majoras’ testimony to the Senate which accompanied the report). The burden of proof logically must be placed on the parties arguing that “gouging,” however it is defined, is at the heart of price increases. The FTC report soundly, and strongly, rejects the notion that the burden has been satisfied to date.

Posted in antitrust, economics, federal trade commission, markets | Comments Off

W$J Letters to the Editor; Organ Sales; Prostitution

Posted by Elizabeth Nowicki on May 23, 2006

You might have noticed that prostitution was on my list of things to talk about while blogging on truthonthemarket.  Had I been blogging a decade ago, both prostitution *and* organ sales would have been on my list.

You see, I have maintained for over a decade that the Supreme Court’s plurality opinion in Planned Parenthood v. Casey supports both (a) the right to have sex for money and (b) the right to “sell” (using the term loosely) an organ.  (Actually, I have long maintained that significant parts of the Planned Parenthood opinion are as nonsensical as a page from a Dr. Seuss book, but if we take Planned Parenthood v. Casey to mean what it says, it seems to me that the Supreme Court should support the “liberty interestâ€? in a woman’s body that allows for sex for money and the selling of an organ, albeit regulated at the state level.)Â

Since at least 1995, I have intended to write a law review article on this topic (to wit, how the Supreme Court inadvertently created this quagmire for themselves with the liberty language loosely lobbed about in Planned Parenthood v. Casey).  I have obviously not yet gotten to the article, and, over the years, I downgraded my goal from an article taking on both organ commodification and prostitution to an article taking on prostitution.

Imagine my delight, then, to see the WSJ piece by Richard Epstein on page A15, dated May 15th, 2006, titled “Kidney Beancounters.â€?  Epstein makes the economic (though not legal) argument for supporting “imagination as to how a sensible organ market could be organized.â€?  His position is that at least testing the market for organs is a sensible response to the current transplant donor drought.  Today’s Wall Street Journal (Letters to the Editor page) had several responsive letters to the editor, both in support of Epstein’s piece and against.  This is an interesting economic and social policy topic, made all the more interesting when juxtaposed with Planned Parenthood v. Casey, Lawrence v. Texas, and Washington v. Glucksberg.  Though I doubt this topic will build steam . . . .

 (Let me be 100% clear – I do not know enough about organ transplant issues to take a stand on the issue of whether an organ market is a good thing.  Additionally, this post should not be taken to mean that I support prostitution.  (For purposes of this post, I am neutral, though I have very strong religious and moral views on the topic outside the academic arena.)  I do know, however, that, while “liberty takes no refuge in a jurisprudence of doubt,� weak opinions that are more akin to thinly-veiled policy decisions proffered by the high Court create more problems than they fix.)

Posted in Uncategorized | 1 Comment »

Vonage commits technical violation of Securities Act

Posted by Bill Sjostrom on May 23, 2006

I blogged earlier about Vonage taking advantage of recently liberalized SEC rules that allow the use of written marketing materials during the IPO waiting period (see here). Specifically, they emailed a letter to their customers regarding a directed share program. They then followed up the letter with a voicemail blast (see here). All this is allowed under SEC regulations provided certain conditions are met. Well it seems that Vonage dropped the ball on some of the conditions. They failed to include a hyperlink to their latest preliminary prospectus in the email. They also did not include all required information in the voicemail blast.

See below the fold for the disclosure on these issues added to Vonage’s amended registration statement. Read the rest of this entry »

Posted in disclosure regulation, IPOs, securities regulation | 3 Comments »

News Flash: Mutual fund investors don’t read prospectuses!

Posted by Bill Sjostrom on May 23, 2006

The Investment Company Institute (ICI), the mutual fund industry trade organization, recently published a survey entitled “Understanding Investor Preferences for Mutual Fund Information.� Click here for the survey and here for an ICI press release with highlights of the survey. Here’s some the findings:

  • Mutual fund investors focus primarily on fees, historical performance, and risk when purchasing funds.
  • Recent fund investors make little use of prospectuses or shareholder reports. Around two-thirds of investors did not consult fund prospectuses or shareholder reports in making their purchase decisions.
  • Few investors reviewed information about a fund’s portfolio manager (25 percent), proxy voting policies (15 percent) or board of directors (15 percent).

These findings are not surprising to me as I would be in the majority on each one.

The survey also includes several findings that go to internet usage by mutual fund investors, mainly, that they have ready access, are comfortable using it, and use it frequently. It’s obvious that these findings are directed at the SEC. The mutual fund industry wants the SEC to adopt the “access equals delivery model� for mutual fund materials. Under the model, a fund can meet delivery requirements by posting materials on the web and notifying investors of their availability instead of mailing hardcopies. The SEC recently adopted the model for prospectus delivery and has proposed a rule applying it to proxy materials. Investment companies, however, are specifically excluded from coverage.

I’m in favor of extending the model to mutual funds. As I’ve said before, hardcopy distribution requirements are simply inefficient and wasteful in the internet age. Further, as the ICI survey points out, few investors even look at mutual fund prospectuses or shareholder reports. Switching to the model will result in cost savings for the funds.  These savings will presumably be passed on to investors, especially given investor focus on fund fees as demonstrated by the survey.

Posted in disclosure regulation, mutual funds | Comments Off

Defining Words

Posted by Elizabeth Nowicki on May 22, 2006

Words and their meanings can be tricky as an absolute matter; moreso when used as tools in the law.  I have vague recollections of the interesting cases from first year contracts class where the contracting parties had gotten themselves all tied up by attributing differing meanings to the same words.  Good times, good times.  And the issue of defining words (how to, when to, how much to) has twice come up on this blog over the past few days, such that I thought a post directly related to defining words was warranted:

Yesterday, Bill raised the issue of using the term “stockholdersâ€? instead of “shareholdersâ€? and vice versa.  His post met some interesting comments (read here).  A couple of days before that, I had posted about defining “good faithâ€? and “not in good faith.â€?  See “Nowicki on Good Faithâ€? here and, in its first iteration, here.  In Bill’s post, he was ruminating about how careful he needed to be (or did not need to be) when using the words “stockholderâ€? and “shareholderâ€? in his academic writing.  In my post, I was ranting about the bastardization of the phrase “not in good faith.â€?Â

In both threads, the issue was indirectly raised – how technical or meticulous should we be with our word usage?  (Note that I am shrewdly not defining “we� in order to leave the potential scope of the conversation broad.)  I am not sure that I have a “position� on the issue as a general matter, but, off the top of my head, I favor (a) using words that the reader can understand without whipping out a dictionary, (b) erring on the side of clarity, and (c) resorting to the dictionary with Justice Scalia-esque frequency when interpreting a word whose meaning is not contextually clear.

Four additional definition-related thoughts:

1.  Peter Tiersma penned an article in the September 2005 Journal of Legal Education titled “The New Black’sâ€? (discussing 2004 Black’s Law Dictionary revisions).  I recommend this article – it was both interesting and edifying, and Tiersma gets bonus points for using the phrase “meet and properâ€? before he closed page two of his article.

2.  Not to be a one-trick pony, but the director liability world would be a lot more user-friendly if we would all agree on one general, affirmative definition of “good faith.â€?  Backing into the definition by way of looking for the absence of “bad faithâ€? does not advance the discussion, in my view.  Bad faith leads us to use phrases such as “intentionally subversive conductâ€? – I am not sure I can differentiate intentionally subversive conduct from conduct that is subversive but not intentionally subversive.

3.  Did you know that the tobacco industry used the word “zephyrâ€? in internal memos as the code word for “cancerâ€? in order to obscure the serious health impacts of smoking?  See Lisa Bero, Implications of the Tobacco Industry Documents For Public Health and Policy, Annual Review of Public Health Vol. 24: 267-288 (Jan. 2003).  My grandfather died of lung cancer – I wonder if he would have been astute enough to define “zephyr” the same way the tobacco companies did, had he been lucky enough to see the internal memos before he took up his deadly habit.

4.  Bonus points if you can work the word “elide� into a sentence tomorrow!  (See here and here)

Posted in Uncategorized | 2 Comments »

 
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