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Doug Mataconis criticizes efforts in Congress to overrule Citizens United by abolishing corporate personhood (HT Bainbridge).

I’ve already addressed this issue, noting among other things that “the loss of personhood would not have the slightest effect under Citizens United” because that case reasoned that the speaker’s identity is irrelevant.  In any event, I pointed out that “if personhood matters at all under Citizens United and subsequent decisions, the loss of personhood actually could be a constitutional boon to corporations.” That’s because “the post-Bellotti cases on corporate political speech showed that it is easier to deny First Amendment rights if the speech is attributed to an artificial person.”

In general, as I noted in my earlier post, this attempted sneak attack around CU crosses St. Hubbins-Tufnel fine line between clever and stupid.

The NYT reports:

When he rejected a new European accord on Friday that would bind the continent ever closer, Prime Minister David Cameron seemingly sacrificed Britain’s place in Europe to preserve the pre-eminence of the City, London’s financial district. The question now is whether his stance will someday seem justified, even prescient.

Mr. Cameron refused to go along with the new European plan of stricter fiscal oversight and discipline hammered out in Brussels this week, in great part because of fears that the City would be strangled by regulations emanating from Brussels. * * *

But will it matter?  The article points out that:

  • Non-British banks in the UK will still be subject to EU regulation.
  • European activity might be redirected from the UK to Frankfurt.
  • Europe could prohibit its banks from dealing with UK firms that didn’t adhere to EU regulation.
  • But the UK could exit the EU, reducing the impact of EU regulation in the UK.
  • European banks would still have a powerful incentive to remain global by competing in the UK market. 
  • Even if excluded from Europe, UK banks would still compete powerfully for U.S. and Asian business.  The UK didn’t lose its edge when it stayed with the pound, and likely won’t if it opts out of EU regulation.

And of course there’s the question whether UK hedge funds and other financial institutions will be better global competitors without being saddled by more intrusive European regulation.

Cameron’s move is a reminder that the EU has a double edge:  it promotes competition within the EU, but erects a regulatory cartel for the EU against the rest of the world.  With or without the cartel, it’s still a global economy, governed by the powerful forces of jurisdictional competition.  Federal cartels can slow down that completion but not stop it.

It’s a lesson worth remembering for U.S. securities regulators.

You’ve seen the blog posts (e.g., here) and the working paper.  Now you can get the published article here.  Let me know if you want a reprint.

My paper from Wisconsin’s in-house counsel symposium (symposium discussed here, paper previewed here) is now available on SSRN. The paper is Delawyering the Corporation.  Here’s the abstract:

This article shows how in-house lawyers’ role has evolved to address the high cost of legal services and the traditional information asymmetry between lawyers and clients. The first stage of this evolution involved the expanding role of in-house counsel from intermediary between corporate executives and the corporation’s outside law firm to the corporation’s purchasing agent in a broader market for legal services. The second stage could see legal work distributed among employees with and without legal expertise throughout the corporation. The article also shows how evolving legal information technology could facilitate corporations’ full-fledged integration of legal information into business decisions. These developments have potential implications for the corporate and general markets for legal services and for legal education.

In short, don’t assume that the evolution of corporate law practice will stop with more legal work moving inside the corporation.  The same forces driving this move — technology and markets — may change the nature of the work.

Should domestic relationships be modeled on corporations, partnerships or other business associations?  This idea may seem attractive.  As I have argued, both business and family relationships can be viewed as standard forms, which are useful for filling gaps in long-term contractual relationships.  Borrowing contract-type thinking from business associations also could help break through the norm-driven rigidity of family law.  Thus, I have argued (here, and in Chapter 8 of The Law Market) for using business associations as a model for a choice-of-law approach to same sex marriage.

My writing got me an invitation to the very interesting “Love or Money” conference at Washington University, which explored “the false dichotomy in life and law between activities initiated for affective reasons, such as love or altruistic impulses, and those undertaken for profit.” 

But I probably disappointed the organizers by insisting on some “dichotomy” — that is, a separation between the statutory standard forms used for “love” (intimate relationships) and for “money” (business associations).  My point is that merging the two, while it may have political advantages, could muddy both legal areas.  This is based on my theory of the functions of these standard forms articulated in several papers, and most completely in my book, Rise of the Uncorporation

My paper from that long-ago conference, Incorporating the Hendricksons, has finally been published.  (Of course the title refers to much missed Big Love). Here’s the abstract:

The family is evolving rapidly, but not fast enough for some people. Several commentators suggest freeing family law of its traditional constraints by applying the contractual business association model. Business models, though superficially similar to domestic relationships, ultimately are unhelpful or counter-productive to defining the family. This Article discusses the essential differences between business and domestic partnerships and the potential havoc from trying to merge the two.

One nice result of the conference and paper is that I finally got to use this title for a blog post.

Big Law as LPO reseller

Larry Ribstein —  10 December 2011

Yesterday’s Law Blog notes a Fronterion report that legal outsourcers are facing more competition from “insourcers” setting up centers inside the U.S. The reasons include rising wages in India and falling wages in the U.S. and the U.K. so  

The glut of new law school graduates in 2012 will likely put offshore legal services outfits at a further disadvantage, the report found. “Most legal professionals, all things being equal, prefer to keep legal work domestically,” it said. In response, some offshore vendors are opening up in places such as Chicago and Washington D.C., said Fronterion managing Principal Michael Bell.

So wages of law workers in the U.S. are getting in line with their counterparts in India.  Not good news for U.S. law grads.

The story concludes with an interesting observation:

“Law firms say, we can hire these contract attorneys in the U.S. for really nothing,” Bell said. “One issue that law firms have is that they can’t mark up the services of an LPO… but if it’s a center based internally and it’s law firm staff, they can charge whatever they want to.”

In other words, amid intensifying global competition, Big Law thinks it’s found another way to make money.  I wouldn’t bet on this lasting very long — certainly not longer than in-house counsel see it happening and realize they can do better by eliminating the middleman.

Krugman on private equity

Larry Ribstein —  10 December 2011

Paul Krugman, writing in Thursday’s NYT, sees Romney as a real life version of Oliver Stone’s Gordon Gekko in the film Wall Street.  He characterizes Romney and his private equity ilk as job-destroyers, and argues that they should be taxed (and presumably also regulated) accordingly. He contrasts this with the supposed position of the GOP “to canonize the wealthy and exempt them from the sacrifices everyone else is expected to make because of the wonderful things they supposedly do for the rest of us.”

I earlier wrote on the NYT’s previous attempt to make political hay out of Romney’s business career.  The story focused a lot of unfavorable rhetoric on one of Bain’s deals.  I pointed out that, clearing away the rhetoric, although there was some short-term job and salary loss, the restructured company ultimately

became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers. The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.

There was a bankruptcy after Romney was no longer associated with Bain, but

In 2007 it was sold to Siemens for $7 billion — 15.5 times the price paid in 1994 for an “ailing” orphaned division of a big corporation. The article concludes with the suggestion that the “painful” layoffs “ultimately worked.”

In short, the story’s details don’t support its slant. Romney’s “brand of capitalism” seems to have worked in this instance, even if its success was colored by events that occurred after he left Bain. Although I’m not suggesting that Romney should or would run the country the way he ran Bain and Dade, I’m also not troubled by his history as a deeply invested owner and manager of Bain. True, he and the other “elites” at his firm made a lot of money. But if every deal was like Dade, it’s not clear society as a whole, including the working class, came out worse.

Now along comes Krugman with his own take on Romney-the-job-destroyer. Krugman seeks to support his point by comparing Romney to a fictional character. 

Now, I’ve spent more than a little time deconstructing Hollywood’s anti-capitalist bent in general and Oliver Stone’s fanciful Gekko invention in particular.  One would think that a Nobel laureate could do a little better than to draw support for his criticism of an industry from a cartoonish portrayal of it, even if the laureate in question has traded academic journals for the editorial pages. 

In fact, Krugman does do a little better by citing a “recent analysis of “private equity transactions” as concluding that, while they both create and destroy jobs, “gross job destruction is substantially higher.” Based on this evidence Krugman concludes:

So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980. * * *

The truth is that what’s good for the 1 percent, or even better the 0.1 percent, isn’t necessarily good for the rest of America — and Mr. Romney’s career illustrates that point perfectly. There’s no need, and no reason, to hate Mr. Romney and others like him. We do, however, need to get such people paying more in taxes — and we shouldn’t let myths about “job creators” get in the way.

There are a number of holes in this “analysis.”  Let’s start with the evidence Krugman relies on.  Curiously, he omits one of the main findings of the paper.  In the paragraph immediately following the quote about gross job destruction the authors observe:

While noteworthy, these results make up only part of a richer and more interesting story about the employment effects of private equity. Using our ability to track each firm’s constituent establishments, we estimate how employment responds to private equity buyouts on several adjustment margins, including job creation at greenfield establishments opened post buyout. This aspect of our analysis reveals that target firms create new jobs in greenfield establishments at a faster pace than control firms. Accounting for greenfield job creation erases about one-third of the net employment growth differential in favor of controls. Accounting for the purchase and sale of establishments as well, the employment growth differential is less than 1 percent of initial employment over two years.

In other words, private equity doesn’t destroy jobs, but reallocates them from less productive uses to more productive uses in new, or “greenfield,” businesses.  This point is emphasized in the abstract of a much more recent version of the paper Krugman chose to ignore, released last summer (emphasis added):

Private equity critics claim that leveraged buyouts bring huge job losses. To investigate this claim, we construct and analyze a new dataset that covers U.S. private equity transactions from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing outcomes to controls similar in terms of industry, size, age, and prior growth. Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.

Krugman’s analysis has other holes in addition to its evidence deficit.  First, it is fair to say that private equity’s objective isn’t to create jobs but to make money.  One hopes that the two will go hand in hand, but there are many reasons why they may not, including government policy.  In other words, there’s a problem when employing people costs firms money, but private equity is only the messenger. The point of my earlier blog post on this is that Romney’s experience restructuring firms gives him a lot better idea than many politicians, including the current president, of what government needs to do to fix the underlying problems.

Second, Krugman seeks to leverage his analysis of private equity into criticism of the 1%, concluding that “we do. . . need to get such people paying more in taxes.” Even if you are willing to conclude that private equity destroys jobs and shouldn’t get any breaks, this is far from killing the argument that business as a whole would thrive if less burdened. This could include some of the businesses that Bain profited by restructuring.

The bottom line is that one shouldn’t read Krugman without a grain, or perhaps a whole tub, of salt.

A recently published on-line symposium calls needed attention to Delaware Chief Justice Myron Steele’s remarkable article, Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221 (2009) (no free link available).

The Chief Justice makes an argument that is guaranteed to shock traditional business association scholars:  that there should be no default fiduciary duty in Delaware LLCs or limited partnerships.  According to the CJ, this would effectuate “Delaware’s strong policy favoring freedom of contract.”

CJ Steele notes that there are no fiduciary duties currently in the LLC statute, providing no basis for implying duties from the standard form.  This argument is less clear for limited partnerships, which link to the general partnership act’s duty of loyalty in §15-404. The Chief Justice argues that the freedom of contract provision in §17-1101 effectively negates this duty.  Although default duties arguably are preserved by reference in this provision, freedom of contract may trumps a nebulous default.

The ambiguity about default duties calls for application of policy considerations. The Chief Justice relies significantly on my writing, particularly Are Partners Fiduciaries? (for a more recent version of my theory see Fencing Fiduciary Duties).  I argue for narrowly construing default fiduciary duties because of the extra transaction and other costs associated with broad duties. In other articles [see, e.g., Larry E. Ribstein, Fiduciary Duty Contracts in Unincorporated Firms, 54 WASH. & LEE L. REV. 537 (1997) also cited by the Chief Justice] I have argued that the parties ought to be able to narrow default duties by contract.

The Chief Justice builds on these policies to take the extra step of leaving it to the parties to contractually define fiduciary duties from scratch. Here’s his reasoning in a nutshell (46 Am. Bus. L. J. 239-40) (footnotes omitted):

Professor Larry Ribstein has written extensively on the economic costs and benefits of fiduciary duties. Professor Ribstein explains that “the existence of default fiduciary duties depends solely on the structure of the parties’ relationship that is, on the terms of their express or implied contract — and not on any vulnerability arising other than from this structure.” Specifically, for LLCs, Ribstein sets forth three economic rationales to narrowly define fiduciary duties.

First, according to Ribstein, even where fiduciary duties have some benefits, those benefits are outweighed by costs such as “effect on the purported fiduciary’s incentives and the reduction of trust or reciprocity from substituting legal duties for extralegal constraints.” In particular, Ribstein notes, “courts often ignore the costs of fiduciary duties perhaps because these costs matter most in the cases that do not get to court, and therefore seem insignificant compared to the unfairness in the case being litigated.” Second, Ribstein argues that “there are benefits to clearly delineating the situations in which fiduciary duties apply, including minimizing litigation and contracting costs and effecting extralegal conduct norms.” Third, and finally, Ribstein concludes that “a narrow approach to fiduciary duties inheres in the contractual nature of such duties.” Ribstein warns that “[a]pplying fiduciary duties broadly threatens to undermine parties’ contracts by imposing obligations the parties do not want or expect.”

Professor Ribstein’s thoughtful analysis also applies to default fiduciary duties. In particular, the cost of applying any default fiduciary duty is outweighed by its benefit. First, default fiduciary duties add unnecessary costs to contracting. Second, default fiduciary duties also add unexpected litigation costs. Finally, any benefit to default fiduciary duties is limited because the LLC, by its nature, is designed to be a highly customized vehicle, determined primarily by contract. A critic to my cost-benefit analysis will invariably argue: (1) there is no cost to default fiduciary duties because the LLC statute provides that parties may eliminate any default duties and (2) parties benefit from fiduciary duties because they expect them and need not contract for them. However, I will demonstrate why those criticisms are misplaced.

First, default fiduciary duties add unnecessary contracting costs. The nebulous nature of default fiduciary duties makes it difficult for parties to eliminate some, but not all, potential fiduciary duties. * * * If we assume no default fiduciary duties, the parties need only explicitly provide for a self-dealing proscription. The contract is much easier to draft, and the parties have more confidence that they adequately provided for that ban without also introducing other unwanted fiduciary duties.

A question remains: how often will parties want to remove the default fiduciary duties? If, for the most part, parties simply intend to keep the default fiduciary duties, then it would be less costly for parties to contract. However, if we proceed from the baseline of no default fiduciary duty, adding in a wholesale provision adopting Delaware’s fiduciary duty principles could also be easily achieved — without much cost. As I described in the last paragraph, this will benefit the parties who intend to adopt a discrete number of those duties because it will be less costly to contract for those limited duties. Moreover, by adopting an LLC, the parties have consciously chosen to use a highly customizable vehicle–in so choosing, we naturally infer that the parties intend customization.

Second, default fiduciary duties introduce unexpected litigation expenses. Without default fiduciary duties, the parties’ litigation will focus solely on the agreement between them–and not on fiduciary duty principles outside of the contract. * * *

In light of those potential costs, the courts must also weigh them against any benefits to applying default fiduciary duties. Professor Ribstein explains that “[i]n general, this is a matter of articulating standard form terms to minimize contracting costs. It is difficult and expensive for parties to enter into customized contracts covering all of the details of a long-term agency-type relationship.” However, it is important to remember that in the context of an LLC that the parties have specifically chosen to use an LLC agreement, which provides contractual flexibility, and have bargained for the relevant provisions in this agreement. Thus, it does not necessarily follow that default fiduciary duty principles will more accurately reflect the parties’ intent rather than principles of contract interpretation. Instead, because the parties chose a Delaware LLC and because the Delaware judiciary is skilled in resolving difficult issues of contract interpretation, the opposite conclusion is likely true, that is, parties would prefer Delaware courts to determine their rights and duties in accordance with the terms of the contract and not an unbargained-for default fiduciary principle. Moreover, if the parties intended to apply traditional fiduciary duties to their relationship, they could easily add a provision stating precisely that in the agreement.

The Chief Justice has a point.  I grappled with the problem of contracting around default duties in my Uncorporation and Corporate Indeterminacy (at 165, footnotes omitted):

Vice Chancellor Strine’s admonition to lawyers not to address fiduciary duties “coyly” could require such careful and costly drafting that it makes fiduciary duties in effect mandatory. Even a moderate  insistence on careful drafting could put fiduciary duty waivers out of the reach of smaller firms. In other words, by making very skilled drafting the price of avoiding indeterminacy, Delaware’s uncorporate law may be trading lower litigation costs for higher fees to transactional lawyers. This may reserve the benefits of the uncorporate approach only for the largest and most sophisticated uncorporations.

In other words, the current Delaware approach achieves free contracting at significant cost.  Chief Justice Steele’s approach may be the best way to deal with that problem. 

The important question is whether there will be many parties who (1) fail to contract fully regarding fiduciary duties; and (2) expect a certain level of fiduciary duties to apply.  If both apply, then eliminating default fiduciary duties could defeat expectations and increase litigation by frustrated LLC members. The Chief Justice’s response  is that parties to Delaware LLCs know they’re getting a contractual regime and therefore are getting what they expect.  In other words, the market for LLC law offers a potential opportunity to contract not only out of default duties, but also away from the existence of default rules.

The brief articles in the symposium by Ann Conaway, Bill Callison & Allan Vestal, Carter Bishop, Dan Kleinberger, and Louis Hering take both sides of the issue, but do not, in my opinion, fully grapple with CJ Steele’s (and my) policy arguments.  Unfortunately I didn’t have an opportunity to participate in this symposium (not sure why, since after all the Chief Justice does rely on me!) so I haven’t had a chance to insert a full-fledged version of my thinking into the debate. I plan to write at more length on this, but wanted to take this opportunity to opine on the important issues raised by the Chief Justice while the iron was hot.

The ABA is considering loosening the bar on non-lawyer ownership of law firms (HT Law Blog).  Here’s the discussion paper.

For those who are thinking that this move is meaningful, forget about it.  The ABA proposal (which would still have to be approved by the ABA and then by individual states) would permit non-lawyer ownership only if the firm provides only legal services, the lawyers have control, and the lawyers are responsible for the non-lawyers’ integrity and compliance with ethical rules.   The ABA is not considering publicly traded law firms, passive outside investments, or firms (as under the UK’s new “Tesco” law) that offer both legal and non-legal services.  

The ABA’s continued resistance to non-lawyer ownership of law firms is misguided on policy grounds.  Keep in mind that eliminating the ban would not permit non-lawyers to render legal services.  It would simply change the ownership structure of the firms in which lawyers practice.  The idea behind the rule is that non-lawyer owners would emphasize bottom-line profits over proper concern for the client.  But firms, whether or not they practice law, can’t profit by stomping on their customers and sullying their brands.  And who really believes that law as it’s practiced today, in lawyer-owned firms, isn’t a business?  Or that the law business should be protected from competition by other business models? For more on these issues see my conversation with Mitt Regan and Bruce MacEwen.

More important is what the ABA move would do about the cost of legal services: nothing.  The non-lawyer ownership ban has been enacted and maintained by and for lawyers as a way of banning lower-cost provision of legal advice.  Under current rules, many middle class consumers have no reliable reasonably priced way of getting basic legal advice.  The UK rule permitting law practice by alternative business structures was promoted by consumers.  It lets consumers buy legal services from the same businesses (e.g., Tesco) whose brands they trust for many other products and services.  It is a way of bridging the huge current divide between supply and demand for legal services by ordinary non-corporate consumers.

In any event, as discussed in my Death of Big Law and my and Kobayashi’s Law’s Information Revolution, big changes are coming to legal services as a result of significant technological developments and global competition.  The responsible position by the profession would be to try to manage these developments in ways that protect consumers, as in the UK and Australia.  The ABA’s decision to go no further than reconsidering modest proposals it rejected twenty years ago is basically one to bury its collective head in the sand and let the changes happen without the bar’s involvement.  This is not only unwise but irresponsible.

Katherine Franke argues that lawyers are partly responsible for the financial misdeeds protested by OWS (HT Leiter):

Implicit in the OWS protests is a condemnation of an approach to lawyering that regards all legal rules simply as the price of misconduct discounted by the probability of enforcement* * *

In recent years we have seen the increased blurring of the boundary between law and business, between the lawyer and the businessperson, and between legal and business education. Too often, being a “good lawyer” has meant taking on the role of consiglieri, providing effective legal cover for otherwise borderline, or worse, practices. Effective and ethical representation of business interests does not relieve lawyers of responsibility for the harmful effects on others created by our clients’ actions, taken pursuant to our counsel. * * *

Servicing law school debt after graduation drives many of our students to highly compensated legal work for the financial services industry. * * *

The widely held public outrage at corporate overreaching given voice in the OWS protests reminds us of the degree to which the legal profession has fallen short of its traditional role as “republican” citizen, obliged to act as guardian of public interests even when — indeed especially when — representing private interests.

Without getting deeper into the psyche of the Occupiers, let’s grant that Wall Street’s improvidence was a cause of its Occupation and that lawyers were partly to blame for this improvidence. (I hope Franke will accept the friendly amendment that the lawyers worked for the government as well as the banks.)   What should we do about this? 

For starters, and recognizing that it has become obligatory to drag the high price of legal education into everything, I don’t think the answer to this particular problem is getting lawyers out of “highly compensated legal work” in finance.  (Indeed, not that many of today’s law school grads are even being tempted by such jobs.) Nor does the answer lie in simply hoping that lawyers will feel more obliged to “act as guardian of public interests.”  Indeed, the latter strategy is a prescription for their irrelevance.

Rather, the answer is training lawyers to get more into business and finance, where they can be respected and full-fledged participants in business decisions.  Law schools don’t adequately train lawyers on the complex financial instruments and deals they’re being called to advise on. Although lawyers may come to law school with this knowledge or learn it after they leave, law school generally doesn’t train them to integrate financial expertise with law practice.  For example, they may understand how a deal works, but not necessarily what material facts about the deal need to be disclosed, or when the transaction comes too close to the regulatory line.  And even if they might have such knowledge, they need to be able to speak the client’s language in order to be sure of being listened to.

Integrating lawyers more fully into business should make businesses in and out of finance more rather than less responsive to legal considerations.  In retrospect it’s clear that the lawyers who didn’t fully advise their clients of the legal risks inherent in their complex deals and securities didn’t just let the public down — they didn’t serve their clients’ interests.

Not every deal or new security that eventually blows up should have been squelched by a lawyer.  Risk can be healthy and perfectly legal.  Anyway, clients will tend to ignore legal advisors who just say no rather than try to find ways to get things done.  But the right course of action is often unclear.  Finding it requires matching high-level business expertise with knowledge of black-letter law and underlying policies.

Taking the lawyers out of finance or blunting their authority by turning them into preachers will not get the results Franke hopes for.

The WSJ reports on comments by former FBI official David Cardona’s on why there haven’t been more prosecutions of financial executives as a result of the recent financial crisis:

“There’s been a realization and a more deliberate targeting by the Department of Justice before we launch criminally on some of these cases” * * * The Justice Department has decided it is “better left to regulators” to take civil-enforcement action on those cases, he said. * * *

Many legal experts have said much of the most controversial behavior likely was a product of poor judgment, not criminal wrongdoing. More than 1,000 bankers went to prison in the wake of the savings-and-loan banking crisis of the 1980s and 1990s. After the financial crisis, “there was an immediate reaction that maybe this was another savings-and-loan type crisis, that we could actually establish criminality in many of these cases,” Mr. Cardona said in the interview. Those hopes eventually faded. * * *

“A lot” of the Justice Department’s criminal investigations, Mr. Cardona said, “hinge on disclosure.…What does adequate disclosure mean? And those are really technical arguments that sometimes get lost with a jury.” * * * U.S. officials also are leery of bringing to trial criminal prosecutions where a jury might decide the losses were due to bad judgment or market conditions, not deceit.

I’ve written on the excesses of corporate criminal prosecutions and on the prosecutorial incentives that drive these excesses.  So obviously I find some satisfaction in the recent prosecutorial caution.

Unfortunately, if the reader comments on the WSJ article are any indication, I may not represent popular opinion.  No doubt many of the Occupiers would feel better about their own economic plight if only the criminal justice system could be used as a vehicle for venting public resentment.  Hopefully prosecutors will continue to keep in mind the potential costs to this system of prosecutions based on public anger rather than careful legal judgments.

Let Congress trade!

Larry Ribstein —  2 December 2011

I have previously discussed here and here the policy arguments against a broad ban on Congressional insider trading (this is apart from Steve Bainbridge’s serious problems with the proposed legislation).  

Now Todd Henderson and I have weighed in on Politico with more on why we should let Congress trade (while imposing strong disclosure duties).  It’s obviously not a popular position these OWS and politician-bashing days. But we think it’s a sensible one that deserves serious consideration.

Update:  Bainbridge responds.  He focuses on the perverse incentive problem, which Todd and I acknowledge.  Unfortunately, he ignores our argument for disclosure as a way of dealing with that issue, and the serious problems of having the SEC enforce a Congressional insider trading ban.  Consideration of these issues caused me to change my views on banning Congressional insider trading.  I think it’s inconsistent to focus on enforcement problems in banning private activity (as both Bainbridge and I do) and not do so in banning public conduct, where enforcement is even trickier.