Last Wednesday, the Securities and Exchange Commission released new rules for crowdfunding under the 2012 Jumpstart Our Business Startups (JOBS) Act. Crowdfunding gives startups a way to raise capital through the Internet and thereby reach a large, diverse set of investors.
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Before receiving cease and desist letters in November 2012, companies providing smartphone apps connecting users in need of rides to willing drivers had operated in their own unregulated market. That has changed now that the California Public Utilities Commission (“CPUC”) voted on September 19th to accept a proposal to regulate the nascent industry.The CPUC asserted its jurisdiction over Transportation Network Companies (“TNCs”) as a subset of chartered passenger services already under their regulatory control.
Former EPA Official Pleads Guilty to Defrauding EPA of Almost $900,000, Raises Further Doubt About EPA Transparency
Less than a year after former Environmental Protection Agency (EPA) Administrator Lisa Jackson’s e-mail scandal surfaced, a former EPA official, John Beale, admitted to pay fraud, adding fuel to the fire regarding the EPA’s transparency.
John Beale pleaded guilty in the U.S. District Court for the District of Columbia on September 27, 2013 for knowingly and willfully converting U.S. government money and property for his own use (18 U.S.C. § 641). He wrongfully took nearly $900,000 in salary, benefits and bonuses from the EPA for work that he never did.
As Deputy Assistant Administrator in the EPA’s Office of Air and Radiation, Beale tricked colleagues for thirteen years into thinking his absences from the EPA were spent conducting high-level, confidential work for the CIA. Beale was in fact taking personal trips to Los Angeles and had no connection to the CIA. He also lied about contracting malaria while serving in Vietnam, although he never served there, so he could use the EPA’s handicapped parking. He took about $500,000 in Retention Incentive Bonuses that were based on employment services that he did not provide. His total absences from the EPA for supposed CIA work amounted to about two and a half years.
The Conflict of Interest Inherent in A Corporation Paying for Its Employee’s Counsel: A Better Model for Preventing and Addressing Corporate Crime
[Editor's note: This post is part of our ongoing series from authors in the forthcoming edition of the Berkeley Business Law Journal.]
Although the U.S. Supreme Court as far back as the 1981 case of Wood v. Georgia identified the inherent conflict of interest that exists when an employer controls its employee’s counsel, until now, no uniform solution has existed to protect the employee’s rights in these situations.
Currently, a single attorney, as in Wood, may often represent both the corporation and the corporation’s employees. The employer can control the employee’s defense because agency law recognizes only that the interests of the principal—the employer—are at stake. Under agency law, the employer controls the defense because it may ultimately be liable for payments to a third party on the employee’s behalf.
But a corporation’s control over its employee’s defense creates conflict of interest problems for the attorney representing both entities. Under Rule 1.7 of the ABA’s Model Rules of Professional Conduct, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.”  This Rule, however, is too often and too easily waived with a corporation and its employee in the perceived interest of economies of scale and ease of representation. And, until now, there has been no good test for exactly when the attorney’s conflict of interest between the corporation and the employee comes to a head.
A recent article by Dan Amiram, Andrew M. Bauer, and Mary Margaret Frank examines the issue of corporate tax avoidance as a product of incentives. The authors suggest that “corporate tax avoidance by managers is driven by the alignment of their interest with shareholders.”* The tax role of the manager is made clear by studying the “effects of corporate tax avoidance on shareholders’ after-tax cash flows” in both classical tax systems and imputation tax systems. The authors conclude that there is higher corporate tax avoidance in classical tax systems if managerial and shareholder interests are closely aligned. Read the rest of this entry »
Recently, Robert P. Bartlett’s article Making Banks Transparent, 65 Vand. L. Rev. 293-386 (2012), was included in this year’s list of the Ten Best Corporate and Securities Articles. The article is a self-proclaimed “thought experiment” that uses two case studies to suggest that more specific, limited credit risk models can be used to increase bank transparency. According to Bartlett, increased bank transparency will help financial institutions avoid crises like the subprime mortgage crisis, by allowing market participants to “more effectively monitor and price the risks embedded in particular institutions.”*
A General Counsel (GC) is one of a small group of c-suite executives charged with leading a company. In serving the GC’s primary client, the corporation, the GC works closely with other c-suite executives, including the CEO. The CEO often has substantial say over the GC’s compensation and work. But what happens when the CEO seeks personal advice from the GC?
Kenton King of Skadden Arps, Scott Haber of Latham & Watkins, and Michael Ross, former general counsel of Safeway, spoke to the Berkeley Center for Law, Business and the Economy (“BCLBE”) community about conflicts that can occur when the company’s CEO personally solicits assistance from the GC. Often the prospect of personally advising a CEO creates a catch-22 situation. Though the GC needs to have a professional relationship with the CEO, providing advice may conflict with the GC’s loyalty to the corporation. This is especially true if the corporation and the CEO are on opposite sides of the bargaining table.
Forthcoming in California Law Review: “From Independence to Politics in Financial Regulation” by Stavros Gadinis.
Berkeley Law Professor Stavros Gadinis’s latest article, “From Independence to Politics in Financial Regulation,” is forthcoming in the California Law Review. Professor Gadinis’s work focuses on the intersections between finance and government regulation. This particular paper takes a global look at how governments reformed their “independent” financial regulatory agencies by making them more politically accountable after the 2007-08 financial crisis.
We at the Network found this article particularly interesting because it focuses on the fundamental—and often taken for granted—relationship between administrative law and business law. In the United States, “agency independence has long been the hallmark of financial regulation.” In fact, most governmental financial regulation occurs within the “headless fourth branch,” i.e., independent administrative agencies like the Federal Reserve (“the Fed”), Federal Deposit Insurance Corporation (“FDIC”), and Securities and Exchange Commission (“SEC”).
Historically, these governmental entities, corporations, boards, and commissions often have been insulated from direct democratic forces. The theory is that, free from “generalist” whims and electoral politics, agency independence allows neutral “subject matter experts” to focus their particular skill and knowledge on the specialized problems they were commissioned to solve. Further, independent agencies bring the country long-term stability and uniformity. Whereas elected politicians, so the theory goes, are often biased towards short-term goals to capture votes in the next electoral cycle.
When scholars speak of “independence” from political influence, they largely mean from the President’s removal power. It has long been settled that Congress may “under certain circumstances, create independent agencies run by principal officers appointed by the President, whom the President may not remove at will but only for good cause.” Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. __ (2010) (slip op. at 2).
However, too much independence can become a problem. For example, in Free Enterprise Fund the Supreme Court held that a dual for-cause removal scheme Congress set up in the Sarbanes-Oxley Act was ultra vires of the Constitution’s separation of powers. The Act placed members of the Public Company Accounting Oversight Board (“PCAOB”) under the SEC’s control, removable only for cause. In turn, SEC commissioners were only removable by the President for-cause. This novel structure, Chief Justice Roberts held, prevented the President from discharging his duty to “ensure that the laws are faithfully executed—as well as the public’s ability to pass judgment on his efforts.”
The anxiety that motivated Chief Justice Robert’s opinion in Free Enterprise Fund could partly be described as a fear of Congressional aggrandizement at the expense of the Chief Executive. But it could also be described as a distrust of the growing independence of democratically unaccountable bureaucrats—the same distrust that Professor Gadinis comments on in his most recent article.
Professor Gadinis argues that a coalescence of unique atmospheric factors post the 2007-08 crisis led to a global shift from financial regulatory independence toward greater political accountability. According to Professor Gadinis’s argument, those factors include (1) pervasive failures across multiple agencies charged with financial regulation, (2) failure of the market to self-correct, (3) fear of agency capture, (4) unprecedented voter interest, and (5) welcomed political assistance.
Professor Gadinis’s empirical data supports his premise in the United States, France, Germany, Australia, Belgium, Spain, Denmark, the United Kingdom and Ireland. Only a few countries surveyed did not evince an increase in political accountability, and that was because they either already had a highly politically accountable system or were in the process of working out legislation. In the United States, for example, one way this shift materialized was through the Dodd-Frank Act. Significantly, the move toward political accountability did not take the traditional route, e.g., Appointment and Removal powers. Instead, Congress sought to retain independent subject matter expertise, but at the same time make the Secretary of Treasury—who is directly accountable to the President—the final arbiter of agency decisions, rather than the agency head.
The upshot of all of this is that the administrative financial regulatory system in the United States, and likely worldwide has seen a paradigm shift. While this shift can simply be seen as moving independent agencies back within the traditional executive agency structure, it is important to remain cognizant of the hazards of too much political influence. After all, the benefits of the independence model are also the downsides of the political model. Professor Gadinis discusses how, in the bailout context, considerations of electoral timing, adverse public opinion detached from economic reality, and opportunities for massive political contributions could improperly influence political actors. Only time will tell where the line will be drawn in this canonical administrative law paradox.
Make sure to read the final version of the article in the California Law Review. The abstract is available after the jump. Read the rest of this entry »
The Dodd-Frank Wall Street Reform Act tasked the Commodity Futures Trading Commission and the Securities and Exchange Commission with creating a regulatory structure to better maintain the $600 trillion derivatives market. As part of this effort, on October 17th, the SEC released for comment proposed rules on margin and capital requirements for securities-based swap dealers designed “to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.”
The rule includes minimum capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants. Read the rest of this entry »
Manhattan U.S. Attorney Files Billion Dollar Lawsuit Against Bank of America, Citing “Brazen” Mortgage Fraud
On October 24th, the United States Attorney for the Southern District of New York, Preet Bharara, along with the Inspector General of the Federal Housing Finance Agency and the Special Inspector General for the Troubled Asset Relief Program (TARP), announced a civil mortgage fraud lawsuit against Bank of America Corporation and Countrywide Home Loans, Inc., seeking punitive and treble damages under the False Claims Act, 31 U.S.C. §3729.
The complaint alleges a systematic lack of oversight in the loan origination process, known as the High Speed Swim Lane, which led to defaults and foreclosures resulting in over a billion dollars in losses for the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The High Speed Swim Lane (“the Hustle”) process originated at Countrywide in 2007 in the face of tightening loan purchase requirements by the GSEs, and was continued under Bank of America after its acquisition of Countrywide a year later. Read the rest of this entry »