STACKING THE DECK: THE SECURITIES LITIGATION UNIFORM STANDARDS ACT OF 1998 AND FEDERAL PREEMPTION OF STATE LAW CLAIMS AGAINST CORPORATE DIRECTORS
Sara Wolf Reust
In an effort to regulate the large volume of securities bought and sold daily in the United States, a wide body of legislation has arisen to protect all parties to these transactions. This opens the door for plaintiffs to bring suit when they feel that they have been wronged. After being charged a fee that was not listed in her contract, one plaintiff launched a class action under state law for breach of contract and breach of fiduciary duty. In a separate class action suit, another plaintiff felt that she had received financial advice that was negatively influenced by undisclosed 2 incentives. In pursuit of a forum to hear their grievances, both classes of plaintiffs became yet another chapter in an ongoing circuit split on the proper handling of these types of claims.
Propelled by a high volume of meritless class action securities lawsuits, Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”). This act established higher federal pleading standards for class action lawsuits alleging securities fraud as a way to stem the 3 tide of baseless claims. However, in many cases plaintiffs responded by simply moving their 4 claims into state court to avoid these higher standards. Congress responded by enacting the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). SLUSA closed the state court loophole by barring claims alleging a “misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” from being brought in a state court.
Although SLUSA was meant to be “targeted and narrow,” it arguably has been applied far more broadly than originally intended. It now threatens to preempt not only securities fraud lawsuits brought under federal law in state courts, but also claims arising under state law causes of action. ThisexpansionofcoverageisillustratedbytheUnitedStatesCourtofAppealsforthe Seventh Circuit’s broad interpretation of SLUSA in two opinions released simultaneously; Goldberg v. Bank of America, N.A. and Holtz v. JPMorgan Chase Bank. These decisions runt the risk of eliminating legitimate state law claims based on breach of contract and fiduciary duty. Eliminating these legitimate causes of action intrudes into the realm of state law and may leave plaintiffs with meritorious claims with no recourse. The Seventh Circuit found that SLUSA precludes any class action based on a claim arising under state law if the plaintiff could have asserted a federal securities law claim on the same facts, even if the state law claim does not require the assertion of an omission or misrepresentation of a material fact. This wide preemption of state law claims goes beyond congressional intent. Congress clearly stated its intent to preserve “the appropriate enforcement powers” of the state when it enacted SLUSA.
WHAT MAKES A MARKET PLACE TRUSTWORTHY?
Catherine M.A. Mc Cauliff
What is a market other than a forum, or platform, for exchange? Two major characteristics keep the platform honest. First, the most central requirement is disclosure of all relevant information so that all participants enter the market on the same terms. This proposition has been dicey even in the early days of this republic since John Marshall (1755-1835), Chief Justice of the United States, writing unanimously for the Court, did not protect the integrity of markets, a characteristic fraught with difficulty over the ages, with a duty to disclose material information within the possession of one trading party. Leaving one contracting party at the mercy of the other in the absence of a duty to disclose does not encourage those who know that in contracts, “every man [acts] for himself and let the devil take the hindmost” or “I am not my brother’s keeper,” to engage enthusiastically in contracting.
Disclosure of relevant, material information, along with equal treatment in access to markets free from the imposition of secret terms and conditions, is crucial in establishing the public’s trust in any market. Disclosure and equal access are the twin pillars of a good, trustworthy market. The particular facts in each type of market transaction differ from market to market.
The three markets covered in this article concern first-time home buyers, entry-level jobs and public-school teachers’ basic pay. Examples of non-disclosure include:
- The mortgage market’s widespread deception during the Great Recession of deliberately stating a temporary low mortgage rate, as though the rate persisted throughout the length of the mortgage;
- A depressed minimum wage per hour in the fast food and large chain and franchisee labor markets, without disclosing lack of over-time pay for additional hours; and
- Often in the elementary and high school public education markets of many states, a starting teacher’s salary is so low that student teachers and masters students apply, while older, more experienced teachers are already working part-time after school in a variety of jobs, from grocery store cashier to security guard or fast-food worker.
These monopoly markets—markets with no real bargaining power—indicate the extraordinary variety of lack of trust on the part of the general public and the workers and lack of disclosure in the markets, extending far beyond the familiar and notorious suits alleging non-disclosure in the sale of corporate securities.
CORPORATE LAW ISSUE, CIVIL LAW SOLUTIONS: RESOLVING DISPUTES ARISING FROM UNAUTHORIZED CORPORATE SECURITY CONTRACTS IN PEOPLE’S REPUBLIC OF CHINA HIGH COURTS
Charles Zhen Qu
A case is a ‘hard case’ ‘when no settled rule dictates a decision either way.’ An example is one where the dispute is caused by a third party’s fault and there is no point in suing that third party. A difficulty besetting the Chinese courts in the recent decade is how to resolve disputes over a company’s liability under an unauthorized contract that gives a security.
The number of this category of disputes has increased significantly after the enactment of Article 16 of the Company Law of the People’s Republic of China (‘PRC Company Law’) in 2005, which, for the first time, confirms that the company has the capacity to act as surety. Under the predecessor provision, Article 60, directors and managers were prohibited from providing security for shareholders or other individuals with the company’s assets. Article 16 confirms the company’s capacity to act as surety by stipulating, inter alia, that the company may make a contract giving security through one of its power organs.
A difficulty in resolving Article 16 disputes is the lack, or the disorganized form, of the requisite legal infrastructure. The representative power of a company, under the PRC legal system, is formally vested in the company’s Legal Representative (LR) , although the company can also be represented by an agent. The rights of the person seeking to deal with the company should accordingly be determined by rules on the effect of the unauthorized acts of the LR or a purporting agent.
INDEX-MAKER ACTIVISM AND PRIVATE RULEMAKERS
In 2017, three major index-makers took swift action to impose rules excluding companies with dual class share structures from some of their largest indices, including the S&P 500. The decisions came following the Snap, Inc. initial public offering, which provided no voting rights to common stockholders. In general, norms of “one share, one vote” have eroded as companies increasingly go public with dual class structures. After months of consultation, the index-makers imposed a private rule that the Securities and Exchange Commission (“SEC”) had tried and failed to implement as a public rule. In this paper, we will question whether index-makers are a desirable source of corporate governance regulation.
In Robert Jackson’s first speech as a newly minted Commissioner of the SEC, he lamented the rise of dual class companies, asking whether it was wise to “place eternal trust in corporate insiders” and “grant corporate executives control of our public companies literally forever.” Rather than turning to the index-makers, however, Commissioner Jackson expressed “hope that our national securities exchanges will soon consider proposed listing standards addressing the use of perpetual dual-class stock.” Similarly, both BlackRock and T. Rowe Price endorsed a recent petition by the Council of Institutional Investors (“CII”) asking the exchanges, not index-makers, to require sunset provisions for listed firms. Vanguard questioned “whether index construction is the right place to the solve the problem” of dual class shares. In calling upon the quasi-public national securities exchanges and challenging regulation by index-makers, Commissioner Jackson and large institutional investors are expressing a preference for a particular private rulemaker to take action.
This paper will utilize the dual-class share exclusions to illuminate the tensions between private and public rulemaking in corporate law. Government can opt for various levels of involvement when responding to policy challenges. This “broad spectrum” of public rulemaking ranges from deferring entirely to private parties, to establishing agencies which create and enforce extensive mandatory laws. This spectrum has various distinctive nodes, each with numerous benefits and drawbacks. The government may, for example, explicitly delegate rulemaking authority to private actors. Some states do this by automatically adopting the professional responsibility rules of the American Bar Association. Alternatively, the government may choose to adopt wholesale the published recommendations of a “private legislature” like the American Law Institute.
JUDICIAL PHILOSOPHY FOR THOUGHTFUL POLITICIANS AND BUSINESS LEADERS
Winston P. Nagan & Samantha Manausa
One of the most important connections between legal theory and economic theory is owed to the foundations of modern American jurisprudence. Today, the dominant economic theory is called economic neoliberalism, which is grounded in the principle of the pursuit of economic self-interest. In the late nineteenth century, Supreme Court Justice Oliver Wendell Holmes examined the question of what law really “is.” His answer was that the best way to look at the issue is from the point of view of “bad man.” The bad man is partly a consumer of the law and he wants to know whether his lawyer will represent his self-interest. It was a short step for economists to use the bad man’s self-interest as the cornerstone of an economic theory based on self-interest. In this sense, the economic man has only his own interest in mind as a consumer. Behind this insight was Holmes’ idea of separating law from morality and values. The only real value of concern to the bad man was his economic self-interest. Thus, modern political economy finds its roots in the jurisprudential idea of the role of the bad man in the definition of law.
SECURITISATION: THE IRISH INSOLVENCY FRAMEWORK
Securitisation in its classic form enables the undertaking (Originator) that wishes to divest its interests in a pool of assets, to transfer such assets to a conduit especially created for raising funds to purchase such assets. The income generated by the assets is then used by the conduit (SPV) to service its obligations to the holders of the securities. In Ireland, the SPV is the ‘orphan’ entity, which, once it has been specifically constituted by the Originator in compliance with the relevant insolvency, tax, accounting and legal requirements, will receive the asset, the pool of assets or exposure to risk. Thus, a securitisation typically entails the establishment and management of a stand-alone “bankruptcy remote” special purpose company whose share capital is typically held on charitable trust. This vehicle is established specifically for the transaction by or for a “structuring principal,” usually a financial institution arranging the transaction. The SPV is used as a mechanism for gathering of a pool of receivables; it either buys the assets, acquires a financial interest in them through the use of derivatives or enters into a loan with the Originator secured on the assets. The oldest and most common types of assets to be securitised are residential mortgages; however, as a result of more efficient financial analysis, “one can expect virtually anything that has cash flow to be a candidate for securitisation.” The SPV will only be able to acquire the receivables once it has secured the necessary financing. It will do so by offering securities (Notes) to Noteholders, mostly in the U.S. or European capital markets.
Despite its importance to the economy, the considerable market share that Ireland has achieved in the European market, scarce attention has been paid to the microstructure of the securitisation market. In particular, there seems to be limited academic analysis in respect of the key risk to a securitisation structure: insolvency.
The Irish securitisation model revolves around one key assumption: the SPV holding a bankruptcy remote status. The aim of bankruptcy remoteness “is to prevent the issuer from being susceptible to insolvent winding up proceedings by ensuring so far as possible that, if its assets prove to be insufficient to meet its liabilities, a director of the issuer will not instigate bankruptcy proceedings in respect of it. Bankruptcy remoteness is one of the criteria used by the rating agencies which issuers of notes seek to satisfy so that their instruments will achieve the highest possible credit rating. That criterion is satisfied in other jurisdictions by provisions which limit the rights of noteholders against the issuer to the value of the issuer’s assets.”
The remit of this article is limited to a number of issues which will be relevant to a securitisation transaction. It will focus on the aspects of insolvency law, which are the most significant or problematic in the context of a securitisation transaction, while it considers only incidentally the position of other parties involved in a securitisation transaction. Therefore, while the relationship between security and insolvency will be addressed, this article does not contain an analysis on the relationship between corporate governance and insolvency nor on the debate on conflict of law issues in insolvency.
TOWARDS LEGALLY REVIEWABLE DAMAGE AWARDS
Frank S. Giaoui
From the perspective of both plaintiffs and defendants, the measurement of damages quantum is obviously of the utmost importance. Therefore, it is surprising to see this process left entirely to the court’s discretion—especially since the quantum is traditionally considered a factual question. The result is that each litigation becomes a unique case calling for a sui generis outcome.
This article shows the limits of that approach. It leads to a structural uncertainty that is detrimental to the legitimate expectations of both parties. In practice, it deeply corrupts the fundamental principle of full recovery. I would argue there exist ways to move towards a model in which the valuation of damages will be a question of law that follows rules and methods whose application will be reviewable. In this article, I begin to explore some of these ways, specifically with respect to damages for breach of contract, using two simultaneous methodologies. The first is a comparison between French civil law, American common law and international commercial law, and the second is an empirical study involving both qualitative interviews with practitioners and the quantitative analysis of a proprietary sample of cases in which damages are difficult to measure. The article concludes with recommendations for judicial practices and a discussion of the possibility of predictive justice through shared compensatory damages schedules, which could eventually lead to artificial intelligence models.
BIFURCATING CHAPTER 7 SERVICE & FEE AGREEMENTS IN ARIZONA: A LEGAL AND ETHICAL QUANDARY OR A VIABLE PRACTICE?
Amanda M. Manke
This Comment addresses the topic of bifurcated service and fee agreements in Arizona between Chapter 7 debtors and their attorneys. Although scholarly works considering this issue conflate service and fee bifurcation, the two forms of bifurcation pose distinct concerns. Services and fees cannot be completely divorced, but this Comment uses a disjunctive approach and separately analyzes bifurcated services and fees within attorney’s agreements for clarity. This Comment considers the Bankruptcy Code, ethical rules, and relevant case law throughout the analysis of the issues to create a comprehensive and needed understanding for Arizona practitioners.
Bifurcation of services (i.e. unbundling) is a widely recognized practice in most areas of law. But, Arizona bankruptcy attorneys face uncertainty with the issue. Responding to bifurcated services, some bankruptcy courts have stated a preference that attorneys represent debtors throughout all aspects of a Chapter 7 bankruptcy case while others have suggested that bifurcated service agreements can be properly executed and have a legitimate place in the complex bankruptcy system. Bifurcated fee agreements also have the nod of approval by only some courts. The concern over how both bifurcated service and fee agreements fare against the ethical rules and Code remains at issue for many.
Part II of this Comment provides relevant background about Chapter 7 bankruptcy, standard attorney service and fee agreements, as well as a summary of the ethical rules that bifurcation implicates. Part III more fully explains bifurcated service and fee agreements and the response to those agreements from bankruptcy courts across various circuits. Finally, Part IV provides guidance to Arizona practitioners and includes a proposal for the Arizona Bankruptcy Courts’ consideration. If the Court adopts the proposed order, this Comment concludes that Arizona bankruptcy attorneys could more easily bifurcate service and fee agreements when representing a Chapter 7 debtor by accounting for specified legal and ethical concerns. Regardless of the Court’s decision, the principles set forth in the proposed order may guide practitioners seeking to bifurcate services and fees.