Professor Bainbridge...on law, politics, religion, culture & food

At the Federalist Society NLC

I am in Washington DC for the Federalist Society National Lawyers Convention. Tomorrow, Saturday, Nov. 22, I’m moderating the Federalist Society Corporations Practice Group Program on the Role of the SEC in the Financial Services Crisis, which will be held from 10:45 AM to 12:15 PM in the State Room at the Mayflower Hotel. Hope to see some of my readers there.

A Split Myers-Briggs Personality? Moi?

Typealyzer is a site that purports to figure out your Myers-Briggs type by analyzing your blog. (HT: Sullivan) As the owner of three blogs, I perhaps present a unique opportunity to test it. Here’s the results:

StephenBainbridge.com (punditry)

ISTJ - The Duty Fulfillers: The responsible and hardworking type. They are especially attuned to the details of life and are careful about getting the facts right. Conservative by nature they are often reluctant to take any risks whatsoever.

The Duty Fulfillers are happy to be let alone and to be able to work in their own pace. They know what they have to do and how to do it.

BusinessAssociationsBlog.com (law and corporate governance)

INTJ - The Scientists: The long-range thinking and individualistic type. They are especially good at looking at almost anything and figuring out a way of improving it - often with a highly creative and imaginative touch. They are intellectually curious and daring, but might be pshysically hesitant to try new things.

The Scientists enjoy theoretical work that allows them to use their strong minds and bold creativity. Since they tend to be so abstract and theoretical in their communication they often have a problem communcating their visions to other people and need to learn patience and use conrete examples. Since they are extremly good at concentrating they often have no trouble working alone.

ProfessorBainbridgeOnWine.com (wine and food)

ESTP - The Doers: The active and playful type. They are especially attuned to people and things around them and often full of energy, talking, joking and engaging in physical out-door activities.

The Doers are happiest with action-filled work which craves their full attention and focus. They might be very impulsive and more keen on starting something new than following it through. They might have a problem with sitting still or remaining inactive for any period of time.

*****

Three blogs. Three different result. But the same author. This suggests three possible hypotheses:

1. I have a split personality, with each blog being written by a different psychic persona.
2. Typealyzer is bogus.
3. The whole Myers-Briggs personality typology is a load of crap.

Personally, I’m voting for # 3. In any case, the Typealyzers have anticipated # 2:

A person can have several blogs - and often have different roles for the various blogs - perhaps as a way to live out more sides of themselves. ... Most people are, and therefore the majority of blogs are affected by how we are feeling at the moment in which period we are in. This text analysis gives a snapshot by looking at the communication style of the text.

FWIW, when I’ve taken real Myers-Briggs tests, I almost always come out as INTJ.

Mark Cuban’s Defense

In my blog post analyzing the insider trading charges against Mark Cuban, I noted that a key issue will be whether Cuban agreed, as the complaint alleged, to keep the information about Mamma.com’s forthcoming PIPE transaction confidential. On his blog, Cuban today quotes a press release from his legal counsel claiming there was no such agreement:

The SEC knows their case centers on one telephone conversation between two individuals- 4 years ago. The SEC claims there was an agreement between these parties to the conversation to keep certain information confidential. We interviewed Guy Faure, the former CEO of Mamma.com Inc., with whom the SEC claims Mr. Cuban made an agreement. We had a court reporter transcribe the interview. There was no agreement to keep information confidential.

Cuban’s blog post then goes on to quote from the transcript of the interview.

If there was no confidentiality agreement, Cuban ought to prevail. As I explained in my book on insider trading:

Although [the leading Supreme Court precedent in Dirks v. SEC] clearly requires that the recipient of the information in some way agree to keep it confidential, courts have sometimes overlooked that requirement. In SEC v. Lund, for example, Lund and another businessman discussed a proposed joint venture between their respective companies. In those discussions, Lund received confidential information about the other’s firm. Lund thereafter bought stock in the other’s company. The court determined that by virtue of their close personal and professional relationship, and because of the business context of the discussion, Lund was a constructive insider of the issuer. In doing so, however, the court focused almost solely on the issuer’s expectation of confidentiality. It failed to inquire into whether Lund had agreed to keep the information confidential.

Lund is usefully contrasted with Walton v. Morgan Stanley & Co.  Morgan Stanley represented a company considering acquiring Olinkraft Corporation in a friendly merger. During exploratory negotiations Olinkraft gave Morgan confidential information. Morgan’s client ultimately decided not to pursue the merger, but Morgan allegedly later passed the acquired information to another client planning a tender offer for Olinkraft. In addition, Morgan’s arbitrage department made purchases of Olinkraft stock for its own account. The Second Circuit held that Morgan was not a fiduciary of Olinkraft: “Put bluntly, although, according to the complaint, Olinkraft’s management placed its confidence in Morgan Stanley not to disclose the information, Morgan owed no duty to observe that confidence.” Although Walton was decided under state law, it has been cited approvingly in a number of federal insider trading opinions and is generally regarded as a more accurate statement of the law than Lund.  Indeed, a subsequent case from the same district court as Lund essentially acknowledged that it had been wrongly decided:

What the Court seems to be saying in Lund is that anytime a person is given information by an issuer with an expectation of confidentiality or limited use, he becomes an insider of the issuer. But under Dirks, that is not enough; the individual must have expressly or impliedly entered into a fiduciary relationship with the issuer.

Even this statement does not go far enough, however, because it does not acknowledge the additional requirement of an affirmative assumption of the duty of confidentiality.

So if Cuban’s right on the facts, there should be no liability.

But that raises another question: Should Cuban be conducting his defense in public on his blog?

The SEC told the WSJ that:

Scott Friestad, deputy director of the SEC’s enforcement division, said: “We’re not going to comment on anything Mr. Cuban or his lawyers have to say on Mr. Cuban’s blog and we look forward to presenting our case in court.”

Any defense lawyers out there with thoughts on whether Cuban should be conducting a public defense via his blog?

The solution for the auto industry is an orderly bankruptcy

Long time readers know I’m no Mitt Romney fan, but he nailed the auto bailout in his NYT op-ed:

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

His prescription is spot on and largely consistent with what I’ve been saying for days now:

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations. ...

A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

Along the same lines, Andrew Sorkin argues that:

G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized.

But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense.

Here’s how it could work:

First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger.

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships. ...

The automobile industry has argued that bankruptcy will be a disaster for the industry; that people won’t buy vehicles while they’re in bankruptcy for fear that the warranty won’t mean anything. There’s a fix for that too. The government should establish a warranty insurance fund that would insure the warranties of all G.M. and Chrysler vehicles bought while the combined company is still operating under bankruptcy protection. The cost to taxpayers should be next to nothing, assuming the company survives and can takeover the warranty obligations.

The government also should consider using some of the money for the financial industry rescue not to save the companies, but to retrain employees in the Detroit area and help promote development of new industry. A lot of people complain about the role of government in business and free markets. But it is hard to complain about efforts to make the nation’s workforce more employable.

We know how to do this. The airline bankruptcies are not a perfect model, but they do illustrate that very large, economically critical industries can be reorganized (more or less) successfully through an orderly Chapter 11 process.

Update: Go read Peter Morici’s Congressional testimony in full. He spoke truth to power, especially in the line where he noted that “we have created in America what my profession calls moral hazard. Now that AIG has been able to put a pistol to the head of the country and say, “If you don’t bail us out, the credit markets will collapse,” we face the same kind of issue with the Detroit Three.”

Holder off to good start

Prospective Obama Attorney General nominee Eric Holder told the American Constitutional Society (as feckless an organization as there is, btw):

… that the United States must reverse “the disastrous course” set by the Bush administration in the struggle against terrorism by closing the detention center at Guantanamo Bay, declaring without qualification that the U.S. does not torture people, ending the practice of transferring individuals involuntarily to countries that engage in torture and ceasing warrantless domestic surveillance.

“Our needlessly abusive and unlawful practices in the ‘War on Terror’ have diminished our standing in the world community and made us less, rather than more, safe,” Holder told a packed room at the ACS 2008 Convention on Friday evening. “For the sake of our safety and security, and because it is the right thing to do, the next president must move immediately to reclaim America’s standing in the world as a nation that cherishes and protects individual freedom and basic human rights.”

Good. The concept of ordered liberty is at the core of conservative principles. There must be a trade off between liberty and security. After all, the Constitution is not a suicide pact. The Bush administration, however, consistently erred on the society of security. Torture, renditions, and the Guantanamo gulag were inconsistent with the American tradition. One of the good things about the last election was that we could be confident either major party candidate would begin unwinding the Bush errors. So I’m glad to see Holder getting off on the right foot, at least rhetorically.

The NYT’s Floyd Norris Flubs Cuban Story

You’d think that Floyd Norris would know something about securities regulation, since he is the chief financial correspondent for the NY Times and the International Herald Tribune. If his story/blog port today on the Mark Cuban SEC case is anything to go by, however, the guy’s a typical MSM idiot. Let’s take a look:

Did Mark Cuban, the Internet entrepreneur turned owner of the Dallas Mavericks basketball team, and would-be buyer of the Chicago Cubs, violate insider trading laws in a particularly egregious fashion?

Or is he the victim of a political hit job because he helped finance a movie that was scathingly critical of President Bush?

If Norris knew anything about the SEC, he’d know that the agency has a very clean reputation when it comes to politics. Indeed, the only government agency or official the SEC would be likely to use enforcement activities to benefit is the SEC itself. Back when John Shad was SEC chairman under President Reagan, he adopted a so-called big bang theory of insider trading enforcement. Shad was busy deregulating the securities industry and he wanted to distract Congress. So he launched a series of high profile insider trading cases that made Congress happy to give the SEC bigger budgets and leave Shad to his deregulatory devices. If you want a conspiracy theory, try assuming that the SEC went after Cuban to distract attention from the SEC’s misadventures in connection with the financial crisis.

Personally, I don’t buy that theory either, but then I’m not a conspiracy theory nut.

Back to Norris:

A person close to Mr. Cuban provided me with a copy of an e-mail message said to have been sent by Jeffrey Norris, an S.E.C. lawyer in the Fort Worth regional office (and no known relation to me.) This e-mail message seems to have been sent after an exchange in which Mr. Norris complained that Mr. Cuban had financed a movie called “Loose Change” that discusses the president’s actions relating to Sept. 11.

Even if some nut job in the SEC Fort Worth office sent such an email, this sort of enforcement proceeding would have been handled out of the DC office. So it’s a red herring. But Norris is happy to pass it along at the behest of a person “close” to Cuban.

Mr. Cuban made a substantial profit from a quick trade in an Internet company that, oh-so-briefly, was a hot stock in 2004. It is not clear from public records just how much money he made, but even if the S.E.C. succeeds in its efforts to take about $750,000 in profits from him, he will still be one of the few public shareholders to rank as having made a lot of money from the company.

Did Norris even read the complaint? The complaint does not allege that Cuban made a profit, it alleges that he avoided a loss. The whole point is that Cuban was “one of the few public shareholders” who avoided a loss and he did so only because he had access to inside information.

As it is, there appears to be no question about when Mr. Cuban sold the stock. The S.E.C. cites phone company records and company memos about the timing and content of the call. If those memos were accurate, it appears that Mr. Cuban knew he had a duty not to sell until the information about the offering was made public.

But even if all that is true, the Norris e-mail, sent from an S.E.C. e-mail address, indicates the commission has a lawyer with, at best, very poor judgment.

An incompetent government employee. There’s a shocker. Real news story. And, however bad SEC lawyer Norris’ judgment may have been, Cuban’s was worse. According to the complaint, he knew he couldn’t sell--indeed, he said as much to mamma.com’s CEO--and still sold because he had a non atypical temper tantrum.

There’s been a lot of stupidity on all sides in this case. Sad to see reporter Norris contributing to it.

Joe Lieberman: If I were a Dem

AP reports:

Sen. Joe Lieberman appears increasingly likely to hold onto his prized chairmanship of the Senate Homeland Security Committee as he meets Tuesday with Democratic colleagues unhappy over his vocal support for GOP nominee John McCain during this year’s presidential campaign.

Not long ago, Lieberman’s hold on his chairmanship seemed to be slipping as Democrats sought to punish him for boosting McCain and criticizing President-elect Barack Obama during the long campaign.

Now, according to several Democratic aides who demanded anonymity because of the sensitivity of the matter, it appears that Lieberman will receive a lesser sanction, such as losing a subcommittee chairmanship on the Environment and Public Works Committee.

It’s interesting. The Democrats are shaing up to be more forgiving than I would be in their shoes. I’d be guided by two principles:

• Treason never prospers, for if treason propers, none dare call it treason
• If you strike at the king, you must kill him

Lieberman turned his coat. Worse yet, he did so unsuccessfully. According to my poltical manual, when a would be kingmaker’s revolution fails, the fate of Warwick the Kingmaker awaits him. This is business not personal.

But then I’m old school.

Mark Cuban: Inside Trader?

The SEC today announced that:

The Securities and Exchange Commission today charged Dallas entrepreneur Mark Cuban with insider trading for selling 600,000 shares of the stock of an Internet search engine company on the basis of material, non-public information concerning an impending stock offering.

The Commission’s complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that in June 2004, Mamma.com Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.

Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company. When the offering was publicly announced, Mamma.com’s stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day’s closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

My review of the complaint suggests that the SEC has a pretty good case, assuming they can prove out the facts alleged, and they get a court willing to give the rules a liberal construction on one key point. For more details, head over to my law blog.