On April 4, 2013, the Government Accountability Office (“GAO”) released its anticipated report on the political intelligence industry, an emerging field where operatives research, analyze, and sell market sensitive political information.[1]  Required under the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”), the GAO’s report discusses: 1) the extent that investors rely on nonpublic information obtained from government branches; 2) whether the practice implicates established securities laws against insider trading; and 3) the costs/benefits of requiring disclosure of political intelligence activity.[2]   Ultimately, the GAO was reluctant to offer policy recommendations on how to regulate political intelligence activity considering the lack of consensus on exactly what the practice entails.

After interviewing a number of political intelligence operatives, including lawyers, lobbyists, and trade association representatives, the GAO concluded that investors do use political intelligence information to “gain advantage in the financial markets.”[3]  Nevertheless, the GAO report notes the difficulty of pinpointing the extent to which investors rely solely on such information since investors may jointly consider a myriad of information prior to investing.[4]  The GAO further explores other issues that make it difficult to determine the prevalence of political intelligence within the financial markets, including the practice of advertising political intelligence services as policy analysis, market research, or information gathering for lobbying purposes.

Regarding the legal implications of political intelligence activity, the GAO reaffirms that political intelligence operatives are already susceptible to insider trading liability when selling confidential information obtained from government sources.  Officials interviewed from the Securities and Exchange Commission (“SEC”) mentioned that political intelligence professionals “may defend against a claim of insider trading by arguing that the information lacked materiality, the information was public, there was no breach of duty, or there was no act of bad faith.”[5]  An issue left unresolved, however, is how to determine exactly when political information should be considered nonpublic or material for insider trading purposes.[6]  Nonetheless, the GAO notes that the SEC enjoys broad enforcement powers including countering government employees who improperly use work-related material nonpublic information when trading securities. The SEC has exercised this authority at least once when a chemist at the Food and Drug Administration traded on nonpublic information prior to a drug approval announcement.[7]

Instead of providing policy recommendations on how Congress should regulate the political intelligence industry, the GAO report suggests that policymakers balance the benefits of a disclosure laws against its potential costs.    Likely pitfalls of a political intelligence regulatory scheme include foreseeable legal challenges based on the First Amendment, attorney-client privilege, and duty of confidentiality claims.  Ultimately, the GAO encourages Congress to carefully consider a number of likely issues before taking legislative action, if such action is indeed necessary.

For more information on the report “Political Intelligence:  Financial Market Value of Government Information Hinges on Materiality and Timing,” view it on the GAO’s official website here.  Additionally, American University’s Business Law Review will highlight the STOCK Act and its potential purview over the political intelligence industry in its forthcoming issue (Vol. 2.2).

On January 25, 2013, the United States Court of Appeals for the District of Columbia (“D.C. Circuit”) ruled that President Obama’s three January 2012 appointments to the National Labor Relations Board (“NLRB”) were unconstitutional.[1] In Noel Canning v. N.L.R.B.,[2] the D.C. Circuit held that an action by the NLRB against Noel Canning was invalid because three of the five members of the board had been appointed by President Obama during a “pro-forma” session, in which the U.S. Senate is formally in session, often with one senator present, but is practically in recess.[3]  The D.C. Circuit premised its decision on two constitutional bases: (1) in the Recess Appointments Clause (“RAC”) of the U.S. Constitution, “the Recess” refers to the “intersession recess” period in between the two or three sessions the U.S. Senate has per Congress, not the “pro-forma” sessions;[4] and (2) the word “happen” in the RAC connotes an event occurring rather than existing, meaning that the vacancy must arise during the periods in between when the U.S. Senate is in session.[5]  In the process, the D.C. Circuit differed from other Federal courts of appeals that had found “the Recess” allowed for intra-session recess appointments where the U.S. Senate may have officially been in session, but was not conducting business.[6] The other circuits had also found “happen” to simply mean “exist” during a recess.[7] Thus, the D.C. Circuit held that any filling of a vacancy under the RAC “must be done during the same recess in which the vacancy arose.”[8]

For the NLRB, the D.C. Circuit holding meant that the three board members who were intra-session recess appointments of President Obama on January 4, 2012 were unconstitutional and thus board actions, such as the Noel Canning decision, were invalid for lack of quorum.[9]  However, the ramifications of the Noel Canning decision could reach far beyond the NRLB, and could directly affect the financial lending industry. President Obama also appointed the current director of the U.S. Consumer Financial Protection Bureau (“CFPB”), Richard Cordray, on January 4, 2012 through an intra-session RAC appointment.[10]  While the Noel Canning decision itself only directly affects the NLRB, the D.C. Circuit set the stage for litigation against Director Cordray to potentially wipe out any or all of his prior actions under the same constitutional bases as in Noel Canning.[11]

The jurisdiction and power of the CFPB over the consumer financial lending industry is broad.  The CFPB has the authority to implement and enforce Federal consumer financial protection laws by monitoring, supervising, and taking enforcement action against qualifying lenders.[12]  Qualifying lenders that fall within the CFPB’s jurisdiction include nondepository lenders, insured deposit institutions or insured thrifts with assets over $10 billion, and even some banks, thrifts and credit unions with assets less than $10 billion.[13]  The director of the CFPB is responsible for authorizing enforcement actions and organizing the structure of the CFPB.[14]  In the wake of Noel Canning, CFPB actions against lending institutions since the beginning of 2012 could potentially be overturned if challenged.  In addition, it might cripple the CFPB’s future ability to regulate the country’s consumer financial product markets because only the CFPB director can exercise most of the agency’s regulatory powers.[15]  Thus, the CFPB would not be able to fully operate until it gets a validly appointed director, which might not occur in the near future.[16]

However, under the D.C. Circuit’s rule for recess appointments in Noel Canning, the recess appointment of CFPB Director Cordray potentially has an additional dimension that could factor into a challenge to his appointment.  Because Director Cordray is the first director of the CFPB, his vacancy “happened” upon the creation of the CFPB and not from a former Director leaving.[17]  A court may view the circumstances of Director Cordray filling an original opening of a new agency differently under the meaning of “happen.”  However, until such court ruling or even perhaps beyond it, the Noel Canning decision has thrown the CFPB and the regulation of consumer financial product markets into a state of uncertainty.

Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals.

Read the full article

In Greek myth, Procrustes, a bandit son of Poseidon, had a one-size-fits-all iron bed on which he invited passers-by to spend the night. Once his guests were asleep, he used his ironsmith’s hammer to stretch them to fit the bed. If a guest proved too tall, Procrustes would use shears to amputate the excess in order that the body would fit the bed. Ultimately, Theseus, who killed the Minotaur and escaped the Maze using Ariadne’s thread, killed Procrustes by compelling him to fit his own body to his bed.

Read the full article

Whether Justice Scalia chopped down the “judicial oak which ha[d] grown from little more than a legislative acorn” or cleared an entire forest of “botanically distinct tree[s]” when he created the transactional test in Morrison v. National Australia Bank, Ltd., he undoubtedly changed the legal landscape for both international and antifraud securities laws. The transactional test—which the Supreme Court designed to act as a bright-line rule to supplant the older “conduct” and “effects” tests developed by the Second Circuit—gauges whether a U.S. court can hear an antifraud securities case containing extraterritorial elements.

Read the full article

In the wake of the most recent financial crisis, interest in social enterprise has increased exponentially. Disillusioned with the perceived shareholder wealth focus of corporate law, entrepreneurs, investors, customers, and governments have become more receptive to new paradigms. In the past four years, nineteen states have passed at least one of five different types of social enterprise statutes and many additional states are considering similar legislation. Focusing primarily on the benefit corporation form, this Article examines three main issues: (1) whether social enterprise statutes are potentially useful; (2) how social enterprise law can be improved; and (3) whether the social enterprise movement will be sustainable.

Read the full article

In SEC v. Citigroup Global Markets, Inc., Judge Rakoff rejected a $285 million settlement between the Securities and Exchange Commission (“SEC” or “Commission”) and Citigroup. The complaint alleged that Citigroup failed to disclose its role in the selection of assets for a billion dollar collaterized debt obligation. Judge Rakoff rejected the consent judgment, concluding it was neither fair, nor reasonable, nor adequate, nor in the public’s interest. The critical issue in Judge Rakoff’s decision was the validity of the SEC’s “no admit/deny” policy, which is a policy that has long been accepted by courts. He objected to this policy because it required the court to employ its power without the parties providing him a factual basis, which constrained his ability to exercise his independent judgment. This decision has great implications for the SEC’s enforcement program. The SEC relied on courts’ longtime acceptance of a standard that produced an efficient and effective process with regards to consent judgments.

Read the full article

Nuclear regulation has faced a variety of challenges since the Atomic Energy Commission first introduced the procedure of two-step licensing, in which construction and operational licenses are issued separately to nuclear reactor developers. Since 1974, and the establishment of the Nuclear Regulatory Commission, the process for licensing a nuclear power plant has changed dramatically. In addition to the two-step licensing process of old, developers now have the option of choosing a one-step combined license, which offers more flexibility in terms of developing technical specifications. The two-step and combined license options are codified under 10 C.F.R. §§ 50 and 52, respectively. Although intended to streamline the process and avoid expensive licensing periods that plagued plant development under the old regime, the newer combined license method is not being executed as planned and runs the risk of confronting developers with the same economic hurdles. This Note examines both licensing options and posits that a new strategy must be developed to efficiently license the next generation of nuclear power plants.

Read the full article

In In re Dewey & LeBoeuf LLP[1], the U.S. Bankruptcy Court for the Sothern District of New York approved a settlement plan as part of Dewey & LeBoeuf’s Chapter 11 proceedings, under which former partners will pay approximately $71 million in settlement payments. The Court also rejected a motion from an ad hoc committee of retired partners that the Court appoint an examiner to review the settlement agreement. The settlement marks the bankruptcy as the first in which a major law firm avoids the historical need for years of litigation and exorbitant administrative expenses.

While Dewey & LeBoeuf engaged in the “winding down” mode of Chapter 11 bankruptcy proceedings,[2] several officers devised Partnership Contribution Plans (“PCPs”) to return value to the bankruptcy estate while limiting future litigation costs. Under the PCPs, participating partners would contribute an amount proportionate to their liability of exposure to loss in exchange for release from claims brought by the estate.[3] However, the PCPs do not protect participating partners from third parties or non-participating partners.[4] Three senior partners were excluded from participation in the PCP because the estate alleges that they played a more integral role in the downfall of the firm and plans to pursue claims against the three individuals.[5]

Under Bankruptcy Rule 9019(a), the court may approve a settlement agreement.[6] While the court must determine whether the settlement is fair, equitable, and in the best interests of the estate,[7] settlements are generally favored because they “limit costly litigation and expedite the administration of the bankruptcy estate.”[8] In examining the agreements presented by the officers, the Court applied the seven interrelated factors prescribed by the Second Circuit in Iridium to the PCPs.[9] These seven factors include (1) the balance between the potential success of litigation compared to the settlement; (2) the likelihood of prolonged litigation; (3) the interests of the creditors; (4) whether other interested parties support the settlement; (5) the competency of counsel advising the settlement; (6) the nature of the releases obtained by officers and directors; and (7) the extent to which the settlement is the product of arm’s length bargaining.[10] The Court weighed all the relevant factors and determined that the PCPs were the result of arms-length bargaining, they would provide for quicker distribution to creditors at a lower risk, the agreements was supported by most constituencies, and the benefits from the PCPs outweighed the possibility of increased recovery after years of litigation.[11] The Court concluded that the factors weighed strongly in favor of the PCPs.[12]

On the ad hoc committee’s motion to appoint an examiner for the settlement, the Court noted that the committee filed the motion with the intent to “scuttle” any proposed PCP. Section 1104(c) of the Bankruptcy Code provides that the court appoint an examiner if the debtor owes in excess of $5 million in fixed, liquidated, unsecured debts.[13] The Court determined that the committee failed to meet the burden of proving an excess of $5 million in fixed, liquidated, unsecured debts.[14]

The Court concluded that, even if the committee had met the burden of proof, the appointment of an examiner would be unnecessary because the PCPs were “well above” the lowest point of reasonableness.[15] The PCPs were fair and equitable and the Iridium factors weighed strongly in favor of the settlement. Further, the Court noted several times that litigation in other bankruptcy proceedings often lasts for several years and praised the PCPs for avoiding prolonged dispute and costly administrative issues.[16]

The Symposium will be held on April 5, 2013 at the American University Washington College Law in Room 602.

Academic participants include:

Associate Professor James Byrne, George Mason University School of Law

Brokaw Professor of Corporate Law George Cohen, University of Virginia School of Law

Professor of Law Ross Davies, George Mason University School of Law

Associate Professor of Law and Finance Steven Davidoff, The Ohio State University, Moritz College of Law

Professor of Law Michael Doran, Georgetown Law

Carole & Hanan Sibel Research Professor of Law Martha Ertman, University of Maryland, Francis King Carey School of Law

Lyle T. Alverson Professor of Law Theresa Gabaldon, The George Washington University, School of Law

Professor of Law, Associate Dean for Academic Programs, Co-Director of Business Law Program Michelle M. Harner, University of Maryland, Francis King Carey School of Law

W. P. Toms Distinguished Professor of Law Joan MacLeod Heminway, The University of Tennessee College of Law 

Professor of Law Louise A. Howells, University of the District of Columbia, David A. Clarke School of Law 

Professor Harry Hutchinson, George Mason University School of Law

Associate Professor Kristin N. Johnson, Seton Hall University School of Law

Professor Lyman Johnson, Washington and Lee University School of Law

Professor Greg Maggs, The George Washington University Law School

Associate Professor Jeffrey Manns, The George Washington University Law School

Director of Business and Entrepreneurship Law Program Karl Okamoto, Earle Mack School of Law at Drexel University

Professor Robert J. Rhee, University of Maryland, Francis King Carey School of Law

Professor Steven Schwarcz, Duke University School of Law

Professor Steven Walt, University of Virginia School of Law

Assistant Professor Mark Weidemaier, University of North Carolina School of Law

Practitioners names forthcoming.

To register, please visit: https://www.wcl.american.edu/secle/cle_form.cfm.

Please direct inquiries to blr-se@wcl.american.edu.