Volume 35, Issue 1

Article

From the Regulatory Abyss: The Weakened Gatekeeping Incentives Under the Uniform Securities Act

Marc I. Steinberg & James Ames

In the last two decades, massive financial scandals have impaired the integrity of the financial markets and cost investors billions of dollars.  Even more financial devastation was wrought as the Great Recession struck.  These calamities have brought the importance of proper regulatory control in the securities markets into sharp focus.  With this backdrop, this Article tackles the task of examining regulation of one of the most integral components of an effective regulatory system for securities:  gatekeepers.  Gatekeepers, such as accountants, attorneys, bankers, and other professionals involved in the securities disclosure process are uniquely positioned to provide much needed oversight with respect to the effectuation of law compliance.

This Article explores the regulatory incentives provided in the securities laws to gatekeepers and focuses on a critical flaw in the framework:  namely, pursuant to the Uniform Securities Act (USA) and as adopted by a majority of states, the private civil liability regimen allows gatekeepers who fail to properly fulfill their role to avoid private civil liability under the securities laws.

As the Supreme Court and Congress largely have eliminated private liability for collateral actors under the federal securities laws, state securities statutes have become increasingly important in holding collateral actors accountable.  While the majority of states have adopted the Uniform Securities Act (USA), that Act contains a significant flaw, which until now, has not been addressed.  The wording of the USA effectively allows outside lawyers, accountants, bankers, and other outside collateral actors to avoid private civil liability under the Act, while inside collateral actors engaging in the same improper activity are subject to significant liability exposure.  Apart from the inherent unfairness presented by this state of affairs, allowing outside actors to escape private liability under this Act generates fundamental concerns regarding the oversight of the securities markets and appropriate gatekeeper incentives.

This Article begins by discussing the gatekeeping function as it has been envisioned and understood over time.  Gatekeepers, properly fulfilling their role, can use their reputational capital to prevent and deter securities violations.  How gatekeepers function to deter illegal or improper conduct, gatekeeper incentives, and the possible results when gatekeepers abdicate their responsibility are analyzed.  The reasons that federal law and common law causes of action fail to adequately fill the regulatory gap left by the wording in the USA is explored.  Specifically, the elimination of private secondary civil liability for aiding and abetting under the federal law, along with onerous requirements and challenges present with common law remedies, means that a liability gap ensues absent private civil liability for collateral actors under the USA. Given this understanding, the disparity under the USA between inside professionals and outside professionals is explored in depth.  Additionally, as a point of reference, the approaches to state securities liability for collateral actors adopted by other states that have not enacted the USA are examined.  After this, an analysis of the classifications under which collateral actors are held accountable under the USA, such as an agent or employee, and how the courts have construed these classifications under the Act, is undertaken.  Finally, the Article recommends a substantive and specific amendment to the USA’s language, thereby remedying the current inequity in collateral actor liability.

In view of the financial scandals that this country has witnessed over the last two decades, gatekeeper functionality is paramount.  The gap in gatekeeper liability, as is the current situation with respect to the USA’s framework, is detrimental to the integrity of the securities markets.  This Article provides a solution to this current disparity in private securities liability between outside and inside gatekeepers that is achievable, fair, and effective in the current regulatory environment.

 
Article

Coughing Up Executives or Rolling the Dice?: Individual Accountability for Corporate Corruption

Sharon Oded

“Flesh-and-blood” corporate criminals have long been a major focus of U.S. enforcement authorities in the battle against foreign bribery. Many of the actions taken against individuals were largely enabled due to the cooperation of culpable corporations with investigative authorities. For years, this cooperation was encouraged by the award of “cooperation credit,” which is a mitigated approach toward cooperating corporations. The Yates Memorandum promulgated recently by the Department of Justice, however, has changed the rules of the game. According to the memo, the Department of Justice will no longer provide “cooperation credit” to corporations unless they demonstrate their cooperative approach by “sacrificing” employees involved in bribery. While the newly emerged policy seeks to send a reinforced message of deterrence to corporate executives, a law and economics analysis reveals that the Yates Memo may fall short of reaching its deterrence goals, and in fact may lead to more—rather than fewer—bribery practices.

Article

The Right of Refusal: Immigration Enforcement and the New Cooperative Federalism

Spencer E. Amdur

The federal government relies on the states to help enforce many of its regulatory schemes. State and local governments are often willing—even eager—to oblige. But when a program is controversial or expensive, subfederal officials sometimes resist. When that happens, the federal government uses a variety of means to coax, cajole, hector, threaten, or even force them to participate. I call these methods “inducement strategies.” 

Inducement strategies test the limits of federalism. They have historically crossed the Supreme Court’s radar in some politically fraught areas—nuclear waste disposal, gun control, healthcare. Today, they are stretching federalism boundaries in an arena where federal-state integration has quietly grown tight: immigration. In the last several decades, the immigration system has come to deeply rely on subfederal aid. State and local reticence has in turn produced a plethora of federal strategies, both formal and informal, for securing assistance. And yet scholars have not explored the full range of constitutional questions raised by federal inducement efforts. Immigration scholars have largely focused on other federalism questions, including state power and preemption. Federalism scholars, meanwhile, have barely engaged the increasingly rich terrain of joint immigration enforcement. 

This Article fills both of those gaps. It provides a sustained account of inducement strategies in immigration law. It identifies the full range of federal-state interactions, assesses their constitutional dimensions, and situates them within the broader federalism literature. To get there, it takes a close look at the Supreme Court’s inducement jurisprudence in the wake of National Federation of Independent Business v. Sebelius. It argues that the commandeering and coercion cases now cohere around what I call a “right of refusal”—a narrow but absolute right against any form of inducement that denies state governments a meaningful ability to opt out. This unified principle helps evaluate the latest inducement proposals, some of which are hurtling toward litigation. 

In an era of intertwined federal-state governance, the set of available inducement options will shape a striking array of regulatory areas, including healthcare, climate change, education, tax, national security, and marijuana enforcement. By identifying and critically assessing these modes of interaction, this Article starts to answer some important questions about the terms on which integrated enforcement will play out.

Policy Essay

Thoughts on the Unification of U.S. Labor and Employment Law: Is the Whole Greater than the Sum of the Parts?

Craig Becker

As the need for fundamental reform of our nation’s labor laws has grown more and more evident since the 1970s, major reform efforts have focused narrowly on adjusting the provisions of the National Labor Relations Act (“NLRA”), but have repeatedly foundered amidst intense polarization over tipping the existing “balance” between labor and management. At the same time, at the federal, state, and, increasingly, municipal levels, U.S. labor laws governing worker organization and collective bargaining have been surrounded by a growing thicket of other laws governing the workplace. These employment laws have established various minimum standards. But the employment law on the books has not been matched by the law in action as violations are endemic, particularly at the bottom of the wage scale.

The Article argues that a politically feasible (in the medium term), economically rational, and effective reform proposal would seek to unify our labor and employment laws. Collective bargaining could both reduce enforcement costs and allow flexibility in the application of minimum standards laws, possibly reducing employers’ implacable opposition to labor law reform and thus permitting expanded union representation. The resulting expanded union representation could, in turn, ensure enforcement of employment law.

The Articles uses two current legal controversies as lenses through which to view how a more integrated regime of workplace regulation might function: the first, over agreements to arbitrate employment law claims that include a waiver of unrepresented employees’ right to engage in collective enforcement activity; and the second, over state and local minimum standards laws that permit waiver or modification of their terms via collective bargaining.

Note

Old Dog, New Tricks: Title VI and Teacher Equity

Noah B. Lindell

Teacher quality has become a central aspect of education “policy” statutes. Yet federal policymaking has not succeeded in improving America’s teacher quality crisis. Title VI of the Civil Rights Act of 1964—which is over half a century old, and which is primarily understood as an antidiscrimination provision—may offer a solution to this problem. Title VI forbids racial discrimination in the provision of resources in federally funded programs. The U.S. Department of Education has recently made clear that teacher quality is, in fact, a resource covered by Title VI. This Note argues that Title VI complaints, investigations, and lawsuits can encourage (or force) districts to pursue policies that are designed to provide minority students with better teachers. It explains the mechanics of Title VI and illustrates how Title VI investigations might play out in the teaching context. It also discusses and resolves a number of doctrinal and policy concerns that this new use of Title VI could generate.

Feature

Law and Inequality: An American Constitution Society Conference at Yale Law School
October 16 and 17, 2015

Editor’s Note

The following pages contain selected essays from the panelists of the American Constitution Society’s Law and Inequality Conference held at the Yale Law School on October 16 and 17, 2015.

The Law and Inequality Conference considered how law shapes, and is shaped by, extreme economic inequality. Today, the richest .1% of Americans holds 22% of the nation’s wealth—the same share held by the bottom 90% of the population.[1] The Conference posited that the law has played a central, yet oft-overlooked role in this phenomenon, presenting an opportunity to understand how law, policy, and jurisprudence have been instruments in generating our current crisis, and to identify ways in which they can be harnessed as tools to redress it.

The Conference attempted to answer some fundamental questions about the role of law in rising inequality: in what way does economic inequality corrupt the democratic process? How does law structure markets that produce inequality? How have changes in legal procedure impeded access to the courts and exacerbated existing inequalities? What role has race played in shaping and reinforcing economic inequalities? To what extent do the principles of federalism and localism either further inequality or offer pathways for redressing it? How should constitutional jurisprudence grapple with consolidated economic power? These questions frame and inform the essays that follow.

[1].   Emmanuel Saez & Gabriel Zucman, Wealth Inequality in the United States Since 1913: Evidence from Capitalized Income Tax Data (Nat’l Bureau of Econ. Research Working Paper No. 20625, 2014), http://gabriel-zucman.eu/files/SaezZucman
2014.pdf [http://perma.cc/UR3S-AVZX]. 

Feature

Needing and Fearing Billionaires in Cities Abandoned by Wealth

Michelle Wilde Anderson

“Heck, we invented the middle class,” wrote journalist Mitch Albom of Detroit in its heyday. Today, the city is inventing something else entirely. A small group of billionaires is leading what surely must be the largest privately financed urban transformation in American history. Detroit’s new model for growth is premised on radical inequality, and it may well perpetuate it too. Is it good news anyway?

In a city where the median household income is about $26,000 per year, three billionaires now own most of the downtown and its riverfront. Another extravagantly wealthy landowner owns nearly 2,000 parcels. All four assembled their land portfolios while the city’s real estate market was flatlining—that is, when Detroit has been littered with so much abandoned property that land ownership brings more costs than value. Since 2005, more than one-third of all properties there have gone into mortgage or tax foreclosure.

Today, most expectations for the city’s financial recovery depend on these new owners bringing in businesses and people. Two of them have relocated thousands of jobs into Detroit, thereby reversing suburban flight for the first time in decades. Just about everyone who cares about Detroit, including me, wants them to succeed. After such a long economic drought, Detroit’s residents need these big boys to make it rain.

Yet it is also true that Detroit knows all too well the unforgiving self-interest of mobile, monopolistic capital—the way that a city’s dependence on a small number of enormous businesses makes a city vulnerable. When the auto industry largely abandoned Detroit for greener pastures (first to the suburbs across Eight Mile Road and later to the far sides of U.S. borders), the city’s employment and tax base collapsed. Springsteen captured that era best: “Now the yard’s just scrap and rubble‌ . . . Them big boys did what Hitler couldn’t do.” When the Big Three Automakers are replaced by the Big Four Landlords, it is worth a critical pause.

Should the residents and elected leaders of Detroit greet their situation with optimism, cynicism, or reluctant dependence? That question matters not just to the city but to the nation, because although Detroit’s circumstances are extreme, they are not anomalous. Across the country are hundreds of broke governments inhabited by millions of broke people. The wisdom or danger of relying on concentrated private wealth to rebuild places leveled by chronic poverty—and our diminishing alternatives if we do not—is the billion-dollar question of modern urban life.

Feature

Uncivil Procedure: How State Court Proceedings Perpetuate Inequality

Hannah Lieberman

Rules of civil procedure presuppose a level playing field where litigants have structured opportunities to develop and present their claims to a neutral fact-finder. In millions of cases—the vast majority processed by state courts today—the field is neither level nor fair. Instead, enormous numbers of small dollar value cases are disposed of mechanically, without meaningful adjudication. High-volume state court dockets involve serious asymmetries of power and knowledge, where plaintiffs’ lawyers are able to manipulate or short-circuit the rules against unrepresented and generally unsophisticated low-income defendants. As a recent study by the National Center for State Courts (NCSC) concluded, “[t]he idealized picture of an adversarial system in which both parties are represented by competent attorneys who can assert all legitimate claims and defenses is an illusion.”

Profoundly harmful consequences befall defendants who, caught in these overburdened, high-volume dockets, are too often unaware of and unable to protect their rights. Judgments are entered without meaningful scrutiny of their substantive or procedural correctness. Civil judgments carry long-term consequences. Evictions frequently lead to homelessness. Judgments that appear on credit reports or that surface as the result of professional data-mining lead prospective employers and landlords to deny jobs and housing. Post-judgment enforcement includes wage garnishment and asset seizures. Without significant reform, too many of the generally low-income defendants in these high-volume dockets suffer wholesale denials of justice, further exacerbating economic inequities.

Feature

Constitutional Economic Justice: Structural Power for “We the People”

Martha T. McCluskey

It is time for an ambitious constitutional vision of economic justice. Since the end of the Lochner era, the prevailing constitutional narrative has taught that the Constitution generally should leave economic policy decisions to the legislative and executive branches. That structural theory treats economic justice as discretionary, separate from and subordinate to fundamental constitutional protections for political and civil justice. At most, that narrative supports constitutional protections against economic inequality as narrow exceptions subject to careful scrutiny and constraint.

As economic inequality has increased over recent decades, constitutional doctrine has become more firmly set against economic equality. Not only has the U.S. Supreme Court turned away from constitutional protection of those with modest resources, but it also has increasingly (though often subtly) used the Constitution to limit political branches’ discretion to promote equality.

In response, this Essay proposes a structural principle for constitutional economic justice centered on equal and broad access to collective political economic power. This theory of economic power for “we the people” adds to the principles guiding the balance of power among the branches of government: judicial, legislative, and executive, or state and federal. The proposed principle builds on two premises about constitutional economic justice.

Feature

Law and Economics: Contemporary Approaches

Martha T. McCluskey, Frank Pasquale & Jennifer Taub

With a new project entitled Law and Economics: Contemporary Approaches, we hope to liberate casebook examples of economic analysis of law from their current cramped confines. While law and economics associations increasingly feature empirical work in their annual conferences, casebooks in property, torts, contracts, and other core legal subjects all too often feature simple models of economic activity developed decades ago. While new ways of thinking about finance, health care, and privacy have developed rapidly in the past few decades (and particularly after the global financial crisis of 2008), casebooks all too often rely on simple models of market-driven supply and demand, out of touch with current economic realities.

This forthcoming casebook will address the shortcomings of the vision of law and economics familiar in dominant instructional materials, which took root in legal education in the 1970s. In 1995, Yale Law School Dean Anthony Kronman noted that law and economics was the “single most influential jurisprudential school in this country.” In the decades since, it has remained not only dominant, but also especially powerful in its influence on the teaching of private law topics. For nearly a half century, law students have been taught that narrow and abstract modeling is the hallmark of rigorous economic analysis of legal scenarios.

The law and economics so influential in law school casebooks is particularly powerful because it so often reduces the search for the optimal legal rule to a quest for efficiency. The concept of efficiency is, by and large, narrow: wealth maximization. As leading proponent Richard Posner explained several decades ago, wealth maximization “refers to weighting preferences for the things that people want, either by willingness to pay for a thing, if you do not own it, or by unwillingness to part with it voluntarily, if you do own it.” From this ground, making law “efficient” means taking most existing legal and economic privileges, constraints, and inequalities as given, and focusing law on increasing wealth regardless of who gets it, how they get it, or what they do with it. More recent versions of the efficiency goal often use the term “economic welfare” instead of “wealth” to represent the individualized gain that law should maximize, but that ideal remains similarly narrow and misleading. The persistent message is that law can and should be guided by an economic goal of maximizing an abstract aggregate “pie,” closing off scrutiny of the quality, content, and distribution of that pie. If law makes a presumed sum of existing individual preferences bigger, it can be “efficient,” without analysis of whether that maximized “pie” is actually toxic or temporary or totally controlled by the top one-tenth of one percent of wealth holders.

In a 2014 essay, Harvard Law student Ted Hamilton reflected that the “most repeated word in my first year curriculum was not justice, or liberty, or order. It was efficiency.” As Hamilton explains, this term continues to reduce law to the goal of maximizing economic gain without evaluating that gain, so that law students are taught that efficiency means wealth maximization, and students learn to treat legal questions as objective problems of counting divorced from complex social, moral, and political analysis. Some empirical research confirms that this emphasis on efficiency can affect students’ views.

This understanding of economics in law is partial, in two ways. It is incomplete, largely ignoring new economic issues and theory, such as the excellent work done by Institute for New Economic Thinking (INET) fellows. And it is often biased, privileging the perspectives of the most powerful actors in the economy by presenting legal rules favoring these interests as uncontestable economic truth.

Law and Economics: Contemporary Approaches will address the shortcomings of law and economics by examining its fundamental theories, methods, and failures. In chapters on specific legal topics, we use examples of current issues in judicial decisions, statutes, regulations, or policy debates as the basis for showing the gaps in conventional economic analysis and the potential contributions of more complete and clear thinking. We will make a more robust economic analysis accessible to non-specialists by showing how economic analysis of law inevitably depends on and draws from other disciplines, and relies on assumptions about facts and values that are not the subject of distinctively economic expertise.

The topics covered will include health law, international trade, labor law, minimum wage policy, civil rights, unemployment policy, securities laws, and financial regulation. The chapters offer new understandings of the assumptions, contingencies, and omissions that complicate legal applications of standard economic principles like supply and demand, comparative advantage in trade policy, externalities, or the distinction between market and state.

To move beyond existing misconceptions and oversimplifications, our casebook chapters draw on methodologically diverse approaches to economics, integrating the best of historical, anthropological, and sociological approaches with a new emphasis on macroeconomics. This approach aims to correct the methodological individualism and lack of context characteristic of traditional law and economics. Legal experts’ narrow focus on microeconomics contributed to the recent financial crisis by reinforcing faith in the capacity of markets to reach optimal outcomes without strong regulatory oversight. Such misplaced faith highlights the need for a new economic analysis of law that is responsive to theories of macroeconomic conditions and financial instability.

In addition, these new approaches to law and economics will include more diverse and sophisticated understandings of law, including legal realism’s understanding that economic conditions shape how law is implemented and enforced. As Columbia Law Professor Katharina Pistor’s recent scholarship on law and finance adeptly demonstrates, law and markets are co-constitutive. Just as law depends on economics, economics cannot provide a simple and unidirectional expertise in “market forces” to legal scholars and policymakers because these economic forces are at least in part a matter of law. If preferences are endogenous, and dependent upon legal rights, then the criterion of allocative efficiency cannot determine a uniquely optimal set of legal rules. Additional normative criteria must be employed. Similarly, insights from behavioral economics have revealed the ways in which so-called “social preferences” may be crowded out by legal incentives. If this is the case, then the law cannot merely and simply respond to a pre-existing homo economicus; it may, additionally, be responsible for shaping it.