News 2002

December 3 : November 25 : August 7 : July 10 : June 20 : May 29 : May 24 : April 26 : April 17 : March 14 : March 5 : January 21 : January 11

December 3, 2002

  • The Washington Legal Foundation has published a useful "backgrounder" on regulation of the off-balance sheet special purpose entities that got Enron in so much trouble: In Defense Of Moderation: Avoiding Overregulation Of "Special Purpose Entities." Click HERE to read.

  • AEI Press has just published a new book on federalism issues in corporate law by Yale law professor Roberta Romano: The Advantage of Competitive Federalism for Securities Regulation. Romano is a leading proponent of the so-called race to the top hypothesis. As many readers of this website will know, former SEC Chairman William Cary popularized the so-called "race to the bottom." Cary and many subsequent corporate and social reformers believed that the states competed in granting corporate charters. After all, the more charters (certificates of incorporation) the state grants, the more franchise and other taxes it collects. According to this view, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders. Many legal scholars reject the race to the bottom hypothesis. According to a standard account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not make loans to such firms without compensation for the risks posed by management's lack of accountability. As a result, those firms' cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from adopting excessively pro management statutes. The empirical research appears to bear out this view of state competition, suggesting that efficient solutions to corporate law problems win out over time. In recent years, however, some prominent legal scholars have revived and defended the race to the bottom hypothesis. In this excellent text, Romano defends the race to the top hypothesis. She then expands the scope of argument from corporate governance to securities regulation, arguing that the SEC should adopt what she calls competitive federalism. Under this system, firms select a regulator from among the states, the SEC, or even other nations. Romano asserts that competitive federalism harnesses the high-powered incentives of markets to the regulatory state to produce regulatory arrangements compatible with investors' preferences. Firms will locate in the domicile investors prefer so as to reduce the cost of capital, and states will have financial incentives, such as incorporation and registration fees, to adapt their securities regimes to firms' domicile decisions.

November 25, 2002

  • The Heritage Foundation's annual index of economic freedom is now available. Click HERE to access it.

  • The National Center for Policy Analysis has a page on the Benefits of U.S. Corporate Bankruptcy Laws. Please click HERE to read.

  • A recent Cato Institute briefing paper argues that "Corporate Accounting: Congress and FASB Ignore Business Realities. Click HERE to read.

  • On October 3d, practice group member George Terwillinger spoke at an event sponsored by The Federalist Society Boston Lawyers Chapter and The Pioneer Institute regarding "Corporate Accountability in a Post-Enron Environment."

  • On October 18, practice group member Stephen Bainbridge spoke on "Sarbanes-Oxley and the Creeping Federalization of Corporate Law" at a Federalist Society student chapter at Gonzaga University School of Law.

August 7, 2002

  • The Federalist Society's Corporate Responsibility Project website is now operational. It contains a number of position papers and analyses by Practice Group members relating to various aspects of the current corporate governance "scandals." Click HERE to visit the Project.

    Corporations Practice Group E-communications Vice-Chair Stephen Bainbridge (Professor, UCLA School of Law) has just published Corporation Law and Economics (Foundation Press 2002). This 800+-page treatise provides a comprehensive overview of corporation law from a law and economics perspective. Click HERE for more information.

July 10, 2002

  • The White House's web site has a useful new portal, detailing the President's response to the on-going corporate governance "crisis." It contains links to the administration's policy proposals, the President's recent speech, and other useful documents. Click HERE to check it out.

    The Heritage Foundation has put out a short position paper by David C. John critiquing the various corporate governance proposals pending on the Hill. Click HERE to read it.

June 21, 2002

  • Under the New York Stock Exchange's (NYSE) aegis, a blue ribbon panel has proposed new listing standards that would, inter alia, significantly increase the role of independent directors in public corporations. To read the report, click HERE. Professor Stephen Bainbridge of UCLA has written a white paper critical of the NYSE's conclusions.

June 20, 2002

  • Richard Painter, Megan Farrell, and Scott Adkins, have prepared a white paper on the continuing need for the PSLRA in the post-Enron environment. Among their more important findings are: (1) that the "courthouse door ... remains wide open for plaintiffs"; (2) "that settlement amounts are higher now than they were before the PSLRA": and (3) "market concentration among the plaintiffs' bar has grown significantly since the PSLRA, with one law firm [Milberg, Weiss] now accounting for over half of securities class action litigation." See "Private Securities Litigation Reform Act: A Post-Enron Analysis."

May 29, 2002

  • The following are articles about the accounting bill that was halted temporarily. Here are three articles, there are more articles in the NY Times, Washington Post, and BNA.

    Sarbanes Delays Action on Accounting Reform Bill. The Wall Street Journal (5/21, Hitt) reports, "The chairman of the Senate Banking Committee has put off action on a sweeping overhaul of accounting practices, hoping to buy time to develop a consensus on the Enron Corp.-inspired package." Sen. Paul Sarbanes (D., Md.) "had planned to move forward with the bill on Tuesday, but encountered splintered support. More than 120 amendments were filed against the bill by Friday, reflecting opposition from Republicans as well as from some Democrats. Consumer and business groups are also divided." Sarbanes "agreed to a request by Texas Sen. Phil Gramm, the committee's top-ranking Republican, to defer action in the hopes of developing a bipartisan bill." Sen. Sawbones's spokesman Jesse Jacobs said, "We're going to work through this and see if we can accommodate some of the issues that are out there." A Gramm spokeswoman "said the Texas Republican 'remains eager to work; on a bill that 'will receive the broad bipartisan support of the committee.' If the gambit works, committee aides said, it will boost prospects for passage on the Senate floor."
  • FINANCE -Congress Daily Delay In Senate Accounting Reform Bill Hailed, Assailed Senate Banking Chairman Sarbanes' decision to postpone a markup on Enron-inspired accounting reform legislation until after the Memorial Day recess came amid criticism Monday by both likely and unlikely sources. Although it had no official comment on the markup's postponement, the American Institute of Certified Public Accountants has openly criticized the panel print unveiled by Sarbanes last week. But so, too, has the U.S. Chamber of Commerce, which issued a statement Monday, shortly before the postponement was announced. "While being touted as an 'Enron reform bill,' such overreaching legislation will raise costs, promote confusing and duplicative regulation and encourage frivolous lawsuits," Chamber President and CEO Thomas Donohue said in a letter to senators. The bill also elicited criticism from another unexpected source, the Council of Citizens Against Government Waste, which called the committee print a "radical proposal" that would "create an entirely new, and duplicative, federal bureaucracy and legislate a government takeover of the accounting profession's standards board." The AeA, the nation's largest high-tech trade association, also strongly opposes the pending accounting legislation and was working on a letter to that effect as of late Monday, an AeA spokeswoman confirmed. A spokesman said Sarbanes had reconsidered holding the markup, originally scheduled for today, after receiving a request to do so from Senate Banking ranking member Phil Gramm, R-Texas, and seeing the mountain of amendments filed by committee members - a sizable portion of which Gramm had filed. However, legislative observers speculated that Sarbanes also is facing some divisions among Democratic senators on his committee. The delay - and the ideological dispute that has given rise to it -raised questions about whether the Senate can reach a consensus and complete action on the complex measure with time left before the end of the session for a conference committee with the House. Frank Torres of Consumers Union harshly criticized Banking Committee Republicans and the industry representatives, saying their actions constituted a "behind-the-scenes effort to derail this bill." Torres also criticized the Republican substitute that Gramm and Sen. Michael Enzi, R-Wyo., planned to offer as a "sham measure," saying it is "much weaker than the paltry accounting bill approved by the House." A spokeswoman for House Financial Services Chairman Oxley, who sponsored the House-passed accounting bill, applauded Sarbanes for seeking consensus among senators. But she noted that "significant differences" currently exist between the House and Senate bills. "Our advice for them is to leave some time for a conference," she said. By Pamela Barnett

    CQ MONITOR NEWS INDUSTRY & REGULATION Markup of Accounting Measure Delayed as Members Weigh In By Keith Perine, CQ Staff Writer May 20, 2002 - Tuesday's scheduled markup of draft legislation to overhaul the way the government regulates the accounting industry was postponed after Senate Banking Committee Chairman Paul S. Sarbanes was deluged with proposed amendments by both Republicans and Democrats who want to put their own stamp on the committee's response to the Enron Corp. collapse. A terse one-sentence press release Monday announced that the markup "has been put over until after the Memorial Day recess at a time to be determined." Last week, Phil Gramm of Texas, the committee's ranking Republican, gave Sarbanes a list of dozens of questions about the draft and asked him to postpone the markup in favor of a hearing. By Friday, the committee had received 123 amendments, committee aides said. The Sarbanes draft proposal would establish a new public oversight board and give it broad new powers to police the accounting industry. Among other provisions, the draft contains so-called "auditor independence" language that would bar accounting firms from providing public company audit clients with many consulting services, including bookkeeping, internal audits and investment banking services. It also would require audit partners at accounting firms to rotate every five years. The draft would require chief executives and chief financial officers of public companies to attest in writing to the accuracy of company materials contained in audit reports filed to the Securities and Exchange Commission. Groups in Opposition. The American Institute of Certified Public Accountants, the accounting industry's main trade group, has asked its members to write letters in opposition to Sarbanes´ draft. The U.S. Chamber of Commerce blanketed the Senate on Monday with a letter opposing Sarbanes´ bill. The Business Roundtable, an association of corporate chief executives, sent a letter to Sarbanes in which it objected to several provisions. Gramm and Sen. Michael B. Enzi, R-Wyo., have been circulating their own, more limited draft proposal. Another, more limited measure (HR 3763) passed the House 334-90 on April 24. Sarbanes held 10 hearings to examine accounting regulation and corporate governance earlier this year, but did not publicly unveil his draft proposal until May 8. Now, the ever-shrinking legislative calendar gives Sarbanes little time to move a bill through his committee, the full Senate, and what would be a contentious House-Senate conference before the end of this year's session.

May 24, 2002

  • The Corporations Practice Group will hold its Corporate Governance Conference on Thursday, June 13 in New York City. This day-long conference will examine the effectiveness of the traditional corporate governance structure, as well as suggestions for improvements; the need for investor confidence and its impact on capital generating ventures; the expansion of the scope of prosecutions as a result of criminalizing corporate behavior; and the role of independent auditors in providing independent review and in ensuring investor confidence. CLE credit will be available. Click HERE for more information or to register.

  • Stanford Law Professor Joseph Grundfest has prepared an interesting white paper on Enron for the Federalist Society. Access it by clicking HERE.

April 26, 2002

  • John S. Baker examines the indictment of corporations, using Arthur Andersen as an example, in The Wall Street Journal article "Corporations Aren't Criminals," (PDF format) published April 22, 2002.

April 17, 2002

  • It now appears increasingly likely that Congress will give the SEC significantly expanded powers to bar individuals from serving as corporate directors and officers. CLICK HERE to read the Washington Post article. If adopted, this proposal will mark a substantial extension of the Federal role into areas of corporate governance traditionally within the purview of state corporation law. States have been in the business of regulating corporate governance since before the United States was founded. Throughout that same time span, many have argued for federalizing corporate law. Yet, the federal government did not enter the picture until the New Deal securities legislation of the 1930s and 1940s. Moreover, when Congress finally did get involved, it did so in a fairly limited way. Congress was mainly concerned with disclosure and with providing procedural safeguards to make the disclosure requirements more effective. In a long line of cases, the Supreme Court has respected the balance created by Congress by holding that the federal securities laws merely place a limited gloss on state corporate law. E.g., Kamen v. Kemper Fin. Servs. Inc., 502 U.S. 974 (1991); Burks v. Lasker, 441 U.S. 471 (1979); Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Piper v. Chris-Craft Indus., Inc., 430 U.S. 1 (1977); Cort v. Ash, 422 U.S. 66 (1975). Unless federal law expressly governs some corporate law question, the court will treat state law as controlling. Cort v. Ash, 422 U.S. 66, 84 (1975). The corporation thus is recognized as a creature of the state, "whose very existence and attributes are a product of state law." CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987). The court therefore acknowledges that states have legitimate interests in overseeing the firms they create and in protecting the shareholders of their corporations. Finally, the CTS court further accepted a state's "interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs." If so, state regulation not only protects shareholders, but also protects investor and entrepreneurial confidence in the fairness and effectiveness of the state corporation law.

    The country as a whole benefits from state regulation in this area, as well. The markets that facilitate national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that corporations generally are organized under, and governed by, the law of the state of their incorporation. CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90 (1987). This is so in large part because ousting the states from their traditional role as the primary regulators of corporate governance would eliminate a valuable opportunity for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country." New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting). So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion. In contrast, a uniform federal standard would preclude experimentation with differing modes of regulation.

March 14, 2002

  • Law Professor Richard Painter has organized a group that is sending a letter to SEC Chairman Harvey Pitt in which the signatories raise the question of "whether lawyers should inform a client corporation's directors about violations of the securities laws." The letter's authors contend "that, if senior management will not rectify a violation, lawyers who are responsible for the corporation's securities compliance work should be required to make such a report." Signatories include Painter and about 20 other prominent law professors, such as Roger Cramton (Cornell), William Simon (Stanford), Geoffrey Miller (NYU), Joel Seligman (Washington University), Geoffrey Hazard (Penn), Stephen Gillers (NYU), Reinier Kraakman (Harvard), and Stephen Bainbridge (UCLA). Interested persons should contact Professor Painter at the University of Illinois Urbana-Champaign College of Law. To read the letter, CLICK HERE.
  • The House has passed (by 233-190) significant class action reform legislation.

March 5, 2002

  • The Silicon Valley Chapter hosted a very timely presentation on the Enron matter featuring Stanford Law Professor and former SEC Commissioner Joseph Grundfest. In his presentation, Professor Grundfest offered a reform strategy that would require accounting firms to disclose material information beyond GAAP. As a way of fostering further debate and discussion, we've included the Grundfest proposal here: It raises many interesting issues, including: the proper disclosure standard (and the timing of such disclosures), and the appropriate balance between civil/private actions against accountants versus government/criminal enforcement activity.
  • Practice group members who have prepared other materials on the Enron matter, which they would like to bring to the notice of the group at large, may forward their materials to E-Communications Vice-Chairman Stephen Bainbridge at

February 20, 2002

  • Enron fallout may lead to securities fraud "reform." In the aftermath of the Enron bankruptcy, several bills are being prepared to repeal or amend key provisions of the Private Securities Litigation Reform Act. Support for such a move is suggested by a February 15, 2002 press release (available on-line), in which the Consumers Union and Consumer Federation of America claimed "that the Private Securities Litigation Reform Act (PSLRA) may have helped pave the way for the Enron disaster." See:
  • The Cato Institute has published an interesting and important book on . According to Cato: "The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which are called government-sponsored enterprises (GSEs) because of their government backing, are supposed to use that government support to reduce interest rates in the home mortgage market. But as shareholder-owned companies, they are also supposed to maximize their profits. This creates what [AEI resident fellow Peter J.] Wallison calls 'two ultimately irreconcilable roles': Fannie Mae and Freddie Mac are now trying to serve both their shareholders, with high profits, and the home-buying public, with reduced interest rates. They obviously cannot do both."
  • The Heritage Foundation has released an interesting research paper by David C. John on moving Social Security to individual investment accounts. You can download it here:
  • Villanova University School of Law is sponsoring a conference on "Religion and Investing" on April 6, 2002. Speakers include several conservatives, including Stephen Bainbridge of the UCLA School of Law and Dr. Samuel Gregg of the Acton Institute of the Study of Religion and Liberty. For information contact:


January 21, 2002

  • Public Statement by SEC Chairman: Regulation of the Accounting Profession
  • Directors and Boards recently reprinted a speech by T.J. Dermot Dunphy, the retired CEO of Sealed Air Corp., originally delivered at the 2000 Corporate Governance Conference. Dunphy calls for "an atmosphere in which CEOs who believe in shareholder democracy are the norm rather than the exception." Click HERE to read his remarks.

January 11, 2002

  • E-communications Vice-Chair Professor Stephen Bainbridge (UCLA School of Law) solicits noteworthy items for inclusion in our practice group web site. If there are recent legislative or regulatory developments, recent cases, newly issued studies or reports, or the like that you believe would be of interest to our membership, please send brief item descriptions to Professor Bainbridge at Bullet points with links to web materials will be especially useful.
  • The November 2001 issue of ENGAGE, The Journal of the Federalist Society's Practice Group, contains a transcript of a panel discussion on "The Regulation of HighTech Industries: Private Ordering or Government Oversight" (pages 32-40).
  • The Federal Trade Commission and U.S. Department of Justice have announced a series of joint hearings, beginning in January 2002, to examine the balance between protection of intellectual property rights and enforcement of the antitrust laws. A description of the planned hearings is available on-line at:
  • The fallout from Enron's demise continues in Washington. President Bush has directed Treasury, the SEC, the CFTC, and the Fed to convene a working group to analyze corporate disclosure rules and regulations. The announcement is available on-line:
  • In his capacity as chairman of the Governmental Affairs Committee, Senator Lieberman has announced plans to conduct committee hearings into the Enron failure.
  • E-communications Vice-Chair Professor Stephen Bainbridge is the co-author of a new casebook, "Agency, Partnership, and Limited Liability Companies: Cases and Materials on Unincorporated Business Associations," published by Foundation Press (2001).

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