Showing papers in "Fordham Journal of Corporate & Financial Law in 2008"

Securities Regulation in Low-Tier Listing Venues: The Rise of the Alternative Investment Market

Abstract: I. INTRODUCTION In recent years, participants in the world's capital markets witnessed a shift in the tide of international listings. As the U.S. financial market rapidly loses its standing as the center of the global economy, other countries eagerly rise to challenge its dominance. In the aftermath of the Enron collapse and the "dot com" bubble burst, investors and other market participants are turning away from the regulatory burden imposed by the rigorous U.S. securities framework. While some favor delisting,1 others seek jurisdictions with less stringent regulation in which the costs of being a public company are comparatively lower.2 By reducing the cost of listing and remaining listed, this trend allows systems that feature lighter levels of regulation and specialized market segments to thrive. These events might well be considered symptoms of global regulatory competition among securities regulators and stock exchanges.3 The worldwide growth of competing trading fora and a stirring movement for reform in the U.S. have given new life to an old debate concerning the proper degree of regulatory stringency for financial markets. Ascertaining the level of securities regulation that will prove most effective in increasing overall social welfare is not an easy task. A straightforward cost-benefit examination might be insufficient to solve this problem, since it is difficult to quantify the economic effects of securities regulation.4 In any case, an optimal securities framework should strike a balance between investor protection and compliance costs for listed companies.5 The tension lies in introducing proper measures to attain such a balance, while still allowing for the development of a deep and liquid capital market. For instance, even if prophylactic regulation boosts investor confidence in the market, thereby enhancing liquidity, such rules can increase the costs of equity issuances beyond reasonable boundaries.6 This situation could induce public companies to de-list or to seek alternative listing venues.7 Yet, lighter levels of regulation could lead to market failures, eroding investor confidence to a point in which liquidity is constrained and a crash ensues.8 Two moments in U.S. capital market history provide further insight. The 2002 Sarbanes-Oxley Act9 ("SOX") is often criticized for increasing listing costs in the U.S.10 SOX was merely the product of a legislative reaction following a market crash, however, which brings to mind the response to the 1929 collapse that prompted the U.S. Congress to pass the Securities Act of 1933(11) and the Securities Exchange Act of 1934.12 Although the 1930's measures and minor subsequent amendments significantly raised listing costs, they created a framework in which the U.S. market flourished for several decades.13 Scholars argue that despite its higher costs, SOX's dissuasive effect on fraudulent behavior will generate net long-term benefits.14 Moreover, well-known regulatory figures, like former Securities and Exchange Commission ("SEC") chairman Arthur Levitt, call for the implementation of still stronger measures in the United States.15 Nevertheless, proponents of a lighter approach to securities regulation abound in the U.S. and abroad.16 As companies flee from the burden of U.S. regulation, policy-makers and scholars argue for an alleviation of local regulatory requirements for listed companies. The Report of the Committee on Capital Market Regulation (informally dubbed the "Paulson Report," after U.S. Treasury Secretary Henry Paulson) set the tone for reform by pointing out the erosive effect of regulatory intensity on U.S. dominance and competitiveness.17 The publication of the Paulson Report was followed by a study conducted by the Commission on the Regulation of U.S. Capital Markets in the 21st Century.18 The argument of this more recent report hinges on a comprehensive overhaul of the U.S. securities framework, focusing on the federal government's regulatory approach to financial markets and the SEC's powers regarding SOX. …

Executive Compensation: The New Executive Compensation Disclosure Rules Do Not Result in Complete Disclosure

Abstract: INTRODUCTION Can a compensation consultant provide objective advice to the board regarding executives' pay packages when the same consultant provides other services to the company? Can investors understand how executives are compensated if companies do not disclose the level of performance that the company must achieve for executives to obtain certain amounts of compensation? Is the disclosure about executive compensation complete, absent full information regarding earnings on deferred compensation and perquisites?1 This Article concludes that the answer to these three questions is a resounding no.2 Although the Securities and Exchange Commission ("SEC") promulgated new executive compensation disclosure rules that governed the 2007 proxy season,3 the foregoing issues were not adequately addressed by the new rules. For example, when the board of the North Fork Bancorporation ("North Fork") hired Mercer Human Resources Consulting for compensation advice, Mercer suggested a golden parachute that would pay the top three executives $288 million if the company underwent a change in control.4 This package included a tax gross-up on restricted stock to the chief executive officer ("CEO") of $44 million.5 One pay expert concluded that the CEO could potentially receive tax gross-up payments worth nearly $111 million.6 Essentially, the corporation would pay the taxes for a CEO taking home about $185 million.7 This pay package raises a red flag: it is unusual for a company to pay the taxes on restricted stock upon a change in control.8 However, Mercer recommended this uncommon compensation package in a situation where it performed other services for the bank.9 In fact, Mercer earned nearly $1 million in 2002 and 2003 for its services as actuary to North Fork's cash-balance retirement plan.10 North Fork's payment to Mercer for these services certainly raises doubts as to whether Mercer provided objective advice to the board and highlights an area of disclosure that the new rules fail to address. In fact, this compensation package exemplifies the reality of the new rules. While the amendments are an overall improvement to the previous regime, they do not result in complete disclosure. Part I of this Article describes the history of executive compensation and the disclosure of this compensation. Part II discusses problems with incomplete disclosure. Part III discusses the amendments to the executive compensation disclosure rules. Part IV discusses the four areas in which the rules fall short: a lack of information regarding compensation consultants, a lack of disclosure of target performance levels, a lack of disclosure of earnings on deferred compensation, and a lack of disclosure of perquisites. Part V proposes solutions for more effective executive compensation disclosure. Part VI concludes this Article. I. BACKGROUND A. History Of Executive Compensation Executive compensation is a relatively new area of study.11 In fact, such compensation did not exist prior to the development of the modern corporation.12 This form of business organization started with New Jersey legislation in 1896, and by 1901 the first major corporation was organized.13 When corporations first formed and developed, they were led by entrepreneurs, exemplified by men like Henry Ford.14 By the middle of the twentieth century, however, a new class of business actor evolved to run corporate America.15 These individuals did not found companies, but rather made up an elite class of executives who held powerful positions in major corporations.16 Even though a corporation must disclose the pay for its top five executives,17 the study of executive compensation typically focuses on the pay received by the CEO.18 The CEO typically receives the highest pay of any person in the corporation, and this amount of compensation has increased over time.19 By the 1950s, some CEOs were making relatively large salaries, but many salaries were not exorbitant. …

Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program

Abstract: The United States Securities and Exchange Commission (the "SEC" or "Commission") is nearing its seventy-fifth anniversary, a milestone that will be marked by reflection on the past and contemplation of the future1 During this time of introspection, the Commission should take the opportunity to examine the manner in which it has reacted to the growth and changes in its regulatory authority and in the capital markets One constant throughout its history has been the SEC's need to balance competing interests The SEC's stated mission reflects this tension Today, that mission is composed of three objectives: "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation"2 Historically, the SEC's mission has focused on investor protection As the sec and its regulatory powers have grown in response to the ever more complex and international financial services markets, the seemingly straightforward mission of investor protection has become more intricate and multidimensional, prompting questions such as, "Who are the investors that should be protected?" and "How should they be protected?" After all, investors range in sophistication, size, activity, goals, needs, and other attributes They include traditional individual and institutional investors in the securities markets, traders, and foreign entities seeking to invest in the United States3 Choices that the SEC makes in its rulemaking and other activities can favor or disfavor one group of investors over another A rule beneficial for one investor may be detrimental to another, depending on an investor's investment strategy or changing circumstances Indeed, because investors ultimately pay for inefficiencies arising from regulatory mandates through direct or indirect costs, diminished returns, and reduced choice, the rules must be made with careful analysis and deliberation Congress acknowledged this potential harm in 1996 when it revised the SEC's statutory mandate to expressly require the SEC "to consider or determine whether an action is necessary or appropriate in the public interest" and to "consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation"4 This multidimensional aspect of investor protection applies not only to rulemaking, but also to enforcement matters Each enforcement matter involves in some degree a balancing of competing interests, some at a pragmatic, case-specific level and others at a higher policy level For example, in distributing money recovered in an enforcement action against a bankrupt company, the SEC conceivably could decline a distribution to all investors and instead choose a distribution that favors one class of investor over another, such as common stockholders over senior debtholders, which by virtue of their preferred position may have had greater recovery per dollar invested than did common stockholders, but still fell short of their desired recovery In its overall enforcement program, the SEC's decisions about resource allocation, charges to be brought, and relief to be sought may enhance the protection of one group of investors at the potential cost of another Advancing a novel legal theory may protect the group of investors in a particular case, but have unintended detrimental consequences to investors as a whole5 The enforcement decisions of the SEC must be guided by the multidimensional nature of the sec's mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation The difficult choices of balancing conflicting interests must be guided by the transcendent principles of predictability, fairness, and transparency, culminating in the rule of law These principles are the defining characteristics of the US markets In order to assess the SEC's application of these principles to its enforcement decisions, this Article investigates the shifting focus of the SEC's enforcement program from its inception to the present day …

Approaching Comparative Company Law

Abstract: This paper identifies some common errors that occur in comparative law, offers some guidelines to help avoid such errors, and provides a framework for entering into studies of the company laws of three major jurisdictions. The first section illustrates why a conscious approach to comparative company law is useful. Part I discusses some of the problems that can arise in comparative law and offers a few points of caution that can be useful for practical, theoretical and legislative comparative law. Part II discusses some relatively famous examples of comparative analysis gone astray in order to demonstrate the utility of heeding the outlined points of caution. The second section offers a framework for approaching comparative company law. Part III provides an example of using functional definition to demarcate the topic "company law", offering an "effects" test to determine whether a given provision of law should be considered as functionally part of the rules that govern the core characteristics of companies. It does this by presenting the relevant company law statutes and related topical laws of Germany, the United Kingdom and the United States, using Delaware as a proxy for the 50 states. On the basis of this definition, Part IV analyzes the system of legal functions that comprises "company law" in the United States and the European Union. It selects as the predominant factor for consideration the jurisdictions, sub-jurisdictions and rule-making entities that have legislative or rule-making competence in the relevant territorial unit, analyzes the extent of their power, presents the type of law (rules) they enact (issue), and discusses the concrete manner in which the laws and rules of the jurisdictions and sub-jurisdictions can legally interact. Part V looks at the way these jurisdictions do interact on the temporal axis of history, that is, their actual influence on each other, which in the relevant jurisdictions currently takes the form of regulatory competition and legislative harmonization. The method of the approach outlined in this paper borrows much from system theory. The analysis attempts to be detailed without losing track of the overall jurisdictional framework in the countries studied.

Returning Rico to Racketeers: Corporations Cannot Constitute an Associated-in-Fact Enterprise Under 18 U.S.C. § 1961(4)

Abstract: INTRODUCTION The Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68 (2006), prohibits a "person" from engaging in a "pattern of racketeering activity" in connection with the acquisition, establishment, or conduct of an "enterprise."4 Violations of the statute can trigger both civil and criminal penalties,5 including treble damages and attorneys' fees on the civil side. RICO's broad language created a potential for abuse of civil actions, which has long been recognized.6 For more than a decade, however, courts were not confronted by this potential. "Throughout the 1970s and early 1980s, RICO's civil remedies went virtually unnoticed and unused."7 Even criminal suits under RICO were rarely filed before 1982, averaging twenty per year in that period.8 Many of the precedents during these formative years read RICO in a broad, remedial fashion without fear of misapplication.9 The potential for abuse of RICO, especially on the civil side, remained latent. This potential soon became a reality. From 2001 to 2006 alone, civil RICO plaintiffs filed, on average, 759 private civil claims each year. Although astonishing, these numbers are not anomalous given the last two decades of RICO jurisprudence,10 in whom a rising proportion of claims are inapposite to the intentions of RICO's drafters.11 Ironically, actions often target legitimate corporate organizations, among the parties whom RICO was designed to protect from mob infiltration.12 Such claims seek to RICO-ize ordinary commercial activity and turn garden-variety business disputes into federal claims for treble damages and attorney's fees. In one recent example, a professional wrestling promoter sued the makers of action figures and video games and licensing agents, alleging commercial bribery and related claims in connection with licensing agreements.13 Several courts have tried to limit RICO's reach in response to the exponential growth of civil RICO, seeking to prevent the "RICOiz[ation]"14 of the law of corporations, business, or torts. Notably, the Supreme Court limited section 1962(c) to claims based on a strict textual analysis. The Court held that a RICO defendant must participate in the RICO enterprise, not merely conduct its own affairs, to be liable under section 1962(c).15 More recently, the Court now requires that a RICO defendant be distinct from the RICO enterprise.16 In response, private plaintiffs attempt to plead around the rule. Rather than allege that a corporate defendant constitutes an entire enterprise, civil claimants assert that such a defendant belongs to part of a larger group "associated in fact."17 The Supreme Court considered this possibility in Kushner and warned lower courts not to accept this species of evasive pleading.18 Most circuits, however, have found that legal entities can be a part of larger associations in fact.19 This Article contends that a proper reading of the definition of "associated-in-fact" enterprise returns RICO to its racketeering roots. In light of the importance of the statutory definition of "enterprise," its language merits quotation in full: "'enterprise' includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity."20 A close reading of the statute recognizes the difference between a corporation and an individual, resulting in the conclusion that corporations cannot be part of a "group of individuals associated in fact." The inclusion of "group of individuals" was designed to reach associations of figures in an unrecognized criminal organization-not legitimate corporations.21 In other words, the correct reading of RICO would return the statute to its original purpose of combating both the civil and criminal dimensions of organized criminal activity. Part I examines the interpretation of RICO as articulated in seminal circuit precedents. These early cases relied on three principal bases for their decisions. …

The Antitrust Aspects of Bank Mergers - Panel Discussion I: Development of Bank Merger Law

Abstract: THE ANTITRUST ASPECTS OF BANK MERGERS[dagger] PROF. FELSENFELD: I would like to welcome you here this morning to Fordham Law School.5 My name is Carl Felsenfeld. I am the Director of the Financial Services Institute, which is one of the sponsors of today's program, along with K&L Gates6 and the American Antitrust Institute7 in Washington. I would like to mention two major events. One is the United States Supreme Court case United States v. Philadelphia National Bank in 1963,8 that held, among other things, that banks are subject to the antitrust laws in their merger activities and that banking is essentially a local business.9 The Philadelphia National Bank case was strict in their antitrust considerations. We jump ahead thirty-one years, when the Riegle-Neal Banking and Branching Efficiency Act of 1994 was enacted.10 That, for the first time, enabled banks in the United States generally to go interstate.11 That led, of course, to the mammoth mergers that we have seen, which brings antitrust laws to mind. What I have seen since 1994 is that the number one bank in the country will merge with the number five bank in the country and create a multi-state institution, with billions of dollars in assets, and if it is found to violate the antitrust laws, the solution is to knock off half a dozen branches in the Peoria area or something like that, which makes me wonder: Do we really have an effective law of antitrust for banks? I hope the discussion today will consider that. With that, I just want to thank the Fordham Journal of Corporate & Financial Law12 for all their help. Doug, why don't I turn it over to you. It's your program. MR. BRODER: Thank you, Carl. Good morning. My name is Doug Broder. I'm the co-head of the Antitrust Group at K&L Gates, resident here in New York. Our panel this morning is going to discuss the substantive competitive analysis of bank mergers. We have two very distinguished and knowledgeable panelists who are going to talk to us about this subject. Bert Foer is the President of the American Antitrust Institute in Washington, a nonprofit think tank focused on antitrust issues.13 Bert's career has included both private law practice, at Hogan & Hartson and Jackson & Campbell, and government service, as the Assistant Director and the Acting Deputy Director of the FTC's Bureau of Competition.u While at the FTC, Bert was a commissioner on the National Commission on Electronic Fund Transfers.15 Bert also served in the private sector as the CEO of a chain of jewelry stores for twelve years.16 Bert is a graduate of the University of Chicago Law School, has an A.B. from Brandeis and an M.A. in political science from Washington University.17 Bert is going to focus on the legal analysis of mergers. Anne Gron is a senior consultant in the securities and Finance Practice of NERA Economic Consulting.18 Anne has conducted research on, among other things, the effect of regulation in banking and insurance, and the effect of bank portfolio composition on lending.19 Before joining NERA, Anne was an assistant professor at the Kellogg School of Management, after beginning her career as an assistant professor at the University of Chicago's Graduate School of Business.20 Anne received her Ph.D. in economics from MIT, after graduating from Williams College with a degree in economics and computer science.21 Anne, logically enough, will focus on the economic side of bank merger analysis. Before I turn things over to Bert and Anne, I would like to briefly outline the statutory and regulatory context within which bank mergers are analyzed. Generally, the basic law that governs merger analysis in the antitrust laws is the clayton Act, section 7, which outlaws mergers and acquisitions "the effect of which may be to substantially lessen competition or create a monopoly."22 Enforcement of section 7 is invested primarily in the Department of Justice ("DOJ"), and specifically in the Antitrust Division of the Department of Justice, and in the Federal Trade Commission ("FTC") and its Competition Bureau. …

Bridging The Gaps: How Cross-Disciplinary Training with MBAs Can Improve Transactional Education, Prepare Students for Private Practice, and Enhance University Life.

Abstract: I. THE NEED TO IMPROVE PRACTICAL TRAINING FOR LAW STUDENTSAND ONE INNOVATIVE SOLUTION A. The Rising Tide of Criticism In recent years, a growing chorus of law school critics has argued that legal education is not preparing law students to practice law. Cameron Stracher, a New York Law School professor, puts the general problem this way: There appears to be an emerging consensus that although law schools may teach students how to 'think like a lawyer,' they don't really teach them how to be a lawyer. . . . In addition to misleading students, the current system [of legal education] harms clients who often assume that their lawyers have more experience than they do. This emerging consensus found clear expression in a January 2007 report by the Carnegie Foundation for the Advancement of Teaching (the "Carnegie Report").2 Visits to sixteen law schools in the United States and Canada revealed that: Most law schools give only casual attention to teaching students how to use legal thinking in the complexity of actual law practice. Unlike other professional education, most notably medical school, legal education typically pays relatively little attention to direct training in professional practice. The result is to prolong and reinforce the habits of thinking like a student rather than an apprentice practitioner, conveying the impression that lawyers are more like competitive scholars than attorneys engaged with the problems of clients. Neither understanding of the law is exhaustive, of course, but law school's typically unbalanced emphasis on the one perspective can create problems as the students move into practice. Although the Carnegie Report shed new light on the issue, leading practitioners were already well aware of the problem. Business lawyers have been particularly dissatisfied. Charles M. Fox, a former senior partner at Skadden, Arps, Slate, Meagher & Flom LLP, wrote about the lack of transactional training years earlier, noting that while most junior associates know how to handle a litigation assignment, they have little, if any, idea how to work with a contract.4 Christopher E. Austin, a corporate partner at Cleary Gottlieb Steen & Hamilton LLP, says many law school graduates are not well-prepared for a transactional practice and that, among other things, they frequently lack the transactional skills they need. "Many people come with virtually none of those skillsdrafting and negotiating a complex contract, conducting due diligence. . . .We find we have to start on a very basic level."5 To deepen my understanding of the problem, I spoke about transactional training with several other partners at leading transactional law firms in New York and Chicago. Each one said something very similar.6 Law students themselves clearly sense they need more "transactional skills training," as the practitioners say. Victor Fleischer, a law professor at the University of Illinois College of Law, notes: [Law] [s]tudents crave deal experience. About 90 percent of Columbia Law School graduates work as corporate transactional lawyers or litigators with corporate clients within five years of graduation. Consider a typical law student who accepts a job at a large firm. She has spent perhaps 95 percent of her time in law school reading and discussing cases and law review articles. Once in practice, she will go days or weeks at a time without picking up a case or a law review article. Instead, her days will be filled with drafting, reviewing, and marking up transactional documents, negotiating language with opposing counsel . . . and composing memos, emails, and letters to colleagues and clients.7 Law schools can do a much better job training students how to practice law. My interest in this task grew in the fall of 2005 as I began to develop a cross-disciplinary8 negotiation course for New York University ("NYU") law students and business students. The more I learned, the more I discovered the extent of the problem, and ways a course could help solve it. …

Hedge Funds, Liquidity and Prime Brokers

Abstract: INTRODUCTION Over the past decade, the hedge fund industry has enjoyed remarkable growth. The media enthusiastically described the success of the top-performing funds and the lavish riches they bestowed on their employees.1 At the same time, however, there were remarkable stories of failure in the industry.2 Both politicians and economists warned of the potential dangers hedge funds present to the national and global economies.3 These warnings and concerns created a debate regarding the level of regulation needed, if any, over what is currently a largely unregulated industry.4 This Note argues that while increased regulation of the hedge fund industry is necessary, the government's recent and ongoing attempts to increase regulation are misguided. A self-regulating body comprised of the brokers that serve the hedge fund industry is the most efficient and effective instrument to limit the most critical risks hedge funds present, while still maintaining the numerous benefits hedge funds bring to economies. Part I provides a general background of the hedge fund industry, the current regulatory environment in which hedge funds operate, and the risks and shortcomings associated with the current regulatory scheme. Part I also presents the failure of the hedge fund Long-Term Capital Management as an example of the risks inherent in the present regulatory scheme. Part II discusses recent efforts to increase regulation and offers an alternative solution. Part III examines the potential benefits and limitations of the alternative solution. I. THE BENEFITS AND THE RISKS OF HEDGE FUNDS The term "hedge fund" generally refers "to an entity that holds a pool of securities and perhaps other assets, whose interests are not sold in a registered public offering and which is not registered as an investment company under the Investment Company Act [of 19405]."6 A hedge fund's goal is to provide an absolute return to its investors regardless of the overall condition of the securities market.7 Hedge funds trade a variety of securities, such as equities, "fixed income securities, convertible securities, currencies, exchange-traded futures, over-the-counter derivatives, futures contracts, commodity options and other non-securities investments."8 Hedge funds offer many advantages, both to their investors and to the securities market as a whole.9 Hedge funds aim to achieve positive investment returns without the volatility of traditional investments such as stocks and bonds.10 Hedge fund advisers are able to use more sophisticated and flexible investment strategies than advisers at entities such as mutual funds.11 Hedge funds offer investors the opportunity to diversify their portfolios by providing alternative investment vehicles that offer positive returns, while historically showing a low correlation to traditional investments in the fixed-income and equity markets.12 In addition to profiting its own investors, hedge funds also benefit the general securities market. Hedge funds help improve efficiency in pricing securities in the marketplace.13 Funds may take speculative trading positions based on extensive research about the true value or future value of a security, and then execute a "short-term trading strategy to exploit perceived mispricing of securities."14 This behavior tends to cause the market price of the security to move toward its true value.15 Hedge funds also help the overall dispersion of risk in the marketplace.16 For example, they often serve as counterparties to entities that wish to hedge risk.17 The result is that risk is more properly allocated to participants in the financial markets.18 In the case of mortgaged-backed securities, for example, the reallocation of risks made possible by hedge funds allows for lower mortgage interest rates throughout the economy.19 Without hedge funds, the economy would experience a higher overall cost of capital.20 Despite its many advantages, hedge funds can also have negative effects on the economy. …

Perceptions of the Future of Bank Merger Antitrust: Local Areas Will Remain Relevant Markets

Abstract: When asked to offer "perceptions of the future" on bank merger antitrust enforcement, I recalled a statement attributed to physicist Niels Bohr: "Prediction is very difficult, especially about the future."1 And so it is for the future of antitrust. Nevertheless, my perception is that bank merger antitrust will change very little in that the geographic scope of the relevant market for important banking services is, and will remain, local.2 Before peering into the future, however, it is useful to lay a foundation by considering past and present bank merger enforcement. The U.S. Department of Justice ("DOJ") reviews roughly 600 bank mergers per year,3 of which it "challenges" roughly one, although these "challenges" do not entail the filing of complaints in district court. In fact, the DOJ has not filed a complaint against a bank merger since 1993.4 Rather, approximately once per year the DOJ issues a press release announcing that competitive concerns with a bank merger have been resolved though the divestiture of branches along with associated deposits and outstanding loans.5 In reviewing bank mergers, the DOJ and the bank regulatory agencies employ a well-publicized screening process.6 The process focuses primarily on shares of deposits within geographic areas delineated by the regional Federal Reserve banks.7 The 1202 rural regions delineated by the Federal Reserve banks are quite narrow; 573 of them consist of a single county.8 Conversely, the 424 urban areas delineated by the Federal Reserve banks are much broader.9 Indeed, they are markedly broader than the relevant markets found in the Supreme Court's bank merger decisions of the 1960s and 1970s.10 United States v. Philadelphia National Bank11 was the seminal Supreme Court case on the application of antitrust law to bank mergers, and one of the seminal Supreme Court cases on the application of section 7 of the Clayton Act12 to mergers in general.13 In that decision, the Court observed that "[t]he factor of inconvenience localizes banking competition as effectively as high transportation costs in other industries."14 The Court also explained that different bank customers do their banking within areas of varying geographic scope, but the Court grouped all of them together and found that a four-county area surrounding Philadelphia represented a "workable compromise" as to the geographic area in which banks competed.15 The Court defended this area on the basis that the same area had been delineated as the relevant market by the bank regulatory agencies.16 Today, however, the Federal Reserve Bank of Philadelphia delineates a far-broader tencounty market for that city.17 In United States v. Phillipsburg National Bank,18 the Court found the relevant geographic market included only the Phillipsburg-Easton area in western New Jersey, specifically rejecting the district court's inclusion of the adjoining part of Pennsylvania.19 Today, the Federal Reserve Bank of New York includes the adjoining part of Pennsylvania and Phillipsburg-Easton within its huge New York City metro area market, which consists of thirty entire counties and parts of others.20 Phillipsburg National Bank is of interest, however, mainly because it expanded on the Court's rationale for delineating local markets by explaining what the Court termed "[c]ommercial realities."21 The Court explained that the banks at issue "generally compete for deposits within a radius of only a few miles" and that convenience is especially important for "small customers."22 Most importantly, the Court observed that the merging banks' loans were mostly quite small, and declared that the "small borrower . . . must often depend upon his community reputation and upon his relationship with the local banker."23 The Court's rationale for the narrow geographic scope of the relevant market is significant because small business loans have been a major focus of concern in the DOJ's bank merger investigations over the past two decades. …

From Vanilla Swaps to Exotic Credit Derivatives: How to Approach the Interpretation of Credit Events

Abstract: INTRODUCTION The credit derivatives instrument market is like a new continent with boundless opportunity. ' Financial institutions, as well as individual investors, are mobilizing all of their resources as they jump into this frontier head-on.2 Opportunity overflows in the financial market, but the competition is becoming increasingly fierce.3 Cutting edge financial products are introduced every day.4 Credit derivatives lead the way. The credit derivatives market is somewhat akin to the middle age practice of alchemy, by which practitioners attempted to convert lead into gold.5 The goal of each is to create new value. Although the alchemists failed, "financial engineering"6 of the present era succeeds in creating new value through the highest levels of statistical analysis,7 in many ways actually creating something from nothing. Derivative dealers and financial engineers are indeed the alchemists of the modern era. Is a credit derivatives instrument transaction a financial transaction? Or is it gambling? The use of credit derivatives instruments greatly increased once the deregulation of the 1980s spurred greater movement of capital internationally.8 As they became a recognized means of hedging risk, derivative transactions based on the buying and selling of future risks increased in frequency and value.9 Initially, derivative transactions developed to manage the various types of financial risk10 that companies typically face." Credit derivatives instruments satisfied the needs of investors who wanted to reduce asset risk in volatile markets.12 In addition, investors used diverse investment tools through derivative transactions, such as "legging arbitrage,"13 which takes advantage of the difference between spot price and the price of futures, and synthetic transactions between swaps and futures.14 An interesting paradox arose, however, as credit derivatives instruments, developed initially for risk management, continued to grow and become more sophisticated with the help of financial engineeringthe tail began wagging the dog.15 In becoming a medium for speculative transactions, credit derivatives increased, rather than alleviated, risk. This Article explores interpretation of the term "credit event,"16 an important element of "settlement"17 in the credit derivatives instrument transaction. In fact, the definition of a credit event is at the very core of all swap transactions, including the Credit Default Swap ("CDS").18 Part I introduces similar derivatives that were historically used by financial institutions and mentions the development process of the derivative financial market. Part II provides a brief explanation of the various financial products that are used in the credit derivatives instrument market. Part III addresses the legal mechanism of a credit derivatives swap, the most frequent type of transaction in the market today. Part IV discusses general issues related to the credit event. Part V reviews pertinent cases that have been litigated in federal court. In particular, as the interpretation of "credit event" faces fierce dispute, the International Swap and Derivatives Association's ("ISDA") definition of sovereign debt restructuring has become increasingly important.19 The discussion focuses on which interpretation is proper under given circumstances. The conclusion includes an assessment of the courts' interpretation of "credit event" and some recommendations. I. DEVELOPMENT OF THE DERIVATIVES MARKETS Credit derivatives instrument transactions originated in 1993 with the buying and selling of notes of specific transactions by Bankers Trust and Credit Suisse Financial Products of Japan, who linked these notes with the specific risk of default.20 Although it is true that the phrase "credit derivatives instrument transaction" is now common in the financial industry, the notion of linking "credit risk"21 existed in the past with concepts such as "loan participation,"22 "risk participation,"23 and "repo transaction. …

Attorneys as Debt Relief Agencies: Constitutional Considerations

Abstract: INTRODUCTION The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005(1) ("BAPCPA") was signed into law on April 20, 2005,2 and became effective six months later.3 Congress' stated rationale for BAPCPA "is to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors."4 However, critics have charged Congress, despite their decades-long effort,5 with impure motives, sloppy draftsmanship leading to inconsistencies and confusion,6 and "arrogant disregard for the facts about debt and debtors in bankruptcy."7 The creation of a new group, "debt relief agencies,"8 and the corresponding provisions regulating their behavior, may be the most baffling.9 A debt relief agency is a person that provides bankruptcy assistance to an assisted person in exchange for consideration.10 These requirements have sparked a two-part debate: whether attorneys fall within the definition of debt relief agencies,11 and if so, whether an application of these regulations on lawyers as a class violates their First Amendment rights.12 Attorneys should not be included in the definition of debt relief agencies. A contrary ruling notwithstanding, the following provisions should be held unconstitutional: (1) § 526(a)(4), which prohibits debt relief agencies from advising assisted persons to incur more debt;13 (2) § 527, which requires attorneys to make specific statements to their clients;14 (3) § 528, which regulates debt relief agency advertisement;15 and (4) § 526(a)(1), which mandates attorneys to perform specific indicated services.16 I. LEGAL BACKGROUND A. Legislative History BAPCPA arose from the lobbying efforts of a coalition of consumer lenders, who "convinced Congress that abuse was rampant in bankruptcy, that many debtors were using bankruptcy as a 'first resort' to avoid paying creditors, and that courts weren't doing enough to police the bankruptcy system."17 Congress rationalized that BAPCPA would restore integrity to the bankruptcy system and protect both creditors and debtors.18 Congress also singled out attorneys as a major abuser of the bankruptcy system,19 and purported that the amendments would curb such behavior.20 Senator Orrin Hatch of Utah, one of the most ardent supporters of the "debtor's bill of rights," intentionally struck at attorneys when addressing the Senate in favor of section 256 of BAPCPA:21 "Some attorneys . . . leave out the part about the years of ruined credit that result, the inability to get a car loan or a house loan."22 Senator Hatch noted that BAPCPA sought to end incomplete and sometimes incorrect information provided by attorneys to their clients.23 Congress also highlighted attorney abuse, or "gaming" of the system, as a factor in support of bankruptcy reform.24 [T]he present bankruptcy system has loopholes and incentives that allow and-sometimes-even encourage opportunistic personal filings and abuse. . . . [The Justice Department] has 'consistently identified' such problems as 'debtor misconduct and abuse, misconduct by attorneys and other professionals, problems associated with bankruptcy petition preparers, and instances where a debtor's discharge should be challenged.' The courts that have held that attorneys are debt relief agencies have relied on this evidence of legislative intent.26 A failed proposal by Senator Feingold provides another relevant piece of legislative history. On March 9, 2005, Senator Feingold proposed, as part of amendment No. 93,2? that the definition for debt relief agencies exclude attorneys.28 However, the Senate did not pass, or even address, his proposal.29 Although Congress turned down the opportunity to resolve the definition of attorneys as debt relief agencies, Congress did not reject BAPCPA, leaving the inclusion of attorneys an issue of contention. Some legislative history suggests intent to exclude attorneys from the term "debt relief agency. …

A Redeeming Interest in Religious Freedom: Are Islamic Mortgage Alternatives Clogs on the Equitable Right of Redemption?

Abstract: INTRODUCTION While the American dream is as varied as the people that comprise this nation, many would agree that one of the pillars of that dream is home ownership. In light of the Qur'an's prohibition against paying interest,1 homeownership remains nothing more than a dream for many Muslims living in America. This Article explores how a Muslim in America can purchase a home with mortgage alternatives specifically tailored to meet his needs, and how these mortgage alternatives can be executed to avoid becoming a clog on the equitable right of redemption. While these mortgage alternatives are not without critics, courts and regulatory agencies should nevertheless encourage their development because: (1) the Islamic mortgagor's equitable right of redemption is protected, either through contract rights or through the functional equivalent to mortgages; and (2) on balance, these mortgage alternatives help a growing segment of the population realize the American dream. To fully explore this issue, Part I of this Article begins with a thorough discussion of the equitable right of redemption, why mortgagees cannot clog that right, and how the courts of equity determine if that right should be given to a borrower. Part II explores the reasons why Muslims face difficulties in the housing market and how lending institutions are responding to meet the needs of these particular consumers. Part II also details two proposed types of mortgage alternatives available to Muslims, the regulatory responses to them, and addresses challenges from critics. Part III applies a two-step analysis to determine whether the proposed alternatives are equitable mortgages and, if so, whether they clog the borrower's equity of redemption. Lastly, Part IV highlights appropriate means to ameliorate the dangers these alternatives may pose and the benefits these alternatives offer to Islamic mortgagors. I. THE EQUITABLE RIGHT OF REDEMPTION The mortgage, which originated in fourteenth century England,2 commonly consisted of a borrower ("mortgagor") giving a deed in fee simple to a lender ("mortgagee"), with a condition subsequent provision ("defeasance clause") stipulating that if the mortgagor repaid the debt on the given due date ("law day"), the deed would defease and the title would revert back to the mortgagor.3 Under the mortgage, the mortgagee was entitled to possession of the real property and he could collect any rents and apply them to the debt.4 Ironically, the reason for the mortgagee's entitlement to rents was the Church's prohibition on paying interest during this period.5 The harsh reality of the time was that if the mortgagor failed to repay the debt on law day, then the mortgagee would own the real property in fee simple absolute and the defeasance clause would no longer be valid.6 Since the land was generally worth more than the debt, the mortgagee received a windfall.7 In response to the mortgagee's perceived unjust enrichment, mortgagors began to petition the chancery courts to use its equitable powers to permit delinquent mortgagors another opportunity to pay the debt and reclaim their real property.8 The chancellors responded by finding "that prompt payment was not of sufficient importance to justify the debtor losing the property when the lender could be compensated by an award of money . . ."9 and, therefore, created the equitable right of redemption to cure this disparate inequity.10 While initially the chancellors only allowed for redemption to prevent "great injustice[s]," by the seventeenth century the equitable right of redemption was well established as a matter of course and right." As a result of this new equitable right, the delinquent mortgagor was permitted to sue in equity to redeem his property.12 Upon payment of the debt with interest, the chancellor would compel the mortgagee to convey the land to the mortgagor.13 Naturally, the mortgagee did not react favorably to the birth of these new debtor-protection rights. …

An End to the Deadbeat Dad Dilemma? - Puncturing the Paradigm by Allowing a Deduction for Child Support Payments

Abstract: I. INTRODUCTION: THE POLICY RATIONALE FOR A CHILD SUPPORT DEDUCTION Bobby Brown, the once famous RB25 in situations where the mother receives public aid, federal and state governments will provide the child support payment to the mother and hold the father indebted to the government for that amount. …

Bank Merger Reform Takes an Extended Philadelphia National Bank Holiday

Abstract: It is revolting to have no better reason for a rule of law than that so it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from blind imitation of the past.1 I. INTRODUCTION The landscape of the United States dual banking system2 changed dramatically in recent decades. The extent of this change, and the consolidation trend in the financial services industry, challenge the assumption that commercial banks provide services which are unique and insulated from non-bank competition.3 Today, commercial banks face increasing competition from various industries, and much of that new competition recognizes no geographic boundaries. Those charged with overseeing this industry in turmoil must move beyond old assumptions about banking products, services, and markets, as embodied within outdated merger review methodologies. This Article addresses the past, present, and future of banking consolidation with an aim to propose modern reforms to the multi-agency approach to banking antitrust analysis. "The market increasingly is being taken by non-banking entities, both on the credit and deposit side," according to a banking consultant in 1993.4 Customers are taking their business to non-traditional institutions (brokerages, mortgage lenders, and insurers) for their online banking services.5 The advent of "pure Internet banks" presents additional borderless competition with traditional banking institutions, sans the "brick and mortar" overhead.6 Moreover, non-traditional banks, though not regulated in the same manner as traditional banks,7 have increasingly ventured into service areas previously dominated by commercial banks.8 Yet, the erstwhile separation of commerce and banking has less to do with tradition, however, than it is attributable to regulatory restrictions.9 In short, administrative standards differ for banks and non-bank competitors, which in turn inhibits the competitiveness of the banks "in areas where the two intersect."10 According to the Department of Justice ("DOJ"), the repeal of interstate banking prohibitions over the last three decades has "erode[ed] banks' monopoly power in 'traditional' products."11 Only a vestige of the traditional regulatory opposition remains to what now appears to be an almost inevitable trend12 "toward a greater blending of banking and commerce."13 Geographic variables must also be prominent on the regulatory agenda. Purveyors of banking products now include numerous non-traditional entities, and the markets for bank products and services and the firms offering them are no longer just locally situated. Increases in the locations and diversity of a market's participants can influence the competitive landscape. Bank mergers enable companies that do not traditionally provide commercial banking services to compete at the local level with commercial banks. For example, consolidations have expanded the geographic scope of credit card giants-which have expansive reach into almost all communities in the nation. When these credit card giants acquire regional banks, such transactions facilitate a broader market for both the targeted bank and the acquirer. Consolidation in any industry inevitably leads to a discussion that contemplates competitive fairness. The United States Supreme Court took up the issue in 1963. United States v. Philadelphia National Bank, the seminal banking antitrust case, is such a result, applying the Sherman Act of 1890 and the Clayton Act of 1914(14) to commercial banks. The Philadelphia National Bank Court established a long-standing common law bank merger competition analysis, and introduced to the banking antitrust competitive analysis key analytical concepts such as "product or services market" and "relevant geographical market," which became commonplace in the evaluation of probable competitive effects of a proposed merger. …