Revolution In Manipulation Law: The New CFTC Rules And The Urgent Need For Economic And Empirical Analyses

Three major banks have now admitted that their employees manipulated worldwide interest rates through the London Interbank Offered Rate (Libor), the most widely used interest rate index. Libor is the interest rate term for trillions of dollars of swaps and loans, and its manipulation may have been used to extract billions of dollars. These allegations come just as commodities manipulation law has been dramatically reformed and the Commodity Futures Trading Commission (CFTC) given vast new regulatory powers. This article provides the first extended, scholarly analysis of the CFTC’s new anti-manipulation rules. We consider the difficulty the rules address: Commodities manipulation claims have traditionally faced nearly insuperable obstacles to success in prosecuting manipulations like that of Libor. We then analyze the new rules, including their extension of the CFTC\u27s powers to cover the swap market. The new rules appropriately lower the standards of pleading and proof, and yet the breadth of the new rules invites abuse. Both to implement the new rules and to prevent overuse, we argue for more elaborate, sophisticated, and creative economic analysis than ever before. We provide a wide-ranging overview of empirical tools for assessing manipulation claims, while re-engaging a decades-old debate on the place of empiricism in the laws of evidence and intent. We provide detailed examples of how manipulation screens are necessary to complete the Dodd-Frank Wall Street Reform and Consumer Protection Act\u27s (Dodd ­ Frank)\u27s revolution in manipulation law

Benchmark Manipulation

Substantial scholarship has questioned whether market manipulation is impossible and regulation unnecessary. This Article challenges orthodox understandings of manipulation, showing that they reflect an obsolete view of markets. While manipulation skeptics discuss prices, markets focus on benchmarks of price—and so do the manipulators who prey upon them. Benchmarks such as LIBOR or the S&P 500 summarize market prices and they have become essential to contemporary markets. They are written directly into industrial contracts, financial derivatives, statutes, and regulations, and so their accuracy affects the economy every bit as much as the prices themselves. They are also are much easier to manipulate than underlying prices, because such benchmarks are typically derived from only a small slice of the market. For example benchmarks of exchange rates—the price of Euros and Yen—reflect only trade prices in a single venue, during a two-minute period of trading. If a manipulator can strategically position trades—placing aggressive purchases on that venue and aggressive sales elsewhere—they can bias the benchmark and therefore project influence over the market as a whole. As manipulation becomes increasingly synonymous with benchmark manipulation, it becomes clear why the recent push by regulators and courts to require fraud in manipulation cases is fundamentally misguided and how a better approach might be fashioned. Likewise, recent proposals to extensively regulate the creation of benchmarks are shown to misunderstand the mechanics of benchmark manipulation

Ex Tempore Contracting

This Article argues that a cornerstone assumption of contemporary contracts scholarship is misleading and limited. Leading academic commentary explicitly assumes that contractual responsibilities are determined in the following way: parties determine many of their duties ex ante, by specifying terms at the time of contract formation, and leave the rest of the terms vague, for a court to specify ex post if any should prove important. This ex ante / ex post dichotomy is the guiding framework in attempts to understand contract design and interpretation. For example, parties use terms like “merchantable” quality when the cost of being more specific up front is higher than the cost of relying on a court to later elaborate its meaning. Yet this dichotomy obscures a third, “real-time” approach to contracting: parties frequently leave terms unspecified and delegate ongoing determination to someone other than a court. This Article identifies this phenomenon, which can be called—as opposed to ex ante and ex post—“ex tempore” contracting. Using a unique cache of data only recently made available, this Article explores ex tempore contracting through a novel dispute management system now prevalent in the construction industry called a “dispute board.” These expert panels radically reduce the cost and frequency of litigation by determining the parties’ responsibilities whenever the parties wish, including in the course of performance. Ex tempore contracting is not merely a dispute resolution system for the construction industry. Ex tempore contracting is also essential to the massive financial derivatives market and countless other transactions. This Article develops important insights for judicial interpretation of contracts and the scholarly analysis thereof. For example, the possibility of ex tempore contracting casts doubt on the wisdom of information-forcing penalty defaults and urges courts to enforce ex tempore contracting clauses much more often than they currently do

The Jurisprudence of Mixed Motives

Legal results often tum on motive, and motive is often complex. How do various domains of law deal with mixed motives? Are we condemned by our darkest motive, forgiven according to our noblest, or something in between? This Article conducts a sweeping examination of motivations in the law, from equal protection and employment discrimination to insider trading and income taxation. It develops a precise descriptive vocabulary for categorizing the treatment of mixed motives in numerous areas of law. This framework yields several important insights. For example, nearly all domains of law pick among just four motive standards, and motive-based analysis is far more workable than commonly believed

Privatizing Personalized Law

In recent years, scholars have devoted increasing attention to the prospect of personalized law. The bulk of the literature has so far concerned whether to personalize any law and, if so, what substantive changes should be instantiated through personalization. Comparatively little discussion has gone to the authorship of personalized laws. Who will make personalized laws? Who will enforce them? In this Essay, I propose we consider the who in the personalization debate. Specifically, I identify the policy considerations that bear on the optimal maker or enforcer of personalized law. To put it another way, my Essay begins where most of the prior literature leaves off: having concluded that personalized law has some merit in a given area, I ask when the state should facilitate personalized lawmaking by nonstate actors. While there are many threads in the discussion, one theme emerges: the move to personalized law is often best taken by private lawmakers. Thus, as both a descriptive and normative matter, a future that makes the best use of personalized law should involve a diminished role for state directives

Insider Tainting: Strategic Tipping of Material Nonpublic Information

Insider trading law is meant to be a shield, protecting the market and investors from unscrupulous traders, but it can also be a sword. Insofar as we penalize trading on the basis of material, nonpublic information, it becomes possible to share information strategically in order to disable or constrain innocent investors. A hostile takeover can be averted, or a bidding war curtailed, because recipients of such information must then refrain from trading. This Article offers the first general account of “insider tainting,” an increasingly pervasive phenomenon of weaponizing insider trading law

Wrong-Termism, Right-Termism, and the Liability Structure of Investor Time Horizons

Do investor time horizons lead to inefficient business conduct in the real economy? An extensive finance literature analyzes whether particular practices (e.g., high frequency trading and stock buybacks) lead firms to operate with inefficiently myopic investment horizons, and an extensive legal literature considers the appropriateness of policy interventions. This Article joins those debates by charting the space of possibilities: what might be the causes of problematic time horizons? What solutions are available? One implication of this analysis is that there may be unexplored market-based solutions located on the liability side of investors’ balance sheets. This Article also argues that we should avoid characterizing the time horizon problem in a manner that subtly endorses some contested perspective on the appropriate time horizon. Rather than investigating excessive “short-termism” or “long-termism,” our starting point should be the broader category of “wrong-termism.

Insider Trading: Are Insolvent Firms Different?

Federal law restricts insider trading. Yet these restrictions operate differently on insolvent or bankrupt firms. The law is more constraining in some respects: federal law extensively regulates the trading of residual claims in solvent firms but not insolvent firms. However, the law is more constraining in other respects: insider trading law does little to limit debt-trading at solvent firms, but a bankruptcy enmeshes all creditors in a web of insider trading rules. This Article identifies insolvency’s economic and legal influence on insider trading law and then normatively evaluates this transformation

The Failure of Mixed-Motives Jurisprudence

Because legal determinations often turn on motive, and motives are often complex, courts must decide what to do about mixed motives. For example, a boss might fire someone both for lawful reasons relating to job performance and also because of illegal prejudice. Increasingly, courts evaluate such cases under a “ButFor standard,” which finds for the plaintiff only if the defendant would have acted differently but for the bad motive. Put another way, the defendant loses unless the bad motive made some kind of causal difference in outcomes. While this approach is intuitive, I argue that the But-For standard is problematic. The widespread acceptance of the But-For standard is the most important failure in our jurisprudence of mixed motives