A Political Economy Approach to Reforming the Foreign Corrupt Practices Act

Prohibitions against transnational bribery suffer from a paradoxical problem of simultaneous over- and under-enforcement. On the “supply-side,” U.S. enforcement against bribery through the Foreign Corrupt Practices Act (FCPA) is increasingly over-aggressive, while enforcement by other developed economies is nearly non-existent. On the “demand-side,” governments of developing economies where bribes take place often have neither an interest in nor the capacity to rein in their corrupt officials. In light of these shortcomings, this Article proposes reforming the FCPA as follows. First, the SEC should cease paying profits disgorged by corporate defendants into the U.S. Treasury. Second, disgorgements should instead be transferred to the Host country where bribery took place, conditional on the Host government’s cooperation with the FCPA investigation. And third, if cooperation is not forthcoming, disgorgement proceeds should be transferred to the Organisation for Economic Co-operation and Development (OECD) Working Group—an international organization designed to facilitate the enforcement of the OECD Convention on Combating Bribery. Reforming FCPA enforcement in this manner would re-allocate the proceeds from anti-bribery regulation on a global scale so as to properly align the incentives of the parties involved and provide greater access to the information required for effective enforcement

Reframing International Financial Regulation After the Global Financial Crisis: Rational States and Interdependence, not Regulatory Networks and Soft Law

The British bank Northern Rock failed on September 14, 2007; U.S. investment bank Bear Stearns collapsed on March 17, 2008 and was subject to a government-engineered takeover by J.P. Morgan Chase; and, on the night of September 15, 2008, U.S. investment bank Lehman Brothers filed for bankruptcy and sent global financial markets into disarray the following Monday morning. These financial institutions shared several features in common prior to their downfall, but perhaps the most curious is that they were each considered fully compliant with the second generation framework for the Basel Accords on Capital Adequacy (Basel II), an international agreement requiring banks to maintain capital levels consistent with then, state-of-the-art risk metrics. Basel II, it turns out, was insufficient to ward off the insolvency of many large, multinational financial institutions. The Basel Committee on Bank Supervision was not the only international body exercising oversight of financial firms and markets prior to the global financial crisis of 2008 (2008 Crisis). One function of the International Monetary Fund (IMF) was to provide continuous “surveillance” of international markets. Among other occasions, it did so informally in September of 2008 by publishing statements of its president Olivier Blanchard, entitled “Blanchard Sees Global Economy Weathering Financial Storm.” Contrary to the IMF’s forecast, however, Lehman Brothers collapsed just two weeks later and the global economy capsized in the ensuing financial storm

Overlapping Legal Rules in Financial Regulation and the Administrative State

Reforms which seek to overhaul the Dodd-Frank Acthave begun to gain support within the TrumpAdministration and Congress. The leading proposals gobeyond technical matters and reflect a wholesalecritique: financial regulation has become tooburdensome, too complex, and grants too muchdiscretion to regulators. This Article argues that what isreally at stake in these debates is the distinct issue of“regulatory overlap”—the joint use of multiple legalrules to address a common market failure. It begins bydeveloping a general framework for analyzingoverlapping legal rules of all kinds. That framework isthen applied in case studies of the two cornerstones offinancial regulation: capital adequacy requirements andresolution authority procedures.The most direct contribution of this Article is tosubstantive issues in financial regulation. Each casestudy yields insights about particular portions of theDodd-Frank Act that pending reforms attempt toeliminate, as well as the big picture problems of systemicrisk and banks that are “Too Big To Fail.” On a moretheoretical level, it also situates the concept of regulatoryoverlap within the law-and-economics literature on the optimal design of legal rules, where it is otherwiseconspicuously absent. Lastly, this Article shows how ananalysis of overlapping rules in finance carries lessonsfor the regulatory process as a whole. It thereby adds toscholarship on administrative law, especially toresearch in that area that deals with a related set ofproblems concerning agency jurisdiction, cost-benefitanalysis procedures, and the role of uncertainty in thepolicymaking environment

A Political Economy Approach to Reforming the Foreign Corrupt Practices Act

Prohibitions against transnational bribery suffer from a paradoxical problem of simultaneous over- and under-enforcement. On the “supply-side,” U.S. enforcement against bribery through the Foreign Corrupt Practices Act (FCPA) is increasingly over-aggressive, while enforcement by other developed economies is nearly non-existent. On the “demand-side,” governments of developing economies where bribes take place often have neither an interest in nor the capacity to rein in their corrupt officials. In light of these shortcomings, this Article proposes reforming the FCPA as follows. First, the SEC should cease paying profits disgorged by corporate defendants into the U.S. Treasury. Second, disgorgements should instead be transferred to the Host country where bribery took place, conditional on the Host government’s cooperation with the FCPA investigation. And third, if cooperation is not forthcoming, disgorgement proceeds should be transferred to the Organisation for Economic Co-operation and Development (OECD) Working Group—an international organization designed to facilitate the enforcement of the OECD Convention on Combating Bribery. Reforming FCPA enforcement in this manner would re-allocate the proceeds from anti-bribery regulation on a global scale so as to properly align the incentives of the parties involved and provide greater access to the information required for effective enforcement

A Portfolio Approach to Policymaking Uncertainty

This article examines a basic dilemma that appears across nearly all areas of the law: what is the appropriate regulatory response to uncertainty in the policymaking environment, where the costs, benefits, and other consequences of any particular legal intervention are difficult to predict, and often equally difficult to measure after the fact? Although a vast theoretical literature addresses that question, the existing scholarship almost uniformly seeks to identify a single policy rule or procedure that is most robust to uncertainty. This article takes a fundamentally different approach. By drawing on the leading theory of financial investment under uncertainty-Modern Portfolio Theory-it argues that the primary normative implication of an unpredictable legal landscape is that policymakers should apply a portfolio of overlapping rules. As this article further shows, insights from Modern Portfolio Theory do not only provide normative guidance on how the regulatory structure can account for legal uncertainty; They also explain how the law does in fact address that problem. This second, positive claim helps resolve an empirical puzzle that has long been debated among law-and-economics scholars: why is the joint use of multiple regulations so often found in contexts where a single rule would appear to suffice? The answer, it is argued, is that the widespread use of overlapping regulatory portfolios is an efficient response to the equally widespread problem of policymaking uncertainty. After laying out these theoretical claims, this article provides supporting evidence from a variety of legal areas, including: safety regulations in accident law; the financial regulation of banking crises; and, environmental law on climate change. The case studies demonstrate the flexibility of Modern Portfolio Theory to questions of regulatory design in general. Although the policy challenges posed by automobile traffic, financial crises, and climate change are essentially unrelated, the legal framework governing each of those areas implicitly reflects a portfolio approach.

Too Many to Fail: Against Community Bank Deregulation

Since the 2008 financial crisis, policymakers and scholars have fixated on the problem of “too-big-to-fail” banks. This fixation, however, overlooks the historically dominant pattern in banking crises: the contemporaneous failure of many small institutions. We call this blind spot the “too-many-to-fail” problem and document how its neglect has skewed the past decade of financial regulation. In particular, we argue that, for so- called community banks, there has been a pronounced and unjustifiable shift toward deregulation, culminating in sweeping regulatory rollbacks in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. As this Article demonstrates, this deregulatory trend rests on three myths. First, that community banks do not contribute to systemic risk and were not central to the 2008 crisis. Second, that the Dodd-Frank Act imposed regulatory burdens that threaten the survival of the community bank sector. And third, that community banks cannot remain viable without special subsidies or regulatory advantages. While these claims have gained near- universal acceptance among legal scholars and policymakers, none of them withstands scrutiny. Contrary to the conventional wisdom, community banks were key participants in the 2008 crisis, were not uniquely burdened by postcrisis reforms, and continue to thrive economically. Dispelling these myths about the community bank sector leads to the conclusion that diligent oversight of community banks is necessary to preserve financial stability. Accordingly, this Article recommends a reversal of the community bank deregulatory trend and proposes affirmative reforms, including enhanced supervision and macroprudential stress tests, that would help mitigate systemic risks in the community bank sector

Justice Kavanaugh, \u3cem\u3eLorenzo v. SEC\u3c/em\u3e, and the Post-Kennedy Supreme Court

This Article analyzes a recent Supreme Court case, Lorenzo v. Securities and Exchange Commission, and explains why it provides a valuable window into the Court\u27s future now that Justice Kennedy has retired and his seat filled by Justice Brett Kavanaugh. Lorenzo is an important case that raises fundamental interpretative questions about the reach of federal securities statutes. But most significant is its unique procedural posture: when the Supreme Court issues its decision on Lorenzo in 2019, Justice Kavanaugh will be recused while the other eight Justices rule on a lower court opinion from the D.C. Circuit in which he wrote separately in an extensive dissent. That dissent is quite remarkable. It contains a scathing assessment of securities fraud enforcement and adjudication at the SEC, the majority opinion\u27s interpretation of deceptive financial conduct under Rule 1 Ob-5, and the SEC\u27s overall role in the development of federal securities law doctrine. Judge Kavanaugh\u27s dissent also goes on to identify how the legal deficiencies specific to Lorenzo motivate his broader skepticism towards the constitutional legitimacy of the administrative and regulatory state as a whole; a view that represents his signature contribution as a federal judge. Thus, in Lorenzo, the defining judicial philosophy of the newest Supreme Court Justice is on full display. More broadly, this Article demonstrates that the deeper import of Lorenzo is not what it reveals about the views of Justice Kavanaugh. Rather, it is in the reception those views will meet from the other eight Justices on the Court. In addressing the argument set forth in the Lorenzo dissent, the current members of the Court will be confronting the positions of their newest peer and colleague. By necessity, they will also signal their openness to being persuaded by Justice Kavanaugh on the issues where he speaks with greatest authority and can be expected to act as forceful advocate for his vision of the law at the Court. Lorenzo can therefore be seen as a bellwether for Justice Kavanaugh\u27s influence as judicial entrepreneur on behalf of his trademark theory of the Constitutional separation of powers in administrative law. Most importantly, the case bears directly on the area of administrative law where the stakes are highest of all-the role that Justice Kavanaugh may play in the demise of the Chevron doctrine and the collapse of judicial deference toward the administrative state

The \u3cem\u3eLeidos\u3c/em\u3e Mixup and the Misunderstood Duty to Disclose in Securities Law

This Article concerns the recent Supreme Court case, Leidos,Inc. v. Indiana Public Retirement System (Leidos), and examines the broader issues that it raised for securities law. The consensus among scholars and practitioners is that Leidos presented a direct conflict among the circuit courts over a core question of securities law—when a failure to comply with the SEC’s disclosure requirements can constitute fraud under Rule 10b-5. This Article provides a much different interpretation of the case. It begins by demonstrating that the circuit split which is presumed to have brought Leidos to the Supreme Court does not in fact exist. It then shows that, rather than being riddled with disagreement, the leading judicial analysis in this area of the law instead reflects a shared set of misconceptions about how the securities regulation architecture works. By unraveling the underlying sources of the Leidos mix-up, this Article makes three contributions. First, it identifies overlooked aspects of the disclosure rules at issue in Leidos, and provides a novel analysis of how the case should have been decided. Second, it explains how errors in leading interpretations of the legal authorities implicated in Leidos carry over to other prominent portions of the regulatory framework, namely Sections 11 and 12 of the 1933 Securities Act. Third, it demonstrates that a central yet ill-defined securities doctrine—the duty to disclose—functions primarily to obscure rather than clarify the legal questions at issue in disclosure fraud claims. Taken together, these points suggest that Leidos was a more unusual case than has been appreciated, and stands at a remarkable confluence of legal and scholarly confusions, many of which implicate fundamental principles of securities law

\u3cem\u3eLeidos\u3c/em\u3e and the Roberts Court\u27s Improvident Securities Law Docket

For its October 2017 term, the U.S. Supreme Court took up a noteworthy securities law case, Leidos, Inc. v. Indiana Public Retirement System. The legal question presented in Leidos was whether a failure to comply with a regulation issued by the Securities and Exchange Commission (SEC), Item 303 of Regulation S-K (Item 303), can be grounds for a securities fraud claim pursuant to Rule 10b-5 and the related Section 10(b) of the 1934 Securities Exchange Act. Leidos teed up a significant set of issues because Item 303 concerns one of the more controversial corporate disclosures mandated by the SEC—an overview of known uncertainties facing a company’s financial future, which must be provided in the company’s “Management’s Discussion and Analysis” (MD&A). In an unusual twist to an already unusual case, the parties in Leidos announced a tentative settlement weeks before the Supreme Court was set to hear oral argument, and have successfully moved to hold the case in abeyance on the Court’s docket until the proposed settlement is ultimately rejected or approved