My article on Reasonable Agencies is all but out in the Virginia Law Review.  Here's the abstract:

This article argues that the complex doctrine of judicial review of administrative action—containing no less than six separate tests depending on the sort of agency action to be reviewed—both descriptively is and normatively should be simplified into a “reasonable agency” standard. Courts, following step two of the Chevron doctrine, have started to sneak a reasonableness standard into their review in lieu of making the difficult distinctions required by current doctrine. Scholars evaluating the difference among the various doctrinal tests have started to note the increasing similarity among the tests, at least as applied by the courts. Empirical research, to which this Article contributes an additional study, suggests that regardless of the standard of review, courts affirm agencies’ actions slightly more than two thirds of the time; the variance of the validation rates of agency action, regardless of the standard of review, is small. A reasonable agency standard would simplify and clarify administrative law, better describe what courts actually do when confronted with agency action, and better explain the judicial role in the administrative state. 

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The mortgage interest deduction is funny.  For many people, it's one of thebigger tax deductions.  But, the more prudent you are, the smaller your deduction becomes.  As you pay your loan down, your deduction becomes smaller.  If you take out a 15 year instead of a 30 year, your deduction will be smaller.  However, if you do questionably prudent things, your deduction is larger.  If you take out a home equity loan to go on vacation, your deduction becomes larger.  Mortgage interest is secured, which makes it low to begin with, and then it is subsidized by the deduction.  So, paying extra on your mortgage loan each month instead of putting that money into the (non-recession) market is not mathematically smart.  If you can borrow at 5% and invest at 10%, then shouldn't you do that?  Except that it leaves you vulnerable to losing your home, which is bad.

After the sub-prime mortgage crisis, many thought that the mortgage interest deduction had a part to play.  The deduction really incentivizes debt, not home ownership.  There is no equity deduction, just a debt deduction.  Maybe we should repeal the deduction or decrease it.  Right now, mortgage rates are low (5% on a 30-year this morning), so the effect of repeal would be lessened, right?

But no one seems to have an appetite for changing the deduction according to this WSJ story.  Though Treasury is proposing a decrease in the deduction, no one is biting.  Lobbyists for the real estate industry say it would hurt an already ailing industry.  Last week, the NYT noted that mortgage applications were down.

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Almost exactly one (short) month after a hearing on February 2, 2010, Bankruptcy Judge Burton Lifland has issued an opinion upholding Trustee Irving Picard's calculation of "Net Equity" in untangling Bernard Madoff's Ponzi scheme (referred to by the judge as the "Net Investment Method").  (Story here; opinion here; prior posts here and here.)Though many victims had argued that their claims were equal to the balances on their November 20, 2008 statements from Bernard L. Madoff Investment Securities LLC, the judge held that this "Last Statement Method" ignored the fictitious nature of the returns reflected there and any withdrawals made, which necessarily were paid out of victim principal.  Therefore, the judge upheld the Net Investment Method, which defines a valid claim as the principal paid in less withdrawals.  The judge acknowledges that this method will lessen or extinguish many victims' claims.  However, the court states that "[t]he Net Investment Method harmonizes the definition of Net Equity with these avoidance provisions [from the Bankruptcy Code] by similarly discrediting transfers of purely fictitious amounts and unwinding, rather than legitimizing, the fraudulent scheme."

In anticipation of this ruling, three "net winner" victims have filed a lawsuit in New Jersey against the President and Directors of SIPC for running a "fraudulent investment insurance scheme."  Two of the victims have lessened or extinguished claims under the ruling because of withdrawals, but one victim seems to run afoul of the definition of "customer" (she is a member of an LLC that was a customer).  As they say, we will stay tuned.

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Most of the members of this here blog will be headed to Philadelphia (some of us will not have far to go) tomorrow, to participate in various activities related to transactional legal education, hosted by Karl Okamoto at Drexel.  There is a meet, and there is a conference too.  I will be interested to compare the ways that law schools are trying to get deals into the classrooms - it, as you might expect, is a question that occupies business schools as well.  Anyway, the conference reminds me of the venerable American Society of International Law, which also combines a meeting component and a contest.

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The unexpectedly interesting discussions from yesterday's arguments center around the voir dire process in the Lay/Skilling trial.  (Transcript here.)  Skilling's legal team argues that (1) the trial should have been transferred out of Houston because of community and outrage and pre-trial publicity; (2) that voir dire would not have been a valid method to ensure a fair and impartial jury in this situation; and (3) even if voir dire possibly could have ensured a fair and impartial jury, the truncated (five hour) voir dire mandated by Judge Sim Lake in this case did not.  Although most analysis of the argument yesterday articulates the take-away as being that the judges seemed very concerned with the jury selection process but was also very concerned with micromanaging the jury selection process, the time spent on asking questions about the selection process seem to weight the first part of that take-away as more serious than the first. 

For example, in a single question that runs 31 lines long, Justice Breyer reads from the transcript and gives examples of biased jurors, but also says in the middle "At the same time, I am worried about controlling too much a trial judge.  I have expressed those concerns" before returning to the line of questioning.  Immediately prior to saying that, Breyer points to six jurors that he thinks might have been erroneously denied being struck for cause, requiring the defense to use its last five peremptory challenges against them.  "So I am concerned about the 5 hours, about the lack of recusal for cause, about the very, very brief questions that he provided to people who had said on the questionnaire they could be -- they could be biased.  They said we think he's guilty, for example.  And all those are cause for concern."

Fun stuff.

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There's a lot to glean from the Skilling v. U.S. transcript, here.  Lots about the voir dire proceeding (which is Texas is pronounced "vwore dear," so follow along), which I'll try to cover later.

But in the "honest services" questioning of Deputy Solicitor General MIchael Dreeben, one particular discussion stood out to me, the lowly Business Associations professor.  The justices want Dreeben to admit that the honest services statute could cover an employee using a business computer for personal business.  Dreeben is arguing that the statute only applies to breaches of fiduciary duty (unspecified), but that this means only "undisclosed conflict of interest cases", so obviously does not want to admit this, so he answers "Well, whether the employee had a fiduciary duty in that respect would be I think quite a litigable question."

JUSTICE SCALIA:  I'm sorry.  The duty of an employee to provide honest services to his employer, that's not included because the employee is not a fiduciary?

MR. DREEBEN:  Not all employees are fiduciaries, no, Justice Scalia.  I mean, most fiduciaries have a sort of heightened duty towards the --

JUSTICE SCALIA:  Where do you get the fiduciary limitation?

MR. DREEBEN:  I think that it's inherent.

* * * *

JUSTICE KENNEDY:  What authority do I look to, to see that some employees are fiduciaries and others are not?

MR. DREEBEN:  That would be a standard agency law principle, Justice Kennedy.

JUSTICE KENNEDY:  If I look in the Restatement of Agency and they have a section that applies to fiduciaries and non-fiduciaries, both of whom are employees?

MR. DREEBEN:  Normally, Justice Kennedy, no such complexities are necessary, and I think that this Court can resolve this case without introducing such complexities, because the core duties of loyalty that have formed the core of the honest services prosecutions are universal.

Well, I have more time on my hands than Justice Kennedy had during oral argument (although I don't have the same staff), so I went to the Restatement of Agency.  You see, I tell my students that all employees are agents, and all agents have fiduciary duties.  So, I need to figure out this complexity, even if the Court doesn't need to.

So, Section 801 of the Restatement (Third) of Agency says:   An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship.  This section is entitled the "General Fiduciary Principle."  In the comments,  we learn that this section applies to all common-law agents, who seem to include employees, particularly employees who use work computers for personal use.

All who assent to act on behalf of another person and subject to that person's control are common-law agents as defined in § 1.01 and are subject to the general fiduciary principle stated in this section. Thus, the fiduciary principle is applicable to gratuitous agents as well as to agents who expect compensation for their services, and to employees as well as to nonemployee professionals, intermediaries, and others who act as agents. Cases that limit the fiduciary duty owed by employees generally involve postemployment disputes engendered by a former employee's subsequent competition with the former employer and do not support the limitation of an employee's fiduciary duty to exclude, for example, liability for self-dealing or unconsented-to use of the employer's property during the employment relationship.

Emphasis is mine.

Well, maybe not all employees are agents, which would then make Mr. Dreeben's assertion that not all employees are fiduciaries true.  However, Section 1.01 of the Restatement defines the agency relationship in the way we all recognize: 

Then the Restatement seems to assume that we all know that employees are agents -- they are the easy question as compared to independent contractors, housekeepers, brokers, etc.  The Restatement does, however, explain in Comment G,

As agents, all employees owe duties of loyalty to their employers. The specific implications vary with the position the employee occupies, the nature of the employer's assets to which the employee has access, and the degree of discretion that the employee's work requires. However ministerial or routinized a work assignment may be, no agent, whether or not an employee, is simply a pair of hands, legs, or eyes. All are sentient and, capable of disloyal action, all have the duty to act loyally.  

Again, the emphasis is mine.  The Illustration posits a non-officer, non-director assembly-line worker profiting from information he was told in his line of work. 

From my journey through the Restatement, I would say that if (1) All agents are fiduciaries and (2) all employees are agents, then it's hard to assert that some employees are not fiduciaries.  That being said, I cannot imagine arguing in front of the Supreme Court and being asked a question about the Restatement of Whatever, so I mean Mr. Dreeben no disrespect.  However, in answering this very important question about the honest services statute, I hope that one of Justice Kennedy's clerks writes a nice memo on this point.

UPDATE:  My colleague Larry Ribstein, a noted expert on partnership and agency law, has his own take, based on his own research on partnerships that case law in some circumstances doesn't treat all agents the same.

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Though corporate law is the subject of my research, I teach Torts for fun, and one issue that fascinates me is why folks litigate losses, particularly insured losses.  Another topic that interests me during the year is "underlitigating" -- the choice to litigate an intentional tort as negligence, presumably because negligent acts are insured acts.  (My favorite case is one known to Texans in my age cohort -- Boyles v. Kerr, in which a young woman whose high school friend intentionally made a certain kind of videotape of them unbeknownst to her and then showed it to all his friends sued him unsuccessfully for negligent infliction of emotional distress.  Texas does not recognize direct NIED.)

These two interests are aligning as Valerie Hunter, the widow of the IRS employee killed when Joseph Stack intentionally crashed his plane into IRS offices, has sued Stack's widow under a theory of negligence.  As we learn in the first weeks of Torts, Stack seems to have committed an intentional battery against Vernon Hunter.  Of course, Stack's estate seems to be light on assets now that he burned down his house and crashed his plane.  But negligence?  Against Sheryl Stack?  The theory seems to be of the duty to control/duty to warn type (Remember Tarasoff?):  Ms. Stack knew that Stack was on the edge because she took her minor child and left him the night before, staying at a hotel for her safety.  I would hesitate to put my money on this cause of action unless we know that Stack told his widow the night before that he was specifically going to do harm to the IRS or the government, or some other identifiable victim.  The facts seem to suggest that the widow was worried for her safety, not the safety of a specific third-party.  (And I have no idea how the rules of evidence fit in here --someone else will have to advise me on spousal privilege in this type of civil case.)

Hunter's attorney claims that though her heart goes out to Ms. Stack, she needed to file the lawsuit to (1) see what types of insurance are available in Stack's estate (probably not homeowner's insurance after the time Stack burned his house down, I would guess) and (2) get an injunction so that Vernon Stack's autopsy report would not be released.  Hmmm.  I wonder what's in that report?

So this leads me to my other curiosity -- why?  Is it just the money?  There doesn't seem to be a lot of money to go around here, and Ms. Hunter, whose children are grown and is also an IRS employee, would seem to a little better off financially than Ms. Stack, who has a minor child but no home or personal possessions to her name and possible lingering mortgages and debts.  Possibly Ms. Hunter could have become very irritated by Mr. Stack's grown daughter (from a former marriage) calling her father a "hero" on Good Morning America and seeing facebook and twitter messages repeating the same misguided meme.

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So I assigned Larry Ribstein's Death of Big Law article to my upper level seminar yesterday.  For those of you who haven't read it, Larry takes the reader on a brief tour of old theories of the law firm (tournament of lawyers, etc.), the increasing specialization of partners and their willingness to jump ship the moment a better offer comes their way.  Larry goes on to discuss changes in the law market and how globalization and increasing price sensitivity among clients is threatening the Big Law model, which was never very stable anyway. 

I talked about the importance of a book of business and the pressure to generate billable hours for associates.  What seemed most surprising to the students was the discussion of law firms as businesses in the classroom, with partners and associates making economically self-interested decisions about their careers. 

Halfway through class I got the nagging feeling that I was breaking some unwritten law professor rule.  We're not supposed to talk about the business of law in law school, are we?  At least we generally don't.  Why not?

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Sarah has already snuck a post in on me, but let me cap off a great Monday, March 1 by welcoming Sarah Lawsky as a guest blogger at Conglomerate!  Sarah is a frequent reader and commenter, but she also has a day job as an assistant professor of law at George Washington University Law School.  This year, she is also a visiting professor at the University of Virginia.  A former tax associate at Hogan & Hartson, Sarah teaches and writes in the area of taxation.  Her SSRN page is here.

By the way, here is the best a cappella version of a mix-up of Fat-Bottomed Girls/Baby Got Back you'll ever listen to!  Because we're a family blog, I'll just direct you to YouTube here!

Welcome, Sarah!.

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Are you gonna take my cash tonight
Ah, you make credit way too tight
Are we gonna get us a bailout
Fat bottomed tail you make the market cap go down
Hey, I was just a skinny lad
Thought V-a-R wasn't too bad
Thought ten sigma could not happen in my life
But then I met leptokurtosis
And the next thing that I know is
Great big crash you made a broke boy out of me

Hey hey!

I've been building up my brand
Tranching debt across the land
I seen every market model on the way, hey
But their smoothly normal style
Went kind of jerky after a while
Take me to Benoit and Nassim every time

C'mon--are you gonna take my cash tonight
Ah, you make credit way too tight
Oh, and you take all that I got
Fat bottomed tail you make the market cap go down
Fat bottomed tail you make the market cap go down

Hey listen here--
I bought mortgages on homes
By buying collateralized loans
Ain't no Gaussians in this locality (I tell you)
Oh, I ain't got no pleasure
I gave up all of my treasure
Hey fat tail, you made a poor man out of me

Now get this--
Oh (I know) you gonna take my cash tonight (please don't)
Oh, you make credit way too tight
Oh, we're gonna get us a bailout
Fat bottomed tail you make the market cap go down
Yeah, fat bottomed tail you make the market cap go down

Get to the Fed and beg
Oooh no, so bad, them fat bottomed tails
Fat bottomed tails
No no no, so bad, hey, beg for capital
Fat bottomed tails
No no

(I apologize, to Queen and to you.  Also, any substantive corrections welcome.)

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1. Declaring a pretrial presumption of prejudice to be irrebuttable would create a significant new incentive to restrict press coverage of the most intensely followed prosecutions and thwart the value of openness. Making the presumption irrebuttable would add pressure on trial courts to close pretrial proceedings, gag lawyers and restrict access to records in order to avoid the potential for a mandatory change of venue with its concomitant disruption, delay and expense. More secrecy, in turn, can only undermine the integrity of the judicial system and the public’s confidence that justice is being done.

2. Any standard for identifying when a presumption of prejudice to the jury pool exists must limit the presumption to the rare case where extraordinary factors beyond just the volume and tenor of pretrial press coverage raise specific and concrete concerns about the ability of jurors to reach a verdict based upon the evidence presented in court.  Criminal defendants regularly object to publicity about their prosecutions, and point to extensive media coverage as sufficient grounds for restricting public access to various aspects of the proceeding. In most cases, these concerns are overstated and properly rejected by trial courts under the existing standards governing the constitutional access right. A relaxed standard for determining when a presumption of prejudice exists would threaten to undermine the public access right. To avoid such a result, the Court should make plain that a presumption of prejudice must be based upon more than the existence of significant publicity, but rather requires additional prejudicial factors. Particularly in a large metropolitan area such as Houston, substantial publicity alone should never be sufficient to sustain a presumption of prejudice.

3. Any presumption of prejudice should be rebuttable given the effective remedial tools that are available to a trial court to address concerns that may arise in a high profile criminal prosecution. Voir dire, properly used, is an effective device for screening out potentially biased jurors and those who may have prejudged a defendant’s guilt or innocence. Other steps, such as calling a larger initial venire, allowing additional preemptory challenges, and strict instructions by the trial court can protect the fair trial right in most circumstances. An extensive record of fair and open trials conducted in the most intensely followed cases—resulting in both acquittals and convictions—confirms the ability of trial courts to ensure fair trials before unbiased juries.

In addition, according to this NYT article, Solicitor General Elena Kagan is going to argue that in this age of the Internet, an effective transfer of venue is illusory because media coverage is national, not regional.

However, after having lived in Houston during the "fall of Enron," I have to say that the hatred in Houston was not a general hatred felt by U.S. citizens after hearing of corporate misdeeds.  On the contrary, the intense emotional surrounding the trial, and the tenor of the news coverage, related to the fact that so many Houstonians lost their jobs, their retirement funds, and even their hometown-skewed investment funds due to the fall of Enron.  This also happened to take place during a recession, after HP bought Compaq, creating lost Houston jobs, and after 9-11, affecting Houston-based Continental Airlines.  I would argue that the bias in Houston was regional.  Folks in another part of hte state might have heard a lot about the Enron case, but they probably heard about it through a different news outlet than the Houston Chronicle, didn't read the anti-Enron op-eds that were part of the daily news diet, didn't hear the talk show call-in hours, etc.  I am very interested int he affect of the Internet on choosing jury pools and insulating jurors' decisionmaking, but I'm not sure this particular case has much to say about it.

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I'll leave it to the Law Blog, the BLT, and Scotusblog to continue to do the excellent job they've been doing prepping you for the Skilling honest services case - you can see what Christine thinks here - and point you instead to Donald Kohn's retirement announcement.  Vice-chair of the Fed, Kohn was notable in my view for two things:

• He, along with then NY Fed head Tim Geithner and rich kid Kevin Warsh, appear to have been the inner circle of Fed crisis-deciders, along with Ben Bernanke
• He never spent a day of his career outside government service.

As for the first bullet, that's what those crisis tick-tocks are for.  But the second demonstrates, in my view, that financial regulation isn't wholly unlike the military (a better comparison may be the State Department, but this rarely happens at Justice), where career bureaucrats can reach the tippy top.  Why is this the case for some fancy DC jobs but not others?  One might consider whether there are private sector cognates for the public sector jobs - there aren't for the military, ditto for diplomats, though there is a long tradition of sending your bluest bloods that counteracts it.  But there are plenty of private sector lawyers who donate and would like to run DOJ or the SEC.

The impressive thing about Kohn's rise, in my view, is that there are plenty of bankers who would be similarly inclined vis a vis the Fed.

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In a NY Times op ed, Joel Seligman, an eminence grise of securities regulation, comes out in favor of funding the SEC through fees. His basic argument – that funding the agency through fees charged to industry rather than through Congressional appropriation will make the agency more independent – has much merit. Seligman writes how the binge and purge nature of staffing the SEC has left the agency strapped during prominent episodes of financial fraud.

I agree with much of his analysis if not with his exact prescription. In a 2006 article, The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation, I looked at how the SEC’s overall budget and enforcement budget failed to keep pace with the stock market in the 1990s, leaving the SEC vastly outgunned during the tech stock boom. Here’s one of the graphs from that article showing the ratio of the SEC’s overall budget to the Dow Jones Wilshire Index (i.e. dividing the overall SEC budget by the DJ Wilshire Index in a given year) from 1990 to 2000.

The article includes other data and graphs showing how the number and dollar value of restatements correlated with the years in which the SEC was most outgunned. Colloquially, one could call this the height of the Enron era. My guess is that similar trends might appear in the last decade. So, like Seligman, I’ve been in favor of changing the SEC budget to allow the agency – particularly the enforcement side – to keep up with market levels and transaction volume.

But the Seligman/Obama proposal to fund the SEC through fees has a potential downside. It may create perverse incentives for regulators to take steps to increase the overall number of licenses/registration statements -- or, more profoundly, to not take steps that would decrease the amount of fees generated.  To turn around the title of Seligman's oped, there is some danger with telling the SEC "help yourself."  To continue our blog's recent movie theme - we don't want the SEC to think of itself as Blanche DuBois and having to be dependent on the kindness of the regulated.

That’s why I’ve been in favor of tying the overall SEC budget (and the budget of bank regulators) to market capitalization levels without relying on direct fees. Given that market capitalization depends on many different factors, the incentive of regulators to change their behavior to earn more fees is weaker. This is a fairly simple version of countercyclical regulation.

(To give credit where it is due, I came to this conclusion after a long conversation in 2004 with Lynn Stout. I still appreciate the time she took to talk with me even though I was still in practice and years from being a law professor).

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• The SEC's announcement today about international accounting standards is basically a "we're still working on this" update.  But the report about the comments is interesting: "Commenters expressed widespread support for the goal of having a single set of high-quality globally accepted accounting standards, but differed in their views about the approach in the Proposed Roadmap."  I still find the American embrace of foreign accounting standards to be surprising, Via Securities Mosiac.
•  Given how many law professors have joined the administration, the thing that surprises me about Goodwin Liu is that he's the first nominee from a faculty.  Bet he won't be the last.
• Peter Orzag, Henry Paulson ... our economic regulatory titans are powered by Diet Coke.  It is good to know that it shouldn't do at least one of them in.  Via Marginal Revolution,

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