Bursting the blockchain bubble

The massive hype surrounding the crypto world is unlike anything I have witnessed over three decades in and studying the financial markets. This includes my direct participation in the securities markets while the dotcom boom raged and collapsed. Crypto far exceeds that excess. There are billions of dollars and hundreds of thousands – if not millions – of people now being sucked into the vortex of this very odd world.

What makes it so dangerous is the ability of this whirlwind to enable people “just switch off their brains and stop thinking,” as Martin Walker, recently testified to a Parliamentary Committee. In fact, it was impressive how the members of that Parliamentary Committee were unwilling to accept the simple facts that Walker tried to share with them. Evidence, clearly, of the impact of crypto hype.

Further evidence of the problem was found recently when Professor Nouriel Roubini, an economist famous for having foretold the collapse of the credit markets in 2008, testified to a Senate Committee about his longstanding view that “cyrpto is the mother of all scams and (now busted) bubbles while blockchain is the most over-hyped technology ever, no better than a spreadsheet/database.” Roubini was then made the subject of a twitter attack that appeared to be something on the scale of what the Russians did to Hillary Clinton, including rampant use of anti-semitic comments and tropes.

As a securities lawyer and legal scholar who has spent the last decade studying the decentralization of the stock markets, I have a particular interest in the bitcoin/crypto/ICO space. It is clear to me that the very same radical ideology that somehow convinced the SEC to condone the destruction of a stable stock market has now migrated towards the heart of our financial system, namely the institutions of money, banking, and payment systems. And since I also train future securities lawyers as a law professor I have a particular concern about the way that crypto has taken on momentum in the legal, banking and tech startup world where I work and study.

I plan to post information on my blog about research and events that are helping to burst the bubble that this ideological assault on our financial system represents. The principle that will guide this effort is a simple one, borrowed from the crusading progessive lawyer and future Supreme Court Justice Louis Brandeis, who wrote in his famous 1913 text, Other People’s Money and How the Bankers Use It, that “sunshine is the best disinfectant.”

Delaware Chancery Court slaps Elon Musk’s wrist on SolarCity deal

Tesla shareholders won an important victory for shareholder rights today, at a time when Silicon Valley CEO’s continue to try to wrest power away from their investors through various mechanisms like non-voting stock (SNAP) and dual and triple class capital structures (Google, Facebook, Theranos).

The Delaware Chancery Court denied a motion to dismiss by Tesla in a lawsuit over Tesla’s controversial acquisition of SolarCity.

The close ties between Tesla CEO Elon Musk and his board members at the time of the SolarCity acquisition were clearly a concern for the Delaware Chancery Court. That Tesla has now added two new independent board members is an important acknowledgement that Tesla had a problem prior to this point in time because Tesla’s board was not sufficiently autonomous from Musk.

Technically what happened here is that the Court agreed with the plaintiff shareholders that it would be reasonable to conclude that Musk “controlled” the Tesla board and thus judicial review of the merger vote is subject to the most exacting standard of review, known as “entire fairness,” as opposed to the more deferential “business judgment” standard. Cases like these rarely get dismissed. Now, Tesla will face full discovery of its internal records and a possible trial on the merits or look to settle the case.

One interesting comment by the Court: the judge compared this situation with the Dell MBO and concluded that there Michael Dell took important steps to separate himself from the Board when it considered the acquisition offer from Silverlake et al. But here Musk took “practically no steps to separate [himself] from the Board’s consideration of the Acquisition.”

Does the California State Bar have a race problem?

A recent meeting of the State Bar’s Committee of Bar Examiners (CBE) suggests to me that the California Bar may have a problem with race. That is, its leaders do not understand or are not willing to accept that they are putting up a barrier to minorities who wish to practice law. The evidence of this potential problem is found in the tape of the hearing which you can view here as well as a report prepared by the Bar Association’s staff on the bar exam.

The CBE chair, Karen Goodman, who readily admits (Min. 48:00) that she is from “Elk Grove” (a small town south of Sacramento that is, ironically, quite racially diverse) and so may not understand the data presented to her, questions whether lowering the “cut score” (the minimum number of points needed to pass) on the bar exam would help improve access to justice.

Yet, the data presented to the CBE she chairs indicates clearly that lowering the cut score even a modest amount (and still at a level well above that of New York state) would significantly increase the number of minority lawyers in the state. And this would be true in a state bar that remains overwhelmingly white and male and older, despite significant demographic shifts in the state over the last few decades.

The Bar staff report concluded: “…applicants of color pass the [current] bar exam at rates that are disproportionate to those of their white counterparts.This impact, when combined with disproportionately lower numbers of people of color in the pipeline to higher education and law school, has resulted in a pool of licensed attorneys in California that does not reflect the population of the state.”

And CBE Chair Goodman seems to go out of her way to minimize the impact of not lowering the cut score by suggesting, without any basis, that newly admitted minority lawyers won’t be of any assistance to the communities from which they came because they may not return to work in those settings. She apparently believes, despite decades of experience with affirmative action and other programs suggesting the contrary, that the only way they help those communities is by going back to them!

In any case, she and others on the CBE seemed unfamiliar with the debt repayment plans and financial support for those who go into public interest legal positions that are available to many law school graduates, thus opening a pipeline to enable lawyers to return to those communities. Of course, if we arbitrarily limit the number of minority lawyers that goal is not going to be easy to meet.

The Bar staff report also concluded that lowering the cut score would likely not have any impact on the number of attorneys subject to discipline by the bar, thus the Committee’s mandate to protect the public would still be met: “…attorney discipline – as measured by private and public discipline per thousand attorneys – appears to have no relationship to the cut score….based on the data available, it appears unlikely that changing the cut score would have any impact on the incidence of attorney misconduct.” (p. 36 of the Report to the Board of Trustees of the California State Bar Final Report on the Standard Setting Study and Public Comments Regarding Pass Line Options September 5, 2017.)

Thus, while we do not know why the cut score is so much higher than needed to meet the primary mandate of the CBE (protection of the public), we do know that by setting it at 144 the Bar has put up a wall over which minority law school graduates have difficulty climbing with the inevitable outcome: a disparate impact on those hopeful new law school graduates.

(This is likely why the Bar staff recommended three options: leaving the score the same, lowering it slightly to 141 or lowering it further to 139, a point which would still be 6 points higher than New York. Despite the troglodyte nature of the CBE deliberations, the Board of Trustees voted 6-5 to send all three staff options to the Supreme Court, which remains free to accept or reject those, as it has ultimate authority now over the cut score.)

Goodman and others on the Committee also seem to be ignorant of the actual improving employment data for lawyers in California over the past several years. Instead of using the reliable longitudinal data of, for example, the Bureau of Labor Statistics (which show steady increases in the number of employed lawyers in California over the last decade as well as steady increases in average earnings), Goodman casually read aloud random and somewhat misleading ABA employment reports of various law schools. These only track the first ten months of a law school graduate’s career.

Amazingly, Goodman seems unaware what that means – given the very high cut score in California, many students require several expensive and demoralizing attempts to pass the bar and thus are unable to get jobs as lawyers in those first ten months.

Yet, many of those students will, in fact, eventually pass. They are only forced to delay their careers at great personal expense because of California’s irrational and baseless high passing score required by Goodman’s committee.

In other words, if Goodman and her Committee were truly motivated to improve access to the bar for minorities who wish to become licensed lawyers they could easily take steps to do so. But they have steadfastly refused to do that to date, instead punting the issue to the California Supreme Court. Hopefully, the Court will do the right thing and begin the process of restructuring the State Bar, including its committee structure and current leadership.

At a minimum, they should ignore the self-serving surveys conducted by the current Bar and 1) temporarily lower the cut score to the same level as New York (133 as opposed to its current 144); and 2) appoint a blue ribbon independent commission chaired by Dean Ferruolo of the University of San Diego School of Law to conduct a thorough study of the purpose, impact and structure of the bar exam with a mandate to propose any and all changes needed to improve access to, and effectiveness of, the legal profession in California.

California Bar opens door to increase in bar exam cut score

The State Bar of California has released a study today it conducted of the so-called “cut score” which determines who does and does not pass the California bar exam. Using the results of a focus group of 20 individuals the study concluded that the cut score could go as high as 150 (it currently stands at 144 – second highest in the country) or as low as 139. An accompanying memo from the Bar seems to suggest moving to 141 as the appropriate step. (The Committee of Bar Examiners will discuss today whether to propose lowering the cut score for the recent July 2017 exam only but will then conduct additional hearings before submitting a final recommendation to the Supreme Court.)

Yet the bar also admits there is little correlation between the bar cut score and lawyer competence and therefore consumer protection: “There is no empirical evidence available that would support a statement that as a result of its high pass line California lawyers are more competent than those in other states, nor is there any data that suggests that there are fewer attorney discipline cases per attorney capita in this state.”

But what stands out about the results is the fact that the 20 person focus group relied upon in the study had only 2 hispanic members but 10 white members. Hispanics out number whites in California and access to legal services by minority communities is a significant issue of concern. This raises the issue of inherent bias in the 20 person study group whose subjective views was the key source of input for the result which led to the study’s conclusions.

The Bar is conducting a meeting today to discuss the results. Video can be found here.

UPDATE: The Bar’s Committee of Bar Examiners voted today to send out for public comment two options: keeping the cut score the same and lowering the cut score for July 2017 only to 141.

Policy by committee is not a pretty process….

Another banner year for lawyers, BLS reports

The Bureau of Labor Statistics (BLS) is out with its annual employment report and the news is, once again, very positive for lawyers. Lawyers’ incomes and employment numbers have increased steadily over the last two decades (except for a decline in incomes in 2008 at the onset of the financial crisis).

The BLS reports that the total number of lawyers employed as of May 2016 was 619,530 compared with 609,930 the year before. Lawyers’ mean income was $118,160 compared to last year’s wage of $115,820.

The outlook here in California continues to be strong with 76,840 lawyers earning a mean annual wage of $162,010. This compares to 72,790 lawyers the year before who earned a slightly higher mean wage of $163,020.

The numbers in my region of Silicon Valley (Santa Clara County which includes Palo Alto but not Menlo Park) remain strong with 5,170 lawyers earning the nation’s highest mean wage of $197,320. This represents a correction against last year when there were 5,430 lawyers earning an annual wage of $204,010. This may reflect a shift in the epicenter of Silicon Valley to the social media companies now based in San Francisco. Lawyers employed there rose in the past year from 10,320 to 11,750 while incomes rose from $178,110 to $183,890.

I tracked earlier data here, here and here.

There are some caveats to the data. Solo practitioners and partners in firms are not included in this data. I examined the prospects for solo practitioners here. The former may fall below the means reported here, while partner incomes could easily outpace those of “employed” lawyers so that the overall effect of the exclusions is minimized.

Presidential power or “police state”: Trump relies on discredited 1950 case to defend Executive Order

At the heart of the legal battle over the President’s Executive Order banning refugees from Syria and individuals from seven predominantly muslim nations is a claim that his authority to do so should not be subject to judicial review. If his order on its face states that he has found their exclusion to be in the interests of the United States that should end the matter, at least according to DOJ lawyers in the recent State of Washington litigation.

There is a lot that is wrong in this position including its failure to recognize that the powers of a President NOT subject to judicial review are very limited and have almost never included a situation where he orders an Agency like the Department of Homeland Security to exclude aliens. The Administrative Procedures Act gives the courts wide latitude to review Agency actions, a principle rooted in the fact that Agencies are not creations of plenary executive power.

Nonetheless, to bolster a very weak case, the Government relied heavily in their argument in Washington on Knauff v. Shaughnessy, a 1950 Supreme Court case, where the Court upheld the exclusion of a German woman who had married an American soldier on security grounds. The case is considered long discredited (see Louis Henkin, The President and International Law, 80 AJIL 930, 937 n.20) but is trotted out by the DOJ whenever it tries to defend some unilateral exercise of power by the President. The Government doubles down on Knauff in their motion for an emergency stay to the Ninth Circuit.

Paradoxically the Government relies on Knauff while also relying on Kleindienst v. Mandel although the latter case can be said to have rendered the former no longer good law. The Government likes the Mandel case because it states that the standard of review of a Presidential order in immigration cases is very limited – to simply what the DOJ lawyer in the Washington hearing called “facial” validity. But that is at least some kind of review and Knauff stood for the proposition that the President’s power was in this area was, in essence, not subject to review at all!

It is worthwhile then to consider the following excerpt from the dissent in that case (Knauff v. Shaughnessy) by Justice Robert Jackson (whom the DOJ also quotes in another case in their brief):

Security is like liberty, in that many are the crimes committed in its name. The menace to the security of this country, be it great as it may, from this girl’s admission is as nothing compared to the menace to free institutions inherent in procedures of this pattern. In the name of security, the police state justifies its arbitrary oppressions on evidence that is secret, because security might be prejudiced if it were brought to light in hearings. The plea that evidence of guilt must be secret is abhorrent to free men, because it provides a cloak for the malevolent, the misinformed, the meddlesome, and the corrupt to play the role of informer undetected and uncorrected. Cf. In re Oliver, 333 U. S. 257, 333 U. S. 268.

I am sure the officials here have acted from a sense of duty, with full belief in their lawful power, and no doubt upon information which, if it stood the test of trial, would justify the order of exclusion. But not even they know whether it would stand this test. And anyway, as I have said before, personal confidence in the officials involved does not excuse a judge for sanctioning a procedure that is dangerously wrong in principle. Dissent in Bowles v. United States, 319 U. S. 33, 319 U. S. 37.

Congress will have to use more explicit language than any yet cited before I will agree that it has authorized an administrative officer to break up the family of an American citizen or force him to keep his wife by becoming an exile. Likewise, it will have to be much more explicit before I can agree that it authorized a finding of serious misconduct against the wife of an American citizen without notice of charges, evidence of guilt and a chance to meet it.

I should direct the Attorney General either to produce his evidence justifying exclusion or to admit Mrs. Knauff to the country.

Now this is where it gets interesting: J. Jackson two years after this case wrote his most noted opinion in the Steel Seizure case where he outlined what has become the modern test of the legitimacy of presidential power. He was clearly influenced by what he learned in the earlier Knauff case and pointed out that where a President acts alone without congressional support his power it at its lowest ebb. So if the Government wants to take a Knauff based approach to the current Executive Order it is in fact flying in the face of the Steel Seizure approach. Yet the Government also argues that it has the support of a statute – Immigration and Nationality Act! Well, if that is the case then it cannot rely on Knauff! And then it is back at least in the land of Mandel where it must allow courts some minimal right of review and thus it is required to provide some basis for its claim that the order is facially valid (i.e., that it meets the requirement of the INA that the Order is rooted in a valid concern for US interests.)

Of course, I think the APA and other approaches based on due process should be applied and I think the 9th circuit may agree given the blanket nature of the Order, the utter failure to provide any support for the ban and the highly suspicious statements about religion made by the President.

State of Washington wins major victory against Trump

Here is the court order blocking the Executive Order on immigration.

The common link between Steve Bannon and the alt-right – the “socialism of fools”

There is growing concern about the attention being given to far right organizations in the wake of the election of Donald Trump. But there is a good deal of confusion about how such groups are linked to the incoming Trump Administration.

One line of criticism bases itself on the fact that Steve Bannon, a top advisor to Trump who is set to join the new President in the West Wing upon inauguration, made the link clear when he said that his website, Breitbart.com, provided a platform for the “alt-right” (a euphemism for anti-semitic, fascist and white supremacist organizations and individuals). Bannon is now distancing himself from that remark and the focus on possible actual organizational links between Bannon and the fascist right is not likely to bear fruit.

Far more important are the ideological connections that are helping to foster a hostile environment since the election.

One key common ideological viewpoint shared by Bannon and the fascist right is their shared interest in and support for the ideas of Julius Evola, a leading intellectual of Italian fascism and an agent of Nazi Germany prior to and during World War II. Evola is not a widely familiar figure now but he deserves much closer attention. During the recent controversial conference sponsored by the National Policy Institute in Washington D.C. – complete with explicit Nazi salutes – the leader of the organization, Richard Spencer, referred to the attendees as “Children of the Sun.” This was an explicit reference to the youthful followers of Evola in fascist Italy. For Evola the sun evokes a notion of a pure culture that is superior to darker lunar cultures.

A more powerful idea of Evola’s intrigues much of the fascist right including Steve Bannon: that is Evola’s “traditionalism.” In comments that Bannon delivered via Skype to a conference held in the Vatican in 2014 he said the following:

“When Vladimir Putin, when you really look at some of the underpinnings of some of his beliefs today, a lot of those come from what I call Eurasianism; he’s got an adviser who harkens back to Julius Evola and different writers of the early 20th century who are really the supporters of what’s called the traditionalist movement, which really eventually metastasized into Italian fascism. A lot of people that are traditionalists are attracted to that.

“One of the reasons is that they believe that at least Putin is standing up for traditional institutions, and he’s trying to do it in a form of nationalism — and I think that people, particularly in certain countries, want to see the sovereignty for their country, they want to see nationalism for their country. They don’t believe in this kind of pan-European Union or they don’t believe in the centralized government in the United States. They’d rather see more of a states-based entity that the founders originally set up where freedoms were controlled at the local level.

“I’m not justifying Vladimir Putin and the kleptocracy that he represents, because he eventually is the state capitalist of kleptocracy. However, we the Judeo-Christian West really have to look at what he’s talking about as far as traditionalism goes — particularly the sense of where it supports the underpinnings of nationalism — and I happen to think that the individual sovereignty of a country is a good thing and a strong thing. I think strong countries and strong nationalist movements in countries make strong neighbors, and that is really the building blocks that built Western Europe and the United States, and I think it’s what can see us forward.”

In a single step Bannon artfully evokes via the concept of “traditionalism” both his support and interest in Evola as well as Vladimir Putin and also explains how he wants to “translate” that concept into the American context via nationalism. Thus, when Bannon now tries to distance himself from the explicitly racist and anti-semitic “alt-right” he does it via the concept of traditionalism-cum-nationalism. And there are no shortage of interviews or videos with Bannon where he goes on ad nauseam about his support for nationalism as against the alleged materialist globalism of Washington and New York elites.

That, in turn, leads to the only slightly more palatable rhetoric of Bannon’s new fuhrer – sorry – leader, Donald Trump. When Trump attacks the New York Times, Saturday Night Live or the cast of Hamilton he is invoking the anti-elitist, anti-cosmopolitan and, most importantly, anti-pluralist themes developed by Bannon since he himself abandoned his own “elitist” career as a Wall Street banker. As his remarks to the Vatican conference demonstrate, these themes are deeply rooted in the fascistic concepts of nationalism and traditionalism – an attempt to return the country to some mythical pre-globalist traditional America – an America that has never existed and cannot ever exist.

Unfortunately that approach struck a chord in the recent election with many unemployed and underemployed Americans who think that Trump can conjure up an economic miracle. Bannon himself has said the Trump era is as exciting as the 1930s – a period of massive industrial expansion in countries like the U.S., in part, but also, of course, in fascist Germany and stalinist Russia.

It is no wonder that the German socialist leader August Bebel referred to anti-semitism as the “socialism of fools.”

Trump to channel Nazi Economy Minister Hjalmar Schacht?

David Frum took a shot today on KRCW at predicting what Trump’s economic policy is likely to be. Frum says it will be a heavy dose of debt financed spending on arms and infrastructure which will help boost industrial employment for (largely) white male workers. That will, Frum insightfully suggests, buy him some popularity, perhaps enough to guarantee a second term.

To those who think recalling history is important this should remind people of the policies implemented by the Nazis under Minister of the Economy Hjalmar Schacht. Massive infrastructure spending (the autobahn, for example) was linked to autarkic trade policy as a way to deal with the collapse of the German economy. The financial hunger of the Nazi regime soon turned to the assets of its Jewish population with Schacht (who expressed some opposition to the more extreme anti-semitism of the Nazi party) suggesting that Jewish property be held in trust by the government rather than outright expropriation.

Schacht funded the industrial and military expansion of the Hitler regime in part by the issue of a new basically fraudulent form of government debt known as MeFo Bills. These were used to hide a massive government debt. Today on CNBC Trump advisor Larry Kudlow basically admitted Trump would be forced to inflate debt in order to cover his planned spending because planned tax cuts won’t generate sufficient growth in GDP.

Countries that try to inflate their way out of economic problems end up in deeper trouble. The signs point to a similar path in the new Trump era.

Remember: the securities laws cover unicorns just like every other species!

The big news in Silicon Valley this week was the Wall Street Journal report that “unicorn” medical testing startup Theranos is being investigated by both the Department of Justice and the Securities and Exchange Commission.

This follows the recent visit by SEC Chair Mary Jo White to the Valley where she made clear that the SEC was focused on potential securities law issues related to highly valued startup companies. As I made clear in a book chapter I wrote for a collection edited by UCLA’s Steve Bainbridge, the securities laws prohibit fraud at both public and private companies.

When the pipeline to an IPO slowed for the tech sector in the wake of the dotcom crash many companies opted to stay private longer. When the credit crisis hit that problem deepened. But as the recovery took hold money flooded into certain sectors in the Valley and valuations of many companies soared, giving rise to the “unicorn” label – entities with more than a billion dollar valuation but still privately or closely held.

But just because a company has not yet engaged in a public offering of its shares does not mean the prohibitions agains securities fraud do not apply. They do, even where there is an exemption available that allows a company to limit the disclosure it provides investors. In fact, this is a regulatory framework I am explaining to my securities law students this week.