Schneider proposes (more) insider trading reform for Congress; background guarantees to outrage

Ever feel like it's harder and harder to pay higher and higher bills, even while the news raves about low unemployment, a rising stock market, and the rich get richer?  Feel like our members of Congress are out of touch and only working to line their own pockets?

Not all paranoia is delusional.  Fuel your outrage with Money, Power, and Radical Honesty: A Look at Members of Congress' Use of Information for Financial Gain, an article published by attorney Spencer K. Schneider, once my teaching and research assistant, in the Pepperdine Journal of Business, Entrepreneurship & The Law in November.  Here is the abstract.

Cleared of wrongdoing due to lack of evidence, Senators Kelley Loeffler and David Perdue continued their bids for re-election, and control of the Senate, in the Georgia run-off. Both Senators Loeffler and Perdue traded stocks in the run-up to the COVID-19 crisis after receiving classified briefings. These are just two of many instances of members of Congress profiting after receiving classified information. While the American public remained uninformed as to the true crisis looming as COVID-19 spread, members of Congress received private briefings and quietly sold securities such as travel and hotel related interests, and purchased other securities, such as remote-work software and medical equipment related interests.

Many members of Congress also profit from federal money earmarked to increase the value of their personal land deals, from access to IPOs, and from corporate board seats. While corporate executives, members of the executive branch, and ordinary citizens are subject to strict insider trading laws, members of Congress sail through loopholes and exceptions that are hand-crafted for their benefit. This article reviews proposals for fixing the problem before proposing a comprehensive solution focused on limiting the financial opportunities for members of Congress and strict reporting requirements.

While many proposals to address this problem exist, none come close to preventing members of Congress from profiting in these often nefarious ways. To ensure that members of Congress work on behalf of the American Public—and not their own pocketbooks—the comprehensive and drastic reform articulated in this article is required.

Spencer K. Schneider

Mr. Schneider worked on a piece of this article when he was still a law student under my tutelage.  I remember being flabbergasted by the background section, and then, in January 2021, thinking that we all should be at the Capitol ramparts, but for different reasons.  What's perhaps most disheartening is that past purported reform efforts in Congress have been devoid of will or insincere in execution. I know that Schneider worked hard on his reform proposal and sought advice from skeptical experts. Whether meaningful reform will precede frustration-fueled revolution in this country is anyone's guess.

The article is Spencer K. Schneider, Money, Power, and Radical Honesty: A Look at Members of Congress' Use of Information for Financial Gain, 14 J. Bus. Entrepreneurship & L. 296 (2021).  Schneider is licensed in Massachusetts and bar pending in his present home state of California.

UPDATE, Jan. 28: Less than a week after I posted this item, The Daily Show with Trevor Noah published a nice exposé on congressional insider trading, incorporating some of the same data that fueled Schneider's article and my ire:

Court rejects qui tam suit against big banks because whistleblower relied on publicly available data

"Big Ballin' Money Shot" by Louish Pixel CC BY-NC-ND 2.0

A whistleblower alleged that a who's who of big banks is improperly manipulating the municipal bond market to profit at the expense of Massachusetts taxpayers.  But the Massachusetts high court today rejected the whistleblower's lawsuit because he relied on public data.

This case is of interest because it arises under, and narrows, a state false claims act.  With the federal government doling out billions of dollars in pandemic relief to corporate America, I've predicted, and it doesn't take a crystal ball, that we're going to see a rise in corruption and a corresponding rise in enforcement actions.  One key enforcement mechanism is a false claims act.  In anticipation of good work to be had for lawyers in the false claims vein in coming years, I added the subject this spring to coverage in my 1L Torts II class.

False claims cases, or "qui tam actions," allow any person, a member of the general public called "a relator," to bring a lawsuit on behalf of the government, that is, the public, to recover money lost to fraud or misfeasance.  Derived conceptually from Roman law and carried on in Anglo-American common law for centuries, "qui tam" is short for a Latin phrase meaning one who sues on behalf of the king and for oneself.  Relators are incentivized by being entitled to a cut of any recovery.  Qui tam is authorized in the United States by federal law (§§ 3729-3722, and at DOJ) and the laws of many states (at Mass. AG), varying in their particulars, and also can be a part of sectoral enforcement mechanisms, especially in healthcare and finance.

In the instant case, relator "B.J." Johan Rosenberg, an investment analyst and capital adviser with experience in municipal securities, alleged that banks are pricing municipal bonds and manipulating the market in ways that profitably breach their obligations to their public clients.  Defendants in the Massachusetts case include Chase, Citi, Bank of America, Merrill Lynch, and Morgan Stanley.

The Supreme Judicial Court (SJC) dug into the particulars, which make my eyes glaze over and remind me why I have a financial adviser.  Suffice to say that Rosenberg understands this stuff well.  In 2019, Bloomberg described him as the "mystery man behind $3.6 billion in muni lawsuits," referring to qui tam actions in California, Illinois, and Massachusetts.  In 2015, Bloomberg reported, Rosenberg patented "MuniPriceTracker," a software designed to "ferret out Wall Street chicanery."

"If we're going to have software patents, let's at least have a level playing field"

by Opensource.com CC BY-SA 2.0

Rosenberg's analytical software is key in the instant case, and there the problem arises.  The false claims act in Massachusetts law (§§ 5A to 5O), as in federal law, bars claims based on publicly available information, whether from government reports or "news media."  The theory is that a qui tam statute should incentivize whistle-blowing by persons privy to information that the government and public are not, rather than potentially rewarding someone who rushes to the courthouse with old information.  As the SJC put it: "Where the essential features of an individual's purported chicanery already have been illuminated, ... affording a private party an incentive to bring suit is unwarranted, as it would add nothing to the Commonwealth's knowledge[.]"

The tricky bit in the instant case is that Rosenberg ran his software analysis on publicly available data.  That sourcing disallowed his action.  The court reasoned: "[I]t suffices that other members of the public, albeit with sufficient expertise and after having conducted some analysis, could have identified the true state of affairs by conducting the same data-crunching exercise as did the relator, using the data publicly available on the [Electronic Municipal Market Access] website."

Well, maybe.  To me, the phrase, "with sufficient expertise" is working overtime in that reasoning.  Rosenberg's method is sophisticated enough to be patent-worthy.  I don't think the average taxpayer spends weekends crunching market numbers, however publicly available they are.  And there's no evidence that anyone's doing it at the AG's office, either.  I worry that this narrowing of false claims to exclude "sweat of the brow" extrapolation from public records ill equips society to respond to sophisticated corporate malfeasance that can be revealed only by equally sophisticated detective work.

But I've already confessed my ignorance of finance.  You can read the 36-page opinion and decide for yourself.  Or choose among the views of the amici: the CFA Institute and Taxpayers Against Fraud Education Fund supported Rosenberg, and the Greater Boston Chamber of Commerce and New England Legal Foundation supported the banks.

The case is Rosenberg v. JPMorgan Chase & Co., No. SJC-12973 (Mass. May 11, 2020).  Justice Dalila Wendlandt wrote the opinion, affirming the lower court, for a unanimous SJC of six justices.  She was an accomplished patent attorney before going on the bench.

EU sustainability reg reaches companies in U.S., world

A sustainability regulation from the EU promises to be the next big compliance hurdle deployed on the continent to affect transnational businesses based in the United States and around the world.

The regulation is the subject of a lecture today by my friend and co-author Gaspar Kot in the 2020-21 lecture series, "Contemporary Challenges in Global and American Law," from the Faculty of Law and Administration at Jagiellonian University (JU) in Kraków, Poland, and the Columbus School of Law at the Catholic University of America (CUA) in Washington, D.C.

Gaspar Kot

Kot speaks today on "Sustainable Investment – The New Heart of EU Financial Market Regulation."  His lecture will be published in the CUA YouTube playlist [now available & below].  Here is the abstract.

With increasing concern for global climate change and following the 2015 Paris Agreement obligations, the European Union adopted the Regulation [2019/2088] on Sustainability-Related Disclosures in the Financial Services Sector (SFDR), which took effect beginning March 10, 2021. The SFDR, along with draft regulatory technical standards and the EU’s Taxonomy Regulation, require financial market participants to incorporate sustainability considerations in their governance frameworks, as well as to prepare disclosures and reporting to investors about environmental, social, and governance factors. The EU sustainable investment regime reaches US entities offering investment funds and financial services to European clients. The EU General Data Protection Regulation sent shock waves across the Atlantic and required many US lawyers and businesses quickly to become expert in GDPR requirements. The EU’s ESG requirements are likely to have a similar dramatic border-crossing impact.

Kot is a markets, products, and structuring lawyer for UBS, the Swiss investment bank and financial services company with worldwide offices including more than 5,000 employees in Poland. He heads the asset management stream of the legal department in the UBS Kraków office.

When I last wrote about the winter-spring line-up for the lecture series, the following spring offerings were yet to be announced.  It's not too late now to sign up for four more programs.

• April 14 – Katarzyna Wolska-Wrona, "Approaches to Combating Gender-Based Violence: The Council of Europe Istanbul Convention and a US Perspective"
• April 27 – Mary Graw Leary, "#MeToo and #Black Lives Matter: Conflicting Objectives or Opportunities for Advancement of Shared Priorities?"
• May 12 – Regina T. Jefferson, "Examining United States Retirement Savings Policy through the Lens of International Human Rights Principles"
• June 2 – Wictor Furman, "European and US Perspectives on Investment Fund Regulation"

My students in comparative law especially might be interested in the April 14 program by attorney Wolska-Wrona, an expert with the EU Agency for Fundamental Rights.  Our class looked at eastern European skepticism of the Istanbul Convention as part of our examination of contemporary issues in EU law.  The matter remains timely; Turkey's withdrawal triggered protests just two days ago and was condemned by the Biden Administration.  I also look forward especially to the presentation of Professor Jefferson, who is a gem of a scholar and colleague.

[UPDATED, March 26, with video, below.]

Comparative law talks look to Biden Administration, covid-19 aftermath, EU market, juvenile justice

The winter-spring lecture series, "Contemporary Challenges in Global and American Law," from the Faculty of Law and Administration at Jagiellonian University (JU) in Kraków, Poland, and the Columbus School of Law at the Catholic University of America (CUA) in Washington, D.C., is free and already under way.

The series promises an exciting lineup, continuing from six lectures in fall 2020, all of which may be viewed online.  This semester's offerings kicked off last week, January 13, with London-Milan lawyer Vincenzo Senatore talking about covid-19 as force majeure in contract law, and comparing common law and civil law approaches.

One week from today, January 27, Professor Geoffrey P. Watson, director of the Comparative and International Law Institute at CUA, will talk on "International Law and the New Biden Administration."  Free registration is now open.

Stryjniak

Here's the line-up for February and March.  Watch the website for more in April and May.  Free registration is required for contemporaneous participation.

• February 10 - Katarzyna Stryjniak, "EU and US Budget-Making: Process, Politics, and Policy in a COVID-Challenged World" 
• February 24 - Heidi Mandanis Schooner, "How Well Did the Post-2008 Financial Crisis Regime Prepare the World for the COVID-19 Pandemic?"
• March 2 - Cara H. Drinan, "The War on Kids: Progress and the Path Forward on Juvenile Justice"
• March 24 - Gaspar Kot, "Sustainable Investment – The New Heart of EU Financial Market Regulation"

The lecture series grew out of a summer 2020 pilot program in which I was privileged to participate, and it's been a welcome way, during the pandemic, to connect with colleagues in Europe and take pride in former students.  Now a legal and policy officer with the European Commission, Kasia Stryjniak is a graduate of JU and CUA master's programs.  Gaspar Kot is near completion of the Ph.D. at JU, holds an LL.M. from CUA, coordinates the LL.M. program at JU, and was my co-author on a recent book chapter.