Thursday, December 22, 2011
UPDATE: Professor Coffee kindly sent me his paper and wrote:
I do not read the blogs (which is only evidence of my antique status and not a rejection of them), but several friends have told me that I am featured today (to my total surprise) in a column on your blog and others. Apparently, I am accused of name calling, to which charge I plead not guilty (and have a counterclaim). The unpublished paper given by me was delivered at a Cornell Law Review symposium here in New York last month. Professor Romano was also a speaker and received a copy. At her request, I emailed her another copy the next day. You can determine whether I engaged in any name calling. She is referred to in the text at page 5, and Professors Bainbridge and Ribstein are referred to at page 7. I summarized their position -- fairly and analytically, I believe -- at page 7. I think what most disturbs Professor Romano is my claim that she lacks any serious theory to undergird her contentions. Indeed, in my view, she has inexplicably ignored the work of Mancur Olson, who long ago explained why reform legislation can only be adopted when large (but impotent) "latent groups" are activated by a political entrepreneur. Otherwise, as he demonstrated in The Logic of Collective Action, smaller but better organized special interest groups will dominate the legislative process and succeed at rent-seeking. Professor Romano has repeatedly argued that securities reform legislation is always misguided and should be curbed by a sunset rule. If you read Olson, you would conclude that there is no need for a sunset rule because the special interests will again dominate the legislative process once the revolutionary euphoria has subsided. Most of this article is about how both Sarbanes-Oxley and Dodd-Frank are being gradually clipped, trimmed, and gutted by such lobbying and legislation. The three authors who feel offended are discussed only on a page and a half. I will in due course respond to Professor Romano's new critique, but have to submit a casebook to Foundation Press by the end of this month. In any event, I also disapprove of name calling and feel that my comments are substantive rather than rhetorical. Professor Bainbridge's reference to Sergeant Schultz was in an oral exchange at an AALS conference where he also was on the panel and could reply. I propose that you let others judge whether this is name calling (and I had not even submitted it to SSRN because I was still considering some of the comments). The article is attached.
Here is the "offending" passage in question, which I think vindicates Professor Coffee's "not guilty" plea:
Professor Romano has her loyal allies. Together, they comprise what might be called the “Tea Party Caucus” of corporate and securities law professors, and their key themes are: (1) Congress should not legislate after a market crash, because the result will be a “Bubble Law” that crudely overregulates, (2) state laws are superior to federal law in regulating corporate governance, because the states are restrained by the competitive pressure of the market for corporate charters; and (3) federal securities law should limit itself to disclosure (at most) and not attempt substantive regulation of corporate governance. The underlying theory here comes very close to asserting that democracy is bad for corporate efficiency, and thus legislative inertia should be encouraged.
 See Stephen M. Bainbridge, THE COMPLETE GUIDE TO SARBANES-OXLEY: UNDERSTANDING HOW SARBANES-OXLEY AFFECTS YOUR BUSINESS (2006); Henry N. Butler & Larry E. Ribstein, THE SARBANES-OXLEY DEBACLE: WHAT WE’VE LEARNED; HOW TO FIX IT (2006); Stephen N. Bainbridge, Sarbanes-Oxley: Legislating in Haste, Repenting in Leisure, 2 Corp. Governance L. Rev. 69 (2006); Larry E. Ribstein, Sarbox: The Road to Nirvana, 2004 Mich. St. L. Rev. 279 (2004); Larry E. Ribstein, Bubble Laws, 40 Hous. L. Rev. 77 (2003-2004); Larry E. Ribstein, International Implications of Sarbanes-Oxley: Raising the Rent on U.S. Law, 3 J. Corp. L. Stud. 299 (2003); Larry E. Ribstein, Markets v. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. Corp. L. (2002-2003); Larry E. Ribstein, Sarbanes-Oxley After Three Years, 2005 N.Z.L. Rev. 365 (2005).
Although these authors do not tire of criticizing SOX, they have not convinced others. Reviewing the same economic evidence, Professor John C. Coates finds it harder to balance the costs and benefits of SOX and generally takes a more balanced position. John C. Coates, The Goals and Promises of the Sarbanes-Oxley Act, 21 J. Econ. Perspectives 91 (2007). Viewing SOX in a less economic light, Professor Donald Langevoort sees SOX as reflecting a shift by Congress from an exclusively contractarian perspective to a more trust-based conception of the corporation. See Donald Langevoort, The Social Construction of Sarbanes-Oxley, 105 Mich. L. Rev. 1817, 1828-1833 (2007).
 Both Professors Bainbridge and Ribstein regularly use the term “Bubble Law” to refer to federal legislation adopted in the wake of a crash that tends to displace state corporate law. See Ribstein, Bubble Laws, supra note 13, and Bainbridge, Dodd-Frank: Quack Corporate Governance Round II, 95 Minn. L. Rev. 1779 (2011).
 Professor Romano has argued that the federal securities laws had historically avoided substantive regulation of corporate behavior, staying safely “within a disclosure regime.” See Roberta Romano, Does the Sarbanes-Oxley Act Have a Future?, 26 Yale J. on Reg. 229, 231 (2009). The distinctive failure of SOX in her view “is its break with the historic federal regulatory approach of requiring disclosure and leaving substantive governance rules to the states’ corporation codes.” Id. at 232. This is a dubious historical generalization. Although the Securities Act of 1933 and the Securities Exchange Act of 1934 do utilize disclosure as their preferred tool, the federal securities laws have frequently regulated substantive corporate conduct and governance. At the time, the most controversial federal securities statute of the 1930s was the Public Utility Holding Company Act of 1935, which imposed a “death sentence” on public utility pyramids and holding company structures – clearly an example of aggressive substantive regulation. See J. Seligman, supra note 2, at 122-23 (describing the Public Utility Holding Company Act as “the most radical reform measure of the Roosevelt Administration”). Similarly, the Investment Company Act of 1940 regulates the board structure of investment companies; initially, it required a minimum 40% of each investment company’s board be composed of disinterested directors (Id. at 228-229), and it also compels them to hold a diversified portfolio and not sell securities “short” – again substantive regulation. More recently, the Foreign Corrupt Practices Act required stronger internal controls over financial reporting (as Professor Romano acknowledges). See Romano, supra, at 231. Thus, SOX was hardly a break with a past in which the federal securities laws only required full disclosure.
The paper argues against their position. "Tempest in a teapot" indeed!