Synthetic CDOs, Conflicts of Interest, and Securities Fraud

Synthetic CDOs, Conflicts of Interest, and Securities Fraud

Jennifer O’Hare*

Following the financial crisis, the synthetic collateralized debt obligation (“CDO”)—a complex derivative that received little mainstream attention prior to the housing meltdown—became big news. Journalists wrote numerous articles explaining how synthetic CDOs spread the contagion of toxic assets throughout the financial system, nearly bringing down the global economy. Government hearings exposed the ugly conflicts of interest inherent in the structuring of synthetic CDOs, as big investment banks created, sold, and invested in synthetic CDOs and often bet against their clients. Some of the world’s largest financial institutions, who faced bankruptcy when their investments lost value, bitterly complained that these synthetic CDOs had been “designed to fail” so that the investment banks could profit at their expense. Greedy investment banks were seen as the problem, not the synthetic CDOs themselves.

As a result, the Securities and Exchange Commission (“SEC”) sued several of the highest profile investment banks for fraud, and some investors in synthetic CDOs brought their own private actions for fraud against the investment banks. Calls for increased regulation of synthetic CDOs resulted in legislation prohibiting investment banks from engaging in certain conflicts of interest in the sale of synthetic CDOs.

This article shows that focusing primarily on the misconduct by investment banks or on the corresponding harm suffered by investors has caused regulators to miss the real issue: the sale of the synthetic CDO. Outrage over the extraordinary greed and sometimes outrageous misconduct by investment banks in the sale of synthetic CDOs is understandable. However, it was not the bad behavior of the investment banks that furthered the financial crisis; it was the use of the synthetic CDO itself. Because the regulators focused on the wrong problem, the dangers caused by synthetic CDOs still exist and must be addressed through additional regulation.

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*Professor of Law, Villanova University School of Law. J.D., 1990, The George Washington Law School; B.S.E., 1986, The Wharton School of the University of Pennsylvania.

Reclaim This! Getting Credit Seller Rights in Bankruptcy Right

Reclaim This! Getting Credit Seller Rights in Bankruptcy Right

Lawrence Ponoroff*

The oxymoronically titled Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” or “2005 amendments”) has received considerable attention since its passage, and considerably less than all of it is positive. By even a neutral account, the bill is clumsily drafted, unnecessarily prolix, internally inconsistent, and annealed in a cauldron of special interest pressures. The legislative history is scant and what does exist is less than altogether clear or helpful. Together, these factors have frequently rendered the traditional judicial function in application of the law; namely, ascertaining (or at least beginning by ascertaining) congressional intent, an exercise in futility. To say the least, it is difficult to discern that which, in all likelihood, does not and has never existed in a uniform or coherent fashion.

Nonetheless, since enactment of BAPCPA, courts have labored gamely to make sense of its provisions, which, in any number of instances, are inscrutably obscure, and seem to lack any inherently clear reason. Thoughtful commentators have undertaken to offer useful insight and analysis to help guide that effort. Overall, however, these efforts have fallen, and will continue to fall, short in relation to any number of provisions of BAPCPA. This is because they entail a stoic and estimable, but ultimately vain, attempt to interpret statutory text that is, in some instances, impenetrably vague or simply incomplete, or, in other instances, confounds essential bankruptcy policy. A coherent and intelligible expression of legislative intent that might have shed some light in the process is nowhere to be found.  Although the competition is unquestionably stiff, in perhaps no substantive area of the field have these observations been truer than in the efforts to deconstruct and rationally apply the changes BAPCPA wrought on an area of commercial law and practice that was already embroiled in confusion and controversy; namely, sellers’ right of reclamation.

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*Samuel F. Fegtly Chair in Commercial Law, The University of Arizona James E. Rogers College of Law.

Lighting a Fire Under Free Speech: the FDA’s Graphic Attempts to Reduce Smoking Rates

Lighting a Fire Under Free Speech: the FDA’s Graphic Attempts to Reduce Smoking Rates

Ashley Peterson*

More than forty-three million adult Americans are cigarette smokers. Cigarette smoking accounts for 400,000 deaths annually—more than AIDS, alcohol, cocaine, heroin, homicide, suicide, motor vehicle crashes, and fires combined—making cigarettes the leading preventable cause of death in the United States. Tomorrow, approximately 4,000 children under the age of eighteen will experiment with cigarettes for the first time and another 1,500 will become regular smokers. Of those that smoke regularly, about half will eventually die from tobacco use. Tobacco-related illnesses in the United States alone cost approximately $193 billion each year in lost productivity and health care expenditures. These sobering statistics have encouraged public health officials and lawmakers to take drastic action designed to encourage smokers to quit and to prevent young adults from ever lighting up. The Family Smoking Prevention and Tobacco Control Act (“FSPTCA” or “the Act”) and its implementing regulations promote the government’s anti-smoking agenda—at the expense of tobacco companies’ constitutionally protected free speech.

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*J.D. Candidate 2014, University of Richmond School of Law; M.T., 2006, B.A., 2005, University of Virginia.

Civil Practice and Procedure

Civil Practice and Procedure

Andrew P. Sherrod *
Jaime B. Wisegarver **

This article surveys recent significant developments in Virginia civil practice and procedure. The article discusses opinions of the Supreme Court of Virginia from June 2012 through June 2013 addressing civil procedure topics, significant amendments to the Rules of the Supreme Court of Virginia concerning procedural issues during the same period, and legislation enacted by the Virginia General Assembly during its 2013 session that relates to civil practice.

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Civil Practice and Procedure

Corporate and Business Law

Laurence V. Parker, Jr. *

In the 2011 session, the Virginia General Assembly passed House Bill 2358, Benefit Corporations, to be codified as article 22 (the “Benefit Corporations Article”) of the Virginia Stock Corporation Act (“VSCA”). The Benefit Corporations Article is largely based on legislation prepared in other states and allows a Virginia corporation to elect in its articles of incorporation to be treated as a “benefit corporation.” These for-profit corporations are required to pursue not only profitability but also a general public benefit and, if one so elects, one or more specific public benefits. In Section II of this article, the author discusses the Benefit Corporations Article in detail. Section III examines some aspects of the Benefit Corporations Article for social entrepreneurs and practitioners to consider before making the benefit corporation election. In Section IV, the author asks whether practitioners and social entrepreneurs can achieve some of the same corporate governance objectives by private ordering without electing to be treated as benefit corporations. Finally, Section V concludes with some observations about the Benefit Corporations Article itself.

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*   Partner, Williams Mullen, Richmond, Virginia; J.D., 2003, University of Richmond School of Law; M.B.A., 2003, The Robins School of Business, University of Richmond; B.A., 1995, University of Virginia.

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