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Abstract:
This essay discusses two recent episodes in the financial derivatives industry and the television coverage of those episodes. Our discussion focuses on (1) the 1994 bankruptcy of Orange County and the 60 Minutes television program describing that county's derivatives losses and (2) the 1998 near-collapse of Long-Term Capital Management (LTCM) and the PBS NOVA program describing that hedge funds' losses.

Orange County and LTCM appear at opposite ends of the spectrum of recent derivatives losses. Orange County's Treasury was a one-man show, and its now-infamous treasurer, Robert L. Citron, was a seventy-year-old college dropout. In contrast, LTCM was a slick, sophisticated hedge fund, led by John Meriwether, whose principals included two Nobel laureates and several "rocket scientists" recruited from the investment bank Salomon Brothers. Notwithstanding these differences, Orange County and LTCM had two things in common: each lost more than a billion dollars on derivatives and each shrouded the details of its operations in secrecy.

Coverage of LTCM was more accurate than coverage of Orange County. We discuss possible reasons for the difference and make some recommendations about how television programs could depict the derivatives markets more accurately, an important issue given the substantial number of policymakers who learn about derivatives through television. We conclude that television, when done properly, is more than capable of keeping pace with derivatives markets.

Abstract:
Whether and how the federal securities laws should restrict insider trading is one of the most hotly debated topics in the securities law literature. Paradoxically, both the theoretical analysis and the legal rules concerning insider trading remain extraordinarily vague and ill-formed. What is the special character of insider trading that leads to this apparently irresolvable puzzle? In this Article, I argue that there is, in fact, nothing special about insider trading that creates this dilemma, but rather there is something special about the nature of information itself. Accordingly, this theoretical dilemma is not limited to insider trading regulation, but rather pervades all areas of intellectual property law.

In this Article, I situate insider trading regulation within the larger body of intellectual property law by discussing three potential allocations of the property right in valuable inside information. First, inside information could be treated as a public resource, meaning that a person in possession of inside information could not legally exploit that advantage for personal profit. Such a regime would forbid some or all insider trading by forcing the disclosure to the marketplace of inside information prior to trading. I argue that regulators should reject this alternative because, despite it's proponents' tendency to justify the rule in terms of fairness, this proposal is unlikely to foster fairness in any meaningful way.

Alternatively, the property right in valuable inside information could belong to issuers, as the producers of such information. I argue that regulators should reject this alternative because, despite its proponents? tendency to frame their arguments in terms of promoting informational efficiency, a legal regime treating inside information as the property of the issuer is unlikely to further that goal. In fact, such proposals assume an affirmative answer to a question that is fiercely debated in other areas of intellectual property law: does creating a property right in information producers incentivize additional production to the extent necessary to offset the social costs of excluding others from use of the information?

Finally, the property right in valuable inside information could reside with "outsider traders" (traders who possess inside information, but are neither insiders nor constructive insiders of the issuer). I argue that regulators should pursue this alternative because, although there is no need to encourage issuers to create valuable inside information, the need to encourage the dissemination of such information to the marketplace has been recognized for many years. Accordingly, I propose in this Article a system of federal securities regulation that would permit trading by corporate outsiders who did not receive their information in a tip from an insider or constructive insider. Such a system, I argue, provides the hope of filling in the gaps left by the current disclose or abstain system, by encouraging the reflection of material information in stock market price without disclosure of the actual inside information. At the same time, this proposal avoids the perverse incentives and negative impacts on market efficiency attendant in a system that permits insider trading by corporate employees.

Abstract:
Corporate America considers risk management vitally important and considers derivative financial products an indispensable tool for managing many types of financial risk regularly faced by today's corporations. Not content with criticizing derivatives speculation as undesirable, however, some academics have begun to question the seemingly more benign use of derivatives as hedging devices, arguing that, under the irrelevance theorem developed by Franco Modigliani and Merton Miller, such hedging by corporations harms diversified shareholders. This has led some legal commentators to conclude that current corporate law norms fail to provide adequate guidance to management in a world characterized by derivatives and other new financial innovations. In this article, I demonstrate that a broad rethinking of the basic principles of corporate law as applied to corporate derivatives hedging is neither necessary nor warranted. In fact, such arguments raise a severe danger, if adopted by future courts judging management decisions regarding corporate hedging, of undermining the business judgement rule as applied to management hedging decisions. I demonstrate, through both a theoretical and empirical analysis, that because many potential benefits may flow to corporate shareholders due to firm-level hedging, the corporate hedging decision is a business decision just like many other decisions impacting shareholder welfare that are commonly made by corporate management. Accordingly, the decision of whether and how much to hedge should be protected by the business judgement rule, so long as that decision is made in good faith by fully informed and disinterested corporate managers.

Abstract:
Across a range of legal regimes - including environmental, tort, employment discrimination, corporate, securities, and health care law - United States law reduces or eliminates enterprise liability for those organizations that can demonstrate the existence of "effective" internal compliance structures. Presumably, this legal standard rests on an assumption that internal compliance structures reduce the incidence of prohibited conduct within organizations. This Article demonstrates, however, that little evidence exists to support that assumption. In fact, a growing body of evidence indicates that internal compliance structures do not deter prohibited conduct within firms and may largely serve a window-dressing function that provides both market legitimacy and reduced legal liability. This leads to two potential problems: (1) an under-deterrence of corporate misconduct, and (2) a proliferation of costly - but arguably ineffective - internal compliance structures.

The United States legal regime's enthusiastic embrace of internal compliance structures as a liability determinant is consistent with the increasing influence of what are referred to in this Article as "negotiated governance" models that seek to improve government regulation and/or the litigation process through more cooperative governance methods that provide a governance role to the regulated group and other interested parties. Drawing on the incomplete contracts literature, this Article argues that, although the negotiated governance model provides valuable descriptive insights into the mechanisms by which legal rules develop, the model's proponents minimize the dangers of opportunistic behavior during the renegotiation phases of governance (that is, the implementation and enforcement phases) by those with the greatest stake in the meaning of incomplete law - in this case, business organizations and legal compliance professionals, including lawyers.

corporations, criminal law, employment law, corporate law, administrative law, legal professionals

Abstract:
Since the rapid rise in organizational forms for business associations, academics and practitioners have sought to explain the choice of form rationale. Each form contains its own set of default rules that inevitably get factored into this decision, including the extent to which each individual firm owner will be held personally liable for the collective debts and obligations of the firm.

The significance of the differences in these default rules continues to be debated. Many commentators have advanced theories, most notably those based on unlimited liability, profit-sharing, and illiquidity, asserting that the partnership form provides efficiency benefits that outweigh any costs. In this article, the authors test these theories empirically by examining the choice of organizational form by New York law firms. Although the evidence indicates a strong shift from the general partnership form to the limited liability partnership form, a significant number of New York law firms remain general partnerships.

The authors conclude that the prevailing theories based on unlimited liability, profit-sharing, and illiquidity are insufficient and posit that, in contrast to the beliefs of many commentators, the choice of form decision is quite complex. It is dependent on a variety of factors, including the behavior of other similarly situated firms that the decision-makers consider competitors for prestige and clients. Nonetheless, it is apparent that unlimited liability is generally considered burdensome, and it is the authors' prediction that, at some point in time, nearly all the firms in their sample will choose to file as limited liability partnerships. The general partnership form, with its unlimited liability, will operate only as a penalty default that punishes parties who fail to sufficiently define their organization, forcing firm members to reveal relevant information to courts and interested third parties.

partnerships, law firms, limited liability, empirical

Abstract:
In this article, I analyze the motivations underlying the actions of "rogue traders" - market professionals who engage in unauthorized purchases or sales of securities, commodities or derivatives, often for a financial institution's proprietary trading account - and the motivations of the managers or supervisors who are assigned to oversee such traders. After beginning with the observation that rogue trading incidents are neither new nor isolated events, I argue that the continued existence of pervasive rogue trading has remained a mystery for industry observers, particularly given both the extensive legal regime and formal institutional policies apparently designed to curb such behavior. If firms are comprised of rational wealth maximizers who, by definition, behave in a manner that enhances their own self-interest, then why do managers and employee-traders engage in conduct that jeopardizes not only the continued existence of the firm, but also jeopardizes the integrity of the markets in which the firm operates?

Drawing on insights from the fields of psychology and social norms, I argue that most commentators have underestimated the benefits of rogue trading to traders, managers, and, arguably, shareholders. Furthermore, commentators have underestimated the costs to managers and shareholders of curbing rogue trading. Accordingly, a cost-benefit analysis indicates that financial institution management has made a conscious decision to foster an institutional culture that tolerates at least some rogue trading. Consequently, contrary to the conclusions of most other legal scholars, I conclude that market forces cannot be expected to eliminate rogue trading, because eliminating the conditions that give rise to rogue trading is not in the best interest of traders, managers, or, perhaps, of shareholders.

Abstract:
Since ancient times, legal scholars have explored the vexing question of when and what a contracting party must disclose to her counterparty, even in the absence of explicit misleading statements. This fascination has culminated in a set of claims regarding which factors drive courts to impose disclosure duties on informed parties. Most of these claims are based on analysis of a small number of non-randomly selected cases and have not been tested systematically. This article represents the first attempt to systematically test a number of these claims using data coded from 466 case decisions spanning over a wide array of jurisdictions and covering over 200 years.

The results are mixed. In some cases it appears that conventional wisdom is correct. For example, our data support the claim that courts are more likely to require disclosure of latent, as opposed to patent, defects. In addition, courts are more likely to require full disclosure between parties in a fiduciary or confidential relationship. On the other hand, our results cast doubt on much of the conventional wisdom regarding the law of fraudulent silence. Indeed, our results challenge ten of the most prominent theories that have been asserted to explain when courts will require disclosure. We find that courts are no more likely to impose disclosure duties when the information is casually acquired as opposed to deliberately acquired and that unequal access to information by the contracting parties is not a significant factor that drives courts to require disclosure. We do find, however, that when these two factors are present simultaneously courts are significantly more likely to force disclosure. Perhaps most interestingly, although it is generally understood that courts have become more likely to impose disclosure duties over time, we find that courts actually have become less likely to require disclosure over time.

contract, tort, litigation, disclosure, common law, duty to disclose

Abstract:
This article demonstrates that, at least since the adoption of the Organizational Sentencing Guidelines in 1991, the United States legal regime has been moving away from a system of strict vicarious liability toward a system of duty-based organizational liability. Under this system, organizational liability for agent misconduct is dependant on whether or not the organization has exercised due care to avoid the harm in question, rather than under traditional agency principles of respondeat superior. Courts and agencies typically evaluate the level of care exercised by the organization by inquiring whether the organization had in place internal compliance structures ostensibly designed to detect and discourage such conduct.

I argue, however, that any internal compliance-based organizational liability regime is likely to fail because courts and agencies lack sufficient information about the effectiveness of such structures. As a result, an internal compliance-based liability system encourages the implementation of largely cosmetic internal compliance structures that reduce legal liability without reducing the incidence of organizational misconduct. Furthermore, a review of the empirical literature on the effectiveness of internal compliance structures suggests that many organizations have adopted precisely this cosmetic approach to internal compliance. This leads to two potential problems: first, an underdeterrence of organizational misconduct and, second, a proliferation of costly but ineffective internal compliance structures.

Corporate crime, corporate law, compliance, criminal law, employment law

Abstract:
Lawmakers often have an incentive to avoid making important policy choices, shifting responsibility for the outcomes of those choices onto other governmental branches. Statutory incompleteness (that is, a statute containing a gap or ambiguity) provides a mechanism for accomplishing this transfer of responsibility. Drawing on the incomplete contracts literature, we argue that the reasons for statutory incompleteness should form an important consideration for courts faced with interpretive disputes regarding an incomplete statutory provision. Specifically, if lawmakers attempt to employ statutory incompleteness as a means to shift responsibility for difficult policy choices onto courts or agencies, courts should penalize lawmakers by holding that the provision in question is an unconstitutional delegation of legislative authority. In contrast, when statutory incompleteness is inadvertent or attributable to a legislative desire to enhance public welfare - such as, for example, an attempt to reduce the transaction costs of lawmaking or harness the special expertise of courts or agencies - a penalty would be futile or overly costly and should not apply.

This "Penalty Default Canon" sheds new light on the Chevron and non-delegation doctrines, as well as many theories of statutory interpretation. Indeed, we demonstrate that these theories and doctrines are flawed because they assume a single underlying cause of statutory incompleteness. The Penalty Default Canon, in contrast, is more nuanced, mimicking the approach taken by contract scholars and courts in the setting of contractual default rules. The article develops a three-part test for discerning the underlying source of statutory incompleteness through a careful examination of legislative history and interest group dynamics. We then apply this test to two statutory provisions that we argue Congress left intentionally incomplete: the "strong inference" provision of the Private Securities Litigation Reform Act of 1995 and Section 6 of the Clayton Act.

default rules, penalty default, nondelegation doctrine, statutory interpreation, incomplete contracts

Abstract:
This paper considers the role that contract doctrine should play in facilitating optimal investment in contractual relationships. All contracts are incomplete in the sense that they do not specify the optimal actions for the buyer and seller in every future contingency. This incompleteness can lead to both under and over-investment in resources specifically targeted to the needs of the other contracting party. To solve these investment problems, economists and legal scholars have looked to complicated contractual solutions and the ownership of assets.

This Article offers another solution: contract doctrine. Specifically, we propose a contractual default rule applicable to all contract interpretation, gap-filling, and good faith inquiries (a relationship-specific investment, or RSI default) that accounts for the renegotiation position of contracting parties. Because contractual default rules form the backdrop against which parties renegotiate, the RSI default allocates bargaining power to one party or the other in much the same manner as does ownership. The RSI default favors the contracting party making an RSI, while at the same time minimizing potential problems of over-investment through a notice requirement. We also offer some preliminary thoughts on the problem of two-sided RSIs.

incomplete contracts, relationship-specific investment, default rules, theory of the firm

Abstract:
Abstract: The ethnic and gender make-up of corporate boards has been the subject of intense public and regulatory focus in many countries, including the United States, in recent years. Of particular interest has been quantitative research on the impact, if any, of board diversity on corporate performance. This body of work leaves substantial gaps in our understanding of the precise mechanisms by which board diversity may alter the corporate environment, if indeed it does. In this Symposium, we discuss some preliminary findings from our first thirty-five of a series of confidential, semi-structured interviews of 45 to 90 minutes in length with corporate directors and other interested parties. Due to multiple board service, these interviews represent ninety-six public company board experiences at eighty-five different public companies. We limit our discussion in this Symposium to an analysis of the rationale for board diversity that figured most prominently in interviews with our initial sample of respondents: signaling theory. Although signaling is frequently mentioned by our respondents and other researchers as a rationale supporting board diversity, we conclude that the distribution of costs and benefits of board diversity in "good" firms versus "bad" firms is unknown. We thus are unable to conclude that "bad" firms are not mimicking the signal, undermining the stability of board diversity as a meaningful signal. We, therefore, approach blanket assertions of the signaling benefits of board diversity with caution. We conclude that the signaling rationale for board diversity is at its strongest under particular conditions that may not exist in all corporations at all times.

corporations, boards of directors, diversity, women, minorities, signaling

Abstract:
In this Article, the author analyzes the reactions of 147 New York City law firms to the 1994 enactment of the New York Limited Liability Partnership statute, which provided New York law firm partners with the first convenient mechanism to limit their personal liability for partnership debts. Using both quantitative and qualitative evidence, she evaluates whether the behavior of New York law firms supports the signaling theory of organizational form - that is, the theory that firms use the partnership form to signal to the marketplace that they provide high quality legal services, due to either superior monitoring or to profit sharing. She concludes that the quantitative data do not strongly support either signaling theory of partnership. In addition, both theories face substantial theoretical hurdles.

At the same time, interviews with law firm partners suggest that signaling concerns did impact law firm choice of form, in some cases profoundly. The author proposes three modifications to the signaling theory of organizational form that render the theory both more theoretically persuasive and more consistent with the observed behavior of law firms. First, the relevant signal appears to be negative, rather than positive. Second, this negative signal is more costly to elite firms than to non-elite firms. Third, firms may attempt to signal something other than, or in addition to, quality through their choice of organizational form - namely, status.

law firms, legal profession, signaling, monitoring, organizational form, partnership, LLP

Abstract:
Over the last generation, the concept of diversity has become commonplace and taken-for-granted in discourses ranging from law to education to business. In higher education, for example, it is hard to imagine a faculty job search or a student admissions discussion that was not heavily laden with talk of diversity, in the sense of the representative inclusion of women and racial and ethnic minorities in a group or organization. In this paper we present the results of an interview-based study of the discourse of diversity in a particular business setting: the corporate boardroom. Our principal observation is that - thirty-one years after the Supreme Court's Bakke decision introduced the term into public discourse - corporate insiders appear not to have arrived at a master narrative to explain the pursuit of diversity on boards of directors. Instead, their accounts stress a variety of factors and feature few concrete examples.

diversity, race, gender, corporations, board of directors

Abstract:
The "rogue trader" - a famed figure of the 1990's - recently has returned to prominence due largely to two phenomena. First, recent U.S. mortgage market volatility spilled over into stock, commodity, and derivative markets worldwide, causing large financial institution losses and revealing previously hidden unauthorized positions. Second, the rogue trader has gained importance as banks around the world have focused more attention on operational risk in response to regulatory changes prompted by the Basel II Capital Accord. This Article contends that of the many regulatory options available to the Basel Committee for addressing operational risk it arguably chose the worst: an enforced self-regulatory regime unlikely to substantially alter financial institutions' ability to successfully manage operational risk. That regime also poses the danger of high costs, a false sense of security, and perverse incentives. Particularly with respect to the low-frequency, high-impact events - including rogue trading - that may be the greatest threat to bank stability and soundness, attempts at enforced self-regulation are unlikely to significantly reduce operational risk, because those financial institutions with the highest operational risk are the least likely to credibly assess that risk and set aside adequate capital under a regime of enforced self-regulation.

rogue trading, operational risk, enforced self-regulation, Basel, bank regulation

Abstract:
Central to every legal system is the principle that certain items are off-limits to commercial exchange. In theory, babies are one such sacred object. This supposed ban on baby selling has been lamented by those who view commercial markets as the most efficient means of allocating resources, and defended by those who contend that commercial markets in parental rights commodify human beings, compromise individual dignity, or jeopardize fundamental values. However, the supposed and much-discussed baby selling ban does not, and is not intended to, eliminate commercial transactions in children. Instead, it is an asymmetric legal restriction that limits the ability of baby market suppliers to share in the full profits generated by their reproductive labor, insisting instead that they derive a large portion of their compensation from the utility associated with altruistic donation. Meanwhile, a wide range of baby market intermediaries profit handsomely in the baby market, without similar restrictions on their market activities. Baby selling "bans" thus have more in common with the rent-seeking by powerful marketplace actors seen in other commercial markets than with normative statements about the sanctity of human life. The author concludes with a call for the removal of the last vestiges of the "ban" against baby selling and other laws that diminish the capacity of baby market suppliers to access the marketplace.

altruism, intermediation, commodification, baby markets

Abstract:
This Article considers the market structure of the human egg (or “oocyte”) donation business, particularly the presence of anti-competitive behavior by the fertility industry, including horizontal price-fixing of the type long considered per se illegal in other industries. The Article explores why this attempted collusion has failed to generate the same public and regulatory concern prompted by similar behavior in other industries, arguing that the persistent dialogue of gift-giving and altruistic donation obscures both the highly commercial nature of egg “donation” and the benefits to the fertility industry of controlling the price of a necessary input into many fertility services – namely, eggs. A comparison to the egg market’s closest cousin – the sperm market – does not reveal similar collusive attempts to depress the price of sperm. A further analysis of the industry explores potential reasons for this difference.

egg, oocyte, sperm, antitrust, sherman act, price-fixing, restraint on competition, fertility industry

Abstract:
As your parents doubtless told you, money can't buy everything. Nearly all cultures reserve certain items, activities, and entitlements as inalienable for profit. It would be incorrect to assume, however, that the individual mental accounting, social norms, and laws regarding the proper scope of commercial activity are universal, preordained, or inflexible. In fact, researchers across disciplines have demonstrated both the malleability and context-dependency of individual mental accounting, and the socially constructed nature of relational boundaries and the accepted means of exchange within them, which vary across time and cultures. Moreover, technological innovation, social or political change, or other developments may create previously unknown circumstances for which there are no existing rules of accepted exchange, causing social strain.

The contributors to this volume consider at length the consequences of making - and restricting - markets in various types of traditionally forbidden or contested exchange, including human blood, organs, eggs, sperm, reproductive services, and labor. What are the problems with, objections to, defenses of, impediments for, developments in, and challenges facing markets in these traditionally forbidden or contested areas of commercial exchange? What is the effect of prohibiting or impeding commercially-motivated transactions in these areas? As we move toward greater market-based exchange in some of these items and activities, what outcomes might we expect? What must those markets look like, who will intermediate them, and how must the legal regime governing the market participants be structured in order to guard against our traditional fears of market-based approaches to exchange in certain areas of life? Here, Rene Almeling, David E. Bernstein, Clark C. Havighurst, Melissa B. Jacoby, Kimberly D. Krawiec, Thomas C. Leonard, Julia D. Mahoney, Hugh V. McLachlan, Elizabeth S. Scott, and J. Kim Swales seek, if not answers, at least insight to these questions.

organs, surrogacy, egg, sperm, adoption, blood, labor, contested commodity, markets

Abstract:
Thanks to the “Octomom” - a single, low-income, California mother of six, who recently gave birth to octuplets conceived through IVF - the American public this year turned its attention to assisted reproductive technology. In this essay, I take issue with one set of proposals to arise from the controversy: embryo-transfer limits, variations on which have been proposed in Georgia, Missouri, and, most recently, by Naomi Cahn and Jennifer Collins. Examining national and international multiple-birth rates, as well as similar limits in other countries, I argue that government-mandated embryo-transfer limits would produce fewer benefits and higher costs in the United States than proponents assume. First, the Octomom is a sad and disturbing, but aberrant, case. Second, questions of embryo transfer and multiple birth inevitably intersect with other politically contentious issues, including the moral and legal status of embryos and abortion. These political minefields render it highly unlikely that the United States will implement comprehensive embryo-transfer regulation effectively designed to reduce multiple births anytime soon.

ART, IVF, fertility, octomom, nadya suleman, industry self-regulation, embryos

Abstract:
Throughout the world, baby selling is formally prohibited. And throughout the world babies are bought and sold each day. As demonstrated in this Essay, the legal baby trade is a global market in which prospective parents pay, scores of intermediaries profit, and the demand for children is clearly differentiated by age, race, special needs, and other consumer preferences, with prices ranging from zero to over one hundred thousand dollars. Yet legal regimes and policymakers around the world pretend that the baby market does not exist, most notably through prohibitions against baby selling - typically defined as a prohibition against the relinquishment of parental rights in exchange for compensation.

This Essay explores the costs of societal pretense that legal baby markets do not exist. Those costs include scarcity, foregone opportunities to address market failures, an inability to develop regulations designed to further particular public policies unlikely to be advanced solely through the goal of profit-maximization, and the promotion of rent-seeking. This Essay focuses specifically on the rent-seeking problem, arguing that, although frequently defended by those who contend that commercial markets in parental rights commodify human beings, compromise individual dignity, or jeopardize fundamental values, bans against baby selling (at least as currently written and enforced) serve little purpose other than enabling anti-competitive behavior by the most economically and politically powerful baby market participants.

baby markets, adoption, surrogacy, fertility industry, egg, sperm, rent-seeking, symbolic law

Abstract:
Financial institutions have always been exposed to operational risk - the risk of loss from faulty internal controls, human error or misconduct, external events, or legal liability. Only in the past decade, however, has operational risk risen to claim a central role in risk management within financial institutions, taking its place alongside market and credit risk as a hazard that financial institutions, regulators, and academics seriously study, model, and attempt to control and quantify. This newfound prominence is reflected in the Basel II capital accord, in numerous books and articles on operational risk, and in the emergence of a rapidly expanding operational risk management profession that is expected to grow at a compound annual rate of 5.5%, from US$992 million in 2006 to US$1.16 billion in 2009.

This increased emphasis on operational risk management corresponds to a much wider trend of responsive or enforced self-regulation, both in the United States and internationally, that attaches significant importance to the internal control and compliance mechanisms of business and financial institutions. Driven by legal changes and well-organized compliance industries that include lawyers, accountants, consultants, in-house compliance and human resources personnel, risk management experts, and workplace diversity trainers (hereafter, legal intermediaries), internal compliance expenditures have increased substantially throughout the past decade, assuming an ever-greater role in legal liability determinations and organizational decision-making, and consuming an ever-greater portion of corporate and financial institution budgets.

This chapter situates operational risk management - particularly those components of operational risk related to legal risk and the risk of loss from employee misconduct - within the broader literature on enforced self-regulation, internal controls, and compliance, arguing that the increased focus on operational risk management portends both positive and negative effects. On the one hand, business and financial institutions that are law abiding and avoid unforeseen and unaccounted for disasters are an obvious positive. At the same time, however, all operational risk management is not created equally. Some operational risk expenditures may prove more effective at enhancing the profits or positions of particular firm constituencies and legal intermediaries, or luring regulators and firm stakeholders into a false confidence regarding operational risk management, than at significantly reducing operational risk losses. Indeed, recent rogue trading losses such as those at Société Générale and MF Global Ltd. demonstrate that operational risk measures such as those embraced in Basel II are no substitute for sound firm management and regulatory oversight.

operational risk, rogue trading, enforced self-regulation, banking law

Abstract:
The United States Supreme Court validated the misappropriation theory in United States v. O'Hagan, but unfortunately rendered a confusing opinion that left many questions unresolved. In this article we discuss the history of the Supreme Court's Section 10(b) jurisprudence as it relates to insider trading, giving particular attention to the Court's insistence prior to O'Hagan that "a material misrepresentation or material failure to disclose," not merely a breach of fiduciary duty, must exist to impose liability under Section 10(b). We then discuss the pervasive inconsistencies among lower courts in interpreting the misappropriation theory, and how the O'Hagan decision does little to clarify this ambiguous body of case law. We also discuss the many scenarios in which it is not certain when a fiduciary relationship exists and when a fiduciary is barred from using his principal's information. On examination of these scenarios, it is clear that the misappropriation theory remains exceptionally vague, particularly as a standard for criminal liability. We further explore how courts can best define the scope of the misappropriation theory. We conclude that Congress or the SEC should act to replace or supplement the misappropriation theory with a clearer definition of when it is and is not illegal for corporate outsiders to trade while in possession of material, nonpublic information.

Abstract:
The large losses suffered by investors in financial derivatives during recent years have prompted a wave of litigation, as well as proposals from Congress and regulatory agencies for increased monitoring of derivatives markets. Many, including some members of Congress and even "industry experts," are uneasy with the growing use of derivatives. Yet many market participants and others knowledgeable about this growing industry insist that derivatives serve an important, and perhaps vital, purpose by allowing investors to better manage the financial risks associated with their business transactions.

I define the term derivative and briefly discuss the history, uses and types of derivatives, as well as the various derivatives market participants. I then provide an explanation for recent derivatives losses through an analysis of the risks inherent in derivative products and markets (market, credit, legal, operational, liquidity and systemic risk) and discuss how these risks are currently being managed. I then conclude that, because the derivatives market is a zero-sum game, regulation is only appropriate with respect to those systemic risks that threaten the financial system as a whole. Regulators and market participants have already taken substantial steps toward controlling systemic risk. Nonetheless, further international cooperation and regulatory guidelines in some areas, particularly disclosure and accounting standards, could lend certainty and stability to the derivatives market.