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Abstract:
Although intense scrutiny has been focused recently on investment banks, initial public offerings, research analysts, and market makers, regulatory reforms have stopped short at criticizing wholesale the initial public offering process in the United States. This paper argues that the bookbuilding process, the almost exclusive method of distributing IPO shares in the U.S., is the root cause of the abuses that occurred in the IPO market in the 1999-2000 bubble. Although investors have tended to view an IPO led by a Wall Street firm as an attractive product with a trusted brand name attached, these firms were taking issuers with questionable potential to the market, gleaning profits for their cronies and customers, then leaving the retail investors to sell their shares after the market reached equilibrium below the original IPO share price. To place the customary practices of the IPO industry in context, this paper compares the legal practices of Wall Street investment banks that restrict supply and create artificial demand to illegal pump-and-dump schemes conducted by fly-by-night brokerage houses.

In the bookbuilding process, agency problems and conflicts of interest abound between and among the participants, including the underwriter, the issuer, the founders, the institutional investors, the analysts, and the retail investors. The moral hazard created by these agency problems results in the underwriter manipulating the IPO market for the purpose of benefiting regular customers and potential investment banking clients. The most extreme abuses involve underwriters allocating IPO shares in return for outrageously excessive commissions. In addition, the founders' own self-interest causes them to manipulate the IPO market for the benefit of themselves, their relatives and friends, and the company's potential allies.

To improve the IPO process in the U.S., regulatory institutions should abolish the bookbuilding system in favor of more transparent, democratic processes, such as the Internet auction. The Google IPO will utilize a Dutch auction system and represents an issuer-led sea change in the IPO process. However, few, if any, issuers have the market power of Google to negotiate with investment banks to change the traditional IPO process. Without regulatory reform, the bookbuilding process, which benefits the investment banks to the detriment of the retail investor, will continue to dominate the U.S. IPO market.

Initial Public Offering, Investment Bank, Research Analyst, Moral Hazard, Bookbuilding, Google

Abstract:
No initial public offering in the history of the United States capital markets has been as intensely discussed as the August 2004 offering of Class A Common Stock of Google, Inc. From the announcement of the IPO itself to the details of its innovative Internet auction to the post-IPO share price, the investing world has been continuously discussing Google for almost a year. One aspect of Google's IPO that received much attention before the offering was the fact that Google chose an online auction process as the mechanism to distribute its original IPO shares. In keeping with Google's nonconformist image, the founders of Google chose an IPO mechanism that is used only once or twice a year in the U.S. Many detractors of the traditional bookbuilding mechanism declared that the Google auction foreshadowed an upheaval in the cliquish investment banking industry. Although Google's auction was predicted to be the beginning of a trend, if anything, the auction process was blamed for low investor demand in the weeks leading up to the offering and a last-minute slash in the price range. In addition, in the year since the Google auction, only two other issuers have launched an online IPO.

As observers of the intersection of the Internet and the securities markets, we are left to wonder whether the Google auction was a harbinger of change, a meaningless electronic blip, or even worse, a marketing event for the public relations-conscious issuer. This article analyzes this historic IPO and explores what important the Google IPO has for the campaign for online IPO auctions. Unfortunately, because Google was a unique issuer in many respects, both positive and negative, its offering cannot be used to herald an immediate sea change in the bookbuilding IPO market. However, Google's auction will only assist other issuers in negotiating with underwriters for alternative offering mechanisms.

Initial public offering, IPO, bookbuilding, auction, Google, Morningstar, Hambrecht

Abstract:
Risk-taking is a distinctively American value. From the frontier spirit of the settler to the entrepreneurial sense of the founder of a start-up company, Americans have been taught to realize nothing ventured, nothing gained. This embracing of risk prompts individuals in the United States to participate in two closely intertwined activities: gambling and investing. To gamble is to put something of value at risk on an uncertain outcome, or, in other words, wagers are economic choices under uncertainty. Under this broad definition, investors gamble with every purchase of a financial instrument. Although many investors act as gamblers, both law and society view investing and gambling quite differently. Regulators characterize investing as an enterprise of skill in which those who are assiduous and diligent may earn deserved rewards. Conversely, gambling is an enterprise of chance that encourages the lazy and untalented to divert useful capital into a chaotic system whereby an undeserving few reap ill-gotten gains while the vast majority foolishly lose. In stock market investing, the financial intermediaries are viewed as earning modest fees for assisting others to invest wisely, but in gaming, the house, or the casinos, are detached hawkers who win every game. In comparing the regulatory environments of gambling and investing, responses to innovations that test the existing frameworks provide telling contrast. In particular, comparing the regulatory responses to both online investing and online gambling reveals interesting, and quite troubling, differences in the fundamental policies behind federal regulation of these two types of Internet speculation. As one might expect, the federal government has been quite receptive to online investing, but unpredictably inhospitable to online gambling. This fairly harsh approach to online gambling is a reversal of both the federal government's delegation of gambling regulation to the states, its receptivity to tribal gaming, and its acceptance of the recent liberalization of gambling laws in most U.S. states. Although morality myths prevail in anti-gambling rhetoric, the abundance of legalized gambling activity in almost all states weakens the authority of those myths as governmental policy. I propose that the U.S. government's efforts to prohibit Internet gambling be abandoned and an appropriate regulatory scheme be created, similar to the regulatory scheme for physical casinos, to insure the integrity of Internet gambling. The federal government's loose regulation of financial speculation should inform regulators' treatment of gambling speculation, specifically, the federal government's decision to treat online trading similarly to traditional trading provides a model for treating Internet gambling similarly to traditional gambling.

Securities, investing, gambling, day trading, online trading, internet gambling, online casino, speculation

Abstract:
Although our conclusion may be refined after hearing discussion of this paper at the panel, Bloggership: How Blogs are Transforming Legal Scholarship, our actions as bloggers seem to suggest to ourselves and others that we believe that the benefits of pretenured blogging outweigh the costs in our individual situations. Other would-be bloggers will have to do their own analysis. Unfortunately, this analysis must be done with an unflinching look at one's own ability to self-monitor, self-discipline, and manage one's own time. Also, blogging candidates should determine whether blogging offers benefits that one's own institution cannot offer. Pragmatic professors will also consider whether the choice of blogging form can decrease the risks or increase the benefits. For the majority of pretenured law professors, blogging may be a great way to become a part of the dialogue in your given area. And isn't that why you became a law professor in the first place?

Abstract:
This article restructures the current debate surrounding the "overcriminalization" of corporate law by comparing the powerful tools of federal prosecutors with the sometimes insurmountable procedural impediments their civil counterparts, private plaintiffs, must overcome in private litigation surrounding the same corporate misconduct. Although the past five years have seen prosecutors accumulating over 1000 indictments of corporate officers, the same years have seen a decline in the ability of shareholder plaintiffs to receive civil redress for the same wrongs. I frame my analysis in the lexicon of statistical error. Which system, the criminal system or the civil system, is erring in creating more false positives or false negatives? If a court is to determine whether a corporate defendant is guilty, then a false positive finding by the court is a "Type I" error. However, if the defendant actually is culpable, but a court finds the defendant not culpable, a false negative, we say that the system has created a "Type II" error. No system, either a criminal law system or a civil system, can eliminate both Type I and Type II errors. Traditionally, the public has found Type I errors in criminal law fairly intolerable, and has preferred to err on the side of Type II errors. On the other hand, because civil penalties do not threaten liberty and livelihoods as much as criminal penalties, our system has been more tolerant of Type I errors in private litigation. However, post-2002, changes in prosecutorial strategy, substantive laws, and sentencing guidelines have combined to create a criminal law system that creates an intolerable number of Type I errors in prosecutions of corporate misconduct. Ironically, due to laws creating additional obstacles for private plaintiffs in both federal securities law litigation and state law fiduciary duty litigation, the civil system creates an unusually high number of Type II errors in trials for the same or similar misconduct. This article argues that not only is this prosecutorial paradox adverse to traditional preferences regarding protections of criminal defendants, but it is also potentially dangerous to vulnerable shareholders. As the public outcry regarding overcriminalization causes prosecutors and legislators to decrease criminal prosecutions, investors will be left with no other recourse but a private litigation system that is currently "undercivilized."

Abstract:
The latest edition of the Bluebook has arrived, and for citation aficionados, the publication of a new edition of the Bluebook is an event to be simultaneously heralded and critiqued. Contrary to public opinion, the Bluebook is not merely a compilation of abstract rules regarding the citations of sources. This Article presents the Bluebook as an important chronicler of legal scholarship and practice. New rules and amendments to old rules serve as archeological proof of changes in how scholars and practitioners view and use "the law." Like high school students rushing to grab a copy of their school's yearbook to glimpse what personalities and events captured the eye of school photographers, legal scholars can trace movements in the law and legal scholarship from edition to edition.

The Eighteenth Edition is no exception to this theory. This Article traces changes in the latest edition to recent developments in legal research and citation practices. For example, the Eighteenth Edition ratifies current practices of citing to electronic sources, including working papers and weblogs, and reflects controversies such as debates over citing to unpublished federal opinions. In addition, the Eighteenth Edition, published in the summer of 2005, is notable in that it is the first edition of the citation manual that was produced in the shadow of a known competitor, the ALWD Citation Manual, which was published for the first time in 2000. The impact of the appearance of a competitor can also be examined by analyzing changes from the Seventeenth Edition, particularly the revamping of the Practitioners' Notes into the new "Bluepages."

Bluebook

Abstract:
At the beginning of this millennium, the future of initial public offerings conducted using an Internet-based auction method in the United States seemed very bright. The Internet, and web-based technologies, promised disintermediation in the IPO markets just as it had in other markets where producers could be linked with consumers without costly intermediaries. In a world in which a buyer would choose to pay a certain price (X) for a product, the producer of that product would prefer to capture as close to 100% of X as possible and not share unnecessarily with intermediaries. The market for initial public offerings is no different from other markets; a small number of investment banks and the underwriters and brokers they employ act as intermediaries that distribute and market offerings for a substantial fee, including a customary discount on the offering price that benefits the intermediaries. However, web-based auction IPOs have the potential of allowing issuers to avoid these investment banks and sell directly to the public at closer to the market price (100% of X), not the bookbuilding underprice (approximately 80% of X), minus the substantial underwriting fee.

However, the number of online auction IPOs each year is miniscule compared with the number of IPOs conducted in the U.S. using the traditional bookbuilding method. Although the market saw an increased number of auction IPOs in 2005, following Google's 2004 auction IPO, the market for online IPO auctions against stalled beginning in 2006. Proponents of these IPOs must explain why the auction IPO model has not challenged, much less replaced, bookbuilding as the dominant offering method in the U.S. This Article argues that although the Internet works well to eliminate intermediaries formerly necessary for distribution, the Internet cannot reliably eliminate intermediaries used by the public for creating demand networks and establishing third-party certification. Because of the power of investment banks and their demand networks, the base market price (X) of any product will be increased (X + Y). Therefore, an issuer must determine whether more profit is to be made by sharing revenues with Wall Street intermediaries and receiving 80% of (X + Y) than capturing 100% of merely X. In addition, to attempt to ignore these powerful Wall Street intermediaries comes with great risk. In certain cases, those who attempt to sidestep intermediaries may find themselves capturing not 100%(X) but 100% of a depressed market price (X-Z). Given this choice, rational issuers will choose the bookbuilding method, which promises .80(X + Y).

Dutch auction, initial public offering, bookbuilding, Google, disintermediation, Overstocks.com, Dixie Chicks, Stephen King

Abstract:
In some quarters of academia, commentators have criticized the lengthy prison sentences meted out to corporate officers convicted of violating federal laws pertaining to white collar crimes. These sentences, made more harsh by amendments to the Federal Sentencing Guidelines pursuant to the Sarbanes-Oxley Act of 2002, are seen as disproportionate to the harms created by the acts and inconsistent with the punishments given for violent crimes under state law. For example, the former President of Enron, Inc., Jeffrey Skilling, was sentenced to over twenty-four years in federal prison, just over the minimum sentence calculated by the Guidelines, for violating securities laws; however, in his home state of Texas, to face a minimum of twenty-four years in prison, a murderer would have to kill five individuals without provocation or passion. This disparity, although not unique in comparing state crimes to other federal crimes, such as drug possession and distribution, poses the question: Is Jeff Skilling worse than a serial killer?

This Essay comes to the unsettling conclusion that the harsher punishments now available for corporate crime, particularly securities crime, are neither disproportionate or inconsistent with state law crimes after examining the values that society places on the interests protected by such punishments. This Essay presumes that prohibitions and punishments of certain acts reflect the relative values that society places on an interest that is threatened by the targeted activity. For example, larceny historically was criminalized to protect the public peace from breaches arising from the wresting of possession of an object from another. In addition, enhanced penalties for robbery and burglary reflect society's interest not in property but in living free from fear of bodily injury, particular in the safety of one's own home or castle. Today, however, society's greatest fear in most parts of the U.S. is not of random violence or home intrusion but of financial insecurity in the future. This Essay presents the argument that in our modern society, maintaining the integrity of the capital markets is the new "keeping of the peace" and that to today's modern worker, a retirement account is the "castle" that needs protection from invasion.

white collar crime, securities law, corporations, criminal law

Abstract:
In recent years, many corporate attorneys have tried to function not merely as legal advisor to their clients, but as business consultants to them, and even as investors in their enterprises. During the Dot-Com boom of the late 1990s, this phenomenon led to the widespread practice of law firms taking equity in lieu of, or in addition to, their traditional legal fees. But when a corporate attorney's financial well-being becomes too closely tied to the success of a transaction in this way, her ability to exercise her independent professional judgment regarding the matter can be compromised. Recent financial scandals have aroused suspicion of the corporate world generally, and although public wrath has thus far focused primarily on the misdeeds of accountants and investment analysts, scrutiny could turn next to the propriety of relationships between corporations and their attorneys. Professor Hurt argues that, at least in part because of the prevalent and questionable practice of taking equity in lieu of fees from a client, the legal profession is now susceptible to the embarrassment of an Enron-like scandal.

attorney fees, initial public offerings, law firms, corporate law

Abstract:
Currently, decrying others’ profits as windfalls is popular among journalists, policy makers, law makers, industry participants, and the public at large. Once an economic gain is spotted that seems suspiciously large or too easily earned, then like the 'pod people' in Invasion of the Body Snatchers, the observer must point and alert the public that this “windfall” gain deviates from an acceptable baseline. If laws are not in place to prevent this gain, then regulators should step in and correct this loophole by promulgating new laws tailored to the situation that produced the unlawful windfall. The law may prohibit the transaction altogether, constrain the terms of any future transaction, or tax the windfall gain so as to deprive the windfall recipient of all or part of the benefit and redistribute the benefit to the larger public. Currently, legislation has been introduced both to create a 'Wall Street Windfall Profits Tax' to limit or create negative tax implications for executive compensation and to revive a windfall profits tax on crude oil, natural gas, and other products of the energy industry. This Article argues that this type of legislation finds its impetus not in sound economics, but in more base feelings of outrage, indignation and envy.

This Article employs both a theoretical framework to create a taxonomy of windfalls and an empirical study of the use of the word 'windfall' in the New York Times, the Wall Street Journal, state law cases and congressional history to analyze the rhetorical power of the term in popular and legal discourse. Though the term 'windfall' originally referred to fruits literally falling off trees due to the vagaries of the wind and no action on the part of the recipient, the term windfall is currently commonly used to refer to marketplace gains between freely negotiating parties. In addition, courts sparingly use the term 'windfall' to refer to double recoveries and recoveries where no underlying loss has occurred. In popular discourse, however, speakers employ the term to convey a sense that a marketplace gain of another is undeserved somehow. This overuse of the term 'windfall' reflects a misunderstanding not only of what a windfall is, but also a misunderstanding of the appropriateness of law to rewrite existing bargains and to limit private parties’ abilities to freely bargain without other considerations. Any defensible argument that redistributing luck by redistributing windfalls falls apart once the so-called windfall gains are the product of industry, innovation, ambition and bargaining. This Article argues against the temptation to label private gains as windfalls that are subject to recapture.

Abstract:
As the Seventeenth Edition of the Bluebook is published and forced to compete with the ALWD Citation Manual, this article analyzes how the Bluebook has sustained its monopoly in the legal citation market, compares the Seventeenth Edition with the ALWD manual, and predicts whether the ALWD manual will be able to make an inroads into the legal citation market. The author describes the Bluebook monopoly as one created and maintained by network effects. In layman's terms, a network effect exists when the value of a product to a user increases with each new user of that product. Once a network dominance is established, any would-be challenger in a network industry will have significantly high barriers to entry.

Bluebook, ALWD Citation Manual, legal citation, network effects, monopoly

Abstract:
A Comment on "The Integration of Theory, Doctrine, and Practice in Legal Education."

legal education, integration