Morning at the sausage factory

Ah, nothing like watching new legislation being made (or, hopefully, not).

Arlen Specter decided he needed a piece of the Goldman/financial reform action. Alas, his subcommittee deals with crime and drugs – not a promising forum.

But fiduciary duties provided a possible hook. After all, it should be obvious to any senator seeking an issue and reelection that there oughtta be a law against Goldman's supposed double-dealing. Never mind that there already are lots of laws against fraud, all cited in the SEC's complaint against Goldman.

Then all we need is to make a breach of fiduciary duty a crime. After all, it should be obvious to any senator that we don't have enough criminal laws already, because if we did, people would not be doing bad things.

Then we need a hearing to produce evidence, or at least talk, to justify such a move. Where can we find people to argue that we ought to create a brand new federal fiduciary duty and impose jail time for its breach? Well, plenty of places. Consumer groups and labor unions will always send somebody over (in this case, Barbara Roper from the Consumer Federation of America, and Damon Silver of the AFL-CIO).

But if you want to be respectable, you also need a few academics. Today we had a full load.

UC-Irvine criminologist Henry Pontell testified that we not only need harsher criminal penalties for white collar crime, but also chief criminologists as officers of regulatory agencies.

Famed securities professor Jack Coffee endorsed Specter's idea. Coffee testified that we need a new fiduciary duty with criminal penalties. He criticized "Chicken Littles" who fear the worst from such a necessary and desirable fix.

Those scared little animals included me and Jay Verret, who testified for the defense. I discussed the ambiguity of fiduciary duties, their inappropriateness for the sorts of things investment bankers do for clients (drawing from my article on fiduciary duties), and how all these problems would be exacerbated by criminalizing the duties. Indeed, I said, it's not even clear we'd get more deterrence, since those subject to the duty would have little idea of what the duty covers. But they sure would stay away from anything innovative, because how would they know whether it's illegal?

Coffee responded that, well, we already have a fiduciary duty in the Investment Company Act and for investment advisers, and they haven't caused any trouble, right? I said, no, unless you count forty years of costly litigation and, finally, a Supreme Court decision, all without coming up with a meaningful standard or a plaintiff victory at trial. And nobody yet knows exactly what the fiduciary duty under the Investment Advisers Act entails.

Senator Specter (only two other committee members were sporadically present) asked me if these problems would be dealt with by the precise definition of the duty in the bill. Unfortunately, the bill isn't available except to a privileged few like Coffee who had worked on it. Fortunately I did have a few minutes to look at Coffee's testimony before the hearing in which he discussed the language. I noticed that the duty seemed to be one to act in the best interests of the customer. So I was able to point out that this is basically a broad fiduciary duty that shares all the problems I had testified about.

The hearing veered off into other Specter pet projects – reviving aiding and abetting liability (which is already criminal, so Specter couldn't do anything about that) and reversing Iqbal and Twombly. This discussion didn't get anywhere, this morning anyway. So many laws, so little time.

Finally, a few words about the remaining witness, Andrew Weissman – the former Enron prosecutor turned defense lawyer. He opined that the current financial crisis was no Enron, and we don't need more criminal laws. Specter understood how damaging this particular witness given his pedigree and used all of his prosecutorial skills to try to discredit him with a discrepancy between two statements he had submitted to the committee (reminder to self: never submit two versions of anything to an adversary).

In the end, a good time was had by all. I had my moment of fun jousting with the Senator from Pennsylvania. I suspect little or nothing will come of this. Which I suppose is the best thing that can be said of anything being done in Washington these days.

For those whose thirst for more knowledge about this hearing has been whetted by this blog post, here are links to the statements and the video of the hearing. Thanks to Gordon and Ted for the plugs.

Comments

[Archana]

We held a conference with the Foundation for the Advancement of Investor Rights at the Hennick Centre for Business and Law on this very issue in Toronto in late March and got a ton of news coverage. Prof. Tamar Frankel from BU was there, plus several Canadian law profs and industry reps from the US and Canada - as well as a representative from the UK FSA. Our website has more info and links to all the news stories.