Friends and colleagues

Summer is here!!!  With summer, I commence my bi-monthly publication schedule, hence this issue will serve as my issue for June and July, and at the end of August or first week of September I’ll publish my August / September issue.

As regular readers of this Newsletter know, each issue I present a summary of recent research reports, legal decisions and news articles that I hope my readers will find of interest and worthy of their time to peruse and perhaps download and read in their entirety.  I focus on two areas:  corporate governance and alternative dispute resolution (“ADR”).  Additionally, I almost always include one or two articles concerning matters of general interest in my “Interesting Cases/Articles of the Month” section.

Beginning with Governance, this month I present two articles.  The first concerns director independence generally, and the April 2017 announcement that Blackrock is appointing Murry Gerber lead independent director.  The appointment has raised eyebrows because Gerber has been a member of the Blackrock board for 17 years, hence some question his independence and the appropriateness of the appointment.  Also presented is a report by the Investor Responsibility Research Center Institute (IRRCi) examining how investors integrate environmental, social and governance (ESG) factors into their portfolios, and which finds that investors are leveraging a diverse set of integration strategies.

For my ADR readers, I present a case and a news/information piece.  The case, Pershing LLC, V. Thomas Kiebach et al, addresses discovery in an arbitration, and whether a tribunal denied the losing party a fair hearing by denying production of documents claimed to be privileged without first conducting an in camera hearing to determine the propriety of the claim.  The news/information piece is a summary of the late May, 2017 American Bar Association ethics opinion addressing cyber-security and lawyers’ duty to maintain client confidences.

Lastly, I present three articles of general interest in my “Interesting Cases/Articles of the Month” section.  First, I relate a study by a group of faculty and researchers at the Kellogg School of Management who analyzed corporate investment behavior and report that actual investment actions are contrary to classical investment theory.  Their findings, and explanation, are presented.  Next, I provide an update on the Trump litigation alleging that he is violating the Constitution’s emoluments clauses.  As I’ve noted in the past, I try to avoid politics in this Newsletter, but seem to be unable to do so in the era of Trump.  I wrote about the litigation in the last issue setting forth the plaintiffs’ positions.  Since that issue, the President’s lawyers responded, hence I thought it appropriate to present their position.  Finally, I present a short op/ed piece from the perspective of a frustrated employer on “how not to get a job.”

This Month’s Articles

Corporate Governance

• Director Independence – Blackrock’s Appointment of a 17 Yr Board Vet as Lead Independent Director:  What is the impact of longevity upon director independence, and should boards re-think the wisdom of fully independent boards?  Blackrock’s appointment of a 17 year veteran of its board as its lead independentdirector has led to questioning whether such a person is “independent.”  Two articles are presented:  one discussing longevity and independence, and a second reporting the results of recent research which found that boards comprised of all independent directors and the CEO as the lone insider director perform less well than boards with greater insider representation.
• Investor Integration of Environmental, Social and Governance (ESG) Factors: $22.9 trillion is managed with some type of ESG analysis, and for many asset managers some type of “ESG Integration” is virtually mandatory.  Thus, the Investor Responsibility Research Center Institute (IRRCi) commissioned a study to determine how asset managers are assessing and integrating ESG factors.  Their report is presented.

Alternative Dispute Resolution

• Pershing LLC, V. Thomas Kiebach et al:  This case arises out of the Stanford Ponzi scheme litigation in New Orleans.  For those who don’t recall, at the same time that the Madoff Ponzi scheme was headlining the airways, a smaller (just $7 billion) Ponzi scheme in New Orleans was also collapsing and in the news.  The suit reported here by investors who sustained losses is against Stanford’s clearing broker.  The investors claim that the broker failed to exercise due diligence and failed to disclose adverse financial information that delayed the uncovering of the scheme.  The case was arbitrated before a Financial Industry Regulatory Authority (FINRA) panel, which refused to permit the discovery and use of certain documents claimed to be subject to attorney/client and other privileges.  Significantly, the tribunal did not conduct an in camera hearing to determine the propriety of the privilege claims.  Several of the documents, subsequently reviewed by a US Court magistrate, were determined to have been discoverable and should have been disclosed.  Thus, the plaintiffs in the District Court litigation seeking to vacate the award claimed that they had been denied a fair hearing by reason of the tribunal’s accepting the clearing broker’s privilege claims and not conducting an in camera review of the documents, and additionally claimed tribunal bias.

• American Bar Association Ethics Opinion 477R – Securing Communication of Protected Client Information:  In late May, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility updated and materially re-stated its position regarding the use of email and other technologies to communicate information regarding client matters.  It’s prior Opinion, issued in 1999, held that lawyers had a reasonable expectation of privacy when communicating via unencrypted email, hence use of that technology for transmitting information regarding client matters was generally acceptable.  The new Opinion walks back that conclusion, and holds that a lawyer must “undertake reasonable efforts to preserve inadvertent or unauthorized disclosure.”  Additionally, it provides that “a lawyer may be required to take special security precautions to protect against the inadvertent or unauthorized disclosure. . . when required by an agreement with the client or by law, or when the nature of the information requires a higher degree of security.”

Interesting Articles/Cases of the Month

• Why Do Companies Turn Down Profitable Investments?:   Researchers at the Kellogg School of Management studied the actual investment decisions of corporations and determined that contrary to classical investment theory, corporations were more conservative when investing in new opportunities and opportunities specific to their business.  The results, and the researchers’ conclusions as to why, are presented.
• Trump Emoluments Litigation:  The multiple lawsuits against President Trump claiming that his failure to divest himself of his business interests or put them into a blind trust violates the Constitution’s emoluments clauses have been widely reported, and indeed described in a prior issue of this Newsletter.  Less widely reported has been the President’s response and arguments defending his position.  Those are presented.
• How Not to Get a Job:  A frustrated employer bemoans the hundreds of resumes he received from applicants who were not remotely qualified for the advertised position, and in the process describes how to properly apply for a job by describing what not to do.

I hope you find one or more of the below articles of interest and worthy of your inbox’s space.

Warm regards,

Jim Reiman

Articles / Corporate Governance

Director Independence – Blackrock’s Appointment of a 17 Yr Board Vet as Lead Independent Director  

In late April, Blackrock, the world’s largest asset manager, appointed Murry Gerber to be the Board’s lead independent director.  While no one questioned Mr. Gerber’s experience or general qualifications, that he had served on Blackrock’s board for 17 years prior to the appointment raised questions regarding the appropriateness of his selection.  Indeed, were Blackrock a UK entity the appointment might violate the UK corporate governance code, which articulates a general “rule” that a director who has served for more than 9 years cannot be deemed independent absent special consideration.

While no similar provision exists in US governance regulations, at least one large pension fund has set a “cut-off” period after which a director is deemed to lose his/her independence.  CaLPERS, the Californian pension fund, deems a director not independent after s/he has served for 12 years.  CalSTRS, the California State Teachers’ Retirement Fund, also focuses on board longevity when determining director independence.  Other funds look at longevity, but have not articulated rules or guiding principles regarding board longevity and independence.

The Blackrock appointment generated a host of articles regarding director independence, including the two linked below:  one by Stephen Foley writing for the Financial Times titled “A surprising definition of board independence,” and one by Joann Lublin appearing in theWall Street Journal.

The FT article, not surprisingly, notes the differences between US and UK regulations with respect to longevity and director independence, and points out that “the average US board director has been in post for more than two years longer than a UK director and is five years older.”

Foley also reached out to large fund managers’ governance directors to solicit their thoughts regarding the Gerber appointment.  Anne Sheehan, head of corporate governance at CalSTRS and a person whose opinion I’ve come to greatly respect, responding to Foley’s query for thoughts and opinions regarding the appointment, stated:

“Choosing a lead director is more art than science.”  “With such a long-term director, we need to know why [the rest of the Blackrock Board] feel that would be the best person. We would want a little bit more information.”

“Rakhi Kumar, head of asset stewardship at State Street Global Advisors (SSgA), one of BlackRock’s top 10 shareholders, also said such an appointment would trigger questions, such as, “Does that person have integrity? Why was that individual chosen?” She declined to comment on Mr. Gerber or BlackRock.”

Foley concludes his piece with an opinion:

“[T]he argument for standardising the rules on independence remains a powerful one, since it removes the need to have sensitive and subjective conversations, in which asking for a fresher board can be misconstrued as an attack on individuals and put companies on the defensive. Not all ultra-long tenured directors lose their independence, but US corporate governance would be better served if there were fewer.”

The second article on the subject presented is a piece by Joanne Lubin appearing in The Wall Street Journal titled:  “Why Having Independent Boards Can Backfire.”  The article, a “teaser” for a to-be published research report by Christine Shropshire, Associate Professor of Management at Arizona State University’s business school, summarizes the findings of Prof. Shropshire’s research which tracked 1,638 companies in the S&P 1500 between 2003 and 2014.  The report’s conclusion:  contrary to conventional wisdom, a board comprised of independent directors and a CEO executive director performs less well than a board with a greater number of executive directors.

Per the article, Prof. Shropshire’s research found that nearly three quarters of the S&P 1500 companies’ boards have a single executive director – the CEO – and that all other directors are “independent.”  She calls this the “lone insider board.”

The research is also reported to have found that “companies with a lone-insider board generated 10% lower net income than those with multiple inside directors,” and “such firms are 27% more likely to engage in financial misconduct—as evident by material financial restatements”.  Additionally, the research revealed that CEO’s of lone-insider board companies received sizable compensation packages:  “lone-insider CEOs made an additional $4.7 million a year, compared with an average of $5.7 million for all chiefs.”

Why the differences?  Per Prof. Shropshire, as reported by the WSJ:  “An extremely independent board ‘is too much of a good thing’ because lone-insider CEOs restrict board access to critical information and to leaders’ possible successors.”

The Arizona State University’s website describing the WSJ article and Prof. Shropshire’s research states the conclusion in blunt terms:

“The conventional wisdom couldn’t be clearer: The more independent a company’s board is, the better. The presence of any company employees, other than perhaps the company’s CEO, can only bring trouble.

The conventional wisdom couldn’t be more wrong: Boards that are too independent invite trouble. According to our research, it can lead to lower profits, excessive CEO pay, and more financial fraud.”

Per the WSJ article, the “The work will appear in a coming issue of Strategic Management Journal.  I look forward to the publication of the full research report.

Stephen Foley, “A Surprising Definition Of Board Independence,” Financial Times, April 29, 2017

 Joann S. Lublin, “Why Having Independent Boards Can Backfire,” Wall Street Journal, June 15, 2017

Arizona State University website

 UK Corporate Governance Code, Section B.1.1.

How Investors Integrate ESG (Environmental, Social And Governance) into Their Portfolios:

In late April, the Investor Responsibility Research Center Institute (iRRC) published a report which examined how investors integrate environmental, social and governance (ESG) factors into their portfolios.  My first question upon learning of the research and report:  why do we care?  Answer:  $22.9 trillion is managed with some type of ESG analysis, and for many asset managers some type of “ESG Integration” is virtually mandatory.

While portfolio analysis and investment are not topics addressed by this Newsletter, how shareholders perceive and categorize the companies they invest in is relevant to governance decisions hence I’ve included the report here.  That said, given the tangential nature of the subject, I’ll just provide a “high-level” summary and leave to those interested in a deeper dive the opportunity to pull and read the report on their own.

Back to the beginning, why is this topic of interest?  Jon Lukomnik provides a succinct answer in the iRRC’s press release announcing the study’s results:

“While ESG factors are increasingly integrated into investment decisions, how that is being done varies considerably, and the market to-date has lacked an analytical framework to organize the full range of ESG integration techniques. This report provides that framework,” . . . “The goal of this typology is to advance the dialogue around what ESG integration really means. Asset owners can use it to understand how asset managers consider ESG factors, and asset managers can use it to compare their approaches to their peers, and, if necessary, refine them.” 

The Report includes several high-level observations about the current landscape for ESG integration, and several “key insights.”  Among those observations and insights are:

• Different approaches to ESG integration exist.  The study identified and classified three dimensions: management (who is integrating ESG), research (what is being integrated), and application (how the integration is taking place).
• Within each dimension, the study identified two key differentiators that captured the essential features of ESG integration practices:  the degree of centralization of ESG related functions, and the use (or non-use) of processes to ensure integration.
• Six prevailing types of ESG integration were identified: 1) the Believer, 2) the Cautionary, 3) the Statistician, 4) the Discretionary, 5) the Transition-Focused, and 6) the Fundamentalist.
• Despite the continued groundswell of investor interest in ESG, limitations defined in investment mandates may be constraining ESG integration.
• A growing number of large investors are paying increased attention to companies’ sustainability impacts and how these impacts may generate systemic risks that can jeopardize economic value.
• Access to ESG research and public commitments to consider ESG issues do not necessarily ensure that ESG information is integrated into investment decision-making.

 The Full Report:  The Investor Responsibility Research Center Institute, Martin Vezér, Trevor David, Doug Morrow, “How Investors Integrate ESG:  A Typology of Approaches,” April, 2017

 Slides from the Investor Responsibility Research Center Institute Webinar Regarding the Report, May 8, 2017

 Press Release:  The Investor Responsibility Research Center Institute, “First-ever Typology Helps Investors Navigate Varied Approaches to ESG Integration,” April 25, 2017

Articles / Alternative Dispute Resolution

Pershing LLC, V. Thomas Kiebach Et Al : 

The US District Court for the Eastern District of Louisiana, in late May, issued a decision upholding an arbitral award issued by a Financial Industry Regulatory Authority (FINRA) arbitration panel arising out of the Stanford Ponzi scheme litigation.  The decision is noteworthy because it addressed the propriety of the tribunal’s discovery rulings – specifically, per the plaintiffs in the case, the tribunal’s “refusing to hear evidence pertinent and material to the controversy.”

The plaintiffs in the US District Court litigation were Louisiana retirees who were investors that had suffered financial losses as a result of the Stanford Ponzi scheme.  Background:  at the same time that the Madoff Ponzi scheme was occurring, a smaller (only $7 Billion) Ponzi scheme was operating in Louisiana by Robert Allen Stanford.  Like the Madoff scheme, the Stanford scheme also unraveled and like Madoff, Stanford was convicted and sentenced to 110 years in prison.

The defendant in the case presented, Pershing, “provides financial services to brokerage firms” and served as a clearing firm for Stanford.  The plaintiffs, retirees, lost $80 million and asserted that Pershing was liable for their losses because it “failed to exercise due diligence in its business relationship with Stanford Group Company and failed to disclose adverse financial information which would have resulted in the Ponzi scheme being uncovered sooner than it was.”  The dispute was arbitrated before a FINRA tribunal, which ruled in favor of Pershing “[a]fter a two week hearing at which the panel heard over 1,600 pages of testimony from fifteen witnesses and considered over 900 separate exhibits.”

Following the adverse decision before the FINRA tribunal, the Louisiana retirees commenced their action in US District Court to vacate the FINRA award.  Per the Court, the primary argument for vacatur was that the “panel arbitrarily and improperly denied the Louisiana Retirees documents to which they were entitled.”  “[U]nder the Federal Arbitration Act (FAA), an arbitration panel’s refusal to hear evidence material and pertinent to the controversy can result in vacatur of the arbitration award when the refusal deprived a party of a fundamentally fair hearing.”  Thus, the plaintiffs argued that by denying them discovery, the arbitration tribunal denied them a fair hearing.

The District Court, in reaching its decision, relied upon a 5^th Circuit decision in the caseKaraha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, (5th Cir. 2004):

An arbitrator is not bound to hear all of the evidence tendered by the parties.  He must give each of the parties to the dispute an adequate opportunity to present its evidence and arguments.  It is appropriate to vacate an arbitral award if the exclusion of relevant evidence deprives a party of a fair hearing.  Every failure of an arbitrator to receive relevant evidence does not constitute misconduct requiring vacatur of an arbitrator’s award.  A federal court may vacate an arbitrator’s award only if the arbitrator’s refusal to hear pertinent and material evidence prejudices the rights of the parties to the arbitration proceedings. 

The District Court concluded that the gist of plaintiffs’ argument stemmed from two decisions by the tribunal relating to documents that the Retirees demanded be produced and whose production the tribunal denied.  Pershing had asserted that the disputed documents were privileged, and the tribunal accepted such argument without conducting an in camera hearing to determine the veracity of Pershing’s claim.  The Retirees argued to the District Court that such decisions evidenced bias and denied them a fair hearing.

Before relating the District Court’s decision on the merits, it is important to note that prior to ruling on the motions that are the subject of the reported decision, the District Court ordered that the disputed documents be reviewed in camera by a U.S. Magistrate Judge.  The Magistrate ruled that certain disputed documents be turned over to the Retirees, thus effectively holding that such documents were not privileged and that the tribunal erred by denying their disclosure.

With that background, and Magistrate’s ruling before it, the District Court held:

“[T]he Court observes that nothing in the FINRA arbitration rules requires in camera review prior to ruling on a discovery motion.  To the extent the Louisiana Retirees claim that the manner in which the panel resolved discovery issues rendered the proceeding fundamentally unfair, the Court rejects that argument.  Even if this Court would have proceeded differently, this Court cannot conclude that the entire arbitration proceeding was tainted because of it.”

*     *     *

“A FINRA arbitration panel has great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.”  [citation omitted]  Indeed, even in federal court the decision whether to conduct an in camera inspection is wholly within the discretion of the district court.  [citation omitted]  The record reveals that discovery was extensively litigated before the panel, which decided six motions to compel, received multiple rounds of briefing from the parties, and held a telephonic hearing to address the [claimed] privilege and the request for an in camera review.

*     *     *

The discovery process was not fundamentally unfair.

With respect to the argument that the tribunal erred by effectively holding certain documents privileged that the Magistrate and by inference the District Court held not to be privileged, the District Court repeated the oft quoted maxim “The court may not refuse to enforce an arbitral award solely on the ground that the arbitrator may have made a mistake of law or fact,” and reiterating its conclusion that the “Court does not find that the Louisiana Retirees were deprived of a fair hearing as a result of the decision.”

Finally, with respect to the Retiree’s claim of bias and partiality as evidenced by the tribunal’s refusing to conduct an in camera hearing and the tribunal’s relying upon Pershing’s statements regarding the claimed privilege applicable to the documents whose discovery they denied, the District Court noted the following:

At the beginning of the arbitration hearing, counsel for the Louisiana Retirees stated that they accepted the panel. At the end of the arbitration hearing, counsel for the Louisiana Retirees agreed that they had enjoyed “a full and fair opportunity” to present their case.  [citation omitted]  Counsel for the Louisiana Retirees even thanked the panel for its time.  [citation omitted]  At that point, the Louisiana Retirees already knew of all the panel’s decisions described above, yet they failed to object.  It was only once the arbitration panel ruled against them that the bias argument emerged.”

Thus, the Court ruled that the Retirees waived their right to object based upon bias.

The Full Opinion:  Pershing LLC v. Kiebach et al, No. 2:2014 cv 02549 – Document 167 (E.D. La. 2017)

American Bar Association Ethics Opinion 477:  Securing Communication of Protected Client Information 

This is a late May, 2017 formal opinion of the American Bar Association (ABA) Standing Committee on Ethics and Professional Responsibility (Ethics Committee).  The Opinion addresses the propriety and requirements of lawyers transmitting information relating to the representation of a client over the internet and effectively updates a 1999 Opinion which concluded:  “Lawyers have a reasonable expectation of privacy in communications made by all forms of e-mail, including unencrypted e-mail sent on the Internet,” hence use of email for communications containing client confidences was permissible.

Noting the increasingly common occurrence of privacy and data breaches “by nefarious actors throughout the internet” and the ABA’s 2012 “technology amendments” to its Model Rules, the Ethics Committee issued its Formal Opinion 477R.  The Opinion’s final conclusion:

“A lawyer generally may transmit information relating to the representation of a client over the internet without violating the Model Rules of Professional Conduct where the lawyer has undertaken reasonable efforts to prevent inadvertent or unauthorized access. However, a lawyer may be required to take special security precautions to protect against the inadvertent or unauthorized disclosure of client information when required by an agreement with the client or by law, or when the nature of the information requires a higher degree of security.”

The new Opinion is not a reversal of the 1999 Opinion.  However, it is a significant “walk back” from the original conclusion that it was generally permissible for a lawyer to believe that s/he had a reasonable expectation of privacy when communicating via unencrypted email.

This commentator’s “take-away” from the new Opinion:  Lawyers can no longer assume that their email communications will be private.  Therefore, a lawyer’s failure to consider the sensitivity of each communication and the risk of its disclosure when choosing how to communicate client confidences, and then choosing an appropriate means of communication, may result in a finding that such lawyer has acted unethically and unprofessionally.

The new Opinion relies heavily upon, and emphasizes, the 2012 “technology amendments” to the ABA’s Model Rules.  Those amendments included revision of Comment 8 to Rule 1.1, which was amended to read “a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology,” and new Rule 1.6(c) which provides:  “A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.”

Per the Opinion,

 “The Model Rules do not impose greater or different duties of confidentiality based upon the method by which a lawyer communicates with a client.  But how a lawyer should comply with the core duty of confidentiality in an ever-changing technological world requires some reflection.

Against this backdrop we . . . identify some of the technology risks lawyers face, and discuss factors other than the Model Rules of Professional Conduct that lawyers should consider when using electronic means to communicate regarding client matters.”

In reaching its conclusions regarding appropriate conduct in 2017, the Ethics Committee adopts the language and conclusions of the ABA Cybersecurity Handbook, which set forth a “reasonable efforts standard:”

“[The ABA Cybersecurity Handbook]. . . rejects requirements for specific security measures (such as firewalls, passwords, and the like) and instead adopts a fact-specific approach to business security obligations that requires a ‘process’ to assess risks, identify and implement appropriate security measures responsive to those risks, verify that they are effectively implemented, and ensure that they are continually updated in response to new developments.

Regarding factors to consider in their “fact-specific” analysis, the Committee looked to Comment 18 of ABA Rule 1.6(c), which sets forth a nonexclusive list of “factors to guide lawyers in making a ‘reasonable efforts’ determination.”  Those factors include:

• the sensitivity of the information
• the likelihood of disclosure if additional safeguards are not employed
• the cost of employing additional safeguards
• the difficulty of implementing the safeguards, and
• the extent to which the safeguards adversely affect the lawyer’s ability to represent clients (e.g., by making a device or important piece of software excessively difficult to use)

Noting that “cyber-threats and the proliferation of electronic communications devices have changed the landscape” such that even using encrypted email may not be sufficient, the Ethics Committee concluded that “it is beyond the scope of an ethics opinion to specify the reasonable steps that lawyers should take under any given set of fact.”  Thus, the Committee “offer[ed] the following considerations as guidance:”

• Understand the nature of the threat
• Understand how client confidential information is transmitted and where it is stored
• Understand and use reasonable electronic security measures
• Determine how electronic communications about clients matters should be protected
• Label client confidential information
• Train lawyers and nonlawyer assistants in technology and information security
• Conduct due diligence on vendors providing communication technology

the Full Opinion:  American Bar Association Standing Committee on Ethics and Professional Responsibility Formal Opinion 477R

 Jill D. Rhodes & Vincent I. Polley, The ABA Cybersecurity Handbook: A Resource For Attorneys, Law Firms, and Business Professionals (2013)

Articles / Interesting Case of the Month

Why Do Companies Turn Down Profitable Investments?:  

Reported in Kellogg Insight, a team of faculty and researchers exploring company investment decisions found that companies are acting contrary to “classical corporate finance theory,” and as a result often turn down profitable investment opportunities.  As they note in the introduction to their research report,

“According to classical corporate finance theory, [the “threshold question:  how profitable must an investment be in order to pull the trigger?”] — often known as a hurdle or discount rate — ought to be pretty close to what an investor could earn putting the money toward a different project with comparable risk.

Based on that theory, one would expect company investment decisions to be consistent based upon the applicable risk.  The researchers’ findings, however, proved otherwise.  Firms in fact used “more conservative criteria for funding new investments—turning down investment opportunities that would be profitable when evaluated on a stand-alone basis.”

The researchers were able to link 127 survey responses to specific companies, and then compare these companies’ average discount rate for taking on a new project compared to their average cost of capital.  What they found is that “the average cost of financial capital for these firms was about 8%, [while] their average discount rate for taking on a new project was 15%.”

Why the discrepancy?  The researchers’ answer – “In a word: bandwidth. New investments require more than just dollars—they require managerial oversight, as well as onboarding additional employees and training new parts of the organization to work together.”

Interestingly, the researchers also found that that “cash-rich firms have the most conservative thresholds of all.”

“‘Firms that hold a lot of cash are often growth firms. They hold cash because they expect to have a lot of investment options.’ . . .These firms ‘have the flexibility to wait and take the best projects’ [say the researchers].

This actually puts them in the best position to pass up lesser, though still profitable, investments. ‘Then, when the right opportunity comes, they’re able to move in fast.’”

The research revealed another trend that was contrary to theory:  “firms are more wary of taking on risk that is specific to their firm, or idiosyncratic, versus risk that is spread across the entire market, or systematic.”

“A firm should theoretically prefer to take on projects heavy in idiosyncratic risk, because its shareholders can diversify their portfolios, mitigating the risk. ‘Think about Boeing and McDonnell Douglas bidding on defense contracts. One of them will get it and the other won’t. If you hold both the companies’ stocks, you’re indifferent,’ says [the research team’s lead author].

Yet the researchers found that firms in fact avoid idiosyncratic risk. ‘The firms are using a higher discount rate when there’s more idiosyncratic risk.’

Why is this?  One explanation is that the managers are actively avoiding idiosyncratic risk in an effort to preserve their own careers and reputations. After all, if Siri falls to Alexa, Apple’s management team looks bad. If both companies are hit hard by a recession, the blame is much harder to pin down.”

 Research of Ravi Jagannathan, David A. Matsa, Iwan Meier and Veha Tarhan, “Why Do Companies Turn Down Profitable Investments?  Limited organizational bandwidth can restrict managers’ options,” Kellogg Insight, July 6, 2017

Emoluments Clause Litigation:

In the April/May issue of this Newsletter, I presented several articles describing the litigation by Citizens for Responsibility and Ethics in Washington (“CREW”) asserting that Donald Trump has violated the emoluments clause of the constitution.  For those who don’t recall or did not see that issue, CREW’s legal team comprises some of the country’s highest profile legal scholars, and includes as counsel on its complaint Laurence H. Tribe (Harvard Law School), Erwin Chemerinsky (Dean of the School of Law, University of California, Irvine), and Ambassador (Ret.) Norman L. Eisen.  As I noted in May, “the CREW lawsuit is not an action brought by lightweights or some seeking a quick buck or their five minutes of fame.”

Since the publication of the April/May issue of this Newsletter, as most know, two additional suits have been filed by serious litigants:  one by the attorneys general of Maryland and Washington, D.C., and one by nearly 200 congressional Democrats who argue that Trump is required to obtain congressional approval before accepting any gifts or compensation.

In Mid-June, government lawyers responded to the CREW complaint (yes – our tax-payor dollars are being used to pay Department of Justice lawyers to defined our president in these suits).  The government’s arguments are interesting, hence I thought I’d present them to those who may be interested.

As I did in the prior edition, I’ll start by setting forth the actual language of the Constitution which is at issue.  There are actually two emoluments clauses:  one dealing with emoluments received from foreign entities, and one from domestic.

Beginning with the foreign emoluments clause, it is embedded in the section of the Constitution prohibiting the granting of titles of nobility.  The entire clause (US Constitution, Article I, Section 9, Clause 8) states as follows:

No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.

The domestic emoluments clause (US Constitution, Article II, Section 1, Clause 7) states:

The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.

Nowhere in the Constitution is the word “emoluments” defined.

The Justice Department’s (DOJ) defense of our president begins by asserting technical arguments giving rise to a court’s power to adjudicate the dispute.  The DOJ argues first that CREW has no provable injury, hence has no “actual case or controversy.” With respect to the indivudal plaintiffs in the CREW complaint (restaurant and hotel owners and workers who claim lost business), the DOJ asserts that those persons “failed to allege sufficient facts to support any non-speculative loss of business,” hence they too are barred from bringing the suit.  Additionally, the DOJ argues

“[the plaintiffs’] claims are outside the Emoluments Clauses’ zone of interests because their asserted injuries—diversion of an advocacy organization’s resources and loss of restaurant or hotel business—are not what the Clauses are intended to protect.”  

Further, in an obvious play to Scalia “originalist” legal thinkers, the DOJ states

“Plaintiffs’ expansive reading of the Emoluments Clauses is contrary to the original understanding of the Clauses and to historical practice.  The term ‘Emolument’ in this context refers to benefits arising from personal service in an employment or equivalent relationship.”  

Finally, the DOJ argues

“Given the President’s unique status in the constitutional scheme, the Framers envisioned only political means to ensure a President’s compliance with constitutional provisions such as the Emoluments Clauses, not official-capacity injunctions against the President.” 

Regarding the technical arguments of “standing” and properly alleged claims for relief, I’ll leave those to the attorneys who may read the DOJ’s brief, which I’ve linked below.  Of general interest, however, may be the DOJ’s arguments regarding the scope or applicability of the emoluments clauses.  Per the DOJ:

“[T]he Emoluments Clauses apply only to the receipt of compensation for personal services and to the receipt of honors and gifts based on official position.  They do not prohibit any company in which the President has any financial interest from doing business with any foreign, federal, or state instrumentality.

*     *     *

Neither the text nor the history of the Clauses shows that they were intended to reach benefits arising from a President’s private business pursuits having nothing to do with his office or personal service to a foreign power.”. . . Were Plaintiffs’ interpretation correct, Presidents from the very beginning of the Republic, including George Washington, would have received prohibited ‘emolument.’”

This commentator notes that the CREW complaint does not allege mere receipt of “benefits arising from a President’s private business pursuits having nothing to do with his office.”  To the contrary, their complaint alleges

• After Trump was elected president, his Washington DC hotel hired a “director of diplomatic sales” to facilitate business with foreign states and their diplomats and agents, luring the director away from a competitor hotel in Washington.
• Diplomats and their agents have expressed an intention to stay at or hold events at Trump hotels because he is president, and in fact have done so.  One “Middle Eastern diplomat” told the Washington Post about Trumps DC hotel: “Believe me, all the delegations will go there.”  An “Asian diplomat” explained: “Why wouldn’t I stay at his hotel blocks from the White House, so I can tell the new president, ‘I love your new hotel!’  Isn’t it rude to come to his city and say, ‘I am staying at your competitor?’”
• Per the Wall Street Jounal, “Saudi Arabia, Kuwait, Turkey and other countries have held state-sponsored events at Trump’s D.C. hotel, and other entities associated with foreign governments lend money to his businesses or lease space in his properties.”

 The Department of Justice’s Memorandum of Law in Support of Its Motion to Dismiss [the lawsuit filed by Citizens for Responsibility and Ethics in Washington], Filed in the US District Court for the Southern District of New York, Case # 17 Civ. 458 (RA), June 9, 2017

 Jonathan O’Connell, “Foreign payments to Trump’s businesses are legally permitted, argues Justice Department,” Wall Street Journal, June 10, 2017
How Not to Get a Job:

Finally, to those who have young adult children or friends in the job market, I present an op/ed piece by Allan Ripp appearing in the New York Times.   Ripp runs a PR firm and advertised for an account director position at his firm.  He relates that his ad specifically stated that candidates were to contact him “only if they had backgrounds in journalism, P.R. or law.”

So, what were the backgrounds of the applicants who applied?  Fragrance design.  Home health aide.  Bed-and-breakfast manager.  Youth hockey coach.  Why, he asks, did these people believe they were qualified to apply to his firm?  Why didn’t “a single candidate bother to look us up and refer to what we do in the cover note?”

The piece is light-hearted, amusing, and yet instructive and to the point.  By relating what not to do, he informs what to do.  If you’ve a job-seeker in the family or among your friends, you may wish to read the piece and forward it along.

 Allan Ripp, “How Not to Get a Job,” New York Times, July 7, 2017