All Politics Are . . . .

The late Speaker of the U.S. House of Representatives Thomas “Tip” O’Neil is most remembers for his observation that “all politics are local.”  It would be absurd to provide a national weather report.

Nationalism and ethnocentrism are facts of life.  That is why U.S. citizens refer to themselves as Americans (at times to the chagrin of Canadians and Argentines).  The concept of “hyphenated Americans” is becoming an anachronism with respect to second and third generations.  Of course, it is entirely appropriate to refer to Louisiana Governor Bobby Jindal as an “Indian-American” and President Obama as an “African-American” because at least one of their parents is an immigrant.

Americans have always had a problem distinguishing between nationality and citizenship — which may be a positive phenomenon.  Still, even though our President had an African father and a white American mother, the press feels that it is appropriate to describe him as a “Black American” as opposed to a mixed race individual.  A focus on individuals would be preferable, but the human tendency is to view people within the context of groups — for example by religion or region of the country.

It seemed as if the Europeans were ahead of us in this area.  With the formation of the European Community, tariff free trade, no need for entry visas for citizens of member states and the adoption of the Euro by most of its members, the “European Man” had emerged.

This appears to be a misconception or idealism over reality.  Few French nationals living in Lyon would describe themselves as “Europeans” but as Frenchmen (or if they have parents having different citizens, they might refer to that fact).  When will Indians or Jamaicans living in London simply be described as British?  Probably not in the near future.

When the Euro was first unveiled, I predicted that it would not last more than 15 years (and the British have not given up the pound).  I doubted that national governments would abandon fiscal policy as a policy tool.  The EU leadership has not enforced their requirements with respect to the size of the deficits its members may have.  By being “flexible,” the European Union survived but what where the consequences.  The needs of the people of Portugal and Greece are not the same as that of France, Germany and Italy.

Now with the current financial crisis, country identification is back.  I dare call it “nationalism” since I cannot predict the future of Britain or Belgium.  Borders are not eternal.  The EU made them less important — but Tip O’Neil was not being chauvinistic when he made his remark.   People need an external threat or commonality of concern (e.g. global warming) to feel connected to persons unlike themselves.  Perhaps an invasion from outer space would be helpful at this time, provided we prevail.  In science fiction movies we usually do.  Suddenly the United Nations functions.  Inevitably the aliens die because they are allergic to pollen.  I have never read a book about what happens after the common enemy is defeated.

Today’s Financial Crisis, Corporate Governance, and the Issue of Third-Party Liability

<This piece appeared on RGE Monitor’s Finance and Market Monitor, available at http://www.rgemonitor.com/financemarkets-monitor/256477/todays_financial_crisis_corporate_governance_and_the_issue_of_third-party_liability.>

According to the U.S. Securities and Exchange Commission, the principal laws that protect investors and preserve business integrity are (i) the Securities Act of 1933, (ii) the Securities Act of 1934, (iii) the Trust Indenture Act of 1939, (iv) the Investment Company Act of 1940, (v) the Investment Advisers Act of 1940, and (vi) the Sarbanes-Oxley Act of 2002.  With the exception of the Sarbanes-Oxley Act (SOX), the above statutes are products of the New Deal. Congress enacted them in response to the country’s greatest financial crisis to date.

The factors that produced the Great Depression and the present economic situation are too numerous to list and complex to adequately analyze. It must not be overlooked, however, that the causes were global in nature and undermined confidence in all economic sectors and among the population as a whole.

Unlike in the 1920s, large numbers of Americans today are “investors” – as purchasers (i.e. shareholders) of individual stocks, mutual funds, etc. In recent months, both individual and institutional investors have witnessed the decline in the value of their portfolio. This situation has made many people ponder: what is the appropriate role of governmental bodies and international institutions when regulating the private sector.

For more than fifty years, most western governments generally evinced considerable faith in the market system, albeit subject to varying degrees of government regulation and social welfare benefits. In addition, policy makers are questioning the roles of private self-regulating organizations in our financial system since many perform quasi-governmental functions.

Central to U.S. thinking about our economic model of organization is the belief that private corporations should have a central role in the economy. Unfortunately, our corporate model is based on the myth of shareholder control. In reality, most shareholders do not monitor the corporations they own part of (much less vote their shares). More annual reports and proxy statements are tossed into the garbage than are analyzed. In lieu of shareholder control a cozy relationship between management and boards of directors has developed that effectively controls the way corporations operate.

Unfortunately, many Chief Executive Officers are also Chairmen of the Boards that employ them – an obvious conflict of interest as is recognized by many countries, including England. The U.S. and its political subdivisions do not limit an individual from serving on numerous boards of directors (though some countries do, such as Colombia – not a country well-known for having a well-developed system of corporate governance).

The procedures and other requirements governing the number and substance of corporate board meetings are seldom set out in great detail. Furthermore, there is no education or training requirements for persons to serve as board members. Board members typically are nominated by senior management or existing board members; it is rare that shareholders are successful in choosing a majority of the board – the costs and dedication needed to organize are significant impediments.[1] Recent events have demonstrated that corporate oversight can be lax. Furthermore, federal and state government regulators frequently lack the resources and political support to perform effective oversight functions or bring enforcement actions.

Finally, there seems to be recognition within Washington that existing laws and regulations have not kept pace with business practices – the need to regulate derivatives and hedge funds is no longer a matter of whether, but how.

After the passages of SOX, many people were lulled into complacency that the factors contributing to corporate governance scandals had been addressed by assigning greater responsibilities to corporate board of directors. In fact, this is only partially the case as recent events have shown.

It is not possible to regulate morality and frequently companies have incentives not to rigorously carry out internal compliance systems as they do not generate a profit. A good share of the blame for corporate governance failures (and poorly performing corporations in general belong to passive boards of directors (the members of which are often handsomely remunerated).[2]   These individuals frequently serve on numerous boards while spending very little time examining the activities of the corporation – the details of which are frequently supplied by management.

Even the so-called independent directors are often only independent in the sense of not being employees of the company. Of course, investors should have understood that it is not logical for the increasing value of stock portfolios to greatly outpace the GNP growth or gains in worker productivity.

Now is the time for people to remember to live within their means. According to New York University Professor Nouriel Roubini, the Anglo-Saxon model of supervision and regulation of the financial system has failed – the same may be true for numerous corporations.[3]  Professor Roubini remarks, “Indeed, it seems that for approximately nine years, the U.S. Securities Commission’s Enforcement Division chose to ignore “red flags” that Bernard Madoff was orchestrating a large scale financial fraud”.[4]

Congress’ seeming inability to pass laws and for the executive branch to issue effective regulations in large part can be attributed to effective lobbying by corporations. For corporate governance to be effective, steps must be taken to ensure that directors, managers, and professionals working for companies are made more accountable.

At times it seems that the higher one rises in a corporation (or the public sector as well), the less accountable they become. Another problem is that corporation managers and board members are sometimes reluctant to file law suits on behalf of the corporation when it has been injured by third parties. This can be explained by numerous factors, including not wanting to damage personal relationships, fearing shareholder law suits or reducing the value of the corporation’s stock (which depending on the manner in which individuals are compensated, creates a divergence between their interests and those of the shareholders).

At present, it is cumbersome for shareholders to obtain the right to file derivative lawsuits. Perhaps, individual or groups of shareholders should be permitted to file claims in court when management and board members fail to investigate thoroughly potentially meritorious claims against third parties who cause through their negligence or wrongdoing harm to the corporation. Professionals working on behalf of corporate clients may be influenced by what could be characterized as conflicts of interest.

Similarly, certified public accountants continue to be hired by the corporations they are supposed to scrutinize. Lawyers are expected to exercise independent professional judgment, particularly. In reality, both accountants and lawyers are frequently asked to bless questionable corporate actions and in fact even devise them. Imagine if the SEC or federal Public Company Accounting Oversight Board (PCAOB) assigned accounting firms to companies.

Do you think that the auditors might have shown some skepticism when individuals were being approved for mortgages for amounts greatly exceeding three times their income?‌ Would questions have been raised about “no doc” loans?‌ Since many shareholders vote with their feet rather than attempt to assert their rights through the procedures set out in the corporate documents, senior management and board members can often act with impunity (and in any event, corporations typically pay for their errors and omissions insurance).

One way corporate governance could possibly be strengthened would be if Congress were to legislatively overturn the U.S. Supreme Court’s unfortunate decision in Stoneridge Investment Partners vs. Scientific-Atlanta, Inc., issued in January 2008.[5] Recent events illustrate that the existing laws relating to corporate governance as well as regulatory scheme cannot achieve the goals for which they were created. Resources in this area are almost always inadequate to investigate, identify and when appropriate ensure the prosecution of financial crimes.

Stoneridge concerned whether plaintiffs had the right to bring private causes of action based on the theory of “scheme liability,” where the actions of third parties allowed the corporation “to mislead its auditor and issue a misleading financial statement affecting the stock price” (i.e. commit a fraud on the market).[6] Justice Kennedy, writing for the Court’s five judge majority, ruled that the plaintiffs had no right to bring such a lawsuit since federal securities law did not create any implied right of action – and in any case the plaintiffs were precluded from bringing their case since they did not rely upon the statements of the third-parties.

This meant that shareholders are not permitted to file lawsuits against third-parties that allegedly aided and abetted a fraud such as assisting in the preparation of a deceptive financial statements in the absence of “reliance” on the third parties’ deceptive actions. Furthermore, Justice Kennedy asserted that only the SEC and not private parties were authorized under US. securities law to bring claims for aiding and abetting liability, that is, not by private parties. Of course private parties may have a greater incentive to bring such a claim than a federal regulator.[7]

In his dissenting opinion, Judge Stevens (joined by three other justices, Judge Breyer did not participate) rejected the majority’s opinion. Not only did Judge Stevens believe that Justice Kennedy misconstrued existing precedent he ignored “the history of court-created remedies and specifically the history of implied causes of action under § 10(b) . . . .”[8]

Judge Stevens was very direct when he wrote that “the Court is simply wrong when it states that Congress did not impliedly authorize this private cause of action “when it first enacted the statute” and that when “Congress enacted § 10(b)” it did so “with the understanding that federal courts respected the principle that every wrong would have a remedy.”[9]

As a practical matter, to restore investors’ faith in the market, Congress must amend existing laws that permit regulators or plaintiffs’ attorneys to aggressively take action against those who facilitate corporate wrongdoing to prevent future financial meltdowns.[10]

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[1] See Robert A.G. Monks and Nell Minnow, Corporate Governance, Chapter 2 – Shareholder Ownership, at 94-222. (4th Ed. 2008).

[2] See William S. Laufer, Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability, at 108-129, (2008).

[3] Ask the Expert, The Anglo-Saxon model has failed,” The Financial Times, at 10,February 10, 2009.

[4] See Testimony of Harry Markapolos, available on the Wall Street Journal’s website, available at http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf (Last Accessed February 12, 2009). Shortly after Mr. Markopolos testimony U.S. House of Representatives Committee on Financial Services on February 4, 20089, the SEC’s Senior Enforcement Official Linda Thomsen, who had been in her post for approximately five years, resigned her position “to pursue opportunities in the private sector, but did not provide further details.” Marcy Gordon, SEC Enforcement Chief Linda Thomsen Resigns,” The Washington Post’s website, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/02/09/AR2009020901409.html‌nav=rss_business/industries (Last Accessed February 12, 2009).

[5] Stoneridge Investment Partners LLC v. Scientific Atlantic, Inc., 128 S. Ct. 761; 169 L. Ed. 2d 627 (Sup. Ct. 2008). [6] Id.,169 L. Ed. 2d at 634.

[7] See Ethan S. Burger and Mary S. Holland, Why the Private Sector is Likely to Lead the Next Stage in the Global Fight Against Corruption, 30 FORDHAM INT’L L. J. 45 (2006).

[8] Stoneridge Investment Partners LLC v. Scientific Atlantic, Inc., 128 S. Ct. at 781. [9] Id. [10] For some critiques of the Supreme Court’s decision in Stoneridge and its impact on the protection of shareholders and the SEC’s enforcement record, see Robert Prentice, Stoneridge, Securities Fraud Litigation, and the Supreme Court,45 Am. Bus. L.J. 611(2008); Faith Stevelman, Corporate Governance Five Years After Sarbanes-Oxley: Is there Real change‌: 52 N.Y.L. Sch. L. Rev. 475 (2007 / 2008) (noting that Sarbanes-Oxley’s emphasis on the role of corporate and governmental bodies to achieve improved oversight and accountability for public companies has contributed to anti-litigation attitude the consequence of which has been to reduce SOX’s ability to achieve its goals); and Rodney D. Chrisman, Stoneridge v. Scientific-Atlanta: Do Section 10(b) and Rule 10b-5 Require a Misstatement or Omission, 26 Quinnipiac L. Rev. 839 (2008) (viewing the Supreme Court’s decision in Stonebridge as not being based on principle and precedent, but a ruling based largely on policy grounds).

Thoughts About Mr. Luzhkov

No one will dispute that it is better for the people that “thieves” rather than “vampires” wield power in Moscow (Latyina, Going from Popularist to Puppet, Moscow Times, 6 October 2010). It is a tragedy that Brodsky’s ironic query represents the real political alternatives currently available in Russia with respect to what its population can expect from Russian high-level public officials.

The actual damage caused by former Moscow Mayor Yuri Luzhkov’s mega-corruption is impossible to calculate. It is the product of numerous “unknowns,” such as the scale of the corruption and how the stolen funds would have been. Certainly, individuals would rather have their own money than see it absconded or wasted by the officials, irrespective whether elected or appointed (though in most they prefer to elect and throw them out themselves).

Many Muscovites have significant needs for better education, environmental protection, housing and public health. Should they take solace from the fact that he was handed a university deanship rather than immediately arrested or charged with crimes as his former Deputy Alexander Ryabinin? It is still far too early to judge the impact President Medvedev’s firing of Mr. Luzhkov.

Was the decision to hand to Mr. Luzhkov a new position made to encourage other corrupt officials to leave their posts in quiet (unfortunately, to probably give other people the opportunity to engage in corrupt behavior) or was it because he has kompromat against other powerful individuals in the country? We will probably never know the answer, but can make reasonable guesses.

Energy, National Security and Terrorist Policy

The term “energy security” if most typically used within the context of economic, foreign and national security policy.  It relates to a country’s need to diversify its energy sources to reduce its dependence on a limited number of suppliers.  The recent disaster in Gulf of Mexico may be the greatest man-made disaster in history (with the possible exceptions of Bhopal and Chernobyl).  It also turn out to be an important alarm bell.

Currently, Columbian drug cartels are apparently using submarines obtained from Russian organized crime groups to move cocaine as a safe way to get their product to market.  According to press reports, last month the Royal Navy has begun to prepare anti-submarine operations to interdict such submarines.

Query what would happen if terrorist organizations were to obtain such submarines with the goal of destroying underwater pipelines or extorting money from governments or private companies not to attack such pipelines.  What would be the appropriate response and is the West prepared for this threat?

In recent weeks, the price of British Petroleum’s stock has plummeted, the economic and human costs of the clean-up from the spill mount, oil prices will inevitably increase.  All these developments provide significant funding opportunities to criminal and terrorist groups who based on their prior knowledge sold BP shares short, purchased stock in companies involved in clean-up operations, and bought oil futures.

Unfortunately, oil pipelines, like other infrastructure facilities, constitute potential attractive targets, all of which cannot be defended at reasonable cost.  Compared with the narco-trade and other forms of finance, criminal and terrorist groups stand to reap significant revenues.  At present, it is difficult to have an abundance of confidence in our ability to counter-act this potential threat.

After 9/11, national security planners studied the risk that airplanes might be flown into nuclear power plants.  Preventive steps were taken and fortunately, no such attacks have been successful.  Governments and the private energy sector should be planning for the next disaster before it is too late.  What is needed are informed analysis, the training and equipping of appropriate personnel, development of reliable warning systems and action, not post hoc, finger pointing, adopting half-measures, and throwing money at problems, which has become all too common.

++  Mr. Burger has written extensively on anti-terrorism, national security, organized crime issues and will be joining the Faculty of the University of Wollongong, and its Centre for Transnational Crime Prevention.

Obama Should Seek to Pack the Supreme Court

We all remember when after the U.S. Supreme Court found unconstitutional the underpinnings of the New Deal.  The country was in a crisis mode and it was a time for decisive action.

The U.S. Constitution does not specify the number of justices who sit on the Supreme Court, which as I have said elsewhere is Washington’s smallest legislature — a body unburden by concepts such as following precedent.

While perhaps it might be interesting to have Congress hold certain former Supreme Court nominees in contempt for not honestly answering the questions that they were asked during the confirmation process, perhaps a better idea to propose expanding the Supreme Court by 8 members.

There is no better time than the present.  The media is giving far too much coverage to the “Tea Party,” the only positive that I can say about it is that the leader of which conveys to the country’s “C” students that they need not rule out a career in politics.

FDR’s court packing ploy, did not succeed, but suddenly the Court disingenuously discovered the Commerce Clause — allowing America to get moving again.  It did not end the great depression, but it did give the country a sense of purpose and hope.

President Obama need not find 8 ideologues.  On the Republican side — I would look for patriots who truly seem committed to the Constitution and problem solving: Lindsay Graham, Charles Grassley, Ted Olsen and Richard Posner.

For the Democrats, I would propose Mario Cuomo, Maureen Dowd, Robert Reich, and Lawrence Tribe.  No one can challenge the degree to which these individuals are committed to public policy.

Even if this stratagem failed (which it almost certainly would), it might get us to begin focusing on issues that confront this national rather than turning politics into a version of People Magazine.

The U.S. Is Too Big to Fail — Can We Tolerate A Plan of Inaction?

U.S. population  is experiencing instability, inequity and insecurity not seen since Franklyn D. Roosevelt assumed the presidency.

It is difficult to ignore that manic quality of the stock market.  The value of stocks climb up, only to plummet following the release of bad news.

The most recent declines in the stock market have been “explained” by certain experts as due to:

(i) the value of the Euro is plummeting due to the economic conditions in Greek Spain and elsewhere in the European Union;

(ii) the negligence, perhaps criminal) negligence of British Petroleum (and its contractors) is creating the greatest man-made economic disaster since Bhopal in the release of inestimable amount of oil into the Gulf of Mexico;

(iii) the regulatory apparatus meant to prevent such disaster failed to do its job, in part due to corruption:

(iv) tensions on the Korean peninsula has reached a level not seen since 1950;

(v) the Iranian “problem” continues to fester; and

(vi) Governments inability or unwillingness to address these and other problems due to a degree of partisanship in many countries and the lack of responsiveness by ruling elites who are not accountable to the people in whise name they purport to rule/govern.

But are the pundits correct?  Perhaps the “market movers” are engaged in a herd behavior.  Perhaps, if on a particular day, the DOW falls or gains 0.5% it should be closed down for the day as a means of controlling stock values moving in excess of the underlying economic conditions of corporations or the economy as a whole.

Most are familiar with the old saying that a “people get the government it deserves?  Perhaps, but most people are not the people the product of inadequate education they and their children receive (except to the extent they refuse to provide schools with adequate funding, are uninvolved in their children’s education, and tolerate mediocre educators).

Perhaps the popular media is at fault since it largely refuses to examine complex issues in an informative manner.  But should we expect anything else from profit-seeking media companies — who recognize that entertainment and not news is what draws audiences and thus advertising dollars?  Would there be an audience for news shows and informed discussion on television?  Yet, the people through their governments who owns the airwaves.  Are governments demanding adequate fees for their use?  Is corporate agency capture of the FCC the problem?

Within many countries, the role of money in the electoral process has increased the power of special interest lobbies.  Is it a result of the decline of labor unions — the only group capable of opposing corporate power or the decline of political parties based on shared goals and values.

The situation is indeed troubling.   In recent decades, productivity in industry has climbed, but median wages do not.  After the recent financial crisis, we people wrong to save, rather than spend or invest their discretionary income?

While large financial institutions gets bailed out, but the percentage of persons living in poverty grows.  Throughout the world, the ratio of the net worth of the wealthiest 10% share of the population grows in comparison to the rest of the citizenry.

Technology and business structures have modernized, but governmental structures have largely not.  What should be done?  Perhaps the growth of corporations and the reduction of business entities in certain sectors should make us re-examine the U.S.’s anti-trust, anti-monopoly, and anti-competition rules.  The failure of the government to take action in these areas may play a major role in the economic insecurity we are experiencing.

Russia and the WTO

Original to La Russophobe

In 2002, at a conference of the American Association for the Advancement of Slavic Studies, as part of a panel a U.S. government official gave a presentation praising all the new legislation Russia was enacting. He suggested that “western technical” assistance in the legal area was having a real impact in the country. The next speaker was a Russian law professor who specializes in anti-corruption and human rights matters. He began his remarks with the comment that while he enjoyed the prior’s speaker’s remarks, it was unfortunate that he was describing a country that did not exist.

Russia is now seeking entry into the World Trade Organization (WTO). It should not be allowed to join this body until it enforces its own domestic laws, amends its restrictive foreign investment laws, and observes its existing international obligations. Russia has a poor record in applying the 1959 U.N. Convention on the Recognition and Enforcement of Arbitral Awards. Its does uphold its obligations under, or follow the standards and guidelines of, arising from its membership in the Organization for Security and Cooperation in Europe. Cyber attacks on Estonia and Britain has arisen from its territory (arguably NATO should have responded). It foreign policy to a great extent seems aimed “reset” Europe to the Cold War era (although it has apparently privatized or contracted out formally state activities. Russia is not so powerful that it should not be challenged for its aggressive actions.

Yet, it would be a mistake to treat Russia as an international pariah. Russia is a member of the international community. It should be held to the same standards as other countries. Progress in one area of international relations should not be linked to another It should not be offered a concession on a trade matter as a means to cooperate on dealing with nuclear non-proliferation and global warming.

The WTO is not like the Financial Activity Task Force (FATF), a body that combats money laundering. FATF is a body that promulgates norms and standards, offers technical assistance and performs evaluations of its members anti-money laundering policies. Ideally, overtime Russia will see the benefit from observing guidelines.

In the human and civil records area, the present situation is troubling. This month, Ms. Vera Trifonova s died during pre-trial detention. Ms. Trifonova asserted her innocence contending that she and a senator conspired to sell a seat in Russia s Federal Assembly s upper chamber, the Council of the Federation to the head of a Russian bank for $1.5 million.

According to her attorney, the investigator in the case, Sergei Pysin, controlled the conditions for her pretrial detention and indicated that he would release her if she confessed. Admittedly, I don’t know the truth in the matter, but now we will never know. Where is the outrage? Why is there no public outcry with the exception of some human rights activists,
journalists and lawyers?

Last year, 37-year old lawyer, Sergei Magnitsky, also died in pretrial detention. He was being held because his CLIENT allegedly engaged in tax evasion — apparently a popular activity for many Russian politicians, their shills and their cronies. Appropriately, Russian President Dmitrii Medvedev orchestrated the firing of approximately 20 prison officials in response to the Magnitsky affair and directed the Russian Procuracy to conduct inquiries into both the Trifonova and Magnitsky cases.

Under the Criminal Procedure Code of the Russian Federation, Section IV — Measures of Procedural Coercion, Chapter 12 — Detention of the Suspect neither Ms. Trifonov nor Mr. Magnitsky should have been detained for more than a few hours (assuming that there were any legitimate grounds for holding them in the first place), but in any case they should have been allowed to be released on bail. Needless to say, the Russian Constitution has been violated. These individuals civil and human rights under both Russian and international law had been violated. Should anyone wonder why Russia has more cases brought against it in the European Court for Human Rights than any other country?

Unfortunately, as citizens of Britain, France and the U.S. know, there are occasions when police/militiamen use excessive force and sometimes even kill suspects in the process of making an arrest. They are frequently acquitted by juries or given light sentences despite using an unjustified level of force. Still it is not an unusual event than such persons are criminally prosecuted. Furthermore, the suspects (or their family members) can find lawyers who are willing to file civil suits against the government or the police/militiamen.

How long will it be before the Russian Procuracy after concluding an investigation file criminal charges against law enforcement personnel may have used excessive force when arresting a suspect, or when a person is being held in pretrial detention or after being convicted? Will private citizens be able to find attorneys to represent them in law suits against the government and have any chance of prevailing? Let’s hope that time happens in the not too distant future — but many people with unrealistic hopes often become disappointed and cynical.

Another Way to Enhance Corporate Compliance

Throughout the industrial world, we are witnessing what seems to be a significant increase in the identification and sanctioning of corporations engaged in unlawful activity.  While there are some people who assert that the existing system of imposing large fines and persecuting corporations for criminal liability (e.g.  BAE, Daimsler-Chrysler and Siemens) are adequate, they frankly are wrong.  Such enforcement actions are rare and business community is well-aware of this situation.

We are in an era of “virtual” law enforcement with respect to corporations.  Regulatory compliance in numerous areas is inadequate.  On the rare occasions when some corporation transgressions are uncovered, the punishment incurred is usually born by corporation shareholders, not the individual wrongdoers.  This situation has an Alice in Wonderland quality where those actually at fault are not held accountable for the harm they cause society.  Frequently, corporations deny and fight when the regulatory authorities believe they have not acted in compliance with the law.

While corporations may conduct internal investigations to ascertain the validity of the accusations, their general tendency is to engage in a legal and public relations counter offenses.  Ultimately, they may agree to institute a compliance program aimed at preventing violations or the payment of fines – but usually only after reaching non-prosecution or deferred prosecution agreements with the government intended to protect those who violated the law or allowed conditions to exist where the law was violated.  At the same time, they frequently deny liability to lessen their exposure to private civil lawsuits.

As a fictional entity, it defies logic that it can have performed an actus rea [guilty act] with the required mens rea [guilty mind].  Corporations do not commit acts – people do; corporations do not have minds.  Furthermore, the very concept of corporate criminal liability is problematic as there is no “it” to punish.  It cannot be imprisoned, feel shame, denied access to friends and family or suffer a decline in its standard of living.  In many instances, the risk of detection and punishment for violations of laws and regulations are sufficient minute that they may be regarded as merely the cost of doing business.

Corporations are the creation of man-made law.  Ironically, in many instances, they enjoy the civil and constitutional rights of citizens.  When corporations are “punished,” for bribing officials, failing to have in place adequate regulatory compliance systems, polluting the environment, or violating securities laws, those individuals who committed the unlawful illegal act are frequently not even prosecuted.

In addition, there is the issue of proportionality – that is, whether the punishment is proportional to the harm caused.  Government bodies often opt to impose fines and other obligations on the corporations as a form of punishment.  Often, this amount is small in comparison with the corporations’ the value of its assets.  The determining the true costs for remedying harm can be difficult – how does one punish British Petroleum if it is found that it has blame for economic catastrophe in the Gulf of Mexico?

If the corporate criminal is punished, those who suffer are usually the shareholders.  Would it not be more appropriate to hold corporate management, directors or the employers who committed unlawful acts or were criminally negligent accountable?

Typically, the U.S. Department of Justice is willing to enter into Non-Prosecution Agreements (NPAs) or Deferred Prosecution Agreements (DPAs) where corporations had a weak or non-existence compliance system, but agree to establish an effective program.  If NPAs or DPAs are violated, sometimes there are consequences for individuals, but if these downsides were significant, corporation management would be far more reluctant to enter into such arrangements.  Whether NPAs and DPAs, can deter future criminal conduct depends on their severity and specificity.

The Government likes settlement agreements since they generally avoid having to try complex cases and risk the embarrassment of possible failure to get the desired result.
DPAs or NPAs, usually, but not always, will have some impact on corporate culture and require actions aimed at improving regulatory compliance – but this frequently is difficult to gauge.  Requiring employees to attend seminars and requiring corporations to hire “compliance personnel” does not guarantee changed corporate behavior and satisfactory results for the public.

What can be done?  If as part of DPAs and NPAs, the culpable individuals were by law prohibited to work or consult for or in any what profit from a relationship with a publicly-traded company for a five-year period – we might be able to achieve a modicum of accountability.  Such individuals might be regarded as persona non grata in the corporate world for their acts or negligence.  In addition, such agreements might be more effective if the ensured that those culpable individual officers, directors, managers, experienced meaningful falls in their standard of living and the forfeiting of bonuses and severance packages.

Furthermore, DPAs and NPAs must take into account that come corporate entities use complex corporate structuring aimed at protecting corporate parents through the use of special-purpose entities.  For example, a subsidiary might plead guilty, thus allowing corporate parent to avoid being disbarred from competing for public contracts or participating in tenders, as well as possibly benefiting from particular government programs.

Complex corporate structuring is largely an Anglo-American legal system done for tax minimization or to insulate parent companies’ from potential liability to public or private entities.  In contrast, many civil law systems make it relatively easy to pierce the corporate veil that operates as a shield for their parent companies.  For example, many civil country’s codes provide that if a subsidiary has insufficient assets to pay creditors, the parent has the obligation for the debt.  Perhaps this concept should be incorporated into DPAs and NPAs for a five-year period as well.

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Russia: What is the Significance of Certain Recent Legal Developments?

In late February 2010, the Russian Constitutional Court issued a resolution indicating that Russian courts must regard decisions of the European Court of Human Rights (ECHR)  as a legitimate basis for the appeal of judicial rulings.  See www.ksrf.ru, www.sutyajnik.ru/courts/33.html, and http://www.rferl.org/content/Russian_Courts_Ordered_To_Respect_Strasbourg_Rulings/1970630.html

Russia is a member of the Council of Europe (CoE) and consequently must respect the decisions of the ECHR, which is often the last resort of Russian citizens to vindicate their legal rights.

Pursuant to Article 15(4) of the Russian Constitution:

“Generally accepted principles and norms of international law and treaties of the Russian Federation shall be an integral part of its legal system.  In an international treaty of the Russian Federation provides for other rules than those envisioned by [the law of the Russian Federation], the rules of the international treaty shall apply.”

Russia is a party to numerous international agreement both as a signatory and as a successor state of the Soviet Union.  For example, this includes the U.N. Universal Declaration of Human Rights, the U.N. Charter, various instruments of the Organization for Security and Cooperation in Europe (and its predecessor the Conference for Security and Cooperation in Europe, and numerous others.

This is noteworthy for numerous reasons:

– the ECHR has begun its proceedings in a Yukos-related matter (webcast at http://www.echr.coe.int/ECHR/EN/Header/Press/Multimedia/Webcasts+of+public+hearings/webcastEN_media?&p_url=20100304-1/en/

–The “so-called ‘extra-systemic’ opposition have chosen to use the Internet to exercise their civil and political rights to circulate an 870-word petition calling for Prime Minister Vladimir Putin’s ouster of the from any position of power in the country.  The signatories include both prominent Russians within the country and abroad as well as ordinary citizens.” See Paul Goble, “Putin Must Go” Petition Gains Signatories Despite   SOS Sites Pointing to it,” March 11, 2010, available at http://windowoneurasia.blogspot.com/.  The Petition is available at http://putinavotstavku.ru/.

What are the implications of these events?  Are Russian citizens beginning to take their laws and legal rights seriously?

Could partition solve Ukraine’s problems?

What of Ukraine’s future now that Viktor Yanukovich has been elected President of Ukraine.  The Ukrainian economy is in terrible shape. Loans and technical assistance from the European Union, international organizations and the United States have had a very limited economic impact on a country plagued by corruption. Much of the  Ukrainian population is suffering financially.

The last two Ukrainian presidential elections suggest how strong a role national identity appears to play in determining voting behaviour. Last Sunday, as in 2004, Viktor Yanukovich received a majority of votes in Eastern Ukraine, where most of the population has a closer affinity to Russia than to Western Europe.

Western Ukraine used to be referred to as “New Russia,” in recognition of the fact that these lands were only added to the Russian Empire through conquest in the 17th and 18th centuries. With respect to political attitudes, the majority here seem to hold views which are closer to those of Poles than Russians. Still, the Russian/Ukrainian linguistic/national distribution in the country is not uniform.

The issue of  self-identity is complex. But it is no accident that Mr. Yanukovich has more appeal to Ukrainian citizens of Russian national origin than does Ms. Timoshenko, the catalyst behind the so-called Orange Revolution, which has disappointed popular expectations.

Collective nouns and generalizations can be misleading.  It is indisputable that Ukraine has a complex ethnology. No less than 17% of Ukraine’s population are of Russian national origin and are primarily Russian-speaking. A fair segment of the population is either bilingual, or ethnically mixed (usually with one parent who considers themselves “Russian” and the other “Ukrainian”). These people tend not to see the choice of language as a political issue so much as a means of communication.

In Western Ukraine, the majority are Ukrainian speaking. While they may understand Russian and speak it when necessary , they tend to see the preservation of Ukrainian culture, history and language as a priority. In addition, Ukraine has other nationalities such as Crimean Tatars, Greeks and others.

Still, it would be a mistake to assume that nationality was a decisive factor in the recent electoral outcome. Ms. Timoshenko was viewed negatively by many of the country’s population — including Mr. Viktor Yushchenko, the country’s ineffective president, who finished fourth in the first round of voting and cast his vote in the second round for “none of the above”.

Mr. Yushchenko hoped that closer ties to the West would produce a vibrant Ukrainian economy. He was wrong. For a start, Ukraine is substantially dependent on Russia for its energy. Yushchenko was also unable significantly to reduce government corruption. Russia did not hide its hostility to his remaining in office. But in the recent election, unlike 2004, the Russian leadership did not blatantly express its preference for Mr. Yanukovich. Instead it made it clear that Ms. Timoshenko and Mr. Yanukovich were both individuals with whom Moscow could work. This reduced Ms.Timoshenko’s ability to play the nationalist card in the second round of voting. Indeed, the fact that a share of the Ukrainian electorate considered her to be ethically-challenged hurt her as a candidate.

So what of Ukraine’s future?  Clearly, the election result must be viewed as a foreign policy success for the Kremlin.  It looks as if Russia will have a satellite on its southern frontier — it is doubtful whether either the Russian leadership or Mr. Yanukovich would risk Russian absorption of Ukraine.

The argument for partition

On the other hand, Ukrainians who are apprehensive over the country’s future might consider division of the country.  This would be difficult to accomplish, and it might provoke a good deal of instability. It would be particularly hard to decide exactly where precisely to partition the country. But the alternatives might be worse.

On the positive side, for those Ukrainians who regard the prospect of renewed subordination to Moscow with repugnance,  it would provide an opportunity to create a new state more consistent with their desires. The Russian government might even favour the idea. It could be accomplished through a referendum overseen by the OSCE.

International borders are often arbitrary and, over time, never permanent.  While they may reflect the topography of the land, more often than not they are a product of political whim or of military force. Most countries have regional differences within their borders. But borders have real consequences for history, for language, nationality, politics and religion. This may be the reason why Ukrainian law prohibits dual citizenship — to prevent ethnic Russians from undermining Ukrainian independence and effecting reunification with Russia.

It has been approximately 18 years since the Soviet Union’s break-up
and the re-emergence of the Ukrainian state.  Despite the claims of many official statements, polls and sociological surveys, Ukraine has not completely solved its nationality problem. The present situation has certain parallels with Yugoslavia during the 1970-80s. Then, to the chagrin of the federal government, more people thought of themselves as Bosniaks, Croats, Montenegrins, Serbs and Slovenes, than Yugoslavs. While the preservation of Yugoslavia proved untenable, the failure to reach a political solution led to incomprehensible death and destruction.

Nor is successful partition without precedent in recent history. In 1993,Czechoslovakia split peaceably into the Czech Republic and Slovakia. Both countries now pursue their separate courses, while moving in the same general direction politically. The Czech Republic has a small Slovak minority, while Slovakia has a small Hungarian minority. All three, the Czech Republic, Hungary and Slovakia, are members of both the EU and NATO.

Last, but by no means least, it might prove possible for the West to prop up a smaller Ukraine whose government were committed to the goal of Western development.

Ethan S. Burger has been following events in the Soviet Union and its successor states for over 20 years. He is an Adjunct Professor at the Georgetown University Law Center.

BofA in $150m settlement to end SEC case

Perhaps, Judge Rakoff was being realistic when he remarked, “[w]hile better than nothing, this is half-baked justice at best.”

Indeed, it is doubtful that those BofA’s officers, directors, employees and agents who failed to disclose material information to the authorities relating to BoFA’s acquisition of Merrill Lynch would be willing to sell a large share of their real and personal property at 50 cents on the dollar.

One can only hope that N.Y. Attorney General Cuomo, judges, prosecutors and regulators better familiarize themselves with the 2000 United Nations Convention against Transnational Organized Crime, racketeering statutes, and common law causes of action before accepting similar “settlements” of the taxpayers’ claims in the future.

Now, who should the public expect to be more transparent and accountable in the future?

Saving Our Political System in Light of McConnell v. FEC

The  McConnell v. FEC is probably the worst Supreme Court decision since Gore v. Bush. These cases do not follow precedent — the term “judicial activism” is too moderate to describe what took place.

The decision has global foreign policy consequences.  It undermines the U.S. from being taken seriously when it takes action to promote “the rule of law.”

The McConnell decision illustrates that the U.S. Supreme Court has become a 9-person legislature.  What should be done?

The election in Massachusetts complicates things, but it does not mean that some clever people cannot get around the court’s decision.

I would propose that the SEC go through the  rule-making process to establish a regulation that before a corporation (an artificial person), give money to political candidates or enter the political arena, such action must be approved by persons holding a majority of external shares to overcome a presumption of the corporate officers and directors committing “waste.”

From my perspective to spend money in the political area might give rise to a shareholder lawsuit.  I am not a securities lawyer, but I would welcome any feedback on the idea.

Just to make things a little interesting, I hope some Senators propose:

1) treating these artificial persons as subject to a reinstituted draft for military service, where the CEO would have to serve if the corporation cannot — while the physical criteria for service might have to be waived, such accomplished managers certainly could assist in managing procurements;

2) seeking to expand the size of the Supreme Court to 15 — even if not successful a healthy debate will ensure.

3) asking George Soros to fund an effort to ascertain whether Justice Thomas ever discussed Roe v. Wade when he was in law school.  I would have thought had he not, it would have disqualified him.  In any case,  perhaps, if some people are willing to testify, we might have a potential perjury case.

The Supreme Court’s most recent decision will do great damage to our political system.

On the more serious side, perhaps the idea should be advanced that as a matter of bi-partisanship that the leadership of the Senate come to an agreement that all individuals seeking to become Supreme Court justices be confirmed by 2/3rds of the U.S. Senate.  Doing this could help ensure that the court be composed of persons with a judicial demeanor rather than persons seeking to advance their own agenda.

Professor Walter J. Kendall III of John Marshall Law School (Chicago) once commented that if one were to have the opportunity to make one amendment to the Constitution, the above concept would be it.  The amendment process is difficult, but putting the idea informally into practice without needing to amend the constitution could be an important first step.