08 June 2005

Did You Really Need to Ask?

As further proof that lawyers (and the securities industry) could learn a lot from stuff drummed into the heads of 19-year-old kids in officer training, the New York Court of Appeals held that investment bankers advising an IPO must disclose conflicts of interest, or they're breaching their fiduciary duty. The military officer's rule—worded slightly different ways by the different services—is roughly this: The appearance of a conflict of interest is a conflict of interest; it's something that officers don't do; and only a thorough look by a disinterested third party that determines that there is no conflict can excuse even the appearance.

What is more disturbing, to me anyway, is that the legal ethics rules would ordinarily have required any lawyers involved in the transaction in question (the IPO of eToys in the 1990s) to disclose conflicts of interest. This leads me to one—or, worse, both—of two inferences. Either the lawyers at (or outside counsel working for) Goldman, Sachs failed to comply with that requirement—whether through ignorance, their own will, or company direction is immaterial—or it was intentionally hidden from them. Or, I suppose, they were just too ignorant to spot it; but the Court of Appeals' decision makes it fairly clear that anyone who had any experience with government contracts—or had taken a securities-law class from the Perfesser—would have spotted the potential conflict.

I find the dissent's position at least somewhat disingenuous. It warns that "injecting fiduciary obligations into sophisticated, counseled parties' arm's-length commercial dealings" is a bad idea. There's just one tiny problem with this: the assumption that businesspeople are "sophisticated" for all purposes by the virtue of being "big" or "hot" enough to justify an IPO. This is also a problem with the UCC: The assumption that sophistication in one aspect—or even many aspects—of business means that one is "sophisticated" in all aspects of business, including those that one has never engaged in. The software designer who engages in his first battle-of-the-forms transaction with a big corporate customer for his customized software and unknowingly signs away his ability to continue developing the software for other customers for other purposes is a good example. And a "counseled party"'s judgment is better if, and only if, counsel has adequate information. In this particular instance, there's a good argument that counsel should at least have asked the question; but all that does is force clients to question whether their own lawyers are telling them everything. Between a policy that sort of encourages skepticism of an investment banker and one that sort of encourages skepticism of one's own counsel, I know which one I'd choose.

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Today's NYT has another entry from the "well, duuuuuh!" department, in which the editor of the NYTBR takes about three times as much space as he needs to in explaining how the American novel-of-manners and/or its descendents have always been obsessed with "class". One need not delve into the depths of the advanced American Literature curriculum (the courses one takes after that nigh-unto-required course in "American Literature"—which I nonetheless somehow avoided—on the way to grad school) to see this. Of course, one actually has to be looking for it, which means reading… and, in the end, that's the real point here. For me, it's sort of like writing: I can't not read the "hard stuff." Since the "hard stuff" is almost always more conscious of its context than is the "easy stuff"—try and figure out what the social structure in, say, a R0b3rt J0rdan "novel" implies about the society, about the book, about the author (and none of that is a positive recommendation)—nobody should have had to say much. Or it might be just another example of ownership of intermediaries?