Law Commons^™

Evil Has A New Name (And A New Narrative): Bernard Madoff, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Virtual Intermediaries Ii - Canadian Solutions (Drop Shipments) Compared With Us, Japanese & Eu Approaches, Richard Thompson Ainsworth

Faculty Scholarship

Virtual travel agents are opportunistic internet-based travel agents. They are intermediary businesses that create mutually beneficial three-party transactions that secure accommodations for a traveler that: (a) meet the basic needs of the traveler (at a discount), (b) fills vacant room for accommodation retailers with guests that pay below market, but above standard costs, and (c) profit from the extra cash, the margin in the transaction.

The virtual intermediary’s eye is always on the discount and the cash flow. One of the things that catches their attention are the accommodation taxes which they collect from the traveler in advance and remit …

Governing Corporate Compliance, Miriam H. Baer

Faculty Scholarship

No abstract provided.

The Morphing Of Mtic Fraud: Vat Fraud Infects Tradable Co2 Permits, Richard Thompson Ainsworth

Faculty Scholarship

Missing trader intra-community (MTIC) fraud has been slowly morphing from cell phones and computer chips to other commodities. In the last few months however MTIC made a dramatic appearance in tradable CO2 permits. It closed exchanges and prompted France and the Netherlands to unilaterally change their tax treatment of CO2 trades. The UK has followed the French treatment in large measure. On Monday June 8, 2009 rumors of MTIC fraud in carbon emission permits closed the main European exchange for spot trading of European Union carbon emissions permits and Kyoto offsets. When BlueNext began trading permits again on Wednesday, June …

Financial Market Failure As A Crisis In The Rule Of Law: From Market Fundamentalism To A New Keynesian Regulatory Model, Timothy A. Canova

Faculty Scholarship

This article considers the financial panic of 2008 in historical context by analyzing the institutional and regulatory factors that contributed to the financial and economic crisis. The move away from a Keynesian regulatory model was a function of larger institutional flaws. The Keynesian regime of command-and-control regulation focused on macroeconomic policy objectives designed to achieve full employment, more equitable distributions of wealth and income, greater transparency in the regulatory process, and reduction in monopoly exploitation of consumers. Central to this regime was a model of central banking that required greater accountability to elected branches of government and the use of …

Demand-Side Gatekeepers In The Market For Home Loans, Edward J. Janger, Susan Block-Lieb

Faculty Scholarship

No abstract provided.

Massachusetts Zappers - Collecting The Sales Tax That Has Already Been Paid, Richard Thompson Ainsworth

Faculty Scholarship

No other New England state is as vulnerable to Zappers as is the State of Massachusetts. Zappers and related software programming, Phantom-ware, facilitate an old tax fraud – skimming cash receipts. In this instance skimming is performed with modern electronic cash registers (ECRs).

Zappers are a global revenue problem, but to the best of this author’s knowledge they have not been uncovered in Massachusetts. A global perspective says: it is highly unlikely that Zappers are not in the Commonwealth – we just need to find them. In fact, using a Quebec template, tax losses from Zappers and related frauds in …

Use And Enjoyment Of Intangible Services: The German, Austrian, Danish And Estonian Vat Derogations, Richard Thompson Ainsworth

Faculty Scholarship

When the Czech Republic elected (effective January 1, 2009) to derogate from the standard rules for determining the place of supply for intangible services, pursuant to Article 58 of the Recast VAT Directive (RVD), it was following the lead of ten other Member States. This paper considers four of those other jurisdictions - Germany, Austria, Estonia, and Denmark - and compares their derogations with that of the Czech Republic.

In each instance a use and enjoyment standard determines the place of supply for certain intangible services. The affected transactions are (potentially) wide ranging. In each instance non-EU countries are on …

Lincoln's Populist Sovereignty: Public Finance Of, By, And For The People, Timothy A. Canova

Faculty Scholarship

No abstract provided.

Use And Enjoyment Of Intangible Services: The Czech Republic's Vat Derogation, Richard Thompson Ainsworth

Faculty Scholarship

On January 1, 2009 a minor change in the Czech Republic VAT became effective. A use and enjoyment standard was added to modify the sourcing of certain service transactions. Traditional proxy-based rules, derived from Articles 43 and 56(1) of the Recast VAT Directive (RVD), are set aside by this modification when the customer receiving the services has a permanent establishment (PE) in the Czech Republic. The modification is authorized by RVD 58.

This change is a limited adoption of RVD 58(b), and functions like a full force of attraction principle in direct taxation. If caught by these rules, transactions that …

Quebec's Module D'Enregistrement Des Ventes (Mev): Fighting The Zapper, Phantomware And Tax Fraud With Technology, Richard Thompson Ainsworth

Faculty Scholarship

On January 28, 2008 the Quebec Minister of Revenue, Jean-Marc Fournier, announced that by late 2009 the MRQ will begin testing a device, the module d'enregistrement des ventes (MEV) that is projected to substantially reduce tax fraud in the restaurant sector. By 2010 or 2011 MEVs will be mandatory in all Quebec restaurants, where they will assure accuracy and retention of business records within electronic cash registers (ECRs).

This paper moves beyond a discussion of the variety of sales suppression programs in use - zappers and phantom-ware. The concern here is on enforcement efforts, particularly the MEV. The intent is …

California Biometrics: A Second Proposal For California's Commission On The 21st Century Economy, Richard Thompson Ainsworth

Faculty Scholarship

This proposal takes a long view to revenue reform. It seeks to fundamentally align the sales tax with the digital foundation of the 21st Century economy.

The core policy question is whether California is willing to change the way it defines sales tax exemptions; is it willing to move from product-centric to person-centric exemptions. Certified tax determination systems can be relied upon. A key element in this proposal is the encryption of exemption certificates in IDs (smart cards with biometric identifiers that will allow the poor or handicapped to make certain purchases tax free).

This proposal suggests that (for example) …

Transfer Pricing In Vat/Gst Vs. Direct Taxation: A Paper On The Topic Of Relations Between Associated Companies, Richard Thompson Ainsworth

Faculty Scholarship

This paper considers transfer pricing in VAT/GST and direct taxes, one of a range of tax relationships that flow between associated companies. The topic necessarily proposes an inquiry into vertical harmonization of transfer pricing norms alongside an assessment of present efforts to horizontally harmonize transaction values.

Stated differently, the vertical inquiry is: should the same transaction between the same associated enterprises be valued in the same manner by a single country in VAT/GST and direct taxes? The horizontal effort is: should two jurisdictions treat transactions between associated enterprises within their respective jurisdictions in the same manner in VAT/GST and direct …

California Zappers: A Proposal For The Commission For The 21st Century Economy, Richard Thompson Ainsworth

Faculty Scholarship

California has not uncovered a single instance of technology-assisted cash skimming - there are no zappers, and no phantomware in California. Is this because Californians are not skimming cash sales with technology, or is this because the California technology works so well that the fraud cannot be detected?

The record in foreign jurisdictions is reasonable clear. Automated sales suppression technology is widely used to skim cash sales, denying the state revenues from consumption taxes that have been paid by the consumer, reducing taxable business profits, and funding a cash hoard out of which unreported employee wages are paid. Government studies …

The Future Of The Securities And Exchange Commission As A Market Regulator, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Anticipating The Unthinkable: The Adequacy Of Risk Management In Finance And Environmental Studies, James A. Fanto

Faculty Scholarship

No abstract provided.

Optimization And Its Discontents In Regulatory Design: Bank Regulation As An Example, William H. Simon

Faculty Scholarship

Economists and economically-trained lawyers tend to speak about regulation from a perspective organized around the basic norm of optimization. By contrast, an important managerial literature espouses a perspective organized around the basic norm of reliability. The perspectives are not logically inconsistent, but the economist’s view sometimes leads in practice to a preoccupation with decisional simplicity and cost minimization at the expense of complex judgment and learning. Drawing on a literature often ignored by economists and lawyers, I elaborate the contrast between the optimization and reliability perspectives. I then show how it illuminates current discussions of the reform of bank regulation.

Into The Void: Governing Finance In Central & Eastern Europe, Katharina Pistor

Faculty Scholarship

Twenty years after the fall of the iron curtain, which for decades had separated East from West, many countries of Central and Eastern Europe (CEE) are now members of the European Union and some have even adopted the Euro. Their readiness to open their borders to foreign capital and their faith in the viability of market self-governance as well as supra-national governance of finance is both remarkable and almost unprecedented. The eagerness of the countries in CEE to join the West and to become part of a regional and global regime as a way of escaping their closeted socialist past …

Banking Reform In The Chinese Mirror, Katharina Pistor

Faculty Scholarship

This paper analyzes the transactions that led to the partial privatization of China’s three largest banks in 2005-06. It suggests that these transactions were structured to allow for inter-organizational learning under conditions of uncertainty. For the involved foreign investors, participation in large financial intermediaries of central importance to the Chinese economy gave them the opportunity to learn about financial governance in China. For the Chinese banks partnering with more than one foreign investor, their participation allowed them to benefit from the input by different players in the global financial market place and to learn from the range of technical and …

Rethinking The "Law And Finance" Paradigm, Katharina Pistor

Faculty Scholarship

The label "Law and Finance" stands for a body of literature that has dominated policy-making and academic debates for the past decade. The literature has its origin in a series of papers co-authored by Andrei Shleifer, Rafael La Porta, Florencio Lopez-de-Silanes and a cohort of other researchers, including Robert Vishny, Simeon Djankov et al. (hereinafter referred to as LLS et al.). More than ten years after "Law and Finance" was first published, it seems appropriate to step back and consider the contribution this literature has made, but also to point out where it has gone astray and deviated attention from …

Keynote Address: Understanding The ‘Subprime’ Financial Crisis, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Keynote Address: The Case For A Market Liquidity Provider Of Last Resort, Steven L. Schwarcz

Faculty Scholarship

This short paper, prepared as a keynote address, explains why the credit crunch is fundamentally a story about financial markets, not banks. Its cause was a collapse of securitization and other debt markets, which have become major sources of financing for consumers and companies. Deprived of this financing, consumers have had difficulty purchasing homes and automobiles, and companies have had difficulty purchasing inventory and making capital investments, causing the real economy to shrink. This paper examines how these financial markets should be protected. Although already subject to many prescriptive regulatory protections, these markets evolve faster than regulation can adapt. The …

Leverage In The Board Room: The Unsung Influence Of Private Lenders In Corporate Governance, Frederick Tung

Faculty Scholarship

The influence of banks and other private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or account for this lender influence. Corporate governance discourse has traditionally focused only on corporate law arrangements. The few existing accounts of creditors' influence over firm managers emphasize the drastic actions creditors take in extreme cases - when a firm is in serious trouble - but in fact, private lender influence is a routine feature of corporate governance even absent financial distress. …

Civil Liability And Mandatory Disclosure, Merritt B. Fox

Faculty Scholarship

This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier – an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the …

Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors …

Shareholder Opportunism In A World Of Risky Debt , Richard Squire

Faculty Scholarship

Modern finance is increasingly dominated by derivatives and similar contracts that create contingent debts, which become payable only upon the occurrence of an uncertain future event. This Article identifies a pervasive opportunism hazard created by contingent debt that lawmakers and scholars have overlooked. If liability on a firm's contingent debt is especially likely to be triggered when the firm is insolvent, the contract that creates the debt transfers wealth from the firm's creditors to its shareholders. A firm therefore has incentive to engage in correlation-seeking - that is, to incur contingent debts that correlate, or that through asset purchases can …

The Return Of The Rogue, Kimberly D. Krawiec

Faculty Scholarship

The “rogue trader”—a famed figure of the 1990s—recently has returned to prominence due largely to two phenomena. First, recent U.S. mortgage market volatility spilled over into stock, commodity, and derivative markets worldwide, causing large financial institution losses and revealing previously hidden unauthorized positions. Second, the rogue trader has gained importance as banks around the world have focused more attention on operational risk in response to regulatory changes prompted by the Basel II Capital Accord. This Article contends that of the many regulatory options available to the Basel Committee for addressing operational risk it arguably chose the worst: an enforced selfregulatory …

Regulating Complexity In Financial Markets, Steven L. Schwarcz

Faculty Scholarship

As the financial crisis has tragically illustrated, the complexities of modern financial markets and investment securities can trigger systemic market failures. Addressing these complexities, this Article maintains, is perhaps the greatest financial-market challenge of the future. The Article first examines and explains the nature of these complexities. It then analyzes the regulatory and other steps that should be considered to reduce the potential for failure. Because complex financial markets resemble complex engineering systems, and failures in those markets have characteristics of failures in those systems, the Article‟s analysis draws on chaos theory and other approaches used to analyze complex engineering …

The Coroner’S Inquest: Ecuador’S Default And Sovereign Bond Documentation, Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

Conventional wisdom is that sovereigns will rarely, if ever, default on their external debts in circumstances where it is clear that they have the capacity to pay. The first line of defense against the errant sovereign is its concern about reputation. It may have to tap the external debt markets again in the future; and there is the fear that the markets will extract revenge. But reputational constraints do not always work because some governments heavily discount future costs in favor of current benefits. When reputational constraints fail, however, a second line of defense is supposed to come into play. …

The ‘Principles’ Paradox, Steven L. Schwarcz

Faculty Scholarship

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of …