Fines on the Horizon for Social Media Companies Complicit in Hate Speech

By David Behrend, J.D. Candidate 2019 | Posted on

German officials have threatened to propose a law that would allow the country to place fines on social network platforms for failing to remove hate speech. Interior Minister Heiko Maas’ draft of the law would permit fines of up to 50 million Euros ($53 million) if social media platforms fail to remove “obviously criminal” content within 24 hours of a complaint.

The German government under Prime Minister Angela Merkel has been increasingly willing to apply provisions of the strict German Criminal Code in response to a rise in anti-refugee attitudes throughout Europe. The law criminalizes behavior that “incites hatred against a national, racial, religious group or a group defined by their ethnic origins.”

Since 2015, tech and social media giants like Facebook, Twitter and YouTube have voluntarily attempted to remove criminal content in a joint effort with the EU commission. The voluntary code of conduct, announced in May, included a commitment to review and remove a “majority” of flagged illegal content. But Maas says that in many cases these efforts have not yet been sufficient. A recent report showed that Facebook only removed 39 percent of flagged criminal content within the agreed timeframe and Twitter a meager 1 percent. YouTube, however, met the commitment by removing 90 percent.

A Facebook spokesman said that they were disappointed by the results of the report, admitting that their processes were a work in progress. Both Facebook and YouTube claimed that their procedures regarding content removal were robust.

In addition to combatting anti-refugee sentiment, the German Criminal Code has found renewed application against Holocaust deniers, an explicit offense in the Code. The Internet and social media have become forums for those attempting to spread this ideology. As a result, the Central Council for Jews in Germany and the World Jewish Congress have welcomed Maas’ proposed law.

German communications officials have likewise come out in support of the law, claiming that it does not abridge free speech. In his announcement, Maas asserted “Freedom of expression ends where criminal law begins.”

Maas also hoped that this law could help combat the spread of “fake news” on the Internet. He claimed that this secondary goal could be achieved by use of defamation and slander offenses under the Criminal Code.

Fines on the Horizon for Social Media Companies Complicit in Hate Speech (PDF)

Bridgewater’s 10-year Transition Plan Leading to Artificial Intelligence Management

By Nicole Saweres, J.D. Candidate 2019 | Posted on

Ray Dalio has announced that he is dropping his role as co-CEO of Bridgewater to further his 10-year transition plan to change the leadership structure of the company. Bridgewater Associates, the world’s largest hedge fund, has gone under fire from the media over the last year for sexual harassment claims made by employees and the company’s questionable management response. Ray Dalio, the founder of Bridgewater, has vehemently defended the hedge fund against said accusations.

The rumored next step in this transition is to replace management with artificial intelligence to save time and eliminate human emotional volatility. Bridgewater has a reputation of having high turnover among its employees and this move may be reaction to control issues between managing staff and employees. It may also stem from Dalio’s desire to make the future of Bridgewater more predictable under machine leadership instead of under wildcard personalities. According to the 10-year plan, by 2022 Dalio plans to be monitoring Bridgewater without actively running the firm.

The high turnover rate in Bridgewater is not only evident in the bottom level positions but in top positions as well. Jonathan J. Rubinstein, served as co-CEO for 10 months before leaving the firm in May 2016. Rubinstein is revered for his technological innovation and his help in launching Apple Inc., NeXT Inc., Palm Inc. and Hewitt-Packard Co, but Mr. Dalio stated that Rubinstein was “not a cultural fit for Bridgewater.”

Dalio has been working on a secret software engineering project that would send “GPS-style directions” for how employees should spend their time, mapping out specific tasks in their day. He has called this project “The Book of the Future.” This goes along with his transparency theme for the company. With all the meetings recorded and every task of the employees monitored the work of the company will remain efficient and predictable.

Dalio had to return as co-CEO last year after Greg Jensen had to step down from the position as it was too demanding with his co-CIO position. Other management committee members hired in recent years have already left the firm, including GE capital executive Joe Parsons, Former HSBC executive Tony Murphy, and former Accenture executive Kevin Campbell. Dalio’s purpose for the 10-year transition plan was to make Bridgewater able to go on without his leadership, and with the high turnover rate in the humans that have been hired and departed he seems to be putting his reliance on artificially intelligent staff to carry the company forward.

Bridgewater’s 10-year Transition Plan Leading to Artificial Intelligence Management (PDF)

A New Approach to Financial Regulatory Enforcement

By Nicole Danesh, J.D. Candidate 2019 | Posted on

The regulatory enforcement of the financial industry may soon change. As the new administration settles into Washington; reports have suggested the rise of dedicated efforts to change, and potentially reduce, financial regulation by the Securities and Exchange Commission (“SEC”) and the Consumer Financial Protection Bureau. While these efforts have not yet fully materialized, there are some indications that they will soon impact the financial services industry.

The pressures to alter the regulatory framework are two-fold. First, major banks want to change the way regulatory agencies collect data related to possible crimes. If the banks can modify the framework in a way that would shift more responsibility to the government, then this may lower the banks’ costs of compliance. Second, government officials and regulatory agencies have taken steps to change the enforcement landscape from the top-down. For example, last month, the acting chairman of the SEC, Michael Piwowar, took steps to limit the agency’s powers. Piwowar’s directive gave exclusive power to the director of the enforcement division to authorize formal investigations. This will both limit inquiries and slow down the process of starting investigations. Consequently, the new structure will weaken financial regulatory enforcement.

Scaling back regulation may create undesirable consequences. Particularly concerning is the idea that violations can go undetected for quite some time until they grow into large and harmful issues. Additionally, a lack of sufficient regulation will increase the risk of another financial crisis.

On the other hand, excess regulations are not always desirable either. Too many regulations can create extremely high costs which may not be proportional to the consequential benefits of detecting minor violations. In order to prevent this, a current administration official and financial regulator has recently called for easing the strict requirements that arose after the 2008 crisis.

Ultimately, these new approaches might simply be an attempt to curb over-regulation. However, it may also offer a way for companies to tip-toe around the law in the name of generating profits. Regardless, regulatory agencies must strike a balance in structuring the new enforcement frameworks and make sure that the new regulatory regime is neither too stringent nor too lenient. This balance is key in preventing arbitrary targeting—wasting taxpayer resources in the process and burdening private businesses—and in incentivizing lawful behavior in the financial industry.

A New Approach to Financial Regulatory Enforcement (PDF)

Professional Conduct Codes for Bankers?

By Emmett Carrier, J.D. Candidate 2018 | Posted on

Two weeks ago, the general counsel of the Federal Reserve Bank of New York issued a statement at the Yale Law School that everyone “should be concerned with culture in financial services.” Such a comment should not be very surprising due to the role that large banks and other financial institutions played during the economic crisis in 2008. Banks have since been vilified, and rightfully so, for their excessive and risky decision-making which led to one of the worst recessions in United States history.

So, how does one correct a culture built around a capitalistic and opportunistic mindset, where the survivor of the fittest can reap a massive monetary award, in order to prevent another collapse? One approach, which has been implemented elsewhere around the world, is to implement a pseudo professional code, much akin to the code of ethics policing lawyers, accountants, and doctors.

To analogize, here is an example from the California Rules of Professional Conduct, which states a lawyer’s duty with respect to client confidentiality. California is unique in this aspect, as California Bar members are expected to protect their client’s confidentiality at “every peril” to himself or herself. Could such a noble requirement find any success in the banking community?

The difficulty, firstly, is the current toxic culture of the banking community, where investment bankers are often at odds with procuring the highest fee for their respective bank, while at the same time providing competent and fair services to their client. More often than not, bankers will do what’s in the best interest for themselves and employer, and put the client second. This isn’t evil, this is just human nature.

The other difficulty lies in the roles that investment bankers provide. In contrast with lawyers and doctors who serve a primary focus to their client, large banks not only provide advisory services, but also serve as middlemen who operate between buyers and sellers. Charging interest rates and providing loans and capital can go against the idea of getting your client “the best deal.”

Of course, with any installation of an ethics code, the issue arises of how to police conduct. Lawyers and doctors can lose their licenses or face malpractice lawsuits for their unethical behavior, but no such remedies exist, outside of criminal penalties, in the banking community. One idea is to create a database of banker misconduct. By tracking “bad apples” in the financial world, bankers would be incentivized to be on their best behavior, as failing to do so would result in future difficulty of finding a job. While this practice and the potential of implementing ethics codes sounds good on paper, real change will not occur until there is a fundamental shift in the banking culture that does not reward risky and dangerous bets in the financial markets.

Professional Conduct Codes for Bankers (PDF)

SEC finds U.S. Crowd-Funding Offers New Capital Source

By Roslyn Akel, J.D. Candidate 2019 | Posted on

Crowdfunding has become an increasingly popular form of raising capital for small businesses and entrepreneurs.

Social Media platforms have come to play a large role in facilitating crowd funding. They also, as a platform for crowd funding, have enabled regulators to foster fair valuations in determining the value of enterprises whose shares are offered for sale.

In May 2016, the U.S. Securities and Exchange Commission (“SEC”) issued a new rule, Reg CF, to regulate crowd funding. The Jumpstart Our Business Startups (JOBS) Act, passed into law in 2012, empowered the SEC to write new rules to create a regulatory regime for crowdfunding.

These new regulations allow crowdfunding, up to $1 million, from accredited and non-accredited investors alike. Reg CF is essentially the first step in the capital ladder for early-stage companies. The intent was to create a low barrier to capital formation in order to enable businesses at their earliest stages to attain sufficient capital to get off the ground.

However, the new regulations, despite their intent to lower the barriers of capital formation, have been criticized by some as overly strict, costly, and ultimately creating barriers to capital formation. Many critics believe that the new regulations may actually be a deterrent to crowdfunding.

Mike Piwowar, acting SEC Chairman, echoed concerns that the rules were too restrictive. Piwowar stated, “[t]he commission should consider whether any further steps should be taken to improve our crowdfunding regulations, including the use of exemptive authority.”

Likewise, the Division of Economic and Risk Analysis (“DERA”), published a report that provided updates on the current state of issuers utilizing these new regulations as well as some critiques for changes to be made in the future. The DERA report affirmed the sentiment that the industry is quickly evolving and that today’s activity is probably not wholly indicative of future outcomes.

Looking forward, this is just the start for regulating crowdfunding. Changes are undoubtedly on the horizon. Congress is in the process of updating Reg CF to reflect some of the issues within the industry. Specifically, there are hopes that this update will allow special purpose vehicles which, in turn, would more easily align the interests of issuers and borrowers as well as more easily manage shareholder interests.

Despite the plethora of critiques, these new regulations are still a step in the right direction. They regulate crowd funding in a manner that will strike a balance to meet the needs of issuers, borrowers, and business in ultimately driving the success of newly formed businesses.

SEC finds U.S. Crowd-Funding Offers New Capital Source (PDF)

Following a Year of Scandal, Deutsche Bank Looks toward the Future

By Lindsay Szymanski, J.D. Candidate 2019 | Posted on

In early March 2017, Deutsche Bank announced that its latest restructuring will include an 8.5 billion capital raising scheme, a reorganization of its retail business, and a merging of its market business and investment bank.

This announcement comes on the heels of a turbulent year for the former investment powerhouse. In December, the bank agreed to a multimillion-dollar settlement with the United States Department of Justice for its involvement in the 2008 financial crises. Then in January, Deutsche Bank announced it would pay millions of dollars in fines for helping Russian investors launder nearly $10 billion. This is a far cry from bank’s well-regarded reputation as a dominant foreign currency trader in 2007.

In the December settlement, Deutsche Bank agreed to pay a $7.2 million to the Justice Department for its sale of toxic mortgage securities in the years leading up to the financial crises. As part of the settlement, the bank paid $3.1 billion in civil monetary penalties and $4.1 billion in consumer relief. The negotiations were followed by harsh plummet in the bank’s stock, leading many to wonder about Deutsche Bank’s stability as a financial player.

These concerns were amplified when, on January 30, Deutsche Bank agreed to pay a $425 million fine to New York State’s main financial regulator for its involvement in a Russian money-laundering scheme. The New York State Department of Financial Services found that between 2011 and 2015 Deutsche Bank executives in Moscow and London helped Wealthy Russians send money overseas by disguising these illicit funds as stock trades. Though this scandal, dubbed the “Russian Mirror Trading Scheme,” is smaller in scale than the mortgage crisis payments, it reinforced Deutsche Bank’s emerging reputation as a financial institution accustomed to skirting regulations to amplify profits.

Despite the difficult last few years, John Cyan, Deutsche Bank’s chief executive, is optimistic that it is on a “path to creating a simpler, stronger and growing bank.” Cyan specifically touts the merging of its commercial and investment bank as an opportunity to expand its competitive environment by availing itself to more than 20 million customers.

Following a Year of Scandal, Deutsche Bank Looks toward the Future (PDF)

PSA Group Acquisition of Opel and Vauxhall Brands Faces Economic and Political Challenges

By Maribeth Hunsinger, J.D. Candidate 2019 | Posted on

PSA Group, the French manufacturer of Peugeot- and Citroën-brand vehicles, agreed to acquire the Opel and Vauxhall brands from General Motors for $2.3 billion. The deal includes Opel and Vauxhall’s full product lines and production facilities across Europe, as well as Opel’s bank. In acquiring its German rival, PSA propelled itself to the position of Europe’s second-ranked carmaker by sales behind Volkswagen. GM, to its benefit, dispatched of its European arm that has been losing money since the 1990s. However, the merger is not without both microeconomic and macroeconomic concerns.

Although the deal puts PSA in a strong position to challenge Volkswagen, the company must demonstrate post-merger profitability to remain competitive. Both companies have more capacity than necessary, and the Opel brand has not been profitable in recent history. Industry observers have expressed anxiety over potential factory closures and job reductions, but the Chairman of PSA maintained the company would target cost reductions in research and development in order to avoid factory closures. Proposed methods to achieve such cost reductions include redeveloping Opel vehicles with PSA technology and architectures.

Although the French government supports the acquisition, the success of the merger may be subject to the increasingly tense political relations of the companies’ parent countries. Recently, European politicians have demonstrated an increasing awareness of and interest in corporate decision-making as they face a rise of right-wing populism. The automotive industry can be an especially sensitive issue for populist constituents, since job losses or reductions associated with flagging car factories will most heavily impact less-educated, lower-income workers.

France is home to most of the Peugeot and Citroën factories, while Britain and Germany are home to the largest Opel and Vauxhall factories. PSA must balance the needs of elected officials and labor leaders in these countries in order to make the acquisition successful. Britain’s exit from the European Union (“Brexit”) also raises concerns regarding the vulnerability of Vauxhall’s British plants at Ellesmere Port and Luton. If PSA exports cars from Britain to the European continent, the company may find themselves subject to substantial tariffs.

Europe is a challenging market for automobile manufacturers. Customers expect groundbreaking features in small cars that have low profit margins. It remains to be seen whether PSA can leverage its new brand acquisitions to find dominance in the European market, or perhaps growth in the global market that allows reduced reliance on the demanding European market. However, in order to work amicably with European politicians and labor leaders, PSA will be challenged to meet such goals without eliminating jobs.

PSA Group Acquisition of Opel and Vauxhall Brands Faces Economic and Political Challenges (PDF)

Hudson’s Bay and Neiman Marcus in Possible Merger Talks

By Chloe Chavez, J.D. Candidate 2018 | Posted on

Neiman Marcus is said to be in merger talks with Hudson’s Bay Company, the Canadian retail giant. If closed, this deal would put the upscale department store under the same company as Sak’s Fifth Ave, OFF 5TH, and Lord & Taylor.

Neiman Marcus was founded in 1907, and passed through the hands of various families until 2005. In 2005, the Neiman Marcus Group, which also operates the Bergdorf Goodman brand, was subject to a leveraged buyout. Two private equity firms, Texas Pacific Group and Warburg Pincus dropped $1.5 billion into the $5.1 billion leveraged buyout deal. In June of 2013, the two private equity firms sought to exit this transaction and originally tried to conduct an IPO. However, they instead opted for an outright sale because of rising stock values and strong credit markets. It was sold to Ares Management LLC and the Canadian Pension Plan Investment Board for $6 billion.

Since 2013, Neiman Marcus has been struggling as online retailers have gained popularity. Their competition stems largely from off-price stores such as TJ Maxx and online retailers such as Amazon.com. The company filed to go public in 2015, but decided to pull this IPO. As of October 2013, Neiman Marcus had about $4.9 billion in debt and a decrease of 2.9 percent in sales.

Now, there are rumors circulating that Neiman Marcus is considering a merger with Hudson’s Bay Company. If closed, this deal would shift the department store environment because Sak’s Fifth Ave, also owned by Hudson’s Bay Company, is currently one of Neiman Marcus’ biggest competitors. Although it is not a public company, Neiman Marcus has publicly registered debt, which requires it to report certain financial disclosures. In one of those disclosures, Neiman Marcus said that is was evaluating its strategic options and the sale of the company was one of the avenues being explored. However, the financial disclosures listed that it has not set a timetable to evaluate its options.

Hudson’s Bay and Neiman Marcus in Possible Merger Talks (PDF)

A Public Policy Perspective on Airbnb’s Legal Battles

By Sheila Tabrizi, J.D. Candidate 2019 | Posted on

Historically, hotel taxes have been easy to pass, but now that the money is shifting to Airbnb, cities have become increasingly concerned about funding. Cities have been fighting Airbnb by imposing licensing restrictions, stricter zoning ordinances, creating maximum allotted stays, and increasing taxes.

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Fox News, Harassment Payouts, and Federal Investigators

By Camila Piedrahita Abello, J.D. Candidate 2019 | Posted on

On July 6, 2016, Gretchen Carlson, former host of an afternoon program on Fox News, filed a lawsuit in the Superior Court of New Jersey. Ms. Carlson described Roger Ailes, chairman of Fox News, as a sexual harasser who ogled her and suggested a sexual relationship in order to advance her career in the network. The lawsuit claims that when she turned him down, Mr. Ailes responded by cutting her salary, curtailing her on-air appearances, and even declining to renew her contract. In response to the allegations, Fox News’ parent company, 21st Century Fox promised an internal review of Ms. Carlson’s charges while Mr. Ailes strongly denounced the allegations as “defamatory.” Ultimately, Mr. Ailes would go on to resign.

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