Three scandals have reshaped business regulation over the pastthirty years: the securities fraud prosecution of Michael Milken in 1988,the Enron implosion of 2001, and the Goldman Sachs “Abacus”enforcement action of 2010. The scandals have always been seen asunrelated. This Article highlights a previously unnoticed transactionalaffinity tying these scandals together—a deal structure known as thesynthetic collateralized debt obligation involving the use of a specialpurpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’saccounting and regulatory benefit. The SPE remains mysterious and poorly understood, despite itsuse in framing transactions involving trillions of dollars and itsprominence in foundational scandals. The traditional corporate alterego was a subsidiary or affiliate with equity control. The SPE eschewsequity control in favor of control through pre-set instructions emanatingfrom transactional documents. In theory, these instructions are completeor very close thereto, making SPEs a real world manifestation of the“nexus of contracts” firm of economic and legal theory. In practice,however, formal designations of separateness do not always stand upunder the strain of economic reality.When coupled with financial disaster, the use of an SPE alterego can turn even a minor compliance problem into scandal because of the mismatch between the traditional legal model of the firm and theSPE’s economic reality. The standard legal model looks to equityownership to determine the boundaries of the firm: equity is inside thefirm, while contract is outside. Regulatory regimes make inter-firmconnections by tracking equity ownership. SPEs escape regulation by
Deputy Dean and Nicholas F. Gallicchio Professor of Law; Co-Director, Institute forLaw & Economics, University of Pennsylvania Law School.
Bruce W. Nichols Visiting Professor of Law, Harvard Law School; Professor of Law,Georgetown University Law Center. Our thanks go to William Birdthistle, Erik Gerding, MikeKnoll, Reed Shuldiner, Lynn Stout, Andrew Tuch, Charles Whitehead, and Chuck Yablon, and toparticipants at faculty workshops at the Cardozo, Cornell, , Georgetown, and Penn law schools andat the University of Miami Business Law Review Symposium.