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Scandal

Scandal

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Published by Foreclosure Fraud
4closureFraud.org
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Categories:Types, Research
Published by: Foreclosure Fraud on Feb 20, 2013
Copyright:Attribution Non-commercial

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 University of Pennsylvania Law School
ILE
INSTITUTE FOR LAW ANDECONOMICS
 
A Joint Research Center of the Law School, The Wharton School, and The Department of Economics in the School of Arts and Sciencesof the University of Pennsylvania
R
ESEARCH
P
APER
N
O
.
 
12-26
Law and Economics Research Paper No. 12-034Public Law Research Paper No. 12-126
A
 
 T
RANSACTIONAL
G
ENEALOGY OF
S
CANDAL
:
F
ROM
M
ICHAEL
M
ILKEN TO
E
NRON TO
G
OLDMAN
S
ACHS
 
86 S.
 
C
AL
.
 
L.
 
R
EV
. (forthcoming 2013)
William W. Bratton
U
NIVERSITY OF
P
ENNSYLVANIA
L
AW
S
CHOOL
 
Adam J. Levitin
G
EORGETOWN
U
NIVERSITY
L
AW
C
ENTER
 
December 10, 2012
 
V
ERSION
 
 This paper can be downloaded without charge from theSocial Science Research Network Electronic Paper Collection at:http://ssrn.com/abstract=2126778
 
A
 
 T
RANSACTIONAL
G
ENEALOGY OF
S
CANDAL
:
FROM
M
ICHAEL
M
ILKEN TO
E
NRON TO
G
OLDMAN
S
ACHS
 
W
ILLIAM
W.
 
B
RATTON
A
DAM
 J.
 
L
EVITIN
 
 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 thenexus 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.

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