Category Archives: US Courts

Consumer Bureau Brushback

Are you serious? OK then,… 9-0
========
Washington’s regulators have great power, and in the case of the Consumer Financial Protection Bureau, created by Dodd-Frank as an independent agency, they also have no serious Congressional check. So three cheers for a recent Supreme Court decision reining in regulatory discretion that has zero foundation in law.

And by the way, the decision was 9-0, with the Justices describing the Department of Housing and Urban Development’s aggressive assertion of its regulatory authority a “palpable overreach.” That’s a nice way of saying, you can’t be serious.

As often happens, this useful principle emerged from the arcana of a little-known 1974 federal law known as Respa, for the Real Estate Settlement Procedures Act. Respa forbids providers of real-estate services—title insurance, appraisals and the like—from taking kickbacks or splitting the fees they receive. In 2001 HUD quietly expanded the law’s reach by declaring it wasn’t limited to “situations where at least two persons split or share an unearned fee.”

This cued the plaintiffs bar, and before long Freeman v. Quicken Loans was headed to the Supreme Court. Three aggrieved married couples alleged that Quicken Loans had illegally split fees—with itself. The Solicitor General sided with them, arguing that HUD indeed had the right to interpret the statute, had done so properly, and the Court should give deference to its decision. Also chiming in was the senior litigator from the new consumer protection bureau, who was a signatory to the government’s amicus brief on the side of the plaintiffs. (The consumer bureau now enforces Respa, thanks to Dodd-Frank.)

The nine justices essentially laughed all these people out of court, upholding the idea that Congress makes laws and the bureaucracy implements them. Writing for the court, Justice Antonin Scalia declared the bureaucracy’s Respa interpretation was “manifestly inconsistent with the statute HUD purported to construe.” The law’s text “clearly describes two distinct exchanges,” he noted, not an exchange of fees of a company with itself.

In the unending battle against regulatory overreach, Freeman is a pretty big deal and has implications beyond the world of real-estate settlement. The Department of Justice, for example, is aggressively using so-called “disparate-impact” analysis, a type of statistical technique that ignores intent, to accuse financial institutions of discrimination under the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act. Neither law has text that supports these interpretations. Freeman suggests the Justices also would be inclined to curb these overreaches.

The Supreme Court’s ideological divisions over abortion and the like are well known. Let it be noted, however, that this Court does not look favorably on regulators unabashedly assuming the powers of lawmakers. Freeman sends a clear message to regulators to do the job they’re asked to do, and nothing more.

Review & Outlook: Consumer Bureau Brushback – WSJ.com.

Share

Killing Awlaki: Legal

The people who decry this killing are the same group who will not support Ohio mothers, jailed because they choose to send there children to a school [because their [[public]] school is so bad.

==========

In the decade before his death, Anwar al-Awlaki served as an imam at two American mosques attended by 9/11 hijackers. He corresponded regularly with Nidal Hasan before the Army major went on his murder spree at Fort Hood in November 2009. He was in touch with Umar Farouk Abdulmutallab, who nearly brought down a jetliner over Detroit the following month. His sermons were cited as an inspiration by attempted Times Square bomber Faisal Shahzad. He said that “jihad against America is binding upon myself, just as it is binding on every other able Muslim.”

Now a Hellfire missile fired from an American drone somewhere over Yemen has brought Awlaki’s career of incitement to an abrupt close. Lest you suppose this is a blessing for civilization, certain self-described civil libertarians would like a word with you.

The caviling over Awlaki’s death began almost the moment the news was announced yesterday. “Al-Alwaki was born here, he’s an American citizen, he was never tried or charged for any crimes,” said Ron Paul, the Republican Presidential candidate, in New Hampshire yesterday. “To start assassinating American citizens without charges—we should think very seriously about this.” In the Guardian, Michael Ratner of the Center for Constitutional Rights called Awlaki’s killing “extrajudicial murder.”

Then there is the view that the U.S. cannot carry out strikes against terrorists in countries that, like Yemen, are not at war with us. Last year, Awlaki’s father filed a case in federal court on those grounds. Federal Judge John Bates dismissed it by noting that “there are circumstances in which the [President’s] unilateral decision to kill a U.S. citizen overseas” is “judicially unreviewable.”

More recently, however, the New York Times has reported that State Department legal adviser Harold Koh is making the case within the Administration that while the U.S. can target terrorists in places like Yemen, it must also “justify the act as necessary for its self-defense—meaning it should focus on individuals plotting to attack the United States.”

Mr. Koh has his current job in part because he made a name for himself as a vociferous critic of Bush Administration antiterror policy, so maybe it’s no surprise that he should now serve as this Administration’s in-house scold. Yet the Authorization for Military Force Against Terrorists adopted by Congress a week after 9/11 (on a 420-1 vote in the House and 98-0 in the Senate) gives the President broad authority to use force against “those nations, organizations or persons he determines planned, authorized, committed or aided” the attacks “in order to prevent any future acts of international terrorism against the United States.”

Though Awlaki and other newer al Qaeda recruits didn’t plan 9/11, they can lawfully be targeted under the “associated forces” doctrine well understood under the laws of war. The U.S. used that doctrine to attack the military of Vichy France in North Africa during World War II, for example, though Congress had declared war against Germany, Italy, Japan, Hungary, Bulgaria and Romania. The Obama Administration’s own March 13, 2009 redefinition of who is an “enemy combatant” includes a specific reference to “associated forces that are engaged in hostilities” against the U.S. or its allies.

If Mr. Koh or his fellow-travelers want to narrow this definition, they are free to suggest that Congress do so. Otherwise, President Obama’s powers to pursue al Qaeda and its affiliates wherever they may be are manifestly legal.

As for the idea that Awlaki was entitled to special consideration on account of his U.S. citizenship, the Supreme Court made its views clear in the 1942 Ex Parte Quirin case dealing with Nazi saboteurs: “Citizenship in the United States of an enemy belligerent does not relieve him from the consequences of belligerency.” Samir Khan, a Saudi-born American who managed al Qaeda’s media organization and was killed alongside Awlaki, described himself as “proud to be a traitor to America“; presumably, he too understood the consequences of belligerency.

Meanwhile, what used to be called the war on terror continues apace. The killing of Awlaki is the third time in recent months that the U.S. has thinned the ranks of al Qaeda leaders, following the raid on Osama bin Laden’s compound in May and the drone strike on operations man Atiyah Abd al-Rahman in August.

Whether this means al Qaeda is on the verge of “strategic defeat,” as Secretary of Defense Leon Panetta put it not long ago, isn’t clear, particularly as the group continues to extend its reach in East Africa. But it does mean that al Qaeda has lost its most charismatic figures and will have to replenish its leadership ranks. Aggressive use of drones and other counterterrorist tools will complicate that task, while reminding potential jihadist recruits of the fate that awaits all of their leaders.

In our asymmetrical war on terror, intelligence and drones are two of our rare advantages. Mr. Obama’s expansion of the drone campaign is his most significant national security accomplishment. For ridding the world of the menace that was Awlaki—even while ignoring the advice of some of its ideological friends—the Administration deserves congratulations and thanks.

Review & Outlook: Killing Awlaki – WSJ.com.

Share

Tale of Three Thefts: China, Russia, and the US

Russia 2006
In December of 2006, Gazprom, the Russian energy monopoly, “accepted” control of Sakhalin-2 from Royal Dutch Shell. Sakhalin-2 is a drilling venture off Sakhalin Island in Russia’s North Pacific. Shell negotiated the offshore drilling rights with the Russian government to be Sakhalin-2’s owner and operator along with its two Japanese partners. In return, Shell agreed to invest $8 billion. Shell’s deal was unusual because it included no Russian partner, but it was approved at the highest levels in 1994. As the end of 2006 approached, Sakhalin-2 was ready to go into production. Shell’s investment had grown to $20 billion.

Then came trouble. Russian environmental regulators suddenly discovered a number of violations that endangered Sakhalin Island’s “delicate ecostructure.” They ordered the project closed down and gave no instructions for remedying the presumed violations. In effect,

Sakhalin-2 was placed on permanent hold.

President Vladimir Putin, however, offered a solution. If Shell would sell fifty percent plus one share of Sakhalin-2 to the Russian state gas monopoly, Gazprom, perhaps a solution to the environmental holdup could be found.

Shell, faced with an indefinite delay during which its license might lapse, caved in. Shell gave up its controlling interest to Gazprom at a price well below market value.

At the signing ceremony, Putin announced that the environmental issue could be considered “resolved.” He cited Shell’s and Exxon’s (which had also been squeezed by regulators) participation in Russian energy development as proof of the open investment climate. Shell executives put on their happy faces and declared how much they looked forward to working with their new Russian “partner,” the state-owned Gazprom.

Shell would be a fool to return to Russia for another major project, although BP did recently with similarly bad results.

——————————————————————————–

China 2011
In its most recent regulatory filing, Yahoo disclosed that Alibaba Group, 43 percent owned by Yahoo but under Chinese management, transferred Alibaba’s on-line payment service, Alipay, to a company owned by its Chinese CEO. Yahoo learned of the transfer only after it was completed and without approval of Alibaba’s board. The Chinese Alibaba chairman’s excuse: He had to transfer ownership because of “Chinese regulatory rules.” In the wake of this disclosure, Yahoo’s share price plummeted. Alipay represented the most valuable single asset of the company’s Chinese operations.

The Chinese CEO of Alibaba, Jack Ma, is a major businessman, Internet pioneer, and celebrity. Although he is not a fabled “Princeling,” he is well connected with Chinese party leaders and bureaucrats. If not, he would not be a billionaire. In a legal battle in China between him and Yahoo, Ma would be the winner.

In late July, Ma and Yahoo reached an “agreement.” Alipay remained the property of Ma, but, in the event that Alipay goes public, Alibaba will receive at least $2 billion but no more than $6 billion.

Like Shell in Russia, Yahoo executives smiled as Ma announced the agreement “that serves the interests of all parties. He left the best for last: “We have secured the license needed to operate.”

Upon hearing this news, an influential fund manager dumped his company’s entire stake in Yahoo because of the de facto loss of one of its most important assets.

United States 2009
In Spring of 2009, a group of Chrysler’s secured lenders threatened to fight in bankruptcy court what they termed the “illegal” sale of Chrysler to a union-aligned trust. Under the government-brokered plan, Chrysler assets would be transferred to a new company owned 55 percent by a union health-care trust. The rest would be owned by Fiat and the U.S. and Canadian governments.

Under established bankruptcy law, secured creditors are first in line in the distribution of assets. They are supposed to get a better deal than unsecured creditors, such as the union fund, in this case. Instead, the secured creditors were told they would get about 29 cents on the dollar

– a return well below others in line.

——————————————————————————–

Unsurprisingly, the four large banks, that held the bulk of Chrysler’s secured debt, agreed to the proposed “hair cut.” They also happened to be among the recipients of billions of dollars of government bailouts under the TARP program. As such, they had already received their payoffs; so why raise a fuss about their Chrysler losses?

Secured lenders, who did not receive TARP funds, could not agree to “unfair and illegal payment schemes.” They complained: “We went into this investment thinking normal bankruptcy laws developed and refined over decades were to be upheld.” Obviously, they were disturbed to learn that they were wrong.

As the Non-TARP secured lenders prepared for battle, they found their numbers dwindling. President Obama, in a press conference, labeled them as “speculators,” whose refusal to play ball forced Chrysler into bankruptcy. Within days, the Non-TARP group dwindled to nine companies representing only $295 million in Chrysler debt. The group was so afraid of a public backlash that its members unsuccessfully asked the court to remain anonymous. The Non-Tarp secured lenders caved in to government pressure. They understood “you cannot fight city hall.” The President’s vitriol could have been followed by Congressional hearings, IRS visits, or other unpleasant things.

The American public remained blissfully unaware that something untoward had even happened.

These three stories tell us a great deal about forces that hold economies back.

In the Russian case, the Putin regime openly blackmailed one of the world’s largest and most visible corporations by unleashing its regulators for the express purpose of extortion. Shell invested $20 billion and its technology. Putin decided it was time for the Russian state and its oligarchs to cash in. When the state itself extorts, newspapers and reporters avoid plain talk. But in my book extortion is extortion, even if the government, not Tony Soprano, does it.

In the Chinese Alibaba case, a Chinese insider ignored all established rules of corporate governance to transfer the most valuable asset of a company he presided over as CEO to another company he owned. In so doing, he violated his fiduciary responsibility to all owners, including the largest shareholder, Yahoo. His excuse was again state regulation.

He had to take over the asset because Chinese regulatory rules forced him to do so. He had no choice, but that choice made him an even richer man.

The Chinese case is only slightly less blatant than the Russian one.

——————————————————————————–

When the abuse became known to the investment community, the Chinese parties backtracked somewhat, and pretended to reach an amicable deal, but it was still a losing deal for Yahoo.

China is very dependent on foreign direct investment for technological progress. Its domestic innovation machine is overblown and ineffective.

Yahoo’s Alibaba experience is probably only the tip of the iceberg. If that is the case, China will eventually have to kiss foreign investment goodbye despite its vaunted high growth and large consumer market.

Chrysler follows the same pattern but is more subtle. The secured debtors clearly had the law on their side, but they could not withstand the threats and accusations that the administration brought to bear against them. The Obama administration decided that the established rule of law was trumped by political considerations. They strong armed those with the law on their side. They could argue that they set aside normal legal procedure for the good of the country (or for labor allies), and only a few lenders were hurt.

These cases show that Russia has no rule of law and is not particularly concerned about this fact being made quite obvious. Russia therefore has little chance of economic progress and is sustained only by its vast energy and mineral resources. China also does not have a rule of law, but China participates in world markets and needs Western technology and direct foreign investment. In the long run, its lack of a rule of law will severely retard its economic progress when the international business community better understands China’s investment climate.

The United States has prospered so far by having a well established rule of law. Apologists for the Chrysler action shrug and note that only a few investors and the rule of law were sacrificed for the sake of the national good (or the administration’s labor allies).

But the Chrysler case could have far reaching implications. Currently lenders are sitting on trillions of dollars. As one of the Chrysler secured debtors warned: “Why should we lend money when we do not know if our legal rights will be upheld?” Similar thoughts must be going through the minds of mortgage and other lenders. Perhaps some government agency will require us to change the terms of the loan. Maybe the President will brand us as evil and drive our depositors away.

Is this one of the reasons why all that money is sitting on the sidelines and holding back our recovery? The presumed denial of the rule of law to a few may affect the behavior of the many.

Paul Roderick Gregory is a Hoover Institution research fellow.

Forbes.com – Magazine Article.

Share

Release the Prisoners! – US Supreme Court

“Most of them will not be prisoners with medical conditions or severe mental illness, and many will
undoubtedly be fine physical specimens who have developed intimidating muscles pumping iron in the prison gym.”
JUSTICE ANTONIN SCALIA, in a dissent on inmates who might be released under a Supreme Court ruling that ordered California to reduce its prison population.

Ah, what does Scalia know…

Share