Volume 94, Number 5

November 2019

Engineered Credit Default Swaps: Innovative or Manipulative?

Gina-Gail S. Fletcher

Credit default swaps (CDS) are, once again, making waves. Maligned for their role in the 2008 financial crisis and condemned by the Vatican, investors are once more utilizing CDS to achieve results of questionable market benefit. A CDS is a financial contract that allows investors to “bet” on whether a borrower will default on its loan. However, rather than waiting to see how their bets pan out, some CDS counterparties are collaborating with financially distressed borrowers to guarantee the profitability of their CDS positions—“engineering” the CDS’ outcome. Under the CDS contract, these collaborations are not prohibited, yet they have roiled the CDS market, leading some market participants to view the collaborations as a sign that CDS are little more than a rigged game. Conversely, some view “engineered CDS transactions” as an innovative form of financing for distressed companies. As engineered CDS transactions proliferate in the market, it becomes increasingly prudent to look beyond their contractual acceptability to assess whether, from a legal point of view, these transactions are permissible. 

Engineered CDS transactions demonstrate the challenges that the existing legal and non-legal framework face in effectively responding to new forms of market distortion. This Article examines the costs and benefits of engineered CDS transactions on the market as a precursor to determining whether legal intervention is needed. Assessment of the relative costs and benefits of engineered transactions indicates that despite their innovativeness, engineered CDS transactions are largely detrimental to the markets because they impose costs on actors unaffiliated with the CDS market and, more broadly, destroy public trust in the financial markets. Yet, despite their associated harms, legally, engineered transactions exist in a gray space. This Article analyzes the phenomenon of engineered CDS transactions, assessing the capacity of applicable legal frameworks, private standards, and market discipline to address these transactions, and finds each to be lacking. Consequently, this Article proposes a range of responses, including modernization of the existing anti- manipulation framework, to mitigate the harm and collateral consequences that stem from engineered CDS transactions. 

Beyond #MeToo

Deborah Tuerkheimer

The #MeToo movement has ushered in a new kind of sexual misconduct accusation—accusation leveled through informal channels of communication. A functional analysis shows that unofficial reporting can advance important ends. But the rise of informal accusation should be of special concern to legal scholars and lawyers, who generally proceed from certain assumptions regarding the primacy of formal systems of accountability. These basic assumptions need revision if, by aiming to satisfy goals that our laws and legal institutions fail to achieve, informal reporting channels are serving as substitutes for the officially sanctioned mechanisms of accountability that monopolize scholarly attention. Unofficial reporting pathways are imperfect legal workarounds; their prevalence means that the law of sexual misconduct has been consigned to a relative state of quiescence. Over time, survivors, long disserved by the criminal law, by campus disciplinary processes, and by workplace complaint structures, have mostly turned away from the systems that have forsaken them. A needed redesign of official complaint channels should be informed by the benefits of informal reporting, along with a commitment to awakening law. 


The Value of a New Judgments Convention for U.S. Litigants

Sarah E. Coco

A new Judgments Convention creates common, binding rules for the recognition and enforcement of foreign judgments among countries that are party to the Convention. This Note considers what such a Convention would have to offer U.S. litigants. It starts by examining a common scholarly view—that U.S. judgments are unreasonably difficult to enforce abroad, in comparison to the relative ease of recognizing and enforcing foreign judgments in the United States. It argues that this view is out of date, due to improvements in three areas that have traditionally prevented the recognition of U.S. judgments—jurisdiction, public policy concerns about punitive damages, and reciprocity. It then considers the Convention in light of the knowledge that U.S. judgments have become easier to enforce abroad and argues that the Convention would still offer important benefits to U.S. litigants, both by making the rules for recognition and enforcement more predictable and transparent, and by “locking in” existing improvements in foreign law. It concludes by arguing that U.S. litigants would benefit if the United States joined the Convention. 

A Single Score No More: Rethinking the Admissions System for New York City’s Specialized High Schools to Preserve Academic Excellence and Promote Student Diversity

Priscilla A. Consolo

Despite decades of litigation and court case rulings, pursuing the goal of diverse student populations in schools, including through affirmative action policies, remains a controversial subject. In the present day, discrimination on the basis of race or ethnicity by educational institutions is still a divisive issue in the United States. In our nation’s most populous municipality, this contentious subject has been debated as a result of the lack of diversity at New York City’s eight “testing” Specialized High Schools (SHSs). Due to the disproportionately low number of Black and Hispanic/Latino students admitted, the prestigious SHSs have not been spared from allegations of racial and ethnic discrimination occurring in their admissions process. Over the past decade, critics have claimed that the admissions system for the SHSs, renowned for their rigorous, career-based academic curricula and ability to produce successful alumni, is discriminatory. Relatedly, there has been a renewed focus on promoting student body diversity in these elite schools, including a plan announced by Mayor Bill de Blasio in June 2018 to increase the number of Black and Hispanic/Latino students admitted. This Note explores the flaws of the Mayor’s proposal and presents an alternative plan for reforming the SHSs’ admissions system—a timely and controversial topic—that fits within the Supreme Court’s doctrine on affirmative action in educational contexts. 

This Note begins by providing background information on the SHSs and their current admissions process. Then, this Note discusses the schools’ lack of student body diversity and past efforts aimed to address this issue, including de Blasio’s recent plan. Next, this Note proposes a novel admissions process for these eight schools, which was created based on the Supreme Court’s precedent on educational affirmative action and the guidance of several experts in this field of law. Under this proposal, a semi-holistic, multi-factor process involving four measures of academic performance—SHSAT score, GPA, rank in eighth grade graduating class, and rank among eighth graders citywide—would be used to evaluate applicants, as well as an explicit fifth factor of diversity. This plan would allow the City’s Department of Education to admit a critical mass of underrepresented minority students, similar to the approach used by institutions of higher-education. By analyzing the Court’s recent affirmative action jurisprudence in the educational context, this Note argues that despite the legal challenges imposed by the Fourteenth Amendment, this plan would allow the City to preserve these schools’ standards of high scholastic achievement, as well as admit increased numbers of Black and Hispanic/Latino students to these elite public high schools in a constitutionally-permissible way. 

The Case for Do-Over Derivative Shareholder Suits in Delaware Chancery Court

Alice Hong

Most of the literature addressing shareholder derivative litigation has emphasized the perils of excessive multi-forum shareholder litigation, proposing various solutions to sidestep the problems encountered in cases like California State Teachers’ Retirement System v. Alvarez (Wal-Mart II). This Note addresses a separate and distinct problem—a long overlooked inquiry into the due process implications of using nonparty issue preclusion to curb what is seen as an overgrowth of shareholder derivative litigation. 

The Delaware Chancery Court’s recent decision in Wal-Mart II illustrates a conceptual puzzle in the application of issue preclusion rules in the context of derivative shareholder suits. In Wal-Mart II, a separate federal suit was dismissed on the grounds that the plaintiffs had failed to satisfy the demand requirement, a crucial step for establishing the plaintiffs’ authority to bring a derivative suit on behalf of the corporation. The Delaware courts gave preclusive effect to the federal court’s ruling in barring a derivative action by different shareholders. But how can such a judgment—finding that a shareholder plaintiff seeking to bring a derivative action lacks authority to bring suit on behalf of the corporation—be given preclusive effect to bar a future suit by other shareholders? A rule that would resolve this inconsistency was proposed by Chancellor Bouchard’s decision for the Chancery Court late in 2017, In re Wal-Mart Stores Delaware Derivative Litigation (Wal- Mart I). While the Delaware Supreme Court declined to adopt the proposal, an analysis of the Delaware Supreme Court’s decision suggests that Chancellor Bouchard’s proposal may have been the right rule at the wrong time. This Note proposes adoption of the rule proposed in Wal-Mart I as Delaware’s preclusion law, arguing that the current treatment of nonparty preclusion in derivative share- holder suits is incompatible with the strong presumption against nonparty preclusion and inconsistent with the treatment of a related mechanism: the class action. In doing so, this Note advocates for an approach to nonparty issue preclusion that would deny preclusive effect to putative derivative suits dismissed prior to satisfaction of the demand requirement. 

Defining “Local” in a Localized Criminal Justice System

Elizabeth Janszky

There is an ongoing movement to democratize the criminal justice system. Providing more avenues for layperson participation, “democratizers” believe, will result in a more egalitarian system. But how to incorporate the public is an ongoing and complicated question. This Note takes a first step in disentangling important differences within the democratization movement. In doing so, it defines for the first time a sub-group of democratizers, which it terms the “localizers.” Analyzing this distinct strand of democratization serves two valuable functions. First, because democratization and localization reforms have often been lumped together, critics of the movement to democratize the criminal justice system have overlooked the unique problems that localizers’ reforms raise. This Note fills a substantial gap in the extant scholarship by providing tools for scholars to evaluate and critique some of the distinct concerns of localization. Second, and perhaps more importantly, this Note serves as a practical road map for localizers by raising questions that they must consider before advancing their reforms, many of which could, if effectuated correctly, immensely improve the current state of the criminal justice system. 

As-Applied Suspension Clause Challenges to the Immigration and Nationality Act’s Jurisdictional Bars: A Pathway into District Court for Deportation Habeas Petitions

Sarah Taitz

In 2005, Congress amended the Immigration and Nationality Act to strip jurisdiction over petitions for habeas corpus challenging an order of removal or the decision to execute an order of removal. A first generation of legal challenges argued that this provision was a facial violation of the Suspension Clause of the U.S. Constitution, which guarantees the right to bring writs of habeas corpus, or an adequate and effective alternative to habeas. These challenges were unsuccessful, and for years, the conventional wisdom has been that noncitizens cannot bring habeas petitions to challenge or delay their removal. However, recent district court cases demonstrate the viability of a new generation of as-applied Suspension Clause challenges to the denial of habeas jurisdiction. This Note identifies and describes a category of cases where the denial of habeas jurisdiction is a Suspension Clause violation: noncitizens with orders of removal who are at risk for persecution in their countries of origin because of changed country conditions that arose while they were living in the United States. Recognizing habeas jurisdiction in these circumstances is essential to protect noncitizens’ rights and to check executive power.