Robert Rhee Copyright (c) 2012 All rights reserved. http://works.bepress.com/robert_rhee Recent documents in Robert Rhee en-us Fri, 27 Jan 2012 01:31:11 PST 3600 A Financial Economic Theory of Punitive Damages http://works.bepress.com/robert_rhee/40 http://works.bepress.com/robert_rhee/40 Wed, 25 Jan 2012 05:25:47 PST This Article provides a financial economic theory of punitive damages. The core problem, as the Supreme Court acknowledged in Exxon Shipping Co. v. Baker, is not the systemic amount of punitive damages in the tort system; rather, it is the risk of outlier outcomes. Low frequency, high severity awards are unpredictable, cause financial distress, and beget social cost. By focusing only on offsetting escaped liability, the standard law and economic theory fails to account for the core problem of variance. This Article provides a risk arbitrage analysis of the relationship between variance, litigation valuation, and optimal deterrence. Starting with settlement dynamics, this Article shows that punitive damages beget problematic risk arbitrage opportunities, which systemically produce under- and over-valuation of cases. These effects yield inefficient pricing in the litigation system. Properly conceptualized and applied, punitive damages can mitigate risk arbitrage that skews actual results from the prescriptions of optimal liability and deterrence. The modern Supreme Court jurisprudence is flawed because it is overbroad. Single-digit multiplier caps underdeter defendants in most cases of ordinary liability because punitive damages do not sufficiently offset a defendant‘s risk arbitrage opportunity gained from a lower litigation risk exposure. When, however, liability is catastrophic, punitive damages overdeter defendants. Even when punitive damages are limited to single-digit multipliers, defendants bear the severe economic cost of financial distress in addition to the monetary cost of legal liability. These additional economic costs must be credited toward the calculus of cost internalization and optimal deterrence. Thus, a calibrated risk-based theory is needed to support legal limitations on punitive damages.

]]> Robert J. Rhee Economics of Dispute Resolution Law & Economics Torts The Law School Firm http://works.bepress.com/robert_rhee/39 http://works.bepress.com/robert_rhee/39 Thu, 11 Aug 2011 09:20:45 PDT This Article introduces the concept of the law school firm. The concept calls for law schools to establish affiliated law firms. The affiliation would provide opportunities for students, faculty, and attorneys to collaborate and share resources to teach, research, write, serve clients, and influence the development of law and policy. Based loosely on the medical school model, the law school firm will help bridge the gap between law schools and the practice of law.

]]> Bradley T. Borden et al. Legal Education Ethical issues in Business and the Lawyer's Role http://works.bepress.com/robert_rhee/37 http://works.bepress.com/robert_rhee/37 Fri, 15 Jul 2011 07:44:17 PDT Robert J. Rhee et al. Business Legal Education Essential Concepts of Business for Lawyers http://works.bepress.com/robert_rhee/36 http://works.bepress.com/robert_rhee/36 Thu, 14 Jul 2011 08:31:14 PDT This book covers essential concepts in accounting, financial statement analysis, financial economics, valuation, financial instruments, capital markets, and corporate transactions.

]]> Robert J. Rhee Business On Legal Education and Reform: One View Formed from Diverse Perspectives http://works.bepress.com/robert_rhee/35 http://works.bepress.com/robert_rhee/35 Mon, 03 Jan 2011 12:41:34 PST This article identifies two interconnected problems in legal education. First, legal education and practice are more disconnected than they should be, a reality which distinguishes law schools from other professional schools. The major flaw of legal education as the failure to produce more market-ready lawyers who have a mix of skills and knowledge to add value in a complex and challenging practice environment. Second, law school imposes large direct and opportunity costs on its students. These costs combine with the problem of a deficiency in academic training and post-graduation financing of additional training in the workplace to impose a growing financial strain on law students. This article discusses the challenges facing legal education after the financial crisis, which may have hastened a long-term trend toward unbundling of legal services, and a move from long-term relationships between law firms and clients toward a short-term spot market for legal talent and engagement. It argues that the problems in legal education must be put in the context of the strong market incentive to reduce costs and the effects on the legal profession and legal education.

]]> Robert J. Rhee Legal Education Faculty Colloquia, Spring 2009 Series http://works.bepress.com/robert_rhee/34 http://works.bepress.com/robert_rhee/34 Sun, 04 Jul 2010 13:20:23 PDT Spring 2009 Presenters:

January 26: Dennis D. Crouch (University of Missouri School of Law)

February 2: Mitu Gulati (Duke University School of Law), Sticky Contracts (or Why Don’t Law Firms Have R& D Departments?)

February 9: Zanita Fenton (University of Miami School of Law)

February 16: Christine Hurt (University of Illinois College of Law), The Windfall Myth

February 23: Alfred L. Brophy (University of North Carolina School of Law), The Sources and Nature of Antebellum Jurisprudence: Thomas Reade Roots Cobb’s An Inquiry into the Law of Negro Slavery

March 16: Robert Steinbuch (University of Arkansas at Little Rock Bowen School of Law), Kidneys, Cash, and Kashrut: A Legal, Economic, and Religious Analysis of Selling Kidneys

March 23: Scott Hershovitz (University of Michigan Law School), Harry Potter and the Purposes of Tort Law

March 30: Joseph Scott Miller (Lewis & Clark Law School), Hoisting Originality

April 13: Robert J. Rhee (University of Maryland School of Law), A Production Theory of Pure Economic Loss

April 17: Brian Z. Tamanaha (St. John’s University School of Law), Beyond the Formalist-Realist Divide on Judging

April 20: Juliet M. Moringiello (Widener University School of Law), Balancing the Bankruptcy Code towards the Honest but Unfortunate Creditor

]]> Alfred L. Brophy et al. Attendee Discussion: How Should Legal Educators and Law Schools Respond to These Changes? http://works.bepress.com/robert_rhee/32 http://works.bepress.com/robert_rhee/32 Sun, 04 Jul 2010 13:20:22 PDT Michael Kelly. "The Gaping Hole in American Legal Education." Major changes that have occurred in law during the last three decades (such as intense competition and phenomenal increases in compensation in the private sector, and consolidation in law practices of all kinds) have been driven by tightly managed and strongly focused practice organizations. But understanding how organizations function is not part of law school curricula or pedagogy or the agenda of those who would reform legal education. Equipping law students for a career in law in the 21st Century now requires understanding organizations, whether lawyers represent them, oppose them or work within them. And legal ethics teaching in law school--focused on the rules and principles applicable to all lawyers in a unitary profession--needs extension to the ethical realities of organizations that are now fundamental to a highly differentiated and segmented profession.

]]> Michael Kelly et al. Crisis, Rescue and Corporate Social Responsibility Under American Corporate Law http://works.bepress.com/robert_rhee/33 http://works.bepress.com/robert_rhee/33 Sun, 04 Jul 2010 13:20:22 PDT This chapter discusses the legal issues of rescue and corporate social responsibility during times of public crisis. It analyzes a corporate board’s fiduciary duty related to the management of a public crisis and the provision of aid to government and the public. The thesis is that American corporate law adequately provides corporate boards authority to assume broad principles of corporate social responsibility, and that during a public crisis this authority is specially recognized in the enabling statutes of corporate law and should be broadened even further to pursue the public good in exigent circumstances.

]]> Robert J. Rhee Corporations & Business Investment Banking Faculty Colloquia, Spring 2009 Series http://works.bepress.com/robert_rhee/30 http://works.bepress.com/robert_rhee/30 Sun, 04 Jul 2010 13:20:21 PDT Spring 2009 Presenters:

January 26: Dennis D. Crouch (University of Missouri School of Law)

February 2: Mitu Gulati (Duke University School of Law), Sticky Contracts (or Why Don’t Law Firms Have R& D Departments?)

February 9: Zanita Fenton (University of Miami School of Law)

February 16: Christine Hurt (University of Illinois College of Law), The Windfall Myth

February 23: Alfred L. Brophy (University of North Carolina School of Law), The Sources and Nature of Antebellum Jurisprudence: Thomas Reade Roots Cobb’s An Inquiry into the Law of Negro Slavery

March 16: Robert Steinbuch (University of Arkansas at Little Rock Bowen School of Law), Kidneys, Cash, and Kashrut: A Legal, Economic, and Religious Analysis of Selling Kidneys

March 23: Scott Hershovitz (University of Michigan Law School), Harry Potter and the Purposes of Tort Law

March 30: Joseph Scott Miller (Lewis & Clark Law School), Hoisting Originality

April 13: Robert J. Rhee (University of Maryland School of Law), A Production Theory of Pure Economic Loss

April 17: Brian Z. Tamanaha (St. John’s University School of Law), Beyond the Formalist-Realist Divide on Judging

April 20: Juliet M. Moringiello (Widener University School of Law), Balancing the Bankruptcy Code towards the Honest but Unfortunate Creditor

]]> Alfred L. Brophy et al. Attendee Discussion: How Should Legal Educators and Law Schools Respond to These Changes? http://works.bepress.com/robert_rhee/28 http://works.bepress.com/robert_rhee/28 Sun, 04 Jul 2010 13:20:20 PDT Michael Kelly. "The Gaping Hole in American Legal Education." Major changes that have occurred in law during the last three decades (such as intense competition and phenomenal increases in compensation in the private sector, and consolidation in law practices of all kinds) have been driven by tightly managed and strongly focused practice organizations. But understanding how organizations function is not part of law school curricula or pedagogy or the agenda of those who would reform legal education. Equipping law students for a career in law in the 21st Century now requires understanding organizations, whether lawyers represent them, oppose them or work within them. And legal ethics teaching in law school--focused on the rules and principles applicable to all lawyers in a unitary profession--needs extension to the ethical realities of organizations that are now fundamental to a highly differentiated and segmented profession.

]]> Michael Kelly et al. Legal Education Case Study of the Bank of America and Merrill Lynch Merger http://works.bepress.com/robert_rhee/25 http://works.bepress.com/robert_rhee/25 Mon, 19 Apr 2010 05:54:20 PDT This is a case study of the Bank of America and Merrill Lynch merger. It is based on the article, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson’s Choice during a National Crisis, 17 Geo. Mason L. Rev. 661 (2010). The case study analyzes the controversial events occurring between the merger signing and closing. It reviews in depth the circumstances under the federal government threatened to fire the board and management of Bank of America unless it consummated the Merrill Lynch acquisition. Among other issues, this case study raises the questions: (1) what is the role of a private firm during a public crisis? (2) what are the responsibilities of the board? (3) what is the role of government and how should it treat private firms? This case study can be used in corporate ethics classes in business schools, or business associations classes in law schools.

]]> Robert J. Rhee Investment Banking The Decline of Investment Banking: Preliminary Thoughts on the Evolution of the Industry 1996-2008 http://works.bepress.com/robert_rhee/24 http://works.bepress.com/robert_rhee/24 Mon, 19 Apr 2010 05:54:02 PDT In this paper, I provide a basic, preliminary financial analysis of several prominent, independent investment banks: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. I provide the following data: (1) segmentation of net revenue by products and services, (2) return on average equity, (3) leverage ratio, and (4) debt to equity ratio. Although the data analysis here is very basic, it still tells an interesting narrative of the evolution of the investment banking industry. The investment banking industry has undergone significant change in the twelve-year period 1996 to 2008. In the mid-1990s, banks had a balance mix of the three major product lines: trading, asset management, and investment banking. In the past few years, trading has become the primary business activity of major investment banks. It has overshadowed the other two major products and services of full service firms, investment banking and asset management. In essence, the executives at these firms made “bet the company” type decisions through heavy reliance on trading and increased leverage to boost profitability. This is a new phenomenon. In fact investment banks had changed their business models. In hindsight, with a collapse of the housing and credit bubbles, pure investment banks were especially vulnerable in a way that they were not only a few years ago.

]]> Robert J. Rhee Corporations & Business Investment Banking Reflections on the Financial Crisis http://works.bepress.com/robert_rhee/22 http://works.bepress.com/robert_rhee/22 Wed, 06 Jan 2010 07:17:28 PST Robert J. Rhee Corporations & Business Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson's Choice during a National Crisis http://works.bepress.com/robert_rhee/21 http://works.bepress.com/robert_rhee/21 Wed, 06 Jan 2010 07:17:18 PST This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of the crisis was Bank of America’s acquisition of Merrill Lynch. While this acquisition was pending, Merrill Lynch was accruing losses at an astonishing rate, so much so that Bank of America considered exercising the merger agreement’s material adverse effect clause to abort the deal. The board of directors ultimately decided against doing this, but only after the government, fearing the injection of more systemic risk into the financial system if the deal fell through, threatened to fire the board and management. This episode, unique in modern business history, provides an object lesson on the public-private nature of corporate governance during a national crisis. This topic is important, and thus far has not been developed in either the judicial or scholarly literature, presumably because this country has not experienced a crisis of this scale since the 1930s. The Bank of America Merrill Lynch episode serves as a contextualizing vehicle to advance a theory of public necessity exemption to fiduciary duty. A board’s action to nationalize corporate governance and purpose per public necessity is authorized by Delaware law, specifically section 122(12) of the Delaware General Corporation Law, which thus far has received scant attention. This Article constructs around this statute a framework for recognizing a fiduciary exemption based on the board’s determination that the firm, being uniquely situated to avert or mitigate the public crisis, should provide aid. Simply stated, public necessity, a well established concept borrowed from tort law, excuses the destruction of private property (in the case of corporate law, transfer of assets to other parties or causes). When the board perceives that the stake in the public welfare is great enough, the shareholder primacy norm can and sometimes does fail the stress test of a crisis.

]]> Robert J. Rhee Corporations & Business The Madoff Scandal, Market Regulatory Failure and the Business Education of Lawyers http://works.bepress.com/robert_rhee/19 http://works.bepress.com/robert_rhee/19 Thu, 03 Dec 2009 11:16:12 PST This essay suggests that a deficiency in legal education is a contributing cause of the regulatory failure. The most scandalous malfeasance of this new era, the Madoff Ponzi scheme, evinces the failure of improperly trained lawyers and regulators. It also calls into question whether the prevailing regulatory philosophy of disclosure of disclosure is sufficient in a complex market. This essay answers an important question underlying these considerations: What can legal education do to better train business lawyers and regulators for a market that is becoming more complex? One answer, it suggests, is a simple one: law schools should teach a little more business and a little less law.

]]> Robert J. Rhee Corporations & Business Bonding Limited Liability http://works.bepress.com/robert_rhee/20 http://works.bepress.com/robert_rhee/20 Thu, 03 Dec 2009 11:15:50 PST Limited liability is considered a “birthright” of corporations. The concept is entrenched in legal theory, and it is a fixed reality of the political economy. But it remains controversial. Scholarly debate has been engaged in absolute terms of defending the rule or advocating its abrogation. Though compelling, these polar positions, often expressed in abstract arguments, are associated with disquieting effects. Without limited liability, efficiency may be severely compromised. With it, involuntary tort creditors bear some of the cost of an enterprise. Most other proposals for reforming limited liability have been incremental, such as modifying veil piercing. However, neither absolutism nor marginalism is inevitable. Reform can be sweeping and yet maintain fidelity to the core idea of limited liability. This Article stakes a middle ground in the debate: liability should be limited against all creditors, but cost externalization to tort creditors can be substantially minimized, if not eliminated, through mandatory bonding that in the aggregate capitalizes a compensation fund. A bond would be minimally burdensome on individual firms, but business enterprise is made to bear risk more fully. Importantly, bonded limited liability is practically administrable and politically feasible. The idea is based on well developed intellectual foundations of enterprise liability and risk retention. This scheme is not only economically more efficient, but also promotes equity and greater social justice.

]]> Robert J. Rhee Corporations & Business Participation and Disintermediation in a Risk Society http://works.bepress.com/robert_rhee/18 http://works.bepress.com/robert_rhee/18 Fri, 17 Jul 2009 09:46:06 PDT The chapter argues that financing extreme catastrophic loss will become more problematic as catastrophes become more frequent and severe. An effective strategy must increase the level of participation in the spreading of risk and loss. Currently, risk spreading is done largely through insurers and government as they are the default aggregators of private and public capital. An enlargement of participation may mean the disintermediation of the traditional insurance and public compensation functions, thus allowing more direct and efficient participation between those are exposed to risk and those who are willing to bear it. This chapter also argues that tax policy should consider catastrophe risk and compensation as a way to positively influence risk-taking behavior. Currently, tax policy focuses on the equity and fairness of taxation of individual income, but these considerations are also at the heart of public financing of catastrophes.

]]> Robert J. Rhee Insurance & Torts A Production Theory of Pure Economic Loss http://works.bepress.com/robert_rhee/17 http://works.bepress.com/robert_rhee/17 Fri, 17 Jul 2009 09:46:05 PDT Although the pure economic loss rule has been remarkably durable in the common law, it suffers from a theoretical deficit. The rule has not been properly framed within the broader context of Anglo-American political economy. Any theory must recognize that the rule fundamentally deals with business risk and economic organization. Two conceptions of risk are important: risk to economic assets essential to the production function (loss of a factor of production), and risk to outcomes (loss of production). This Article proposes a production theory of the pure economic loss rule, which is rooted in the neoclassical economic understanding of the relationship between uncertainty and profit. The theory is simply stated: tort law protects one’s factors of production, but not outcomes. The emphasis on the loss of an economic asset departs from the requirement of loss of one’s property, the traditional basis for recovery of consequential economic loss. Ownership is not and should not be the touchstone of recovery. Rather, society has a normative preference for economic production, and tort law protects an asset essential to the production function, irrespective of ownership. The pure economic loss rule is a market abstention doctrine. It reflects a bright line judicial policy against corrective legal action when economic loss represents not a market failure in precaution but instead is a necessary condition of the engagement of enterprise under Knightian uncertainty. Thus, the production theory resolves a classic, longstanding riddle of the common law—that is, why consequential economic loss is recoverable upon the loss of an asset, but pure economic loss is not upon a poor economic outcome.

]]> Robert J. Rhee Insurance & Torts Probability, Policy and the Problem of Reference Class http://works.bepress.com/robert_rhee/15 http://works.bepress.com/robert_rhee/15 Fri, 17 Jul 2009 09:46:04 PDT This short paper focuses on the problem of reference class in evidentiary assessment as it relates to probability and weight of evidence. The reluctance to inject mathematical formalism into the factfinding function is justified. Objective probability requires a reference class from which a proportion is derived. Probability assessments change with the reference class. If a proposition is subject to proportional comparison against two or more different references, their selection is often an inductive process. The advantage of objectivity and methodological rigor is illusory. A legal dispute is the search for a plausible understanding of the truth, and an overtly mathematized process runs the risk of substantially substituting particularized inquiry with aggregate assessment, a notion inimical to transactional causation between conduct and injury. In special circumstances, however, when such inquiry cannot advance the goal of error minimization, a rule of law consistent with a class proposition may advance the notion of statistical justice. But as a general matter the juridical process should not confuse aggregate assessment with individual justice.

]]> Robert J. Rhee Economics of Dispute Resolution The Application of Finance Theory to Increased Risk Harms in Toxic Tort Litigation http://works.bepress.com/robert_rhee/16 http://works.bepress.com/robert_rhee/16 Fri, 17 Jul 2009 09:46:04 PDT In toxic tort litigation, a plaintiff has no cause of action for increased risk of harm unless that risk is proven by a preponderance of the evidence to lead to a future physical injury. This rule of law is based on an antiquated concept of uncertainty, and evinces the law’s detachment from the knowledge gained from other intellectual disciplines and the everyday workings of the world. This article argues that freedom from increased risk should be a legally cognizable interest, the violation of which gives rise to an independent cause of action. When analyzed under finance theory, increased risk harms a person by increasing costs, reducing economic asset value, and imposing a negative value option. The resulting damage for increased risk can be quantified more accurately by applying securities and derivatives pricing techniques used in the financial markets. Lastly, this article suggests that the rules of liability and damages proposed here create the singular circumstance in law where the application of a statute of limitations would be a suboptimal solution for defendants. The statute of limitations imposes a barrier to informational efficiency for both parties. Accordingly, it should be eliminated in increased risk tort cases.

]]> Robert J. Rhee Insurance & Torts