Securities Law Practice is a Racket

Posted in Uncategorized by a1icey on November 26, 2012

American securities law is formidable. In order to access capital markets, you must comply with securities law. In order to comply with securities law, you must be a law abiding corporation, which must be certified by lawyers and accountants. Those lawyers and accountants must do excessive due diligence in order to certify you for the purposes of the securities laws. If you do not have proper certification, the SEC might not catch it but any investor can sue under the private causes of action created by securities laws.

As a result, we have an extremely high number of technically law abiding business organizations in the US. I say technically, because you only have to be law abiding in literal senses that would be visible in due diligence. Hence Enron, who was able to use tax shelters (generating fake losses) and creative accounting (generating fake profits) which are both technically compliant actions. Enron was publicly traded and had full access to the capital markets.

Investors rely on boards of directors who rely on management who rely on investment banks who rely on law firms to actually do due diligence, to do all their jobs. This immense structure of oversight eventually falls on some overworked junior associate who doesn’t give a damn.

But all you need to gain access to those capital markets is a law firm and accounting firm rubber stamp. To provide that rubber stamp all Vinson and Elkins had to do to evade liability was spend a lot of time. The fact that they conducted an investigation, even though it was inept, was enough. Time means billable hours, but the quality of the work is sort of irrelevant (we really don’t want anyone preventing a client from accessing the capital markets and paying our fee).

But so long as you have hired from the top law firms, your business is in the clear. As long as the SEC knows you paid for the best, they probably will be easy on you – both before and after you implode. So the magical alchemy that makes up an effective securities practice: charging as much money as possible for the most inexperienced people to do total busywork.

Thankfully this also the source of the unimpeachable $160,000 entry level salary at such firms. If they decrease it, the firms are going to fall out of these upper ranks that can rubber stamp SEC filings. But that also means they can’t afford enough new associates to cover the same work.

This may sound familiar to law students because it is a continuation of the story we’ve known our whole academic careers: get a top LSAT score and schools will accept you to maintain their US News rank (yes, 0L friends – your GPA is irrelevant). Then, leave a top school and a firm will pay you $160,000 to maintain their AmLaw rank. No one really cares what happens after that because they are supplied with endless work by the SEC just to give access to capital markets.

And you thought securities law practice is the most prestigious! Lol!

Jim Chanos knows what I am talking about:


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