All Good Things Must End

Hello Everyone,

When I started this blog two years ago, it provided a format through which I could explore my own interests in law, business, and Italy.  I hoped that the stories and thoughts on those subjects would educate and excite those who stumbled across the blog.  The evidence suggests I’ve been successful at reaching an audience of great size and diversity.  With the knowledge I have gained over the past two year and the exciting opportunities ahead, I have a great deal to say.

Yet, I have decided that I can no longer maintain this blog with its current focus.  The reason is that now, as never before, I am mindful that I have come to represent much more than myself.  This includes my former Italian employer, the clinic for which I currently work, and the firm that has offered me a terrific post-graduation opportunity.  These are each wonderful entities who deserve respectful and thoughtful treatment of their confidences.  With so much material now out of bounds, I believe there is little left to say in a casual format such at this.

So I’ll just say goodbye to the world of blogging.

Thank you,

J Sanders Avvocato Americano.

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Wake Forest Law is #1

It was announced earlier this week that Wake Forest Law had the highest North Carolina bar exam pass rate of any North Carolina law school.  Wake’s Class of 2015 put up a very impressive 83% pass rate.  This was better than Duke, UNC, and NC State (which doesn’t have a law school).  It was also a full 25% higher than the overall pass rate for the July 2015 North Carolina bar exam.

Go Deacs!

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Negotiations and the Time Value of Money Problem

This semester, I am enrolled in a great practical skills course called “Negotiations” at Wake Forest Law.  It’s taught by a professor who is sharp, personable, and the recipient of numerous teaching awards.  The seats in the classroom are filled with a good mix of domestic and international, old and young, business savvy and novice students.  There is some reading, but the class is primarily focused on gaining practical experience through simulated negotiations.  Law school really shouldn’t be so fun.

I want to briefly relay to you an early takeaway from the course.  It is that few law students (and, by extension, young lawyers) understand the concept of time value of money.  Despite what the business-minded readers are now thinking, this state of affairs stands to reason.  There is no reason to be acquainted with the concept unless you were a business, finance, accounting or economics major.  Law students and lawyers tend to be political science, history, and philosophy majors.

For those of you law-minded readers, I want to briefly describe the time value of money.  Time value of money is simply the idea that you’d rather have $1 today than $1 next year.  This is principally due to the fact that the $1 today gains interest over the year to become some greater amount.  For a more complete lesson, you can go to the online Khan Academy.

The problem with not understanding the time value of money is that you might view, in a negotiation, the option of $1 Millions a year from now as equal to $1 Million today.  And you might view $1.05 Million a year from now as obviously better than $1 Million today.  Your business client would be dismayed if you accepted that deal and it had the ability to turn $1 Million obtained today into $1.2 Million a year from now.

So here is the two-for-one observation.  First, for business people dealing with young lawyers in a negotiation, don’t presume they understand the concept of time value of money.  You should explain exactly what you’d be willing to take today, tomorrow, and next year.  Discuss the presumptions you are making, including discount rates.

Second, for law students and young lawyers, dedicate some time now to familiarizing yourself with this concept that is so important to business clients.  Whenever a negotiation may present options for payments at different points in time, speak to the client about their presumptions and preferences.  You’ll do a better job and maybe even impress the client with your financial savvy.

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The Cost of Going Public…and the Exemptions

The average cost to an organization of going public and issuing securities is $4.7 Million according to PricewaterhouseCoopers.  According to the Community Enterprise Law organization, the average cost for firms to simply register its securities for an offering is above $100,000.  These estimated costs are related to the legal work that is required to register the securities with the appropriate state or federal authority.  As a result, few smaller for-profit and non-profit organizations consider funding their development through security offerings.

It may be that too many entities interested in issuing securities to fund their operations give up too quickly.  Instead of assuming an entity will incur those costs, it would be wise to consult a lawyer who will take start-up clients on a pro bono basis or one of the many law school legal clinics to learn if there is an exemption.  An exemption would allow the issuer to forego the costly registration process.  Exemptions come in two general varieties:  security-based and transaction-based.  Today, I want to briefly outline the security-based exemptions.

The statute that exempts securities is 15 USC 77c.  That statute, which is titled “Exempt Securities”, states, “Except as hereinafter expressly provided, the provisions of this subchapter shall not apply to any of the following classes of securities.”  The list that follows includes securities issued or guaranteed by the United States government, certain debt instruments with maturities of less than 9 months at issuance, securities issued by certain non-profits, and securities issued by certain banking entities.  These are just a few examples representing the more commonly used security exemptions.  See the statute for a complete list and, of course, consult a qualified securities lawyer before relying on any of the exemptions.

While it is not a complete description of the exemptions available, I think the above list is helpful is opening the mind to the possibility of issuing exempt securities.  One can justifiably imagine that there are trillions of dollars of exempt securities issued each year that fund a wide variety of complex organizations and activities.

I hope this post shed some light on a valuable exemption to a potentially costly process.

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The Value of the JD/MBA

In recent weeks, I’ve been asked by a few of my law schools peers whether I thought pursuing a JD/MBA is “worth it”.  This is a question posed to me because 1) I am in my last year of law school, 2) I have an MBA, and 3) I have accepted an offer to work for a very good corporate law firm.  What I think my younger peers are asking is, do they need an MBA to get where I am right now.  The answer is not a simple one.

I think the first thing to do is address the two most common reasons that younger law students or those considering law school give for considering the JD/MBA joint degree.  Those reasons are to land jobs and earn higher salaries.

Let me begin by dismissing the idea that the JD/MBA is some sort of magical incantation.  Saying it to a recruiter or writing on a resume will not move you up swiftly up the queue of qualified applicants and into a job offer.  Instead, it is a “plus one” factor for recruiters.  This means that while it isn’t sufficient to secure good work, it may be the deciding factor if a firm is choosing between two otherwise identical candidates.

Let me also say that I don’t believe it has much bearing on your starting salary as a junior associate at a law firm.  Law firms tend to pay the same starting salary to everyone in a particular hiring class.  Those firm-wide starting salaries are public and widely disseminated online.  This means there is generally no haggling and no variation.   The one caveat here is that the MBA may be the “plus one” factor that gets you a lone offer from a Biglaw firm where starting salaries are higher.

That said, there is value in the JD/MBA joint degree.  However, I think much of that value is realized after one begins to work.  First, I think that the knowledge acquired through the MBA program makes the summer or junior associates better able to grasp client situations and assignments.  As a result, they are more likely to get offers and move up the ladder to senior associate.  Second, the knowledge acquired through the MBA program enables better client interaction and client development.  This is absolutely crucial to long-term success in a Biglaw firm, which means becoming a partner or being hired in-house by a client.

This perceived long-term value, I think, begs the question of whether the JD/MBA is really necessary.  Can’t the same long-term value be obtained by working for several years and gaining some management experience?  Can’t the same value be obtained by working in a start-up?  Most definitely.  And the recruiters and hiring partners I’ve talked to over the last two years would agree completely with that.  Some would go as far as saying the work experience is more weighty in their evaluations of candidates.

This leads me to conclude that the value of the JD/MBA is truly a question of value.  And a great part of value for an individual is cost.  For me, the cost was $0 because my then-employer paid for my MBA.  For others, the cost might be $60,000 or more.  At that cost, whether there is value in the degree is a much closer question.   My ultimate advice for those considering the joint degree is to consider the matter carefully in light of their grades, their undergraduate major, cost, and prior work experience.

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My View of “Hedge Fund Billionaires”

My career in the financial industry started in some of its sleepier corners.  First, I was at a credit union.  Then, I was a mutual fund specialist at a an index fund company.  There was talk of CDOs, AMT, SPVs, etc in the air.  But more exotic financial products weren’t part of my world until about six years ago.

Since that time, I’ve been exposed to financial products of increasing complexity.  I’ve become friends with lawyers who put those products together for a living.  I’ve also met the people whose financial interests are the necessity that drives financial invention.  I have been lucky enough to be allowed to look “under the hood”.  I’ve been able to probe the details of the deals with both the counsels and the financiers.  I’ve seen this work and met these people across the U.S. and Europe.  What I’ve learned through these experiences has surprised me.

I think we all know that hedge funds and their managers have a bad reputation in America today.  They are attacked by politicians in both parties.  They are the butt of jokes.  Always, the idea is that they are privileged to the point of excess.  They burn diamond watches to fuel their private jets or something like that.

What I’ve learned over the past several years is that this impression is inaccurate.  I think that comes from two places.  First, we confuse hedge fund managers with their clientele.  Which is like confusing the waitress at Babbo for the celebrities who dine there. Second, we have some high-profile examples of people who have made billions managing hedge funds.  These are guys like George Soros,  Carl Icahn, and Steven A. Cohen who got to the party early.  They are the exception, not the rule.

The average hedge fund manager, I’ve found, is actually an entrepreneur.  It is someone who is turning an investment philosophy and some well-heeled connections into a small business. This small business, rather than being yet another cupcake shop, is an investment fund.

Like other entrepreneurs, they are sacrificing to do it.  Most are giving up high paying jobs as money managers for established firms.  Their first 2-3 years managing the fund are often at a loss – revenues just don’t meet expenses with small funds.  What’s more, they are tying up an inappropriate percentage of their own wealth in the fund to show would-be investors that they have “skin in the game”.  I have to say, I have a deep respect for the guts of these people.

Once these individuals have successfully put together a fund with their own funds, the savings of their family members, and investments from a few 3rd parties, then they have to actually perform.  In the hedge fund world performing isn’t just making money. Oh no.  It’s beating the market, which is incredibly difficult to do on a consistent basis.  Often, new hedge funds fold.  I recently spoke to someone about this and he estimated that the failure rate was the same for hedge funds as it is for mom and pop restaurants.

At this point, you might be wondering why anyone starts a hedge fund.  What I think the chief reason they people choose to start hedge funds is the Investment Company Act of 1940.  Complying with the ’40 Act can be prohibitively costly to comply with for someone starting out in the fund management business.  The ’40 Act also restricts what the manager can do with the money by requiring liquidity and encouraging diversification.

I hope this post has improved your understanding of hedge funds and the people that manage them.  You can certainly still laugh at the hedge fund manager jokes – most have a good sense of humor about the public perception of the business.  Just be a little more thoughtful when you hear them come up in a political stump speech.  Without exception, the candidate railing against hedge fund managers actually knows, likes, and takes money from them the types of managers I’ve described above.

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3L Fun

I’ve written here a time or two that the 2L year is much more fun than the 1L year.  My reasoning was that in the second year a law student chooses their own classes and professors.  For me, that meant I could take a lot of courses that focuses on corporate and securities law.  It was fun.

But I can already see that the 3L year is even better.  The 3L year includes the same perks of choosing your own classes and professors.  It also includes the perk of practical skills classes, more certainty about post-graduation employment, the availability of pass-fail credits, and one last opportunity to write an intellectually stimulating article.

So this last year of law school is something I am already enjoying.  I’ve been able to enroll in the Wake Forest Community Law and Business Clinic where I can serve actual clients under the guidance of an accomplished corporate law professor.  I’ve been fortunate enough to find work for a great firm in my preferred area of law.  I’ve used my pass-fail credits to take family law with Wake Law’s most enthusiastic professor without worrying about being beat out for As by students who truly love family law.  And I am almost finished with writing one last academic paper about the ways the SEC and CFTC regulate spoofing.

It’s going to be a great year.  A fun year.  It kinda makes the struggle of the 1L year worth it.

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