Huang, Bert I., Harvard Law Review
B. Confessing Compliance
The permission that one achieves by meeting an exemption or taking extra steps toward compliance -- a cure that converts an illegal act into a legal variant -- can also be conveyed to an observer in some settings. (86) For an intriguing example, consider again the marit ayin lesson about cooking meat with a dairy substitute (almond milk). Beyond banning this otherwise permitted practice, the doctrine does suggest one further solution:
Illustration -- Marit Ayin. Because it may give the wrong appearance, cooking meat with almond milk is prohibited -- unless almonds are sprinkled around, to make clear it is not real milk. (87)
Although they overlap, loud licenses and confessions of compliance differ in one respect: for the latter, it may be more necessary to convey precisely how the cure achieves compliance. The marker of the cure can still be subtle, though, even when it is specific (consider: an almond).
1. Ease and Timing of Disclosure. -- One useful quality that pre-approvals, exemptions, and compliance cures share is that Actor 1's permitted status can readily be certified by the time the action is taken -- and thus before it is observed. The permitted status is certain; it is not merely a guess at what an enforcer or a court might do. A pre-approval may even be accompanied by a license or permit, which can easily be advertised. (By contrast, consider excuses or defenses, some of which can be determined only during enforcement or adjudication.) But timing should not be confused with ease of disclosure. As will be explored in section IV.B, in some cases the more difficult disclosures will have a better policy effect. For the policymaker facing a shallow signals problem, early disclosure is almost always an advantage, but easy disclosure may not be.
2. Ex Post Cures. -- Disclosing a compliance cure earlier, rather than later, may be critical. In this respect, there can be a notable difference between ex ante and ex post compliance cures. (88) Recall the hypothetical regarding backdated stock options. The scenario is based on an actual episode, one involving an ex post cure.
Illustration -- Corporate Misconduct. After the backdating scandal broke in 2006, sweeping up hundreds of companies that had adopted the practice, many insiders pointed to Microsoft as the original model for many firms' nearly identical practices. (89) Microsoft had not, in fact, done its accounting properly when it began backdating in 1992. (90) Yet it did so in 1999, accounting for the hidden compensation costs on its public books. (91) Microsoft's correction was barely noticed by the industry, however. (92) It is clear that other technology companies not only continued, but even started improper backdating after 1999 (93) -- that is, even after Microsoft had demonstrated how to "do it right."
Here, Actor 1's cure was overlooked even though it was publicly disclosed. How could it have been missed or ignored? Was it because the correction was buried deep inside a quarterly earnings disclosure, worded in sterile language? As an initial matter, this episode suggests the problem of Actor 1's weak incentives to advertise ex post cures for prior misconduct (a confession with the flavor of an admission of error) -- in contrast to advertising ex ante compliance measures (with perhaps a more self-congratulatory flavor). (94)
Yet that cannot be the only reason. Even the most expert of experts failed to react: stunningly, it seems that Microsoft's own auditor, Deloitte, allegedly continued to advise at least one other client to use backdating -- in the improper way, without adjusting for the underreported compensation -- even after Microsoft had decided that the practice needed to be corrected. (95) (Notably, this troubling allegation undermines the assumption that corporate actors must be immune to imitative misconduct …
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Shallow Signals. Contributors: Huang, Bert I. - Author. Journal title: Harvard Law Review. Volume: 126. Issue: 8 Publication date: June 2013. Page number: 2258+. © 2007 Harvard Law Review Association. COPYRIGHT 2013 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.