Rule 10b-5 and Law Schools

Often we write, and think, and behave, as if law firms--and perhaps clients, when we're thinking broadly--are the only actors that matter on the landscape of BigLaw.  But of course this isn't true (and we know better):  A profoundly important actor is the ecosystem that generates and offers up for our consideration talent:  Namely, law schools. 

Although in a single column I can't begin to do justice to the role of law schools in selecting, grooming, and "certifying" our talent pipeline, I can at least endeavor to focus on one aspect of their role, and one I'm afraid they're doing very very badly--to the point where they need to be called to account. 

During the great boom of ca. 1980--September 15, 2008, they did get a pass on this particular piece of misbehavior, simply because the economically rising tide forgave so many facially irrational practices, most of them ours and not law schools'.  But by and large, we have responded with surprising alacrity and nimbleness to the challenges of the Great Reset.  If you doubt me, consider that about 85% of all the layoffs that occurred in BigLaw last year took place in the first three months of the year alone--in other words, just a single quarter after the Lehman implosion and all the other assumption-shattering events of September 2008.

I would be the last to tell you that we're anywhere remotely near "done" in terms of changes to our business models and conventional management practices, but we got off to a fast start and the overall degree of soul-searching has, I believe, never been so high.

But back to law schools.

There's one massively important reason to fear they will be the last to implement any serious reforms attempting to bring their operational practices into line with the New Normal.  I offer you one word:  Tenure.

For example, a fair amount of loose talk has been thrown about proposing a 2-year JD program instead of the 3-year status quo.  (I for one am very sympathetic to the notion and have believed since about the end of my 2L year myself that one more year was of extremely marginal value--and not cheap.) 

But regardless of whether the hidebound ABA accrediting committees would ever accede to such a seeming diminution in quality and gravitas for the degree, consider what else would have to happen to make this realistic:  Essentially one-third of tenured law school faculty would have to be excused.

So if profound structural changes along those lines are implausible to the point of risibility, what else could be done?

Permit me to digress into the annual release of the US News law school rankings, available here.  Although their methodology (here) seems to be purposefully opaque, I know that one quite important ingredient is total spending per student.  The more a law school spends, the better for its ranking.  Before you nod your head too vigorously, consider the viciousness with which this invites the law of unintended consequences to kick in.  Since law schools tend to lack any meaningful endowments, the only way to raise the more-money you want to spend to goose your rankings is to raise tuition.  So here we have the terrible bargain that many schools struck during the boom years: 

• They could attempt to raise their US News ranking
• By spending more per student
• Funded by tuition increases
• Leaving graduates with more and more student loan debt
• Which was OK so long as jobs were plentiful at BigLaw starting at salaries of $160,000.

This has all the characteristics of a classic arms' race, which ends up leaving all involved impoverished and no better off--relatively or "positionally" speaking, which is all that matters.  Nice job.

Nearly two years ago, I wrote in "The Bi-Modal Starting Salary Distribution" about how unrealistic it is for all law firm grads to assume they can start at BigLaw's high salary levels.  This chart (courtesy of NALP) says it all:

If you're wondering whether it has changed since 2006, nope:

Distribution of Full-Time Salaries--Class of 2008

And although it's very early to see statistical results of the impact of the Great Reset on BigLaw hiring out of law school, we all know through a wealth of anecdotes and press reports that demand for all but the creme de la creme of law school graduates will be all but nonexistent for at least a few years--if not as far as the eye can see.  Here are two early data points:

Offer rates made to summer associates 

Firms interviewing 3L's

If law schools are almost constitutionally incapable of serious change (we won't even waste pixels on the incorrigibility of US News), what's to be done?

When at a loss for a substantive solution, the securities lawyer in me often turns to our rocket-propelled grenade of a weapon:  Disclosure.

I propose that law school deans subscribe to what I'll call the "10b-5 Oath." 

For those of you who may be unfamiliar with Rule 10b-5 (promulgated in 1942 under §10b of the Exchange Act), it reads pithily as follows:

Rule 10b-5: Employment of Manipulative and Deceptive Practices:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

You can read all you ever wanted to know about 10b-5 and then some at The 10b-5 Daily.  I have often thought that if all the securities laws on the books save one had to be repealed, 10b-5 is the one I'd keep.

So how would this work?

Simple:  Focus on clause (b), prohibiting (let's read it a bit broadly, folks) people from selling things by mis-stating a material fact or omitting a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

Now, in law schools' universe, I can't think of anything more material to prospective enrollees than the employment prospects of the school's graduates.

So here's my modest proposal, elaborating a bit on The 10b-5 Oath:  Law schools should be required to disclose:

• Employment by sector (with thanks to Prof. Bill Henderson for the categories):
  • BigLaw (NLJ 250, for clarity)
  • Other law firm
  • Government
  • Public interest
  • Judicial clerkship
  • Business
  • Graduate school (pursuing another degree)
  • Academia (working in academe, that is)
  • Unemployed
  • Unknown/can't be found, and
  • 1L attrition
    
    
• For all its alumni
  • As of graduation, and
  • On the first, third, and fifth anniversaries of their graduation
    
    
• Along with average student debt load at graduation.

I think that might do it.   And let the market begin to exercise its discipline.

So now, law school deans, what sayeth thou?  Don't tell me that you're opposed to full and fair disclosure; there can't possibly be anything to hide, can there?