When Is a Dog Really a Duck?: The True-Sale Problem in Securities Law* Say you have a dog, but you need to create a duck on the financial statements. Fortunately, there are specific accounting rules for what constitutes a duck: yellow feet, white covering, orange beak. So you take the dog and paint its feet yellow and its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, “This is a duck! Don’t you agree that it’s a duck?” And the accountants say, “Yes, according to the rules, this is a duck.” Everybody knows that it’s a dog, not a duck, but that doesn’t matter, because you’ve met the rules for calling it a duck.1 I. Introduction When is a sale really a loan? This vexing question comes up often in bankruptcy, where characterization as one or the other can determine whether or not transferred assets escape the reach of creditors and bankruptcy trustees.2 The state of the law on this subject is quite unsettled, with much left to the discretion of individual courts.3 The picture is further complicated in the context of securitization transactions, in which loans or accounts re- ceivable are pooled and transferred.4 Relatively little case law exists to suggest whether such transactions can properly be characterized as sales or as secured loans.5 A major concern for investors in securitizations, and for the ratings agencies who evaluate these deals, is to protect the assets in the event * Many thanks to the members of the Texas Law Review, especially Emily Falconer, Ben Hallmark, and Matt Nance. I am also grateful to Professor Jay Westbrook for suggesting the topic and for his invaluable research guidance. Finally, my deepest thanks to my wife Tina and son Jackson for their love and support. 1. BETHANY MCLEAN & PETER ELKIND, THE SMARTEST GUYS IN THE ROOM: THE AMAZING RISE AND SCANDALOUS FALL OF ENRON 142–43 (2003) (quoting an unnamed Enron employee). 2. See generally STEVEN L. SCHWARCZ ET AL., SECURITIZATION, STRUCTURED FINANCE AND CAPITAL MARKETS 37–86 (2004); Robert D. Aicher & William J. Fellerhoff, Characterization of a Transfer of Receivables as a Sale or a Secured Loan upon Bankruptcy of the Transferor, 65 AM. BANKR. L.J. 181 (1991) (both describing the true-sale question in relation to bankruptcy). 3. See infra Part IV. 4. For an introduction to securitization, see generally SCHWARCZ ET AL., supra note 2, at 1–17. Schwarcz and his coauthors describe the history and mechanics of securitization and provide an example of a typical securitization transaction. Id. 5. See Stephen J. Lubben, Beyond True Sales: Securitization and Chapter 11, 1 N.Y.U. J.L. & BUS. 89, 96 (2004) (noting the lack of case law dealing with the true-sale issue in the specific context of a securitization). 488 Texas Law Review [Vol. 87:487 of the transferor’s bankruptcy by placing them beyond the reach of the transferor’s bankruptcy estate and its creditors.6 In recent years, innovations in structured finance have tempted companies to use securitization deals to improve their balance sheets by removing money-losing assets and recording revenue from the “sales.”7 Enron made infamous the use of special-purpose entities (SPEs) as a device to conceal debt and artificially inflate earnings.8 In many such “sales,” how- ever, the transferor either retains control and derives benefits from the transferred assets, or promises to assume their risks via recourse provisions.9 To the extent that such a transaction is improperly accounted for as a true sale, the company runs the risk of presenting an inaccurate picture of its true financial condition.10 For publicly traded companies, getting true-sale ac- counting wrong can bring expensive consequences in the form of action by the Securities and Exchange Commission (SEC) or by private shareholder litigation.11 This Note will explore the true-sale problem in the context of securities law. By what standard does securities law evaluate a transaction as sale or loan? Part II sets out the legal bases for SEC enforcement and private share- holder action, and discusses the SEC’s emphasis on compliance with generally accepted accounting principles (GAAP). Part III explores GAAP’s approach to true-sale accounting, which focuses on the degree to which the transferor retains control over the transferred assets. Part IV discusses GAAP’s reliance on substantive true-sale law, and the incoherent state of the latter. Parts V and VI illustrate how the SEC and private securities litigants, respectively, apply GAAP’s true-sale analysis in practice—and how that ap- plication, in one important instance, departs from both the strict letter and the 6. See FIN. ACCOUNTING STANDARDS BD., STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES ¶ 152 (2008), available at http://www.fasb.org/pdf/aop_FAS 140.pdf [hereinafter SFAS 140] (stating that credit-rating agencies and investors in securitized assets attempt to structure those transactions so that the assets cannot be reached by creditors). 7. See OFFICE OF THE CHIEF ACCOUNTANT, SEC, REPORT AND RECOMMENDATIONS PURSUANT TO SECTION 401(C) OF THE SARBANES–OXLEY ACT OF 2002 ON ARRANGEMENTS WITH OFF-BALANCE SHEET IMPLICATIONS, SPECIAL PURPOSE ENTITIES, AND TRANSPARENCY OF FILINGS BY ISSUERS 45 (2005), available at http://www.sec.gov/news/studies/soxoffbalancerpt.pdf [hereinafter SEC REPORT] (noting that some asset transfers appear to be motivated—in whole or in part—by accounting strategies designed to inflate earnings or conceal losses). 8. On the subject of Enron, see generally MCLEAN & ELKIND, supra note 1. But see Steven L. Schwarcz, Securitization Post-Enron, 25 CARDOZO L. REV. 1539, 1541–42 (2004) (arguing that most securitization transactions are economically beneficial and have been unfairly tainted by association with Enron’s abuses). 9. SEC REPORT, supra note 7, at 40–46. 10. See id. at 100 (defining “accounting-motivated structured transactions” as “those transactions that are structured in an attempt to achieve reporting results that are not consistent with the economics of the transaction, and thereby impair the transparency of financial reports”). 11. See infra Parts V and VI. 2008] The True-Sale Problem in Securities Law 489 intent of the GAAP standards by emphasizing recourse obligation, rather than effective control, as the defining factor. For both the SEC and private litigants, the focus is squarely on disclosing the substantive characteristics of the transactions, particularly the retention of risks and benefits by the transferor. Finally, Part VII considers various legislative proposals that have aimed to clarify or simplify true-sale law. However, these are unlikely to have much impact in the securities context. Precisely because the SEC’s views on true-sale accounting rarely face judicial scrutiny, it can use its en- forcement power to impose its own standards. II. The Application of Securities Law Securities law is, in theory, about disclosure, not substance. It regulates publicly traded companies by prohibiting false or misleading statements, and by requiring those companies to file accurate financial reports.12 In practice, however, the SEC uses its considerable enforcement power to force publicly traded corporations to comply with its preferred substantive accounting stan- dards.13 Because the accuracy of financial statements depends upon proper accounting, the SEC necessarily must take an interest in the definition, interpretation, and enforcement of accounting standards. The Securities Exchange Act requires that financial statements be prepared in accordance with GAAP.14 Failure to properly account for a transaction, by definition, violates the disclosure obligation. Under SEC regulations, financial state- ments filed with the Commission that do not comply with GAAP will be presumed to be misleading or inaccurate.15 On the other hand, technical compliance with GAAP does not excuse less-than-full disclosure of the substantive risks of a transaction—particularly, the SEC warns, if the transaction’s primary purpose is “the attainment of a particular financial reporting result.”16 In short, the SEC can use GAAP as a sword, but defen- dants cannot rely on it as a shield. 12. SEC enforcement actions are typically based on the statutory authority of the Securities Act of 1933, 15 U.S.C. §§ 77a–77mm (2006), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a–78mm (2006). For example, § 17(a) of the Securities Act, 15 U.S.C. § 77q(a), prohibits any “device, scheme, or artifice to defraud” or any untrue statement or omission of material fact in connection with the offer or sale of securities. See also Securities Exchange Act § 10(b), 15 U.S.C. § 78j(b) (prohibiting “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of any registered security); id. § 13(a), § 78m(a) (requiring filing of periodic reports); id. § 13(b)(2), § 78m(b)(2) (requiring accurate accounting and internal controls). SEC rules provide more detailed regulatory guidelines for the enforcement of these statutory prohibitions. E.g., 17 C.F.R. §§ 240.10b-5, 240.13a-1, 240.13a-13 (2008). 13. See infra Part V. 14. 15 U.S.C. § 78m(b)(2)(B)(ii). 15. 17 C.F.R. § 210.4-01(a)(1) (2008). 16. See PNC Fin. Servs. Group, Inc., 10 S.E.C. 1064, 1090 (July 18, 2002) (order instituting administrative proceedings) (citing 17 C.F.R. § 229.305 (2008), which requires the disclosure of both quantitative and qualitative market risk, and § 229.305(b)(1), which requires the discussion of the “objectives, general strategies, and instruments” used to manage risk exposure), available at 490 Texas Law Review [Vol. 87:487 When a company draws the SEC’s attention, shareholder lawsuits will not be far behind. Plaintiffs in private securities litigation rely on many of the same statutory provisions, but they operate under some significant handi- caps in comparison to the SEC. The Private Securities Litigation Reform Act of 199517 (PSLRA) requires plaintiffs to spell out their claims in considerable detail in their initial pleadings, or else face dismissal.18 Private litigants, unlike the SEC, must establish at the pleading stage that the company and its responsible executives acted with scienter, i.e., that they not only violated securities law but did so knowingly or recklessly.19 GAAP violations, though helpful to a securities plaintiff in establishing scienter, are insufficient in and of themselves to state a claim absent other evidence of fraud.20 GAAP is a less powerful tool in the hands of private litigants, carrying at most sug- gestive rather than presumptive force. III. The GAAP Standard for True-Sale Accounting To define generally accepted accounting principles, both the SEC and private securities litigants look to statements issued by the Financial Accounting Standards Board (FASB).21 The true-sale issue is addressed in FASB’s Statement of Financial Accounting Standards No. 140 (SFAS 140).22 http://www.sec.gov/litigation/admin/33-8112.htm. The general instructions to SEC Regulation S-K, Item 305(b) explain that the term instruments includes any financial instruments for which fair- value disclosures are required under GAAP, such as mortgage-backed securities, trade accounts receivable, investments, and loans. 17 C.F.R. § 229.305(b); see also FIN. ACCOUNTING STANDARDS BD., STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 107: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ¶¶ 3, 8 (1991) (listing the financial instruments for which fair-value disclosures are required and the financial instruments for which they are not required). 17. Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified in scattered sections of 15 U.S.C.). 18. See 15 U.S.C. § 78u-4(b) (requiring plaintiffs to specify each statement alleged to have been misleading, and to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind”); see also FED. R. CIV. P. 9(b) (requiring that allegations of fraud be pleaded “with particularity”). 19. See generally THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION 490–95 (rev. 5th ed. 2006), for a discussion of the scienter requirements in securities litigation. 20. See, e.g., In re Cardinal Health Inc. Sec. Litigs., 426 F. Supp. 2d 688, 741 (S.D. Ohio 2006) (holding that GAAP violations, when combined with other evidence pointing to actual fraud and insider trading, were sufficient to state a claim); Fin. Acquisition Partners, LP v. Blackwell, No. Civ.A.3:02-CV-1586-K, 2004 WL 2203253, at *21 (N.D. Tex. Sept. 29, 2004) (finding that the plaintiff’s bare allegations of GAAP violations were insufficient to establish scienter); In re Cree, Inc. Sec. Litig., 333 F. Supp. 2d 461, 477 (M.D.N.C. 2004) (finding that the alleged GAAP viola- tions were insufficient to support a claim when the plaintiff had failed to allege fraud with particularity). 21. See SEC Policy Statement, Reaffirming the Status of the FASB as a Designated Private- Sector Standard Setter, 68 Fed. Reg. 23,333 (May 1, 2003) (recognizing FASB’s financial account- ing and reporting standards as “generally accepted” for the purposes of federal securities law). FASB’s Statements of Financial Accounting Standards (SFAS) can be found online at http:// www.fasb.org/st/. 22. SFAS 140, supra note 6. SFAS 140 was issued in September of 2000 and is effective for transactions taking place on or after March 31, 2001. Id. ¶ 336. Transactions before that date were 2008] The True-Sale Problem in Securities Law 491 GAAP’s true-sale analysis focuses squarely on the substance, rather than the form, of the transaction.23 Whether or not the transaction may be accounted for as a sale depends on the extent to which the transferor has surrendered control over the transferred asset.24 For a transaction to qualify for true-sale accounting under GAAP’s control test, three conditions must be met: (1) The transferred assets must be “isolated” from the transferor, placed “presumptively” beyond its reach and the reach of its creditors.25 Essentially, this means that the transfer must be legally sufficient to protect the assets from being dragged into the transferor’s bankruptcy estate.26 The odd consequence of this standard is that an accounting judgment depends on a legal prediction as to what a bankruptcy court might do, which in turn requires reference to the applicable substantive law of a particular jurisdiction.27 (2) The transferee must be free to pledge or exchange the assets, and no condition must constrain its ability to do this or provide more than trivial benefit to the transferor.28 In a true sale, the rights and benefits of ownership must pass to the transferee. (3) The transferor must not maintain effective control over the assets through any agreement that both allows and obligates it to repurchase or redeem the assets,29 or that allows it unilaterally to take back specific assets.30 Recourse—the ability to undo all or part of the deal—may disqualify a transaction from true-sale accounting.31 As with isolation, the significance of full or partial recourse depends on whether applicable substantive law would accord it weight in deciding whether governed by the now-superseded Statement of Financial Accounting Standards No. 125. See generally FIN. ACCOUNTING STANDARDS BD., STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES (1996) [hereinafter SFAS 125]. Aside from somewhat stronger disclosure requirements in the current version, SFAS 140 and SFAS 125 do not differ significantly with regard to the issues discussed here. See SFAS 140, supra note 6, ¶¶ 126–27 (discussing SFAS 140’s revisions of SFAS 125). 23. See SFAS 140, supra note 6, ¶ 130 (stating the FASB’s intent to “reduce . . . confusion by distinguishing sales from secured borrowings based on the underlying contractual commitments and customs that determine substance”). 24. Id. ¶ 9. 25. Id. ¶¶ 9(a), 27–28. 26. Id. ¶ 152. 27. Id. ¶¶ 9(a), 27–28, 152. 28. Id. ¶ 9(b). 29. Id. ¶¶ 9(c), 47–49. 30. See id. ¶¶ 50–54 (“Some rights to reacquire transferred assets . . . regardless of whether they constrain the transferee, may result in the transferor’s maintaining effective control over the transferred assets through the unilateral ability to cause the return of specific transferred assets. Such rights preclude sale accounting under paragraph 9(c)(2).”). 31. See id. ¶ 113 (“In a transfer of receivables with recourse . . . . [t]he transferor is obligated under the terms of the recourse provision to make payments to the transferee or to repurchase receivables sold under certain circumstances, typically for defaults up to a specified percentage.”). 492 Texas Law Review [Vol. 87:487 the deal had successfully placed the assets beyond the reach of the transferor’s creditors.32 Note, however, that GAAP only considers recourse to be important insofar as it may be indicative of control.33 If a transferor retains an obligation, but not an option, to repurchase or redeem assets, then it has no “control” and true-sale accounting is not precluded.34 As we will see, however, the SEC does not consider mandatory-recourse provisions to be consistent with true-sale accounting—a significant difference between the SEC’s application of GAAP, and what GAAP actually says.35 Regardless of whether the control test is met, GAAP also requires the holder of securitized assets to disclose the details of any recourse provisions or interests retained by the transferor.36 Thus, even if a deal is structured to satisfy the above criteria, it may still be in violation of GAAP if its arrange- ments are not clearly explained to the investing public.37 Note that GAAP places the burden of disclosure largely on the transferee holding the securi- tized assets—because it is the transferee (and its investors) who will lose if the “sale” is recharacterized and returned to the transferor’s bankruptcy estate.38 By contrast, the disclosure obligations imposed by federal securities law and enforced by the SEC apply to both transferor and transferee, insofar as improper true-sale accounting might cause either party to report a mis- leading picture of its true financial condition.39 IV. Substantive True-Sale Law GAAP offers little guidance as to exactly how substantive true-sale law should be applied, which is understandable because its standards are written 32. See id. (“The effect of a recourse provision on the application of paragraph 9 may vary by jurisdiction. In some jurisdictions, transfers with full recourse may not place transferred assets beyond the reach of the transferor and its creditors, but transfers with limited recourse may.”). 33. See id. ¶ 151 (“Under the financial-components approach, the accounting for a transfer is based on whether a transferor surrenders control of financial assets.”). 34. The SFAS 140 provides: Transfers that include only the right to reacquire, at the option of the transferor or upon certain conditions, or only the obligation to reacquire, at the option of the transferee or upon certain conditions, generally do not maintain the transferor’s control, because the option might not be exercised or the conditions might not occur. Id. ¶ 217. 35. See infra notes 78–82 and accompanying text. 36. See SFAS 140, supra note 6, ¶ 17(h)(2) (requiring a holder of securitized financial assets to disclose “the transferor’s continuing involvement with the transferred assets, including, but not limited to, servicing, recourse, and restrictions on interests that continue to be held by the transferor”). 37. Cf. SEC REPORT, supra note 7, at 103 (“Many accountants, lawyers, and others seem to view the goal of financial reporting as achieving technical compliance with the rules without regard to communicating effectively to investors.”). 38. See SFAS 140, supra note 6, ¶ 17(h) (outlining the transferee’s disclosure requirements). 39. See infra notes 68–76 and accompanying text. 2008] The True-Sale Problem in Securities Law 493 by and for accountants, not lawyers.40 Still, a critical concern for investors and credit-rating agencies is to predict what might happen if a deal were challenged in bankruptcy.41 Unfortunately, true-sale law is sufficiently unsettled to make prediction difficult. In deciding how to characterize a transaction, federal bankruptcy courts are guided by substantive state law on loans and sales.42 Article 9 of the Uniform Commercial Code (U.C.C.) dis- cusses security interests in accounts receivable, and spells out the consequences of their sale or transfer for purposes of perfection or priority.43 However, it offers no guidelines for distinguishing a sale from a secured loan.44 That judgment is left to the courts, whose approaches have been far from consistent. While federal courts attempt to apply the law of the state in which they sit, the relative (though not perfect) uniformity of U.C.C. enact- ments across state lines encourages parties to cite favorable precedents (and ignore unfavorable ones) from other jurisdictions.45 Courts view true-sale analysis as a fact-intensive determination, rather than as a question of law.46 In bankruptcy, the court’s power to protect equitable as well as legal interests in the debtor’s property allows an even greater scope for judicial discretion.47 Courts’ approaches to the true-sale question have spanned a broad spectrum. At one end is what might be termed a “nominal” approach: if the parties call it a sale, then it is a sale.48 At the other extreme, a few courts 40. See FIN. ACCOUNTING STANDARDS BD., FACTS ABOUT FASB 1 (2007), available at http:// www.fasb.org/facts/facts_about_fasb.pdf (discussing the mission, organizational structure, and staffing of FASB). 41. SFAS 140, supra note 6, ¶ 152. 42. See, e.g., Wawel Sav. Bank v. Jersey Tractor Trailer Training, Inc. (In re Jersey Tractor Trailer Training, Inc.), No. 06-02003, 2007 WL 2892956, at *5 (Bankr. D.N.J. Sept. 28, 2007) (looking to Article 9 of the U.C.C. as the “starting point” for the court’s analysis of a true-sale issue). 43. See U.C.C. §§ 9-109(a)(1), (3) (2007) (noting Article 9’s application to both “a transaction, regardless of its form, that creates a security interest in personal property” and “sale of accounts, chattel paper, payment intangibles, or promissory notes”). 44. See id. § 9-109 cmt. 5 (“[N]either this Article nor the definition of ‘security interest’ in Section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation.”). Official Comment 4 to U.C.C. § 9-109 boasts, unhelpfully, of Article 9’s success in “avoiding difficult problems of distinguishing between transactions in which a receivable secures an obligation and those in which the receivable has been sold outright” and leaves classification of particular transactions to the courts. Id. cmt. 4. 45. See, e.g., NetBank, FSB v. Kipperman (In re Commercial Money Center, Inc.), 350 B.R. 465, 481 (B.A.P. 9th Cir. 2006) (“Although Nevada law governs, neither party has argued that there is anything distinctive about Nevada’s approach to the issue and both parties treat decisions from other states as relevant.”). 46. E.g., id. at 474 (holding that a bankruptcy court’s decision on the loan-versus-sale issue is a factual question, not a mixed question of law and fact, and thus is reviewed only for clear error). 47. See In re LTV Steel Co., 274 B.R. 278, 285–86 (Bankr. N.D. Ohio 2002) (using equitable considerations to conclude that receivables belonged to the debtor’s estate). 48. See, e.g., Wawel Sav. Bank v. Jersey Tractor Trailer Training, Inc. (In re Jersey Tractor Trailer Training, Inc.), No. 06-02003, 2007 WL 2892956, at *8 (Bankr. D.N.J. Sept. 28, 2007) (deciding the case on the ground that the parties clearly intended a “true sale,” and suggesting that other factors are relevant only when the parties’ intent is not clear). 494 Texas Law Review [Vol. 87:487 seem to think that no securitization transaction, no matter how structured, can put assets beyond the reach of a debtor’s bankruptcy estate.49 Some have adopted a middle ground, ostensibly using the parties’ “intent” as the stan- dard, but deducing that intent from the substantive provisions of the deal, and giving little weight to the formal language of the contract.50 Substantive fac- tors that might cause a court to recharacterize a sale of receivables as a loan include recourse to the seller, the seller’s retention of loan-servicing functions, the seller’s collection and commingling of proceeds with its own funds, the seller’s right to excess collections, and the seller’s right to repur- chase assets or to change the terms of the underlying loans.51 Generally, to the extent that the “seller” continues to share in the risks and rewards associ- ated with the underlying assets, courts that focus on substance are more likely to reject a true-sale characterization.52 In such a legal landscape, predicting how any particular court will evaluate a given transaction is not easy. Fortunately for accountants and the lawyers who advise them, however, GAAP purports to offer some relief: the 49. See, e.g., Octagon Gas Sys., Inc. v. Rimmer (In re Meridian Reserve, Inc.), 995 F.2d 948, 957 (10th Cir. 1993) (approving a holding that the account was “property of the debtor’s estate regardless of the nature of the underlying transaction”). The drafters of revised Article 9 countered in 2001 with an amendment to the U.C.C. making clear that “[a] debtor that has sold an account . . . does not retain a legal or equitable interest in the collateral sold.” U.C.C. § 9-318(a). For an account of this provision as a response to the Octagon decision, see Lois R. Lupica, Revised Article 9, Securitization Transactions and the Bankruptcy Dynamic, 9 AM. BANKR. INST. L. REV. 287, 300–02 (2001). More recently, the odd holding in LTV Steel, 274 B.R. at 285–86, that a debtor maintained “at least an equitable interest” in the cash proceeds of sold assets it “create[d] with its own labor,” has raised eyebrows. See Kenneth N. Klee & Brendt C. Butler, Asset-Backed Securitization, Special Purpose Vehicles and Other Securitization Issues, UCC L.J., Fall 2002, at 23, 57 (stating that the LTV Steel decision “created a good deal of concern in the financial industry”). By recharacterizing the sale as a loan, the LTV Steel court sought to retain sufficient cash in the debtor’s estate to make Chapter 11 reorganization viable—and thus to keep a large manufacturer in business and save thousands of local jobs. LTV Steel, 274 B.R. at 285–86. It should be noted, however, that LTV Steel was not a final decision on the merits, but simply a rejection of a creditor’s application for emergency relief from an interim order allowing the debtor to use cash collateral. Id. at 279, 287. 50. See, e.g., Bear v. Coben (In re Golden Plan of Cal., Inc.), 829 F.2d 705, 709 (9th Cir. 1986) (“Whether the parties intended outright sales or loans for security is determined from all the facts and circumstances surrounding the transactions at issue.”); see also Commercial Money Center, 350 B.R. at 481 (citing Golden Plan for the proposition that a court should look at all of the circumstances to decide whether a transaction is a sale or a loan); cf. Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 545 (3d Cir. 1979) (“In cases of this kind it is more important what parties actually do than what they say they do.”). 51. In Jersey Tractor Trailer, 2007 WL 2892956 at *7–8, the court helpfully summarized these factors with references to case law; however, ironically, it went on to decide the case at hand based entirely on the stated intent of the parties. 52. Compare Golden Plan, 829 F.2d at 709 (citing the unconditional nature of the transfer—and its express disavowal of any recourse—as dispositive of true-sale status), with Fireman’s Fund Ins. Co. v. Grover (In re Woodson Co.), 813 F.2d 266, 271–72 (9th Cir. 1987) (finding a transfer to be a loan because the transferees bore no risks), and Major’s Furniture Mart, 602 F.2d at 545 (finding that the transferor’s retention of “all conceivable risks of uncollectibility” supported recharacterization of the “sale” as a transfer of a security interest). 2008] The True-Sale Problem in Securities Law 495 accounting judgment need only provide a “reasonable assurance” based upon the evidence available.53 V. Application of the GAAP Standard in SEC Enforcement Actions Substantive legal analysis of the true-sale question in a securities context is hampered by a near-total dearth of case law. SEC civil enforcement actions tend to settle long before a court has the opportunity to reach a final judgment on the merits.54 In a typical settlement, defendants admit no wrongdoing, but consent to payment of a civil fine and agree to submit to an injunction requiring them to set up sufficient internal controls to ensure future compliance with GAAP.55 The SEC’s interpretation of GAAP’s true-sale analysis, though never judicially tested, has become the de facto rule. Because it is almost never tested on the merits, the SEC can get away with brevity and vagueness in its pleadings.56 In challenging a transaction’s true-sale status, SEC pleadings generally invoke GAAP but do not delve into the specifics of the GAAP analysis prescribed by SFAS 140.57 Far from un- dertaking the substantive-law inquiry called for in GAAP’s treatment of 53. See SFAS 140, supra note 6, ¶¶ 27–28 (recommending that “all available evidence” be considered in order to provide “reasonable assurance” that the asset will be beyond the reach of creditors); see also id. ¶ 153 (“[T]he Board concluded that having to consider only the evidence available should make that requirement workable.”). Lawyers preparing true-sale opinions on behalf of ratings agencies, however, may not be so lucky. Standard & Poor’s guidelines require such opinions to state their conclusions with confidence by saying “would” rather than “should,” disallowing qualifiers such as “not free from doubt”—and, whatever else they do, the guidelines mandate that the opinions must not mention LTV Steel! STANDARD & POOR’S, LEGAL CRITERIA FOR STRUCTURED FINANCE TRANSACTIONS app. II, at 107–08 (2002), quoted in SCHWARCZ ET AL., supra note 2, at 79–80. On the ethical duties and professional-responsibility compliance issues facing lawyers who prepare true-sale opinions in securitization transactions, see generally Steven L. Schwarcz, The Limits of Lawyering: Legal Opinions in Structured Finance, 84 TEXAS L. REV. 1 (2005). 54. See JAMES D. COX ET AL., SECURITIES REGULATION 773 (4th ed. 2004) (“[M]ost SEC enforcement proceedings (over 90 percent) are settled, not litigated.”). 55. For more discussion of the cases examined in this Note, see PNC Fin. Servs. Group, Inc., 10 S.E.C. 1064, 1090 (July 18, 2002), available at http://www.sec.gov/litigation/admin/33-8112.htm. See also Press Release, SEC, Doral Financial Settles Financial Fraud Charges with SEC and Agrees to Pay $25 Million Penalty (Sept. 19, 2006) [hereinafter Doral Press Release], available at http:// www.sec.gov/news/press/2006/2006-155.htm; Press Release, SEC, First Bancorp Settles SEC Financial Fraud Charges Involving “Non-Conforming” Mortgages (Aug. 7, 2007) [hereinafter First BanCorp Press Release], available at http://www.sec.gov/news/press/2007/2007-161.htm. 56. While the SEC’s recitations of GAAP violations tend to be short and simple, private litigants, forced to meet PSLRA’s heightened pleading requirements, typically go into much greater detail. In the Doral case, discussed infra, the SEC’s complaint is a scant sixteen pages while the private plaintiffs’ complaint, alleging essentially the same facts, runs to a full 167 pages. 57. See, e.g., Complaint at 9, SEC v. Doral Fin. Corp., No. 06-CV-7158 (S.D.N.Y. Sept. 19, 2006) [hereinafter Doral SEC Complaint], available at http://www.sec.gov/litigation/complaints/ 2006/comp19837.pdf; Complaint at 4–5, SEC v. First BanCorp, No. 07-CV-7039 (S.D.N.Y. Aug. 7, 2007) [hereinafter First BanCorp SEC Complaint], available at http://www.sec.gov/litigation/ complaints /2007/comp20227.pdf. 496 Texas Law Review [Vol. 87:487 isolation and recourse, securities complaints that raise the true-sale issue typically do not even make reference to state substantive law.58 Because companies that draw the SEC’s attention tend to be involved in a variety of serious accounting irregularities, if not outright frauds, the true-sale issue may get relatively little space.59 Although the SEC has not formally joined the judicial and academic debate over what makes a true sale, its enforcement priorities are strongly suggestive of its views on the matter. As is appropriate for an agency whose purpose is to enforce accurate disclosure of companies’ true financial conditions, the SEC is concerned with the substantive characteristics and consequences of transactions, and gives little weight to what the parties call them.60 The SEC will challenge true-sale accounting when the risks and re- wards associated with the assets remain with the “seller,” because such arrangements tend to obscure the true state of the transferor’s finances.61 Among Enron’s numerous other accounting violations, the SEC took issue with one of its SPE arrangements.62 GAAP required that at least 3% of the equity capital in an SPE come from an outside investor.63 But Enron orally promised the investor, CIBC Bank, that its 3% stake would be repaid.64 The SEC argued that because the transferee was thus protected from risk, it did not count as a true sale.65 The SEC made the same com- plaint about a similar arrangement in the PNC case, where advance payment of a “management fee” to the outside investor effectively offset its 3% stake, and where PNC retained the risks and benefits of an investment denominated in its own preferred stock.66 58. See infra notes 66–78 and accompanying text. 59. For an extreme example, see the SEC’s complaint against the Enron officers, in which the true-sale issue merits only two paragraphs in a sixty-page pleading, Second Amended Complaint at 15, SEC v. Lay, No. H-04-0284 (S.D. Tex. July 8, 2004) [hereinafter SEC Enron Complaint], available at http://www.sec.gov/litigation/complaints/comp18776.pdf. 60. See SEC REPORT, supra note 7, at 101–02 (arguing for an “objectives-oriented” approach that looks to the underlying reality and purpose of the accounting standards, as against rule-based, bright-line standards that “allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard”). 61. See, e.g., id. at 11 (contrasting GAAP’s “control approach” with a “risks and rewards analysis” that asks how various events might affect the value of investors’ holdings in an entity). 62. SEC Enron Complaint, supra note 59, at 15. 63. Id. at 9. 64. Id. at 15. 65. Id. 66. PNC Fin. Servs. Group, Inc., 10 S.E.C. 1064, 1090 (July 18, 2002), available at http://www.sec.gov/litigation/admin/33-8112.htm. In this case, the issue was not the true-sale analysis under SFAS 140, but whether the SPE transferee was sufficiently distinct from PNC to avoid “consolidation,” which would force PNC to list the SPE’s assets and liabilities on its own balance sheet. Id. Consolidation, of course, would defeat the whole purpose of the transaction, which was to enable PNC to keep the debts off its books. For the GAAP test for nonconsolidation that was in effect at the time of the financial statements at issue in the Enron and PNC cases, see EMERGING ISSUES TASK FORCE, FIN. ACCOUNTING 2008] The True-Sale Problem in Securities Law 497 The Enron and PNC cases concerned SPEs, special entities created by a transferor solely for the purpose of accommodating a securitization.67 But similar issues and problems can arise in arm’s-length transactions between independent parties. The mortgage-securitization deal between Doral Financial and FirstBank offers an excellent case study, in which we can observe the SEC pursuing mirror-image actions against both transferor and transferee based on improper true-sale accounting.68 Doral, the leading mort- gage lender in Puerto Rico, pooled and securitized its mortgages and sold them to FirstBank.69 The contract contained limited-recourse provisions, by which Doral promised to repurchase or substitute mortgages that became de- linquent in their first two years, up to a maximum of 10% of the total principal.70 It was later revealed, however, that Doral’s managers had orally promised FirstBank that they would extend the repurchase guarantee beyond two years, to the full term of the loans.71 This promise turned “limited re- course” into full recourse and disqualified the transaction from true-sale treatment. Effectively, FirstBank had made a loan to Doral and taken the mortgages as security. Both sides benefited—on paper—from accounting for the deal as a sale. Doral recognized revenue from the “sale,” overstating its income by nearly $600 million.72 FirstBank profited by earning $100 million in risk-free interest, thanks to other secret provisions by which Doral assumed the risk of interest-rate fluctuations.73 By characterizing the mortgages as “bought” rather than as security for a loan to Doral, FirstBank was able to overstate its own assets for purposes of complying with the Federal Deposit Insurance Corporation’s (FDIC) capitalization requirements—thus allowing it, in turn, STANDARDS BD., IMPACT OF NONSUBSTANTIVE LESSORS, RESIDUAL VALUE GUARANTEES, AND OTHER PROVISIONS IN LEASING TRANSACTIONS 6 (2001), available at http://www.fasb.org/pdf/abs 90-15.pdf. This report notes that the general consensus of the FASB’s Emerging Issues Task Force was that “3 percent is the minimum acceptable investment” to prevent consolidation of an SPE. Id.; cf. id. at 11 (noting that a different consolidation test applies to financial statements filed in or after 2003). The SEC’s concerns in this context are, however, essentially the same as with SFAS 140: whether the risks and benefits stay with the transferor. Id. 67. GAAP’s special accounting rules for SPEs and Qualifying Special Purpose Entities (QSPEs) are beyond the scope of this Note. See generally SFAS 140, supra note 6, ¶ 35–46; SCHWARCZ, supra note 2, at 89–98. 68. See complaints cited supra note 57. Both companies were also targets of shareholder litigation over the same issues, and the pleadings in the private suits offer much more detail. See generally Consolidated Amended Complaint, In re Doral Fin. Corp. Sec. Litig., No. 1:05-md- 01706-RO (S.D.N.Y. June 22, 2006), available at http://securities.stanford.edu/1034/DRL05_01/ 2006622_r01c_051706.pdf; Amended Class Action Complaint, Fox v. First BanCorp, No. 05-CV- 2148 (D.P.R. Feb. 13, 2006) [hereinafter Fox Complaint], available at http://securities.stanford.edu/ 1035/FBP05_01/2006213_r01c_05218.pdf. 69. Doral SEC Complaint, supra note 57, at 3, 9. 70. First BanCorp SEC Complaint, supra note 57, at 3–4. 71. Doral SEC Complaint, supra note 57, at 9; First BanCorp SEC Complaint, supra note 57, at 4; Fox Complaint, supra note 68, at 68–74. 72. Doral SEC Complaint, supra note 57, at 10. 73. First BanCorp SEC Complaint, supra note 57, at 1, 4. 498 Texas Law Review [Vol. 87:487 to borrow more from other banks.74 Correctly recharacterizing the transaction as a loan would have caused FirstBank to fall below the FDIC’s threshold for “well-capitalized” status, with various unpleasant consequences.75 Needless to say, the SEC took a dim view of a transaction that was deliberately designed to conceal its true impact on the parties’ bal- ance sheets. The SEC charged that the deal substantively violated GAAP by providing for full recourse and that the secret nature of the deal violated both companies’ disclosure obligations.76 Both defendants quickly settled.77 The SEC’s interpretation of GAAP on the issue of recourse merits closer attention, because it contradicts what GAAP actually says. Doral had obligated itself to buy back loans in case of default—a trigger event beyond its control—and the SEC cited this obligation as a violation of GAAP.78 But SFAS 140 specifically provides that a repurchase obligation for the transferor, by itself, does not preclude true-sale accounting.79 Only an obligation combined with an option, or an option alone, violates the third prong of GAAP’s control test.80 Why this difference? GAAP—reflecting the concern of underwriters and ratings agencies to make deals bankruptcy- proof—is primarily concerned with whether the transferor can be said to ex- ercise control over the assets, because too much “effective control” might tempt a judge to recharacterize the agreement as a lease and return the assets to the transferor–debtor’s estate.81 For the SEC and for the investing public, though, both of which care more about a company’s fortunes before it reaches the point of bankruptcy, control is not the issue. Rather, the problem is obligation—the danger that the transferor could find itself responsible for future losses caused by trigger events beyond its control, and that those li- abilities would come as a surprise because everyone thought they had been 74. Fox Complaint, supra note 68, at 17–20. 75. Id. 76. Doral SEC Complaint, supra note 57, at 9; First BanCorp SEC Complaint, supra note 57, at 4. FirstBank did not improve its position when it attempted to conceal the true nature of the interest-rate provisions by backdating documents. First BanCorp SEC Complaint, supra note 57, at 6. 77. See press releases cited supra note 55. Settlements of the private shareholder suits in both cases, with substantial payouts, soon followed. See Notice of Pendency and Proposed Settlement of Class Action at 1, In re First BanCorp Sec. Litig., No. 3:05-cv-02148-GAG (D.P.R. Aug. 13, 2007), available at http://www.gilardi.com/pdf/fbcp1not.pdf (settling for $74.25 million); Notice of Pendency and Proposed Partial Settlement of Class and Derivative Actions at 1, In re Doral Fin. Corp. Sec. Litig., No. 1:05-md-01706-RO (S.D.N.Y. May 2, 2007), available at http://www.gilardi. com/pdf/dfnl1not.pdf (settling for $129 million). 78. Doral SEC Complaint, supra note 57, at 9; First BanCorp SEC Complaint, supra note 57, at 4. 79. SFAS 140, supra note 6, ¶ 217. 80. Id. ¶¶ 9(c), 217. 81. Id. ¶¶ 9(a), 152–53. 2008] The True-Sale Problem in Securities Law 499 safely transferred off the company’s books.82 To the extent that the SEC’s priorities differ from those of the FASB, the SEC redefines GAAP to suit its own ends. In this way the SEC uses its enforcement powers, theoretically limited to matters of procedure and disclosure, to get its way on a substantive issue. Whether the SEC’s interpretation of GAAP would withstand judicial scrutiny is probably an academic question, because it seems unlikely a de- fendant company will ever fight back long enough for a court to reach the merits. VI. Application of the GAAP Standard in Private Securities Litigation Although private securities actions face tough procedural hurdles under the PSLRA, a claim based on improper true-sale accounting, stated specifically enough, can be legally sufficient to survive a motion to dismiss.83 Cases that make it past this stage typically settle without any resolution on the merits.84 The settlement agreements—the fairness of which must be justified to the court in class actions—regularly cite the uncertainty of further litigation.85 Generally, private actions take the same approach to true-sale analysis as the SEC, with the difference being that heightened pleading requirements force private plaintiffs to spell out their arguments more clearly and specifically.86 Like the SEC, private litigants emphasize substance over form in true-sale analysis, because their causes of action are founded on defendants’ failure to disclose the true nature of a transaction. The Spiegel case is illustrative. A retailing company pooled, securitized, and sold the receivables of its store credit-card accounts.87 The shareholders’ complaint, closely following GAAP’s control test, alleged that Spiegel retained control of the transferred accounts in a variety of ways. It 82. See SEC REPORT, supra note 7, at 8 (stating as the report’s purpose the improvement of “transparency” in financial statements, which it defines as “reporting that provides investors and other users of financial statements with appropriate information to assess the material risks, rewards, rights, and obligations associated with arrangements”). 83. See, e.g., In re Spiegel, Inc. Sec. Litig., 382 F. Supp. 2d 989, 1023 (N.D. Ill. 2004) (mem.) (order upholding claims against all but one defendant) (finding that the plaintiff’s claim of a true- sale violation was stated with sufficient specificity). For a detailed discussion of the complex factual and procedural background of this case, see id. at 996–1011. 84. Updates on the settlement status of the cases discussed here can be found at the Stanford Securities Class Action Clearinghouse, http://securities.stanford.edu. For information about a particular case, click the Search link and enter the name of the defendant company. 85. See, e.g., Lead Plaintiff’s Unopposed Motion and Memorandum of Law for Preliminary Approval of Settlement at 5, In re First BanCorp Sec. Litig., No. 3:05-cv-02148-GAG (D.P.R., July 24, 2007), available at http://securities.stanford.edu/1035/FBP05_01/2007724_r01t_052148.pdf (“Plaintiffs . . . recognize the expense and length of continued proceedings . . . [and] are also mindful of the inherent problems of proving, and the possible defenses to, the violations of the federal securities laws asserted in the Complaint.”). 86. See supra note 18 and accompanying text. 87. Spiegel, 382 F. Supp. 2d at 1000–03. 500 Texas Law Review [Vol. 87:487 retained the ability to appoint trustees and to change terms on the underlying credit accounts; it could decide when to write off individual delinquent accounts; and it collected the receivables and was free to commingle the cash with its own funds.88 Although Spiegel was obligated to buy back the accounts, the company’s financial disclosures falsely described the transactions as non-recourse, and concealed the fact that various “payout events” might require Spiegel to divert much of its own cash flow to pay off investors.89 In its preliminary ruling on the defendants’ motion to dismiss, the court decided that the plaintiffs had met the high pleading threshold be- cause their allegations of GAAP violations were backed by detailed and specific challenges to the company’s financial models.90 VII. Statutory Responses to the True-Sale Problem The drafters of the Uniform Commercial Code attempted to place sales of accounts beyond the reach of bankruptcy courts by adding § 9-318, which declares that a debtor “does not retain a legal or equitable interest in the col- lateral sold.”91 However, the U.C.C. does not provide any rules for distinguishing between receivables that are truly “sold” and those that are merely transferred as collateral for a loan.92 Some states have attempted to fill that gap by adopting “true-sale statutes,” under which the stated intent of the parties is more or less controlling, regardless of a transaction’s sub- stance93—in other words, calling a dog a duck is legally sufficient to make it so. It is unclear what weight, if any, such a statute would carry in the federal bankruptcy context.94 From time to time, there are calls for a sweeping federal solution to the true-sale problem.95 An early version of the Bankruptcy Reform Act 88. Third Consolidated Amended Complaint at 99–113, In re Spiegel, Inc. Sec. Litig., No. 02- C-8946 (N.D. Ill. May 23, 2006), available at http://securities.stanford.edu/1026/SPGLA/2006926_ r01k_028946.pdf. 89. Id. at 29. 90. Spiegel, 382 F. Supp. 2d at 1023. The case settled soon thereafter. Stipulation of Settlement at 2, Spiegel, Inc. Sec. Litig., No. 02-C-8946 (N.D. Ill. Nov. 3, 2006), available at http:// securities.stanford.edu/1026/SPGLA/2006113_r01k_028946.pdf. 91. U.C.C. § 9-318(a) (2007). 92. See id. § 9-318 cmt. 2. 93. See, e.g., DEL. CODE ANN. tit. 6, § 2703A(a)(1) (2002); OHIO REV. CODE ANN. § 1109.75(A)(1) (West 2001) (both providing that any assets “purported to be transferred” in a securitization transaction “shall be deemed” no longer to be property of the transferor); TEX. BUS. & COM. CODE ANN. § 9.109(e) (Vernon 2002) (providing that “the parties’ characterization of a transaction as a sale . . . shall be conclusive that the transaction is a sale and is not a secured transaction”). For a discussion of these statutes as they apply to securitization transactions, see SCHWARCZ ET AL., supra note 2, at 76–78. 94. See Schwarcz, supra note 8, at 1547–48 (discussing the uncertain prospects for these state statutes in federal bankruptcy courts). 95. See, e.g., Steven L. Schwarcz, The Impact of Bankruptcy Reform on “True Sale” Determination in Securitization Transactions, 7 FORDHAM J. CORP. & FIN. L. 353, 362–64 (2002) 2008] The True-Sale Problem in Securities Law 501 included a proposed § 912, which would have amended the Bankruptcy Code to protect most asset-backed securitizations by placing them, once and for all, definitively beyond the reach of the debtor’s bankruptcy estate.96 Had it passed, § 912 would have made things much simpler for accountants strug- gling with the “isolation” element of GAAP’s control test.97 It would have put federal law squarely on the nominal, rather than the substantive, side of the true-sale debate. Such a safe harbor would have been good news for par- ticipants in securitization deals—but not necessarily for the investing public, to the extent that it helped companies obscure the true state of their finances by hiding recourse liabilities. However, § 912 fell victim to the fallout from the Enron scandal. After commentators pointed out that its provisions would have protected and encouraged some of the same kinds of SPE transactions that had been exploited by Enron’s executives, § 912 was quietly withdrawn.98 The backlash from the Enron scandal shifted the political winds so sharply that some in Congress proposed legislation to expand, rather than contract, the ability of federal bankruptcy courts to recharacterize sales as secured loans and recover the assets for creditors.99 (arguing in favor of a legislative “safe harbor” that would place asset-backed securitizations beyond the reach of the transferor’s creditors in bankruptcy). 96. Bankruptcy Reform Act of 2001, S. 220, H.R. 333, 107th Cong. § 912 (2001). The Act proposed two new subsections to § 541 of the Bankruptcy Code. Id. One stated that an “eligible asset” transferred by the debtor “to an eligible entity in connection with an asset-backed securitization” will not be considered the property of the debtor’s estate. Id. § 912(b)(8). The other stated that the validity of such a transfer would be determined solely by the debtor’s stated intent to remove the asset from the estate, and that the presence of recourse or repurchase obligations, or the characterization of the transaction for tax, accounting, or regulatory purposes, is not relevant. Id. § 912(f). For a discussion of the proposed § 912 and its implications for the true-sale doctrine, see generally Jonathan C. Lipson, Enron, Asset Securitization, and Bankruptcy Reform: Dead or Dormant?, 11 J. BANKR. L. & PRAC. 101 (2002). Lipson’s article discusses the benefits and disadvantages involved in applying the proposed § 912 to existing asset-securitization issues in light of the Enron scandal. Id. 97. SFAS 140, supra note 6, ¶¶ 9(a), 27, 152–53. 98. See Lipson, supra note 96, at 102–03 (discussing the political climate that defeated the proposal). However, some commentators supported the proposed reform and believe that Congress overreacted in withdrawing it. E.g., Schwarcz, supra note 95, at 353. 99. In 2002, Senator Richard Durbin and Representative William Delahunt introduced the Employee Abuse Prevention Act, which, among other things, would have allowed bankruptcy courts to recharacterize sale transactions if their “material characteristics” were “substantially similar” to those of secured loans. S. 2798, H.R. 5221, 107th Cong. § 102 (2002). The bill died in committee. See Library of Congress, THOMAS, http://thomas.loc.gov/cgi-bin/bssQuery/?&Opt=T &Db=107&srch=/bss/d110query.html&TxtStr=EMPLOYEE+ABUSE+PREVENTION+ACT+OF+ 2002 (providing the status of the House and Senate versions of the Employee Abuse Prevention Act). The legislation would have allowed federal bankruptcy judges to consider recharacterization based entirely on their own judgment of the substance of the transaction, without any reliance on state substantive law. See Schwarcz, supra note 8, at 1544–45 (criticizing the Durbin–Delahunt bill for “replac[ing] generally applicable and settled state law with a vague federal test”). 502 Texas Law Review [Vol. 87:487 VIII. Conclusion Those looking for certainty and consistency will find true-sale law maddening. GAAP’s standard for true-sale accounting depends on a substantive law that is itself an incoherent patchwork.100 SEC enforcement actions and private securities lawsuits invoke GAAP but gloss over its com- plexity, ignoring the jurisdiction-specific substantive-law analysis called for in SFAS 140.101 Even if § 912 or similar federal legislation had been enacted to change the underlying substantive law, it would have made little differ- ence. After all, the SEC has shown that it can ignore specific GAAP provisions when it wishes.102 The SEC is unlikely to be forced to defend the merits of its positions in federal bankruptcy court—or, for that matter, in any other court.103 In the absence of substantive guidance from the courts, the SEC has filled the vacuum by making its own true-sale law. It remains free to use GAAP as a sword, but its targets cannot shield themselves behind GAAP’s true complexity, since even technical compliance does not relieve a company of its disclosure obligation.104 Precisely because courts never reach the merits of the issue, the SEC is able to impose and enforce its own inter- pretation of GAAP—and, in the case of recourse obligation, without regard to what GAAP actually says.105 Even if all securitizations were characterized as “sales” as a matter of law, the SEC would still be able to insist on full dis- closure of any substantive arrangements that left risks or benefits with the transferor. Companies that used such transactions to hide liabilities and in- flate earnings would not likely face any less jeopardy than they do now. Even if the law calls it a duck, failing to disclose to investors the risk that it will bark and chase after cars may land the company in the doghouse. —Michael Gaddis 100. See supra Part IV. 101. See supra Parts V and VI. 102. See supra notes 78–82 and accompanying text. 103. See supra notes 55–59 and accompanying text. 104. See supra note 16 and accompanying text. 105. See supra notes 78–79 and accompanying text.