Law Commons^™

Going Public, Selling Stock, And Buying Liquidity, Richard A. Booth

Working Paper Series

It is a well known anomaly of corporation finance that initial public offerings (IPOs) tend to be underpriced. That is, it appears that shares tend to be offered at a price that is below what the market would bear. Scholars have offered several explanations, most of which focus on various sorts of underwriter opportunism (and insider acquiescence therein). But it is difficult to believe that competition among underwriters does not force offerings to be made at the highest possible price, particularly in view of the numerous alternatives to traditional underwriting methods that have arisen in recent years. The persistence of …

What Is A Business Crime?, Richard A. Booth

Working Paper Series

Criminal prosecution has been used with increasing frequency recently in connection with a variety of business failures and other financial offenses. Indeed, it appears that there are few such offenses that cannot be prosecuted criminally even though they also give rise to civil remedies. While some such offenses seem to be quite serious frauds, others seem to be as minor as getting the accounting rules wrong. Thus, the question addressed in this essay is how to define a business crime and what should be the proper role of criminal prosecution in connection with business offenses. I start with the proposition …

The Investor Compensation Fund, Alicia Davis Evans

Law & Economics Working Papers Archive: 2003-2009

The prevailing view among securities regulation scholars is that compensating victims of secondary market securities fraud is inefficient. As the theory goes, diversified investors are as likely to be on the gaining side of a transaction tainted by fraud as the losing side. Therefore, such investors should have no expected net losses from fraud because their expected losses will be matched by expected gains. This Article argues that this view is flawed; even diversified investors can suffer substantial losses from fraud, presenting a compelling case for compensation.

The interest in compensation, however, should be advanced by better means than are …

Governance Of Markets In The United States And The European Union: A Comparative Survey Of Sec Regulation Nms And The Eu Markets In Financial Instruments Directive, Linda Jeng-Braun

Linda Jeng-Braun

Regulation NMS and MiFID were proposed in the U.S. and the EU, respectively, in the same year of 2004 and are dramatically changing U.S. and EU securities market infrastructure and practices. They possess a large number of similarities and address common issues that markets and regulators are facing on both sides of the Atlantic. Through an examination of Regulation NMS and MiFID, this Article conducts a themed comparison of the governance of securities markets in the U.S. and the EU by history, regulatory governance and supervisory developments, market infrastructure issues of fragmentation and transparency, and long-term consequences for market participants. …

Retail Investor Remedies Under Rule 10b-5, Jennifer O'Hare

Working Paper Series

This paper assesses the private remedies available under Rule 10b-5 to retail investors who have been defrauded by false corporate disclosures. After comparing the treatment received by retail investors to the treatment received by institutional investors, I identify several areas in which the federal securities laws disfavor retail investors who have been defrauded by false corporate disclosures, including the creation of a two-tiered system of investor remedies for securities fraud. Institutional investors are permitted to pick and choose which law and forum offers them the most attractive chance for recovery, but retail investors typically do not have this opportunity. They …

The Fatal Flaw Of Proposals To Federalize Insurance Regulation, Elizabeth F. Brown

Elizabeth F Brown

While the federal government has had the option of regulating insurance since the decision by the U.S. Supreme Court in the United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944), the states have retained almost exclusive control over insurance regulation. Within the past seven years, Congress, however, has considered three different methods of federalizing insurance regulation. Some members of the insurance industry see these efforts to federalize insurance regulation as a means of eliminating the problems in the current state system, which they view as costly, cumbersome and confusing. In the Congressional hearings on federalizing insurance, both opponents and …

Efficiency And Effectiveness In Securities Regulation: Comparative Analysis Of The United States Competitive Regulatory Structure And The United Kingdom’S Single Regulator Model, Joseph Silvia

Joseph Silvia

Efficiency and Effectiveness in Securities Regulation: Comparative Analysis of the United States Competitive Regulatory Structure and the United Kingdom’s Single Regulator Model Does the form of regulatory institutions impact the efficiency and effectiveness of the regulatory structure? While the current status of the multi-level/multi-functional regulatory structure in the United States (US) has developed over many years, the recent adoption of a single regulator structure by the United Kingdom (UK) offers us opportunity to test the impact of form on substance. To what extent does each system efficiently and effectively monitor and enforce the regulations of the financial markets? This paper …

The "Carrot" Approach To Accounting Standard Setting, Neal F. Newman

Neal F Newman

For years, accounting standard setters have been waging a battle against financial fraud and obfuscated and distorted financial reporting. The standard setters, however, have been steadily losing ground as accounting fraud and obfuscated financial reporting continues to proliferate the public company landscape. The ongoing battle between financial information prepares and regulators has resulted in an accounting and financial reporting regime that is fragmented, overly complex and allows for accounting results that are devoid of economic substance. Poor financial reporting has been deemed to be of such significance, that the Securities and Exchange Commission has formed an advisory committee whose purpose …

Executive Compensation: The New Executive Compensation Disclosure Rules Do Not Result In Complete Disclosure, Sean M. Donahue

Sean Donahue

In 2006, the Securities and Exchange Commission adopted new rules governing the disclosure of executive compensation. This Article discusses four ways in which the rules do not result in complete disclosure. While the SEC should be commended for its efforts, the rules still leave investors uninformed about compensation consultants, performance targets, earnings on deferred compensation, and perquisites. To remedy these deficiencies, this Article suggests several amendments to Regulation S-K. It recommends that the Commission require disclosure of: all work performed by compensation consultants, all performance targets after the conclusion of the performance period, all earnings on deferred compensation, and all …

The Rule 10b5-1 Loophole: An Empirical Study, Alexander P. Robbins

Alexander P Robbins

This paper is the culmination of an MVP2 Law and Economics Student Fellowship at the University of Chicago Law School, for which the author received the John M. Olin Prize in Law and Economics. It seeks to empirically examine the effects of an insider trading loophole created by the Securities and Exchange Commission's Rule 10b5-1. Rule 10b5-1 creates a safe harbor for pre-planned securities transactions (or 10b5-1 plans), so long as the 10b5-1 plans are irrevocable and established prior to the trader's obtaining inside information. The SEC has taken the position, however, that it lacks the legal authority to prevent …

Intermediated Securities, Legal Risk, And The International Harmonisation Of Commercial Law, Luc Thevenoz

Luc Thevenoz

Investors do not physically hold their investment securities any more. Securities are held and transferred through a complex, sophisticated, and international network of financial intermediaries, including central securities depositories, investment banks, and brokers-dealers. Investors buy and sell their holdings by having book-entries made to their securities accounts; they provide collateral to secured lenders by book-entries or by control agreements. Because transfers and collateral transactions are critical to the liquidity of the financial markets and to financial stability, market participants and regulators have become increasingly concerned with the legal soundness, the internal consistency, and the international compatibility of national laws regulating …

Regulating Hedge Fund Managers: The Investment Company Act As A Regulatory Screen, Mercer E. Bullard

Mercer E Bullard

The Blackstone IPO in June 2007 signaled a new strategy of exploiting all of the advantages of a public offering while avoiding critical regulatory constraints. Hedge fund managers such as Blackstone are the functional equivalent of private investment companies in which only sophisticated investors are eligible to invest. Regulators have ignored this economic reality, however, in permitting hedge fund managers to evade all of the restrictions that Congress imposed on publicly offered investment pools. Hedge fund managers should be subject to the Investment Company Act, which uses a combination of statutory and regulatory exemptions as screens to ensure the optimal …

The Uptick Rule Of Short Sale Regulation - Can It Alleviate Downward Price Pressures From Negative Earnings Shocks?, Lynn Bai

Lynn Bai

This paper empirically examines the effect of the uptick rule (including the bid test applicable to NASDAQ stocks) of short sale regulations on stock prices and short selling activities immediately after negative earnings surprises that occurred during the period of May to November 2005. It compares price paths and short selling activities of stocks restricted by the uptick rule with stocks that were exempted from the rule as a result of the SEC’s Pilot Program. The study has not found any evidence that prices of stocks subject to the rule declined at a slower speed than prices of exempted stocks …

Gaming The System: Virtual Worlds And The Securities Markets, Caroline Bradley

Caroline Bradley

“IPOs” and “stock exchanges” in virtual worlds such as Second Life raise a number of issues for real world financial regulators as well as for player-inhabitants of virtual worlds and academic researchers who focus on virtual worlds. The paper argues that under current rules some virtual world financial transactions constitute transactions in securities, and are therefore subject to registration requirements and fraud liability under the securities laws. Arguments that this virtual financial activity is only an aspect of the game would risk encouraging fraud. Thus an exemption regime would be desirable to distinguish between game activity with a financial theme …

Stock Market, Corporations And Their Regulation: A Few Glimpses Into Reality, Palladam M. Vasudev

Palladam M Vasudev

The paper examines events in three public companies – Enron Corp., Sycamore Networks and Amazon.com, from the perspective of corporate law and securities law. The events are interpreted in terms of the applicable law, and explain how it influences them. In particular, the paper demonstrates how the prevailing loose legal regime for corporations and the stock market-centricity of corporate arrangements give rise to specific varieties of negative behaviour. The paper adopts a critical approach, and is an effort to describe the consequences of the minimalist philosophy underlying corporate and securities regulation.

Companies And Corporations: Their Transition From Status To Contract And Its Political Economy, Palladam M. Vasudev

Palladam M Vasudev

This article traces the state of corporate law in the English-speaking world since 1720, identifies the political economy of the changes that occurred since mid-nineteenth century, and the consequences for corporate law. During this period, there was a transition from the position that incorporation was a status to be conferred by the law to the position that they were the products of private contracts. In addition, they came to be treated as the property of their shareholders. These conceptual changes have had far-reaching consequences for the growth of corporations and were used to largely abandon the public regulation of corporations. …

The Missing Link Between Insider Trading And Securities Fraud, Richard A. Booth

Working Paper Series

In a recent article, I argued that diversified investors - the vast majority of investors - would prefer that securities fraud class actions under the 1934 Act and Rule 10b-5 be dismissed in the absence of insider trading or similar offenses during the fraud period. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berk. Bus. L. J. 1 (2007), http://ssrn.com/abstract=683197. In this article, I draw on the classic case, SEC v. Texas Gulf Sulfur Company, to show that the federal courts originally viewed securities fraud as inextricably connected to insider trading …

The Undefined Definition Of A Security: Why Investment Contract Is The Last Security Standing And A Proposal For The Adoption Of A Contextual Analysis To Determine Its Reach, Bradley D. Allen

Bradley D Allen

A judicial “opportunity doesn’t always knock . . . sometimes it rings.” In this case, however, the United States Supreme Court did not answer. Presented with an opportunity to clarify its dangerously broad definition of an investment contract under the securities laws, the Court limited its decision to merely whether a transaction may be considered an investment contract if the scheme offers a fixed rather than variable return. Although the Court correctly concluded that an instrument offering a fixed return may properly be considered within the definition of investment contract, it failed to seize the opportunity to step beyond the …

The Screening Effect Of The Private Securities Litigation Reform Act, Stephen Choi, Karen K. Nelson, Adam C. Pritchard

Law & Economics Working Papers Archive: 2003-2009

Prior research shows that the PSLRA increased the significance of merit-related factors, such as the presence of an accounting restatement or insider selling, in determining the incidence and outcomes of securities fraud class actions. (Johnson, Nelson, and Pritchard, 2007). This result, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of non-meritorious litigation. Second, the PSLRA may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. This paper tests these alternative hypotheses. We find that pre-PSLRA claims that settled for nuisance value would be …

Developing Governance And Regulation For Emerging Capital And Securities Markets, Ali Adnan Ibrahim

Ali A Ibrahim

This paper discusses various legal and regulatory issues for developing strong capital and securities markets in the transition economies. Toward this end, the paper analyses the available literature, and emphasizes that: (i) the development of corporate governance should be gradual and must take into consideration the customary laws that impact on the ownership structures and related preferences for doing business in the emerging markets; and (ii) the foreign investment policies should be consistent with the development of corporate governance and vice versa.

Dr. Jones And The Raiders Of Lost Capital: Hedge Fund Regulation, Part Ii, John W. Verret

John W Verret

Hedge funds can sometimes achieve remarkable returns. The market fees exceed that of other asset classes, leading some fund managers to engage in illicit behavior, including fraud, that violates their duty to their investors and tempts institutional investors to violate their fiduciary duty to their principals. I will examine the hedge fund registration requirement struck down during the summer of 2006, as well as the tools used by other regulators to oversee institutional investors. This study relies on a survey of literature on financial regulation, commentary on the hedge fund registration rule, models of self-regulation, and examples in other areas …

The Missing Link Between Insider Trading And Securities Fraud, Richard A. Booth

Faculty Scholarship

In a recent article, I argued that diversified investors - the vast majority of investors - would prefer that securities fraud class actions under the 1934 Act and Rule 10b-5 be dismissed in the absence of insider trading or similar offenses during the fraud period. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berk. Bus. L. J. 1 (2007), http://ssrn.com/abstract=683197. In this article, I draw on the classic case, SEC v. Texas Gulf Sulfur Company, to show that the federal courts originally viewed securities fraud as inextricably connected to insider trading …

Prediction Markets And The First Amendment, Miriam A. Cherry

Miriam A. Cherry

What would happen if new laws banning on-line gambling were used to target prediction markets? The answer is a clash with the First Amendment. The continuing development of prediction markets is important because of their success at foretelling the future. Unfortunately, overly restrictive gambling laws could jeopardize the progress of prediction markets. In this Article, we identify the expressive elements inherent in prediction markets and explore how legislation such as the Unlawful Internet Gambling Enforcement Act of 2006 might harm such predictive speech. This Article is the first to explore First Amendment protections for prediction markets, and in so doing, …

The Limits Of Hedge Fund Activism, Robert Thompson

Robert Thompson

Abstract Hedge funds have burst on to the corporate governance scene. Not just as one player among many, but one with the potential to be the long-sought shareholder champion who can effectively discipline management in a world where ownership is separated from control. The argument has been made, with some justification, that these investors face different economic incentives than do traditional institutional investors such as mutual funds or public or private pension funds. The business plan of a typical hedge fund is more compatible with shareholder activism and they lack some of the conflicts of interests that have deterred traditional …

Developing Governance And Regulation For Emerging Capital And Securities Markets, Ali Adnan Ibrahim

Ali A Ibrahim

This paper discusses various legal and regulatory issues for developing strong capital and securities markets in the transition economies. Toward this end, the paper analyses the available literature, and emphasizes that: (i) the development of corporate governance should be gradual and must take into consideration the customary laws that impact on the ownership structures and related preferences for doing business in the emerging markets; and (ii) the foreign investment policies should be consistent with the development of corporate governance and vice versa.

Buy, Sell Or Hold? Analyst Fraud From Economic And Natural Law Perspectives, Ronald J. Colombo

Ronald J Colombo

Investor protection and healthy capital markets are commonly acknowledged as the objectives historically driving U.S. federal securities legislation and policy. Less commonly appreciated, or perhaps intentionally neglected, is the critical role that virtue was understood to play in realizing these objectives by the architects and original enforcers of the securities laws. This understanding has largely been lost, in no small part, due to the success that “law and economics” has had in dominating securities law thinking. This Article posits that this original understanding can be rediscovered, and the role of virtue restored to its rightful place in securities regulation, via …

The Sec Regulation Of Takeovers: Some Doubts From A Game Theory Perspective And A Proposal For Reform, Sharon Hannes, Omri Yadlin

Sharon Hannes

In theory, a hostile tender offer poses a threat to the target shareholders who, for strategic reasons, may tender their shares in response to an inferior bid. It has therefore been suggested that the decision to tender be made separately from the shareholder vote on the actual merits of the bid. While the regulator has never adopted this proposal, market forces in the poison pill era did generate a mechanism with a similar effect. To overcome a poison pill (a mechanism implemented by managers to thwart bids), the bidder must win the shareholders’ vote in a proxy contest that is …

Triumph Or Tragedy? The Curious Path Of Corporate Disclosure Reform In The U.K., Cynthia A. Williams, John M. Conley

William & Mary Environmental Law and Policy Review

No abstract provided.

Insider Waiting: The New Loophole Under 10b5-1, Maureen Mcgreevy

Maureen McGreevy

In October, 2000, the Securities and Exchange Commission (SEC) enacted Rule 10b5-1 which provides an affirmative defense for individuals charged with insider trading. The Rule states that a person is not deemed to have traded on the basis of material non-public information if, before he or she gained knowledge of that material, non-public information, the person had entered into a trading plan under which he or she contracted to sell the securities in question. As a result of this rule, many corporate executives have established what have become to be known as 10b5-1 trading plans in order to protect themselves …

Mcmahon Turns Twenty: The Regulation Of Fairness In Securities Arbitration, Jill I. Gross

Elisabeth Haub School of Law Faculty Publications

I believe that current regulation of securities arbitration does ensure that it is fair to investors. Part II of this Commentary explores the various sources of law, including the FAA, which could require fairness in securities arbitration. It revisits the first critical assumption of the McMahon Court, that the FAA's provisions for post-award judicial review protect investors from an unfair arbitration process. This Part demonstrates that, while the FAA does require “fundamental fairness” in arbitration, courts loosely construe that requirement and find most arbitration proceedings meet it easily. Part IIII of this Commentary explores SEC oversight of securities arbitration, particularly …