Law Commons^™

Universalizing Fraud, Parmida Enkeshafi

Duke Journal of Constitutional Law & Public Policy Sidebar

The criminal trial of Elizabeth Holmes has reanimated public interest in fraud. Holmes, once a Silicon Valley prodigy, was charged with two counts of conspiracy to commit wire fraud and eleven counts of wire fraud. A jury found Holmes guilty on four counts, potentially subjecting her to 80 years in prison. This Note uses the example of Elizabeth Holmes's case to examine more broadly the role of morality in fraud and argues for a new framework by which to articulate and prosecute fraud.

Criminal jurisprudence has struggled to construct a satisfactory definition of "white-collar crime" since sociologist Edwin H. Sutherland …

A Revised Monitoring Model Confronts Today's Movement Toward Managerialism, James D. Cox, Randall S. Thomas

Faculty Scholarship

There are many lessons to be drawn from the sweep of history. In law, the compelling story repeatedly told is the observable co-movement of law on the one hand, and economic, social, and political changes on the other hand. Aberrations, however, do arise but generally do not persist in the long term. Contemporary corporate law seems to be on the cusp of such an abnormality as legal developments and proposed reforms for corporate law are currently conflicting with the direction in which the host environment is moving. This article identifies a series of contemporary judicial and regulatory corporate governance developments …

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg

Faculty Scholarship

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

Regulating Financial Guarantors, Steven L. Schwarcz

Faculty Scholarship

To improve financial regulation, scholars have engaged in extensive research over the past decade to try to understand why systemically important financial firms engage in excessive risk-taking. None of that research fully explains, however, the unusually excessive risk-taking by financial guarantors such as bond insurers, protection sellers under credit-default-swap (CDS) derivatives, credit enhancers in securitization transactions, and even issuers of standby letters of credit. With tens of trillions of dollars of financial guarantees outstanding, the potential for failure is massive. This Article argues that financial guarantor risk-taking is influenced by a previously unrecognized cognitive bias, which it calls “abstraction bias.” …

Deterring Algorithmic Manipulation, Gina-Gail S. Fletcher

Faculty Scholarship

Does the existing anti-manipulation framework effectively deter algorithmic manipulation? With the dual increase of algorithmic trading and the occurrence of “mini-flash crashes” in the market linked to manipulation, this question has become more pressing in recent years. In the past thirty years, the financial markets have undergone a sea change as technological advancements and innovations have fundamentally altered the structure and operation of the markets. Key to this change is the introduction and dominance of trading algorithms. Whereas initial algorithmic trading relied on preset electronic instructions to execute trading strategies, new technology is introducing artificially intelligent (“AI”) trading algorithms that …

Post-Crisis Financialization Through Product Innovation: Assessing Complexity, Growth & Design In Exchange Traded Funds, Ryan Clements

Duke Law SJD Dissertations

This dissertation examines emerging risks and regulatory concerns in exchange traded funds (ETFs). It makes four core arguments through four published or accepted (and forthcoming) law review articles, alongside two published blog posts, all of which were written and previously submitted to the SJD Committee during the author’s dissertation research period. These articles are organized herein as dissertation chapters together with a contextual introduction and a summary conclusion which frames the dissertation within the scholarly literature on economic “financialization,” and emerging challenges associated with the growth of large interconnected asset managers.

The four core arguments in this dissertation are as …

Foreign Corruption As Market Manipulation, Gina-Gail S. Fletcher

Faculty Scholarship

No abstract provided.

Anticipating Venezuela’S Debt Crisis: Hidden Holdouts And The Problem Of Pricing Collective Action Clauses, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

A creditor who asks for stronger enforcement rights upon its debtor’s default will rationally accept a lower interest rate reflecting the greater expected recovery the exercise of those rights provides. Over a dozen studies, however, have failed to document this basic relationship in the context of the collective action clause, a key provision in sovereign bonds. We conjecture that this failure is because enforcing the rights in question requires collective decision-making among anonymous creditors with different interests, impeding market predictions regarding future price effects. The pricing of rights that require collective enforcement thus turns on whether the market observes an …

Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi, Ofer Eldar

Faculty Scholarship

A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions …

Tepoel Lecture: Bond Trustees And The Rising Challenge Of Activist Investors, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Central Clearing Of Financial Contracts: Theory And Regulatory Implications, Steven L. Schwarcz

Faculty Scholarship

To protect economic stability, post-crisis regulation requires financial institutions to clear and settle most of their derivatives contracts through central counterparties, such as clearinghouses associated with securities exchanges. This Article asks whether regulators should expand the central clearing requirement to non-derivative financial contracts, such as loan agreements. The Article begins by theorizing how and why central clearing can reduce systemic risk. It then examines the theory’s regulatory and economic efficiency implications, first for current requirements to centrally clear derivatives contracts and thereafter for deciding whether to extend those requirements to non-derivative contracts. The inquiry has real practical importance because the …

Engineered Credit Default Swaps: Innovative Or Manipulative?, Gina-Gail S. Fletcher

Faculty Scholarship

Credit default swaps (“CDS”) are, once again, making waves. Maligned for their role in the 2008 financial crisis and condemned by the Vatican, investors are once more utilizing CDS to achieve results of questionable market benefit. A CDS is a financial contract that allows investors to “bet” on whether a borrower will default on its loan. However, rather than waiting to see how their bets pan out, some CDS investors are collaborating with financially distressed borrowers to guarantee the profitability of their CDS positions—“engineering” the CDS’ outcome. Under the CDS contract, these collaborations are not prohibited, yet they have roiled …

The Conflicted Advice Problem: A Response To Conflicts & Capital Allocation, Gina-Gail S. Fletcher

Faculty Scholarship

No abstract provided.

Revolving Elites: The Unexplored Risk Of Capturing The Sec, James D. Cox, Randall S. Thomas

Faculty Scholarship

Fears have abounded for years that the sweet spot for capture of regulatory agencies is the "revolving door" whereby civil servants migrate from their roles as regulators to private industry. Recent scholarship on this topic has examined whether America's watchdog for securities markets, the Securities and Exchange Commission (SEC), is hobbled by the long-standing practices of its enforcement staff exiting their jobs at the Commission and migrating to lucrative private sector employment where they represent those they once regulated. The research to date has been inconclusive on whether staff revolving door practices have weakened the SEC' s verve. In this …

The Enduring Distinction Between Business Entities And Security Interests, Ofer Eldar, Andrew Verstein

Faculty Scholarship

What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, …

Seeking An Objective For Regulating Insider Trading Through Texas Gulf Sulphur, James D. Cox

Faculty Scholarship

Data summarized in the opening of this article document that inside trading is a growth industry. And, as deals get ever bigger, the growth curve becomes steeper as more the data confirms intuition that the more who know about a good thing the more who will seek to harvest its benefits. Even though insider trading appears to have thrived during the fifty years after Texas Gulf Sulphur, we gather in this symposium to celebrate the decision. But why? As developed below, the Second Circuit’s landmark decision gave way to the Supreme Court’s erection of a fiduciary framework that this article …

Securitization Ten Years After The Financial Crisis: An Overview, Steven L. Schwarcz

Faculty Scholarship

This symposium issue examines securitization a decade after the 2008 financial crisis. Prior to the crisis, securitization was one of America’s dominant means of financing. Many observers, however, blamed securitization for causing the crisis, sparking regulation that arguably has been overly restrictive and, in some cases, even punitive. Where are we now?

The Price Of Law: The Case Of The Eurozone's Collective Action Clauses, Elena Carletti, Paolo Colla, Mitu Gulati, Steven Ongena

Faculty Scholarship

Do markets value contract protections? And does the quality of a legal system affect such valuations? To answer these questions we exploit a unique experiment whereby, after January 1, 2013, newly issued sovereign bonds of Eurozone countries under domestic law had to include Collective Action Clauses (CACs) specifying the minimum vote needed to modify payment terms. We find that CAC bonds trade at lower yields than otherwise similar no-CAC bonds; and that the quality of the legal system matters for this differential. Hence, markets appear to see CACs as providing protection against the legal risk embedded in domestic-law sovereign bonds.

The Myth Of The Ideal Investor, Elisabeth De Fontenay

Faculty Scholarship

Critiques of specific investor behavior often assume an ideal investor against which all others should be compared. This ideal investor figures prominently in the heated debates over the impact of investor time horizons on firm value. In much of the commentary, the ideal is a longterm investor that actively monitors management, but the specifics are typically left vague. That is no coincidence. The various characteristics that we might wish for in such an investor cannot peacefully coexist in practice.

If the ideal investor remains illusory, which of the real-world investor types should we champion instead? The answer, I argue, is …

The Hausmann-Gorky Effect, Mitu Gulati, Ugo Panizza

Faculty Scholarship

For over a century, legal scholars have debated the question of what to do about the debts incurred by despotic governments; asking whether successor non-despotic governments should have to pay them. That debate has gone nowhere. This paper examines whether an Op Ed written by Harvard economist, Ricardo Hausmann, in May 2017, may have shown an alternative path to the goal of increasing the cost of borrowing for despotic governments. Hausmann, in his Op Ed, had sought to produce a pricing penalty on the entire Venezuelan debt stock by trying to shame JPMorgan into removing Venezuelan bonds from its emerging …

Sec Reporting Requirements For Publicly Traded Companies Should Not Be Expanded Despite Advancements In Information Technology, Lindsey Kell

Duke Law & Technology Review

Advancements in information technology allow information to be collected and analyzed quickly within a corporation. As a result, technology also allows the quicker release of information to the Securities Exchange Commission (SEC)—much quicker than the Form 10-K and Form 10-Q releases that are currently required for publicly traded companies. Although publicly traded companies must also disclose certain significant events in Form 8-K, the reporting requirements for publicly traded companies are not nearly as expansive as they could be considering the easy access these companies have to their business information. Even with this in mind, the SEC is well into a …

Sovereign Debt And The “Contracts Matter” Hypothesis, W. Mark C. Weidemaier, Mitu Gulati

Faculty Scholarship

The academic literature on sovereign debt largely assumes that law has little role to play. Indeed, the primary question addressed by the literature is why sovereigns repay at all given the irrelevance of legal enforcement. But if law, and specifically contract law, does not matter, how to explain the fact that sovereign loans involve detailed contracts, expensive lawyers, and frequent litigation? This Essay makes the case that contract design matters even in a world where sovereign borrowers are hard (but not impossible) to sue. We identify a number of gaps in the research that warrant further investigation.

Differing Perceptions? Market Practice And The Evolution Of Foreign Sovereign Immunity, W. Mark C. Weidemaier, Mitu Gulati

Faculty Scholarship

The 20th century witnessed a transformative, “tectonic” shift in international law, from “absolute” to “restrictive” theories of sovereign immunity. As conventionally understood, however, this dramatic transformation represented only a shift in the default rule. Under absolute immunity, national courts could not hear lawsuits and enforce judgments against a foreign sovereign without its consent. Under restrictive immunity, foreign sovereigns were presumptively not immune when they engaged in commercial acts. We demonstrate that market practices undermine this conventional understanding. Using an extensive, two-century data set of contracts between foreign governments and private creditors, we show that contracting parties have long treated absolute …

Regulatory Competition And The Market For Corporate Law, Ofer Eldar, Lorenzo Magnolfi

Faculty Scholarship

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995- 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms.Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that …

The Puzzle Of Pdvsa Bond Prices, Paolo Colla, Anna Gelpern, Mitu Gulati

Faculty Scholarship

Market reports in the summer of 2016 suggest that Venezuela is on the brink of default on upwards of $65 billion in debt. That debt comprises of bonds issued directly by the sovereign and those issued by the state-owned oil company PDVSA. Based on the bond contracts and other legal factors, it is not clear which of these two categories of bonds would fare better in the event of a restructuring. However, market observers are convinced — and we agree — that legal and contractual differences would likely impact the payouts on the bonds if Venezuela defaults. Using a comparison …

Restructuring Sovereign Debt After Nml V. Argentina, Lee C. Buchheit, G. Mitu Gulati

Faculty Scholarship

The decade and a half of litigation that followed Argentina’s sovereign bond default in 2001 ended with a great disturbance in the Force. A new creditor weapon had been uncloaked: The prospect of a court injunction requiring the sovereign borrower to pay those creditors that decline to participate in a debt restructuring ratably with any payments made to those creditors that do provide the country with debt relief.

For the first time holdouts succeeded in fashioning a weapon that could be used to injure their erstwhile fellow bondholders, not just the sovereign issuer. Is the availability of this new weapon …

The Financial Crisis And Credit Unavailability: Cause Or Effect?, Steven L. Schwarcz

Faculty Scholarship

Although the relationship between credit availability and financial decline leading to the global financial crisis was somewhat interactive, a loss of credit availability appears to have caused the financial crisis more than the reverse. The potential for credit unavailability to cause a financial crisis suggests at least three lessons: (i) because credit availability is dependent on financial markets as well as banks, regulation should protect the viability of both credit sources; (ii) diversifying sources of credit might increase financial stability if each credit source is robust and does not create a liquidity glut or inappropriately weaken central bank control; and …

Sovereign Debt Restructuring And English Governing Law, Steven L. Schwarcz

Faculty Scholarship

The problem of sovereign indebtedness is becoming a worldwide crisis because nations, unlike individuals and corporations, lack access to bankruptcy laws to restructure unsustainable debt. Decades of international efforts to solve this problem through contracting and attempted treaty-making have failed to provide an adequate debt-restructuring framework. A significant amount of outstanding sovereign debt is governed, however, by English law. This Article argues that the U.K. Parliament has the extraordinary power to help solve the problem of unsustainable country debt by changing English law to facilitate fair and consensual debt restructuring. This Article also proposes modifications to English law that Parliament …

The Deregulation Of Private Capital And The Decline Of The Public Company, Elisabeth De Fontenay

Faculty Scholarship

From its inception, the federal securities law regime created and enforced a major divide between public and private capital raising. Firms that chose to “go public” took on substantial disclosure burdens, but in exchange were given the exclusive right to raise capital from the general public. Over time, however, the disclosure quid pro quo has been subverted: Public companies are still asked to disclose, yet capital is flooding into private companies with regulators’ blessing.

This Article provides a critique of the new public-private divide centered on its information effects. While regulators may have hoped for both the private and public …

How To Restructure Venezuelan Debt (¿Cómo Restructurar La Deuda Venezolana?), Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

English Abstract: There is a growing consensus that Venezuela will not be able to persist for much longer with its policy of full external debt service. The social costs are just too great. This implies a debt restructuring of some kind. Venezuela, principally through its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”), has extensive commercial contacts with the United States. Not since Mexico in the 1980s has an emerging market country with this level of commercial contacts attempted to restructure its New York law-governed sovereign debt. Holdout creditors in a restructuring of Venezuelan sovereign debt will therefore present a …