Securities Law Commons^™

Taking Stock Of Startup Stock Options: Addressing Disclosure And Liquidity Concerns Of Startup Employees, John R. Dorney

Vanderbilt Law Review

U.S. capital markets are becoming increasingly private. Initial public offerings have steadily declined since the 1990s, and private companies are remaining private over twice as long as they have in the past. Furthermore, private company financing has reached unprecedented levels. Private securities offerings now greatly outpace the value of publicly traded securities. Additionally, recent regulatory changes seem to be accelerating this shift from the public to the private markets. One result of this shift is that private company valuations have grown immensely, so much so that private companies with valuations of over $1 billion exist and are known as “unicorns.” …

Finding The Boundaries Of Equitable Disgorgement, Cameron K. Hood

Vanderbilt Law Review

The disgorgement of “ill-gotten gains” is a significant mechanism for enforcing the securities laws. By compelling a violator of the securities laws to forfeit their illegal proceeds, disgorgement serves as a strong deterrent for securities fraud and an important method by which investors are compensated for unjust losses in the market—and today accounts for the recovery of billions of dollars annually. Despite its importance, commentators in recent years began to call into question the
availability of the disgorgement remedy for the SEC. The SEC purses disgorgement under the agency’s grant for seeking equitable relief for the benefit of investors; however, …

High-End Bargaining Problems, William W. Clayton

Vanderbilt Law Review

Many important areas of the law place great confidence in the ability of contracting parties to bargain effectively. In this Article, I question the wisdom of a formalistic faith in bargaining by identifying flaws in the bargaining process at the high end of the market, where parties are sophisticated and have substantial resources to aid them in bargaining.

My analysis focuses on the private equity fund industry, which is widely regarded as one of the most elite contracting spaces in the market. Because of rigorous investor qualification laws and other distinctive features of private equity funds, this industry enjoys many …

The Misuse Of Tobin’S Q, Robert Bartlett, Frank Partnoy

Vanderbilt Law Review

In recent years, scholars have addressed the most important topics in corporate law based on a flawed assumption: that the ratio of the market value of a corporation’s securities to their book value is a valid measure of the value of the corporation. The topics have included staggered boards, incorporation in Delaware, shareholder activism, dual-class share structures, share ownership, board diversity, and other significant aspects of corporate governance. We trace the history of this flawed assumption, and document how it emerged from Tobin’s q, a concept from an unrelated area in macroeconomics. We show that scholars have misused Tobin’s q, …

Inflated Private Offering: Regulating Corporate Insiders And Market Moving Disclosures On Social Media, Marisa Papenfuss

Vanderbilt Law Review

This Note will explore Regulation FD’s development, from its enactment in 2000 to its status in the age of social media. It will ultimately propose a safe harbor provision that clearly delineates when issuers and corporate insiders are not subject to the regulation’s requirements. Part I provides an overview of Regulation FD’s provisions and enforcement as well as the SEC’s subsequent guidance, which attempts to elucidate the regulation’s application to new technologies. Part II analyzes the specific problems that arise when Regulation FD is applied to information distributed through social media and assesses scholars’ proposed solutions to these problems. Lastly, …

Golden Parachutes And The Limits Of Shareholder Voting, Albert H. Choi, Andrew C.W. Lund, Robert Schonlau

Vanderbilt Law Review

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Congress attempted to constrain change-in-control payments (also known as “golden parachutes”) by giving shareholders the right to approve or disapprove such payments on an advisory basis. This Essay is the first to empirically examine the experience with the Say-on-Golden-Parachute (“SOGP”) vote. We find that unlike shareholder votes on proposed mergers, there is a significant amount of variation with respect to votes on golden parachutes. Notwithstanding the variation, however, the SOGP voting regime is likely ineffective in controlling golden parachute (“GP”) compensation. First, proxy advisors seem …

After Corwin: Down The Controlling Shareholder Rabbit Hole, Ann M. Lipton

Vanderbilt Law Review

As Delaware has developed its doctrine with respect to controlling shareholders, its view of their relationship to directors has evolved. This evolution has produced some pronounced inconsistencies with respect to the weight placed on director approval of controlling shareholder action. The recent Delaware Supreme Court decisions in Corwin v. KKR Financial Holdings LLC, Kahn v. M & F Worldwide Corp., and C & J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust introduced further uncertainty into the mix by making the determination as to whether a transaction involves a controlling shareholder practically outcome determinative …

Calculating Sec Whistleblower Awards: A Theoretical Approach, Amanda M. Rose

Vanderbilt Law Review

The Dodd-Frank Act provides that Securities and Exchange Commission (“SEC”) whistleblower awards must equal not less than ten and not more than thirty percent of the monetary penalties collected in the action to which they relate; SEC Rule 21F-6 provides criteria that the SEC may consider in determining the award percentage within the statutory bounds. When applying the Rule 21F-6 criteria, the SEC is required to think only in percentage terms, ignoring the dollar payout the award will actually yield. Last June, the SEC proposed to change this, at least in cases where the existing methodology would yield an award …

Boilerplate And The Impact Of Disclosure In Securities Dealmaking, Jeremy Mcclane

Vanderbilt Law Review

Capital markets dealmaking, like many kinds of business transactions, is built on a foundation of copied and recycled language what many call boilerplate. Regulators and the bar periodically call for less reliance on boilerplate, but despite these pressures, boilerplate remains a fixture of ever-growing securities disclosures. This Article explores why boilerplate persists and how it affects investors, showing that boilerplate may have a more complex role than commonly recognized. This Article does so by developing a theory on the effect of boilerplate in securities disclosure-a context that is little studied despite a wealth of literature on boilerplate in other settings--and …

The Securities Black Market: Dark Pool Trading And The Need For A More Expansive Regulation Ats-N, Brian P. Baxter

Vanderbilt Law Review

Procedural law in the United States seeks to achieve three interrelated goals in our system of litigation: efficient processes that achieve "substantive justice" and deter wrongdoing, accurate outcomes, and meaningful access to the courts. For years, however, procedural debate, particularly in the context of due process rights in class actions, has been redirected toward more conceptual questions about the nature of legal claims-are they more appropriately conceptualized as individual property or as collective goods? At stake is the extent to which relevant procedures will protect the right of individual claimants to exercise control over their claims. Those with individualistic conceptions …

Understanding Causation In Private Securities Lawsuits: Building On Amgen, James D. Cox

Vanderbilt Law Review

The securities antifraud provision is a bastard. It has no indisputable parentage; its existence is attributed to a federal statute, but its features are borrowed from state law, a body of law that the enacting Congress presumably believed was inadequate.' Why would Congress borrow from state law that it considered deficient? Even though the antifraud provision has come of age largely through judicial construction similar to the laudatory process that underlies our common law, critics attack the antifraud provision like no comparable common-law development. To many scholars, private antifraud suits are not viewed as a net benefit, but as a …

Setting Attorneys' Fees In Securities Class Actions: An Empirical As, Lynn A. Baker, Michael A. Perino, Charles Silver

Vanderbilt Law Review

n 1995, Congress overrode President Bill Clinton's veto and enacted the Private Securities Litigation Reform Act ("PSLRA"), a key purpose of which was to put securities class actions under the control of institutional investors with large financial stakes in the outcome of the litigation.' The theory behind this policy, set out in a famous article by Professors Elliot Weiss and John Beckerman, was simple: self-interest should encourage investors with large stakes to run class actions in ways that maximize recoveries for all investors. These investors should naturally want to hire good lawyers, incentivize them properly, monitor their actions, and reject …

Unreliable Securities For Retirement Income Security: Certifying The Erisa Stock-Drop Class, Lauren N. Fromme

Vanderbilt Law Review

Catherine Stevens had built her retirement savings "a dollar at a time over a lifetime of hard work" when it was "reduced to virtually zero" at Enron's collapse. "I feel very strongly that we have all been wronged," she said. Her plans for a secure future had been destroyed. Almost eight years after Enron's failure, stories like Catherine's persist, and employee retirement income security remains as comforting as an imaginary friend. A falling stock market in the wake of financial finagling leaves many employee retirement plans dangerously insecure. Employees like Catherine who bet their futures on their company's stock have …

Trimming The "Judicial Oak": Rule 10b5-2(B)(1), Confidentiality Agreements, And The Proper Scope Of Insider Trading Liability, Ryan M. Davis

Vanderbilt Law Review

In recent years the Securities and Exchange Commission, commonly known as the SEC, has been involved in a number of high- profile suits that have attracted a good deal of media attention. Among those prosecuted by the Commission are hedge fund billionaire and Galleon Group founder Raj Rajaratnam, investment/Ponzi- scheme guru Bernie Madoff, television host and magazine publisher Martha Stewart, and colorful Dallas Mavericks owner Mark Cuban. Although such notable suits may simply be the SEC's attempt to justify its own existence and role in the market it polices in light of the financial disasters of the past decade, these …

Auditing The Pcaob: A Test To The Accountability Of The Uniquely Structured Regulator Of Accountants, Michael A. Thomason, Jr.

Vanderbilt Law Review

After a slew of highly publicized corporate accounting scandals during the early 2000s at prominent companies-including Enron, WorldCom, Adelphia, and Tyco-public confidence in the integrity of financial reporting by public companies was undoubtedly shaken. Several major financial reporting frauds demonstrated serious weaknesses with the then self-regulated accounting profession, including the failure of auditors to detect those companies that were "cooking their books." The collapse of several prominent companies not only affected top executives, who often were subjected to civil and criminal charges, but also produced harsh consequences for several other constituencies who relied on the integrity of the accounting firms …

Star Creation: The Incubation Of Mutual Funds, Alan R. Palmiter, Ahmed E. Taha

Vanderbilt Law Review

Mutual fund incubation is a process by which new funds are initially operated out of public view. The high-performing funds are then marketed to investors, and the low-performing funds are quietly terminated. This selection process is not revealed to investors, thus creating the illusion that the successful funds' returns were the result of skill rather than luck. Also, some fund companies subsidize their incubator funds in ways that do not continue after the funds are sold to the public. As a result, the high returns of successful incubator funds generally do not persist after the funds are marketed to investors. …

Attorneys, Accountants, And Bankers, Oh My! Primary Liability For Secondary Actors In The Wake Of "Stoneridge", Robert J. Grubb

Vanderbilt Law Review

Mervin "Buddy" Schwartz, Jr., embodied the American Dream. A Pennsylvania resident, Schwartz began working for Hershey Foods in 1961 as a maintenance mechanic.' He eventually became a member of the local union's executive board. A hard worker providing for his family, Schwartz had a thirteen-year perfect attendance record and often worked overtime. He even managed to attend night classes and obtained an associate's degree in Bible studies.

Lacking any financial training, Buddy Schwartz relied on the retirement plan and 401k5 Hershey provided for his retirement. Because he contributed the maximum allowable amount out of each paycheck to his 401k, he …

Hands-Off Options, Jesse M. Fried

Vanderbilt Law Review

Executive compensation long has attracted considerable interest from investors, academics, regulators, and the media. It received increased attention in the wake of the Enron and other corporate governance scandals that erupted at the beginning of the century. Hundreds of firms were found to have engaged in various forms of earnings manipulation that, ultimately, destroyed tens of billions of dollars of social value. Much of this earnings manipulation was linked to executives' pay arrangements, such as their ability to time the unwinding of their equity incentives. The scandals eventually led to some of the most important corporate governance reforms in decades, …

Proxy Contests In An Era Of Increasing Shareholder Power: Forget Issuer Proxy Access And Focus On E-Proxy, Jeffrey N. Gordon

Vanderbilt Law Review

The current debate over shareholder access to the issuer's proxy statement for the purpose of making director nominations is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission's ("SEC's") new e- proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via the issuer's proxy and a freestanding proxy solicitation. No matter which avenue is used, however, the serious question relates to the appropriate disclosure required of a shareholder nominator. Should the nominator be subject to …

The Lead Plaintiff Provisions Of The Pslra After A Decade, Or "Look What's Happened To My Baby", Elliott J. Weiss

Vanderbilt Law Review

In 1995, my colleague John Beckerman and I had an experience shared by very few legal academics. We mailed the galley proofs of an article that we had written to the staff of a Senate Committee and then saw the Committee, the Senate, and the full Congress enact into law a bill that included all of the recommendations in our article. The article was Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions; the law was the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The relevant provisions of the PSLRA, now …

There Are Plaintiffs And ... There Are Plaintiffs: An Empirical Analysis Of Securities Class Action Settlements, James D. Cox, Randall S. Thomas, Lynn Bai

Vanderbilt Law Review

Reform of the securities class action is once again the subject of national debate. The impetus for this debate is the reports of three different groups-the Committee on Capital Market Regulation,' the Commission on the Regulation of U.S. Capital Markets in the 21st Century, and McKinsey & Company.3 Each of the reports focuses on a single theme: how the contemporary regulatory culture places U.S. capital markets at a competitive disadvantage to foreign markets. While the reports target multiple regulatory forces in their calls for reform, each report singles out securities class actions as one of the prime villains that place …

Realigning The Corporate-Stockholder Relationship: Facilitating Stockholder Communications During Active Proxy Solicitations, Michael Burgoyne

Vanderbilt Law Review

The bankruptcy of the Enron Corporation in December of 2001 "sent shock waves throughout the country" that forced both Wall Street and the average investor to rethink our system of corporate governance. WorldCom, the second-largest long distance carrier in the United States, topped Enron by filing an even larger bankruptcy in 2002 with pre-petition assets estimated at a staggering $103,914,000,000. Although these were two of the largest bankruptcy filings in United States history, Enron and WorldCom were merely the tip of the iceberg. Similar scandals at Adelphia Communications, Arthur Andersen, Global Crossing, HealthSouth, Qwest, Rite Aid, Tyco, and Xerox represent …

The Evidence On Securities Class Actions, Stephen J. Choi

Vanderbilt Law Review

Shareholders of large publicly held corporations face a well- known collective action problem. To the extent an individual shareholder bears all the costs of activities that benefit the entire group of shareholders (giving the individual shareholder only a fraction of the benefits), the individual shareholder will have marginal incentive to pursue such collective activities. Corporations owe their shareholders specific duties and rights. However, due to the collective action problem, no single shareholder may seek to litigate these rights. In the context of the federal securities laws within the United States, the U.S. regime provides a solution: private class actions. This …

Unfit To Serve: Permanently Barring People From Serving As Officers And Directors Of Publicly Traded Companies After The Sarbanes-Oxley Act, Philip F.S. Berg

Vanderbilt Law Review

On June 4, 2003, lifestyle guru Martha Stewart was indicted on multiple criminal and civil charges by the Securities and Exchange Commission (SEC or Commission). The charges, including obstruction of justice and civil insider trading, stemmed from Stewart's sale of ImClone stock shortly before the Food and Drug Administration rejected a drug produced by ImClone and sent the company's stock price tumbling. Although Stewart could face a number of serious penalties under her criminal indictment, the primary remedy sought by the SEC for her civil insider trading charges is rather uncommon-a bar from serving as a director of Martha Stewart …

Securities Fraud As Corporate Governance: Reflections Upon Federalism, Robert B. Thompson, Hillary A. Sale

Vanderbilt Law Review

State law gives corporate managers extremely broad power to direct increasingly large pools of collective business assets. Not surprisingly, economic incentives, norms, markets, and law all work to constrain the breadth of the power and the potential for abuse of what is other people's money.' State corporate law has occupied the center stage in the legal portion of this landscape, with federal securities law playing a supporting role-at least in the academic presentation of the debate. The New Deal's securities legislation eschewed a general federal corporations statute in favor of a more focused federal role emphasizing disclosure and antifraud protections …

The Critical Resource Theory Of Fiduciary Duty, D. Gordon Smith

Vanderbilt Law Review

This Article proposes a new theory to unify the law of fiduciary duty. The prevailing view holds that fiduciary law is atomistic, arising for varied reasons in established categories of cases (such as trustee-beneficiary and director-shareholder) and ad hoc in relation- ships where one person trusts another and becomes vulnerable to harm as a result. By contrast, the critical resource theory of fiduciary duty holds that every relationship properly designated as "fiduciary" conforms to the following pattern: One party (the "fiduciary') acts on behalf of another party (the "beneficiary') while exercising discretion with respect to a critical resource belonging to …

Information Technology And Non-Legal Sanctions In Financing Transactions, Ronald J. Mann

Vanderbilt Law Review

This Essay investigates the effect of advances in information technology on the private institutions that businesses use to resolve information asymmetries in financing transactions. The first part of the Essay discusses how information technology can permit direct verification of the information, obviating the problem entirely; the Essay discusses the example of the substitution of the debit card for the check, which provides an immediate payment that obviates the need for the merchant to consider whether payment will be forthcoming when the check is presented to the bank on which it is drawn.

The second part of the Essay discusses how …

The Unclear "Clear And Unmistakable" Standard: Why Arbitrators, Not Courts, Should Determine Whether A Securities Investor's Claim Is Arbitrable, Guy Nelson

Vanderbilt Law Review

When an individual investor opens an account with a securities broker, the customer often must sign a standard-form contract as a precondition of conducting business with the broker. This non- negotiable contract, referred to as a Customer Agreement, generally contains an arbitration clause under which the parties agree to submit any future disputes to arbitration conducted by one of the securities industry's self-regulatory organizations ("SROs"). Proceedings initiated under the broad and inclusive arbitration clause are subject to the arbitration guidelines established by the SROs, a group which includes all the major stock exchanges. Virtually all brokers are members of an …

Securities Fraud Or Mere Puffery: Refinement Of The Corporate Puffery Defense, R. Gregory Roussel

Vanderbilt Law Review

A corporation's use of forward-looking corporate statements' is a common, arguably essential, element of the landscape of modern financial markets. Unfortunately, the failure to meet the expectations created by forward-looking statements often serves as the basis for a potentially devastating private action for securities fraud. Before Congress responded to frivolous private securities fraud class actions with the Private Securities Litigation Reform Act of 1995, ("Reform Act") the judiciary took it upon itself to provide relief to burdened corporations. In doing so, the courts focused on the materiality of the corporation's statements, an essential building block in the plaintiffs construction of …

Inefficiency In The Market For Initial Public Offerings, Jonathan A. Shayne, Larry D. Soderquist

Vanderbilt Law Review

The market for initial public offerings ("IPOs") of common stock is inefficient, and this fact is not reflected in securities law. New statistical evidence shows that, on average, companies go public at times when the general stock market is priced 22.7% higher than its normal level, and that underwriters sell IPO stock at a further 12.5% premium to the prevailing, high market. These two figures are based on the long-term performance of IPOs and comparable non-IPO stocks over the period 1970 to 1990, and are consistent with the beliefs of knowledgeable practicing investors.

The value and number of IPOs varies …