Securities Law Commons^™

Spac Mergers, Ipos, And The Pslra's Safe Harbor: Unpacking Claims Of Regulatory Arbitrage, Amanda M. Rose

Vanderbilt Law School Faculty Publications

Communications in connection with an initial public offering (IPO) are excluded from the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 (PSLRA). Unsurprisingly, IPO issuers do not share projections publicly-—the liability risk is too great. By contrast, communications in connection with a merger are not excluded from the safe harbor, and special purpose acquisition companies (SPACs) routinely share their merger targets’ projections publicly. Does the divergent application of the PSLRA’s safe harbor in traditional IPOs and SPAC mergers create an opportunity for “regulatory arbitrage” and, if so, what should be done about it? …

A Response To Calls For Sec Mandated Esg Disclosure, Amanda M. Rose

Vanderbilt Law School Faculty Publications

This Article responds to recent proposals calling for the SEC to adopt a mandatory ESG-disclosure framework. It illustrates how the breadth and vagueness of these proposals obscures the important--and controversial-- policy questions that would need to be addressed before the SEC could move forward on the proposals in a principled way. The questions raised include some of the most contested in the field of corporate and securities law, such as the value of interjurisdictional competition for corporate charters, the right way to conceptualize the purpose of the corporation, the proper allocation of managerial power as between the board and shareholders, …

Objector Blackmail Update: What Have The 2018 Amendments Done?, Brian T. Fitzpatrick

Vanderbilt Law School Faculty Publications

In 2012, I, along with Brian Wolfman and Alan Morrison, wrote a letter to the Federal Advisory Committee for the Rules of Appellate Procedure asking them to adopt a new rule to prohibit class members who file objections from dismissing their appeals in exchange for side settlements from class counsel...

The new rule does not go as far as our letter recommended: it does not prohibit side payments but, instead, allows side payments if the district court that approved the class settlement also approves the side payment.7 I was skeptical when the new rule was adopted that it would mitigate …

The Indian Securities Fraud Class Action: Is Class Arbitration The Answer?, Brian T. Fitzpatrick, Randall S. Thomas

Vanderbilt Law School Faculty Publications

In 2013, India enacted one of the most robust private enforcement regimes for securities fraud violations in the world. Unlike in most other countries, Indian shareholders can now initiate securities fraud lawsuits on their own, represent all other defrauded shareholders unless those shareholders affirmatively opt out, and collect money damages for the entire class. The only thing missing is a better financing mechanism: unlike the United States, Canada, and Australia, India does not permit contingency fees, so class action lawyers cannot front the costs of litigation in exchange for collecting a percentage of what they recover. On the other hand, …

The Law And Practice Of Shareholder Inspection Rights: A Comparative Analysis Of China And The United States, Randall S. Thomas, Robin Hui Huang

Vanderbilt Law School Faculty Publications

Shareholder inspection rights allow a shareholder to access the relevant documents of the company in which they hold an interest, so as to address the problem of information asymmetry and reduce the agency costs inherent in the corporate structure. While Chinese corporate governance and American corporate governance face different sets of agency cost problems, this Article shows that shareholder inspection rights play an important role in both China and the United States. On the books, while shareholder inspection rights in both countries are broadly similar, there are some important differences on issues such as the proper purpose requirement. The empirical …

The Long Rise And Quick Fall Of Appraisal Arbitrage, Randall S. Thomas, Wei Jiang, Tao Li

Vanderbilt Law School Faculty Publications

Appraisal is a legislatively created right for shareholders to seek a judicial determination of the fair value of their stock in certain transactions. For many decades, appraisal was a little-used and frequently maligned corporate law remedy. Beginning at the turn of the twenty-first century, this all changed when a group of financial investors, including some hedge funds, began filing appraisal cases. Appraisal arbitrage, as it became known, grew rapidly in popularity.

Appraisal arbitrage's success soon attracted negative attention. In 2016, the Delaware legislature amended its appraisal statute to eliminate most small shareholders' appraisal rights and to permit companies to prepay …

Fintech And The Innovation Trilemma, Yesha Yadav, Chris Brummer

Vanderbilt Law School Faculty Publications

Whether in response to roboadvising, artificial intelligence, or crypto-currencies like Bitcoin, regulators around the world have made it a top policy priority to supervise the exponential growth of financial technology (or "fintech") in the post-Crisis era. However, applying traditional regulatory strategies to new technological ecosystems has proven conceptually difficult. Part of the challenge lies in the tradeoffs involved in regulating innovations that could conceivably both help and hurt consumers and market participants alike. Problems also arise from the common assumption that today's fintech is a mere continuation of the story of innovation that has shaped finance for centuries.

This Article …

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

Vanderbilt Law School Faculty Publications

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 whether staff revolving door practices have weakened the SEC’s verve. In this paper, we …

Oversight Failure In Securities Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

According to statute, securities exchanges play an essential role in ensuring compliance with applicable laws and industry standards. Long imagined as unique in their institutional capacity to bring traders together, collect information and exclude problem participants from the marketplace, exchanges have offered an efficient source of private discipline for public regulators. The classic conception of the exchange, however, no longer holds true in today’s markets. Rather than concentrate activity within a handful of exchanges, equity markets are fragmented across a network of 14 exchanges and around 40 lightly regulated, off-exchange alternative venues (colloquially, “dark pools”).

This Article shows that the …

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

Vanderbilt Law School Faculty Publications

The Dodd-Frank Act provides that SEC whistleblower awards must equal not less than 10 and not more than 30 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 less than $2 million …

Insider Information And The Limits Of Insider Trading, Yesha Yadav

Vanderbilt Law School Faculty Publications

This essay offers brief observations on the internal coherence of the rationales underlying the prohibition against insider trading, taking the opportunity offered by Newman and Salman to reflect on its central policy aims. I do not discuss these cases specifically, or what a resolution by the Supreme Court might mean for the future of insider trading. Scholars and commentators have thoughtfully critiqued Newman alongside the doctrinal whiplash that has followed in its wake. Rather, I take this opportunity to look under the hood of securities trading to examine information flows within the mechanisms by which securities are bought and sold. …

The Shifting Tides Of Merger Litigation, Randall Thomas, Matthew D. Cain, Jill Fisch, Steven D. Solomon

Vanderbilt Law School Faculty Publications

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award. We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger …

The Reasonable Investor Of Federal Securities Law, Amanda Rose

Vanderbilt Law School Faculty Publications

Federal securities law defines the materiality of corporate disclosures by reference to the views of a hypothetical reasonable investor. For decades the reasonable investor standard has been a flashpoint for debate with critics complaining of the uncertainty it generates and defenders warning of the under-inclusiveness of bright-line alternatives. This Article attempts to shed fresh light on the issue by considering how the reasonable investor differs from its common law antecedent, the reasonable person of tort law. The differences identified suggest that the reasonable investor standard is more costly than tort laws reasonable person standard - the uncertainty it generates is …

The Failure Of Liability In Modern Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

In April 2015, the Department of Justice charged Navinder Sarao for his role in causing the Flash Crash-the near-1,000-point drop-and- rebound in the Dow Jones Index that roiled markets in May 2010. Sarao, a small-time British trader operating out of his parents' suburban basement, stood accused of putting together a string of illusory, fake orders that fooled markets enough to spark the largest single-day drop in the index's history. Commentators rightly contest whether a bit-player like Sarao could have unleashed a near-catastrophe on U.S. securities markets single-handedly. Yet, the complaint-and its causal account- point to a troubling dilemma facing scholars …

Insider Trading And Market Structure, Yesha Yadav

Vanderbilt Law School Faculty Publications

This Article argues that the emergence of algorithmic trading raises a new challenge for the law and policy of insider trading. It shows that securities markets comprise a cohort of algorithmic “structural insiders” that – by virtue of speed and physical proximity to exchanges – systematically gain first access to information and play an outsize role in price formation. This Article makes three contributions. First, it introduces and develops the concept of structural insider trading. Securities markets increasingly rely on automated traders utilizing algorithms – or pre-programmed electronic instructions – for trading. Policy allows traders to enjoy important structural advantages: …

Quieting The Shareholders' Voice, Randall Thomas, James D. Cox, Fabrizio Ferri

Vanderbilt Law School Faculty Publications

No abstract provided.

Corporate Darwinism: Disciplining Managers In A World With Weak Shareholder Litigation, Randall S. Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

Because representative shareholder litigation has been constrained by numerous legal developments, the corporate governance system has developed new mechanisms as alternative means to address managerial agency costs. We posit that recent significant governance developments in the corporate world are the natural consequence of the ineffectiveness and inefficiency of shareholder suits to address certain genre of managerial agency costs. We thus argue that corporate governance responses evolve to fill voids caused by the inability of shareholder suits to monitor and discipline corporate managers.

We further claim that these new governance responses are themselves becoming stronger due in part to the rising …

How Algorithmic Trading Undermines Efficiency In Capital Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

This Article argues that the rise of algorithmic trading undermines efficient capital allocation in securities markets. It is a bedrock assumption in theory that securities prices reveal how effectively public companies utilize capital. This conventional wisdom rests on the straightforward premise that prices reflect available information about a security and that investors look to prices to decide where to invest and whether their capital is being productively used. Unsurprisingly, regulation relies pervasively on prices as a proxy for the allocative efficiency of investor capital.

Algorithmic trading weakens the ability of prices to function as a window into allocative efficiency. This …

Form Vs. Function In Rule 10b-5 Class Actions, Amanda M. Rose

Vanderbilt Law School Faculty Publications

The Supreme Court’s widely anticipated decision last term in Halliburton Co. v. Erica P. John Fund, Inc. did little to change the fundamental landscape of securities fraud litigation in the United States. Rule 10b-5 class actions premised on the “fraud-on-the-market” presumption of reliance may still be brought, although it is now clear that defendants may present evidence of lack of price distortion to rebut that presumption at the class certification stage. Halliburton does, however, raise a variety of new questions that will keep plaintiffs’ lawyers and defense counsel fighting for years to come. Determining the answers to these questions will …

Better Bounty Hunting, Amanda Rose

Vanderbilt Law School Faculty Publications

The SEC’s new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits — rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the …

Policing Public Companies: An Empirical Examination Of The Enforcement Landscape And The Role Played By State Securities Regulators, Amanda Rose, Larry J. Leblanc

Vanderbilt Law School Faculty Publications

Multiple different securities law enforcers can pursue U.S. public companies for the same misconduct. These enforcers include a variety of federal agencies, class action attorneys, and derivative litigation attorneys, as well as fifty separate state regulators. Scholars and policy makers have increasingly questioned whether the benefits of this multienforcer approach are worth the costs, or whether a more coordinated and streamlined securities enforcement regime might lead to efficiency gains. How serious are these concerns? And what role do state regulators play in the enforcement mix? Whereas the enforcement efforts of the Securities and Exchange Commission and class action lawyers have …

State Enforcement Of National Policy: A Contextual Approach (With Evidence From The Securities Realm), Amanda Rose

Vanderbilt Law School Faculty Publications

This Article addresses a topic of contemporary public policy significance: the optimal allocation of law enforcement authority in our federalist system. Proponents of competitive federalism have long argued that assigning concurrent enforcement authority to states and the federal government can lead to redundant expense, policy distortion, and a loss of democratic accountability. A growing literature responds to these claims, trumpeting the benefits of concurrent state-federal enforcement - most notably the potential for state regulators to remedy under-enforcement by captured federal agencies. Both bodies of scholarship are right, but also incomplete. What is missing from this rather polarized debate is a …

Dodd-Frank's Say On Pay: Will It Lead To A Greater Role For Shareholders In Corporate Governance?, Randall S. Thomas, Alan R. Palmiter, James F. Cotter

Vanderbilt Law School Faculty Publications

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, Dodd-Frank mandated such votes at public companies. The first year of "say on pay" under the new legislation may have changed the dialogue and give-and-take in the shareholder-management relationship at some companies, particularly on the question of executive pay.

We study the evolution of shareholder voting on "say on pay" - beginning in 2006 as a fledgling shareholder movement to get "say on pay" on the corporate ballot, evolving as a handful of companies and later the financial firms receiving …

Intraportfolio Litigation, Amanda Rose, Richard Squire

Vanderbilt Law School Faculty Publications

The modern trend is for investors to diversify. Shareholders who own one S&P 500 firm tend to own many of the others as well. This trend casts doubt on the traditional compensation and deterrence rationales for legal rules that hold corporations liable for the acts of their agents. Today, when A Corp sues B Corp (for breach of contract, theft of trade secrets, or any other legal wrong), many of the same shareholders own both the plaintiff and the defendant. For these shareholders, damages just shift money from one pocket to another, minus of course lawyer fees. We offer here …

The Multienforcer Approach To Securities Fraud Deterrence: A Critical Analysis, Amanda Rose

Vanderbilt Law School Faculty Publications

Participants in the U.S. capital markets can be sued for securities fraud by a mishmash of enforcers, including the SEC, class action plaintiffs, and state regulators. Does this multi-enforcer approach make sense from a deterrence perspective? This Article suggests that the answer is probably no. Although in theory there are conditions under which a multi-enforcer approach would promote optimal deterrence, it is unclear at best that those conditions exist in the United States. And further empirical research, while warranted, is unlikely to resolve the issue definitively. The status quo tends to persevere in the face of this sort of irreducible …

Lying And Getting Caught: An Empirical Study Of The Effect Of Securities Class Action Settlements On Targeted Firms, Randall Thomas, Lynn Bai, James Cox

Vanderbilt Law School Faculty Publications

The ongoing Great Recession has triggered numerous proposals to improve the regulation of financial markets and, most importantly, the regulation of organizations such as credit rating agencies, underwriters, hedge funds, and banks, whose behavior is believed to have caused the credit crisis that spawned the economic collapse. Not surprisingly, some of the reform efforts seek to strengthen the use of private litigation . Private suits have long been championed as a necessary mechanism not only to ompensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a …

Do Differences In Pleading Standards Cause Forum Shopping In Securities Class Actions?: Doctrinal And Empirical Analyses, Randall Thomas, James D. Cox, Lynn Bai

Vanderbilt Law School Faculty Publications

Federal appellate courts have promulgated divergent legal standards for pleading fraud in securities fraud class actions after the Private Securities Litigation Reform Act (PSLRA). Recently, the U.S. Supreme Court issued a decision in Tellabs v. Makor Issues & Rights that could have resolved these differences, but did not do so. This article provides two significant contributions. We first show that Tellabs avoids deciding the hard issues that confront courts and litigants daily in the wake of the PSLRA's heightened pleading standard. As a consequence, the opinion keeps very much alive the circuits' disparate interpretations of the PSLRA's fraud pleading standard. …

Mapping The American Shareholder Litigation Experience, Randall Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those …

Reforming Securities Litigation Reform: Restructuring The Relationship Between Public And Private Enforcement Of Rule 10b-5, Amanda Rose

Vanderbilt Law School Faculty Publications

Commentators have long debated how to reform the controversial Rule 10b-5 class action without pausing to ask whether the game is worth the candle. Is private enforcement of Rule lOb-5 worth preserving, or might we be better off with exclusive public enforcement? This fundamental but neglected question demands attention today more than ever. An academic consensus has emerged that the typical Rule 1Ob-5 class action cannot be defended on compensatory grounds. That leaves the oft-cited, but undertheorized, rationale that private enforcement is a "necessary supplement" to the securities fraud deterrence efforts of the SEC. When this justification is critically examined, …

Public Pension Funds As Shareholder Activists: A Comment On Choi And Fisch, Randall Thomas

Vanderbilt Law School Faculty Publications

No abstract provided.