Securities Law Commons^™

The Uneasy Case For The Inside Director, Lisa Fairfax

All Faculty Scholarship

In the wake of recent scandals and the economic meltdown, there is nearly universal support for the notion that corporations must have independent directors. Conventional wisdom insists that independent directors can more effectively monitor the corporation and prevent or otherwise better detect wrongdoing. As the movement to increase director independence has gained traction, inside directors have become an endangered species, relegated to holding a minimal number of seats on the corporate board. This Article questions the popular trend away from inside directors by critiquing the rationales in favor of director independence, and assessing the potential advantages of inside directors. This …

Are Investors’ Gains And Losses From Securities Fraud Equal Over Time? Theory And Evidence, Alicia J. Davis

Law & Economics Working Papers

Most leading securities regulation scholars argue that compensating securities fraud victims is inefficient. They maintain that because diversified investors that trade frequently are as likely to gain from trading in fraud-tainted stocks as they are to suffer harm from doing so, these investors should have no expected net losses from fraud over the long term. This assertion, which analogizes trading in fraud-tainted stocks to participating in a coin toss game in which players win $1 on heads and lose $1 on tails, is problematic for a number of reasons. First, even if we accept this analogy, probability theory holds that …

Securities Law In The Roberts Court: Agenda Or Indifference?, Adam C. Pritchard

Law & Economics Working Papers

Historically, securities law has not been a high priority for the Supreme Court. The first five years of the Roberts Court, however, suggest an upsurge of interest in the federal securities laws, with nine cases decided, a significant increase from the Rehnquist Court’s average. These numbers are deceptive. Analysis of the opinions deciding these cases – and more importantly, the issues debated by the justices – suggests that the Court is not interested in the substance of the securities laws or the policies that animate them. Instead, securities law serves as a backdrop for debates over statutory interpretation and the …

The Fsa, Integrated Regulation, And The Curious Case Of Otc Derivatives, Dan Awrey

Cornell Law Faculty Publications

With a view to better understanding the optimal structure of financial regulation, this paper tests prevailing theoretical hypotheses respecting the efficiency and overall desirability of integrated financial regulation relative to competing institutional models. This test is conducted through the lens of a comparative case study examining the approaches adopted by (fragmented) U.S financial regulators and the (integrated) UK Financial Services Authority (FSA) toward the myriad of regulatory challenges posed by the emergence, growth, and systemic importance of over-the-counter (OTC) derivatives markets. More specifically, this paper examines why, despite the numerous theoretical advantages of integrated regulation, the FSA adopted a non-interventionist …

Is Our Economy Safe? A Proposal For Assessing The Success Of Swaps Regulation Under The Dodd-Frank Act, Michael Greenberger

Faculty Scholarship

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The central goal of the Dodd-Frank Act is to ensure that all standardized derivates products are regulated. The Act requires these trades be fully transparent and backed by adequate capital. The central question for evaluating the success of the Dodd-Frank Act is simple but profound: Has the Dodd-Frank Act made the economy any safer from the threat of another economic meltdown? This paper introduces a number of metrics that can be used to assess the success of the Dodd-Frank Act.

Managing Corporate Federalism: The Least-Bad Approach To The Shareholder Bylaw Debate, Christopher M. Bruner

Scholarly Works

Over recent decades, shareholders in public corporations have increasingly sought to augment their own power - and, correlatively, to limit the power of boards - through creative use of corporate bylaws. The bylaws lend themselves to such efforts because enacting, amending, and repealing bylaws are essentially the only corporate governance actions that shareholders can undertake unilaterally. In this Article I examine thecontested nature of bylaws, the fundamental issues of corporate power and purpose that they implicate, and the differing ways in which state and federal lawmakers and regulators may impact the debate regarding thescope of the shareholders' bylaw authority.

The …

The Redemption Puzzle, Reuven S. Avi-Yonah

Articles

After the adoption of partial integration in 2003, there has been only a modest rise in dividends, but a sixfold increase in redemptions. This article argues that the explanation for that lies in the different treatment of dividends and capital gains to foreign shareholders and that Congress should respond by making sections 302 and 304 inapplicable to foreign shareholders.

The Price Of Pay To Play In Securities Class Actions, Stephen Choi, Drew T. Johnson-Skinner, Adam C. Pritchard

Law & Economics Working Papers

This paper studies the effect of campaign contributions to lead plaintiffs — “pay to play’’ — on the level of attorneys’ fees in securities class actions. We find that state pension funds generally pay lower attorneys’ fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity. This differential disappears, however, when we control for campaign contributions made to officials with influence over state pension funds. Thus, pay to play appears to increase agency costs borne by shareholders in securities class actions.

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

All Faculty Scholarship

The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Happy Talk And The Stock Market, David A. Westbrook

Journal Articles

No abstract provided.

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

Faculty Articles and Other Publications

Private suits have long been championed as a necessary mechanism not only to compensate investors for harms they suffer from financial frauds but also to enhance the deterrence of wrongdoing. But many critics have claimed that there is a hidden dark side to the successful prosecution of a securities class action. In this paper, we shed light on these issues by examining whether the revelation of earlier misstatements, the initiation of private suit, and the payment of a substantial settlement, weaken the defendant firm so that the firm is permanently worse off as a consequence of the settlement.

We find …

Investment Promotion Agencies And Sustainable Fdi: Moving Toward The Fourth Generation Of Investment Promotion, Columbia Center On Sustainable Investment, World Association Of Investment Promotion Agencies

Columbia Center on Sustainable Investment Staff Publications

In April and May 2010, CCSI supported WAIPA to conduct its annual survey. This report, Investment Promotion Agencies and Sustainable FDI: Moving toward the Fourth Generation of Investment Promotion, benchmarks the responses of IPAs regarding sustainable FDI and its four dimensions (economic development, environmental sustainability, social development, governance) and finds, among other things, that these are unevenly addressed by investment promotion strategies and investment incentives. The report also draws attention to the desirability of attracting sustainable FDI, rather than focusing on volume of investment alone.

In 2017, CCSI also helped the World Association of Investment Promotion Agencies (WAIPA) to conduct …

Punitive Damages In Securities Arbitration: An Empirical Study, Stephen Choi, Theodore Eisenberg

Cornell Law Faculty Publications

This article provides the first empirical analysis of punitive damages in securities arbitrations. Using a data set of over 6,800 securities arbitration awards, we find that claimants prevailed in 48.9 percent of arbitrations and that 9.1 percent of those claimant victories included a punitive damages award. The existence of a punitive damages award was associated with claims that suggested egregious misbehavior and with claims that provided higher compensatory awards. The pattern of punitive awards is more consistent with a traditional view of punitive damages that incorporates a retributive component than with a law and economics emphasis on efficient deterrence. We …

The Role Of Derivatives In The Financial Crisis – Testimony Before The Financial Crisis Inquiry Commission, June 30, 2010, Michael Greenberger

Congressional Testimony

It is now almost universally accepted that the unregulated multi-trillion dollar OTC CDS market helped foment a mortgage crisis, then a credit crisis, and finally a ―once-in-a-century systemic financial crisis that, but for huge U.S. taxpayer interventions, would have in the fall of 2008 led the world economy into a devastating Depression. Before explaining below the manner in which credit default swaps fomented this crisis, it worth citing in the margin those many economists, regulators, market observers, and financial columnists who have described the central role unregulated CDS played in the crisis.

Even those once skeptical of arguments about the …

Corporate Governance In The Courtroom: An Empirical Analysis, Jessica M. Erickson

Law Faculty Publications

Conventional wisdom is that shareholder derivative suits are dead. Yet this death knell is decidedly premature. The current conception of shareholder derivative suits is based on an empirical record limited to suits filed in Delaware or on behalf of Delaware corporations, leaving suits outside this sphere in the shadows of corporate law scholarship. This Article aims to fill this gap by presenting the first empirical examination of shareholder derivative suits in the federal courts. Using an original, hand-collected data set, my study reveals that shareholder derivative suits are far from dead. Shareholders file more shareholder derivative suits than securities class …

Evolutionary Enforcement At The Securities And Exchange Commission, Jayne W. Barnard

Faculty Publications

Hundreds of critics in the past eighteen months have heaped abuse on the SEC Enforcement Division. How could the Division have missed so much misbehavior on Wall Street? How could the Division's young lawyers have been charmed by Bernie Madoff and thwarted from discovering his terrible crimes? Most critics seem to agree that the Division's most urgent needs include developing substantially more financial sophistication among Division lawyers and investigators; better communications within the Commission and with other federal agencies; and a meaningful system for handling tips and processing information. The SEC's response to its critics has been remarkable. The Commission …

Fiduciary Exemption For Public Necessity: Shareholder Profit, Public Good, And The Hobson's Choice During A National Crisis, Robert J. Rhee

UF Law Faculty Publications

This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of …

Placebo Ethics, Usha Rodrigues, Mike Stegemoller

Scholarly Works

While there are innumerable theories on the best remedy for the current financial crisis, there is agreement on one point, at least: increased transparency is good. We look at a provision from the last round of financial regulation, the Sarbanes Oxley Act of 2002 (SOX), which imposed disclosure requirements tailored to prevent some of the kinds of abuses that led to the downfall of Enron. In response to Enron's self-dealing transactions, Section 406 of SOX required a public company to disclose its code of ethics and to disclose immediately any waivers from that code the company grants to its top …

Reframing Financial Regulation, Charles K. Whitehead

Cornell Law Faculty Publications

Financial regulation today is largely framed by traditional business categories. The financial markets, however, have begun to bypass those categories, principally over the last thirty years. Chief among the changes has been convergence in the products and services offered by traditional intermediaries and new market entrants, as well as a shift in capital-raising and risk-bearing from traditional intermediation to the capital markets. The result has been the reintroduction of old problems addressed by (but now beyond the reach of) current regulation, and the rise of new problems that reflect change in how capital and financial risk can now be managed …

Voting Power Without Responsibility Or Risk--How Should Proxy Reform Address The Decoupling Of Economic And Voting Rights?, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

How To Improve Retail Investor Protection After The Dodd-Frank Wall Street Reform And Consumer Protection Act, Barbara Black

Faculty Articles and Other Publications

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission authority to address two issues especially important to retail investors. First, section 913 requires the SEC to conduct a six-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and specifically authorizes the SEC to establish a fiduciary duty for broker dealers. Second, section 921 grants the SEC authority to prohibit the use of predispute arbitration agreements that would require investors to arbitrate future disputes arising under the federal securities laws and regulations or the rules of a self-regulatory organization. …

Introduction: The Sec At 75, Barbara Black

Faculty Articles and Other Publications

This Introduction begins with a brief look back at the creation of the SEC and then examines the present-day agency's expression of its mission. It next reviews the Blueprint's assessment of the agency and its proposal for reform and then turns to the Obama Administration's Financial Regulatory Reform and its proposals relating to the SEC. Finally, this Introduction describes five issues to which the panelists paid particular attention: the SEC's mission, competition among financial markets, the proposal to merge the SEC and the Commodity Futures Trading Commission (CFTC), the role of financial market networks in systemic risk regulation, and the …

Cleaning The Murky Safe Harbor For Forward-Looking Statements: An Inquiry Into Whether Actual Knowledge Of Falsity Precludes The Meaningful Cautionary Statement Defense, Allan Horwich

Faculty Working Papers

Congress included a safe harbor for forward-looking statements in the 1995 Private Securities Litigation Reform Act. This affords certain issuers and other specified persons limited protection from civil liability for damages under the Securities Act of 1933 and the Securities Exchange Act of 1934 when the projections or objectives in a forward-looking statement are not realized, i.e., turn out to be false. The safe harbor contains two principal elements, in addition to protection for "immaterial" statements: one prong where projections are accompanied by "meaningful cautionary statements," the second prong where the plaintiff fails to prove that the speaker made the …

Guilty By Association? Regulating Credit Default Swaps, Houman B. Shadab

Articles & Chapters

A wide range of U.S. policymakers initiated a series of actions in 2008 and 2009 to bring greater regulation and oversight to credit default swaps (CDSs) and other over-the-counter derivatives. The policymakers’ stated motivations echoed widely expressed criticisms of the regulation, characteristics, and practices of the CDS market, and focused on the risks of the instruments and the lack of public transparency over their utilization and execution. Certainly, the misuse of certain CDSs enabled mortgage-related security risk to become overconcentrated in some financial institutions.

Yet as the analysis in this Article suggests, failing to distinguish between CDS derivatives and the …

Breaking Bucks In Money Market Funds, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the "breaking of the buck" in the $3 trillion money market - a debacle at the fulcrum of the 2008 financial meltdown - the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon …

Breaking Bucks: Sec Regulation By Obfuscation, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis profoundly contradicts widely accepted theoretical and regulatory approaches to financial oversight. More alarmingly, the SEC’s newest rules increase rather than decrease the likelihood of future failures in money market funds and the broader capital markets.

Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market …

Investment Indiscipline: A Behavioral Approach To Mutual Fund Jurisprudence, William A. Birdthistle

All Faculty Scholarship

Next Term, in Jones v. Harris, the Supreme Court will be called upon to resolve philosophical divergences on a massive, critical, yet academically slighted subject: the dysfunctional system through which almost one hundred million Americans attempt to save more than ten trillion dollars for their retirement. When this case was in the Seventh Circuit, two of the foremost theorists of law and economics, Chief Judge Frank Easterbrook and Judge Richard Posner, disagreed vociferously on competing analyses of the investment industry. The Supreme Court’s ruling will not only resolve the intricate fiduciary and doctrinal issues of this dispute but also have …

Banks And Brokers And Bricks And Clicks: An Evaluation Of Finra's Proposal To Modify The "Bank Broker-Dealer Rule", Jill I. Gross

Elisabeth Haub School of Law Faculty Publications

As discussed in this article, the proposed rule change protects bank customers who may be solicited for the purchase of investment products and services, but only to a limited extent. It does not rectify sales practices of broker-dealers--affiliated with financial institutions--which tend to confuse, and even mislead, financially unsophisticated investors of modest means who can least afford to be exposed to excessive risk. Additionally, the proposed rule change adds no meaningful surveillance, inspection, enforcement, or punitive mechanisms to prevent and/or redress insidious practices that are akin to “bait and switch” tactics and are particularly effective against financially unsophisticated investors. In …

Fiduciary Exemption For Public Necessity: Shareholder Profit, Public Good, And The Hobson's Choice During A National Crisis, Robert J. Rhee

Faculty Scholarship

This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of …

Freeze-Outs: Transcontinental Analysis And Reform Proposals, Marco Ventoruzzo

Journal Articles

One of the most crucial, but systematically neglected, comparative differences between corporate law systems in Europe and in the United States concerns the regulations governing freeze-out transactions in listed corporations. Freeze-outs can be defined as transactions in which the controlling shareholder exercises a legal right to buy out the shares of the minority, and consequently delists the corporation and brings it private. Beyond this essential definition, the systems diverge profoundly.

This gap exists despite the fact that minority freeze-outs are one of the most debated issues in corporate law, in the public media, in a vast body of scholarly work …