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Post Racialism?, André Douglas Pond Cummings

Law Faculty Scholarship

The 2008 election of President Barack Obama represents a halcyon moment in U.S. history. President Obama’s election begs a critical question: whether his nationwide landslide victory catapulted the United States, with its sordid racial past, into a truly post-racial place as many claim. While Obama’s election was possible due to important changes that have taken place in the United States in the past fifty years, the reality is that profound disparities continue to exist between minority and white Americans that show no sign of dissipating during this Obama presidency. Of these profound disparities, some of the most striking include those …

Fraud On The Market: An Action Without A Cause, Amanda Rose

Vanderbilt Law School Faculty Publications

This is a response to William W. Bratton & Michael L. Wachter, The Political Economy of Fraud on the Market, 160 U. PA. L. REV. 69 (2011). Bratton and Wachter argue that fraud-on-the-market class actions (FOTM) should be eliminated and replaced with stepped-up public enforcement efforts targeted at individual wrongdoers (rather than the corporate enterprise, the FOTM target of choice). In this Response, I do not disagree: My own scholarship has similarly emphasized the benefits of shifting away from FOTM to greater reliance on public enforcement mechanisms. Instead, I take the opportunity to elaborate on the deterrence and corporate governance …

Credit Derivatives, Leverage, And Financial Regulation's Missing Macroeconomic Dimension, Erik F. Gerding

Publications

Of all OTC derivatives, credit derivatives pose particular concerns because of their ability to generate leverage that can increase liquidity - or the effective money supply - throughout the financial system. Credit derivatives and the leverage they create thus do much more than increase the fragility of financial institutions and increase counterparty risk. By increasing leverage and liquidity, credit derivatives can fuel rises in asset prices and even asset price bubbles. Rising asset prices can then mask mistakes in the pricing of credit derivatives and in assessments of overall leverage in the financial system. Furthermore, the use of credit derivatives …

Racial Coding And The Financial Market Crisis, André Douglas Pond Cummings

Law Faculty Scholarship

The financial market crisis of 2008 continues to plague the United States and countries around the world. The underlying causes of the 2008 collapse are numerous, intricate and complex. Academic scholars, investigative reporters and leading economists are now deconstructing the multiplicity of failures that enabled the breathtaking meltdown that nearly collapsed the global economy. As this thoughtful deconstruction emerges, a disturbing trend has forcefully surfaced, wherein dozens of writers, scholars and thinkers, motivated by politics, limelight and self indulgence, attempt to fix a singular or foundational cause as “the” reason for the market crisis of 2008. In a current political …

Reforming The United States' Economic Model After The Failure Of Unfettered Financial Capitalism, Richard B. Freeman

Chicago-Kent Law Review

This Article is based on the 2009 Kenneth M. Piper Lecture at the Chicago-Kent College of Law. The 2008–2009 financial meltdown and ensuing economic developments have shown three things about modern capitalism: First, that unfettered financial markets remain the Achilles heel of capitalism with the capability of destroying economic stability and bringing misery to all. Second, that high-powered incentives paid to "talent" in finance are a fundamental cause of the excessive risk-taking, chicanery, and financial fraud that contributes to instability. Without a new compensation system that rewards banking and finance for contributing to sustainable economic progress rather than for economic …

Testimony Before The Financial Crisis Inquiry Commission, Miami, Florida September 21, 2010, William K. Black

Faculty Works

"Control frauds" are seemingly legitimate entities controlled by persons that use them as a fraud "weapon." (The person that controls the firm is typically the CEO, so that term is used in this testimony.) A single control fraud can cause greater losses than all other forms of property crime combined. Neo-classical economic theory, methodology, and praxis combine to optimize criminogenic environments that hyper-inflate financial bubbles and produce recurrent, intensifying financial crises. A criminogenic environment is one that creates such perverse incentives that it leads to widespread crime. Financial control frauds’ "weapon of choice" is accounting. Neoclassical theory, which dominates law …

How Trust Is Abused In Free Markets: Enron’S 'Crooked 'E’', William K. Black

Faculty Works

A market can have a lemon's problem when one party to the transaction has far superior information to the other and defects are not obvious. The classic bad car, the "lemon" led to the name for this theory. A lemon's market is inefficient. Both consumers and reputable sellers of high quality goods are harmed by the consumer's inability to distinguish superior goods. Frauds, who sell poor quality goods by misrepresenting quality are the only winners. Markets beset by lemon's problems may be improved by government intervention, which can aid both consumers and honest sellers.

In his article "How Trust is …

Electronic Tax Fraud - Are There "Sales Zappers" In Japan?, Richard Thompson Ainsworth

Faculty Scholarship

Although there is no public acknowledgement - in the press, in a court case, though any announcement by the Japanese National Tax Administration, or in any academic studies or papers - that Zappers and Phantom-ware are a fraud problem in Japan, a number of factors suggest that Japan may be very fertile ground for technology-assisted cash skimming fraud. Those factors include: (1) a high concentration of small to medium sized businesses; (2) the fact that the retail economy is highly cash-based; and (3) the high level of technology acceptance in the Japanese retail sector - electronic cash registers (ECRs) and …

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

Rewarding Outside Directors, Assaf Hamdani, Reinier Kraakman

Michigan Law Review

While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards. In this Article, we consider the use of rewards to motivate director vigilance. Measures to enhance director liability are commonly perceived to be too costly. We, however demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs. We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors. We conclude by providing preliminary sketches of two alternative reward regimes. While …

Illuminating Secrecy: A New Economic Analysis Of Confidential Settlements, Scott A. Moss

Michigan Law Review

Even the most hotly contested lawsuits typically end in a confidential settlement forbidding the parties from disclosing their allegations, evidence, or settlement amount. Confidentiality draws fierce criticism for harming third parties by concealing serious misdeeds like discrimination, pollution, defective manufacturing, and sexual abuse. Others defend confidentiality as a mutually beneficial pay-for-silence bargain that facilitates settlement, serves judicial economy, and prevents frivolous copycat lawsuits. This debate is based in economic logic, yet most analyses have been surprisingly shallow as to how confidentiality affects incentives to settle. Depicting a more nuanced, complex reality of litigation and settlement, this Article reaches several conclusions …

Laws Against Bubbles: An Experimental-Asset-Market Approach To Analyzing Financial Regulation, Erik F. Gerding

Publications

This article analyzes the effectiveness of proposed and actual securities, financial, and tax laws designed to prevent, or dampen the severity of asset price bubbles, including laws designed to mitigate excessive speculation. The article employs experimental asset market research to measure the effectiveness of these anti-bubble laws in correcting mispricings. Experimental asset markets represent complex simulations of stock markets in which subjects trade securities over a computer network. These markets allow scholars to test causal links between legal policies and market effects in ways that empirical research alone cannot. With these virtual markets, researchers can identify asset price bubbles - …

A Social Defense Of Sarbanes-Oxley, James Fanto

NYLS Law Review

No abstract provided.

Internal Whistleblowing And Sarbanes-Oxley Section 806: Balancing The Interests Of Employee And Employer, Kevin Rubinstein

NYLS Law Review

No abstract provided.

Illuminating Secrecy: A New Economic Analysis Of Confidential Settlements, Scott A. Moss

Publications

Even the most hotly contested lawsuits typically end in a confidential settlement forbidding the parties from disclosing their allegations, evidence, or settlement amount. Confidentiality draws fierce criticism for harming third parties by concealing serious misdeeds like discrimination, pollution, defective manufacturing, and sexual abuse. Others defend confidentiality as a mutually beneficial pay-for-silence bargain that facilitates settlement, serves judicial economy, and prevents frivolous copycat lawsuits. This debate is based in economic logic, yet most analyses have been surprisingly shallow as to how confidentiality affects incentives to settle. Depicting a more nuanced, complex reality of litigation and settlement, this Article reaches several conclusions …

Legislation And Legitimation: Congress And Insider Trading In The 1980s, Thomas W. Joo

ExpressO

Legislation and Legitimation:

Congress and Insider Trading in the 1980s

Abstract

Orthodox corporate law-and-economics holds that American corporate and securities regulation has evolved inexorably toward economic efficiency. That position is difficult to square with the fact that regulation is the product of government actors and institutions. Indeed, the rational behavior assumptions of law-and-economics suggest that those actors and institutions would tend to place their own self-interest ahead of economic efficiency. This article provides anecdotal evidence of such self-interest at work. Based on an analysis of legislative history—primarily Congressional hearings—this article argues that Congress had little interest in the economic policy …

Implementation Of Sarbanes-Oxley: New Rules For Lawyers And What Lawyers Think, Olga Yevglevskaya-Wayne

ExpressO

This paper discusses practical implications of Sarbanes-Oxley for lawyers. Emphasis is on the new federal rules of professional responsibility the Act sets up. The paper includes the views of various renowned practitioners interpreting and using these rules. The paper also contains suggestions for how the Securities and Exchange Commission could potentially improve those areas that are proving problematic for attorneys so as to better effectuate the purpose of this major new law, in light of its legislative history and intent, which are also discussed in the paper.

The Next Epidemic: Bubbles And The Growth And Decay Of Securities Regulation, Erik F. Gerding

Publications

This article explores how speculative bubbles undermine the effectiveness of securities regulations and spawn epidemics of securities fraud. A brief historical survey demonstrates that stock market bubbles almost invariably coincide with epidemics of securities fraud, and provides a compelling argument that the outbreak of fraud in the Enron era did not stem merely from factors unique to the 1990s, but from the dynamics of an asset price bubble as well.

Drawing on perspectives from securities law practice and economic theory, the article argues that bubbles dilute the deterrent effect of antifraud rules and promote deregulation. Both effects alter the calculus …

Share Price As A Poor Criterion For Good Corporate Law, Lynn A. Stout

Cornell Law Faculty Publications

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price.

Contemporary economic and corporate theory, as well as recent business history, nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, …

Detection Avoidance, Chris William Sanchirico

ExpressO

In practice, the problem of law enforcement is half a matter of what the government does to catch violators and half a matter of what violators do to avoid getting caught. In the theory of law enforcement, however, although the state’s efforts at "detection" play a decisive role, offenders’ efforts at "detection avoidance" are largely ignored. Always problematic, this imbalance has become critical in recent years as episodes of corporate misconduct spur new interest in punishing process crimes like obstruction of justice and perjury. This article adds detection avoidance to the existing theoretical frame with an eye toward informing the …

Fighting Fraud On Faith: Federal Securities Regulation And The Limits Of Disclosure, Shannon R. Selden

ExpressO

In the past ten years, Congress passed three major reform acts to address two diametrically opposed concerns: It first restrained what it believed was an excess of securities fraud litigation, then responded to an explosion of securities fraud. This Article contends that despite the competing provocations and ambitions of the reforms, they share an unwarranted adherence to the principle of disclosure as the best means to attack market malfeasance: The Article examines the basis for and consequences of that undeserved legislative fidelity. Applying behavioral economics and cultural theory to the recent legislation and its underpinnings, the Article concludes that a …

The Comparative Law And Economics Of Pure Economic Loss, Francesco Parisi, Vernon Valentine Palmer, Mauro Bussani

George Mason University School of Law Working Papers Series

Law and economics shows that a key factor in determining the optimal economic loss rule is found in the relationship between pure economic loss and social loss. Economic loss should be compensable in torts only to the extent that it corresponds to a socially relevant loss. In this paper we undertake a comparative evaluation of the economic loss rule to verify whether modern legal systems, although not formally adopting the economic criterion, define the exclusionary rule in light of efficiency considerations. The comparative analysis reveals that the substantive applications of the economic loss rule in European jurisdictions are consistent with …

Where There’S At-Will, There Are Many Ways: Redressing The Increasing Incoherence Of Employment At Will, Scott A. Moss

ExpressO

Employment at will, the doctrine that employees have no legal remedy for unfair terminations because they hold their jobs at the will of the employer, has become mired in incoherence. State courts praise the common law rule as “essential to free enterprise” and “central to the free market,” but in recent years they have riddled the rule with increasing exceptions, allowing employee claims for whistleblowing, fraud, etc. Yet states have neither rejected employment at will nor shown any consistency in recognizing exceptions. Strikingly, states cite the same rationales to adopt and reject opposite exceptions, as a case study of two …

Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary Investigation), Jonathan C. Lipson

ExpressO

This article presents the first in-depth exploration of third-party closing opinions, a common but curious – and potentially troubling -- feature of U.S. business law practice. Third-party closing opinions are letters delivered at the closing of most large transactions by the attorney for one party (e.g., the borrower) to the other party (e.g., the lender) offering limited assurance that the transaction will have legal force and effect.

Hundreds, if not thousands, of legal opinions are delivered every week. Yet, lawyers often complain that they create needless risk and cost, and produce little benefit. Closing opinions thus pose a basic question: …

Organizational Misconduct: Beyond The Principal-Agent Model, Kimberly D. Krawiec

ExpressO

This article demonstrates that, at least since the adoption of the Organizational Sentencing Guidelines in 1991, the United States legal regime has been moving away from a system of strict vicarious liability toward a system of duty-based organizational liability. Under this system, organizational liability for agent misconduct is dependant on whether or not the organization has exercised due care to avoid the harm in question, rather than under traditional agency principles of respondeat superior. Courts and agencies typically evaluate the level of care exercised by the organization by inquiring whether the organization had in place internal compliance structures ostensibly designed …

Where There's At-Will, There Are Many Ways: Redressing The Increasing Incoherence Of Employment At Will, Scott A. Moss

Publications

Employment at will, the doctrine holding that employees have no legal remedy for unfair terminations because they hold their jobs at the will of the employer, has become mired in incoherence. State courts praise the common law rule as "essential to free enterprise" and "central to the free market," but in recent years they increasingly have riddled the rule with exceptions, allowing employee claims for whistleblowing, fraud, etc. Yet states have neither rejected employment at will nor shown any consistency in recognizing exceptions. Strikingly, states cite the same rationales to adopt and reject opposite exceptions, as a case study of …

Going-Private Decisions And The Sarbanes-Oxley Act Of 2002: A Cross-Country Analysis, Ehud Kamar, Pinar Karaca-Mandic, Eric L. Talley

Faculty Scholarship

This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little …

Strict Liability For Gatekeepers: A Reply To Professor Coffee, Frank Partnoy

University of San Diego Law and Economics Research Paper Series

This article responds to a proposal by Professor John C. Coffee, Jr. for a modified form of strict liability for gatekeepers. Professor Coffee’s proposal would convert gatekeepers into insurers, but cap their insurance obligations based on a multiple of the highest annual revenues the gatekeepers recently had received from their wrongdoing clients. My proposal, advanced in 2001, would allow gatekeepers to contract for a percentage of issuer damages, after settlement or judgment, subject to a legislatively-imposed floor. This article compares the proposals and concludes that a contractual system based on a percentage of the issuer’s liability would be preferable to …

Protecting The Perception Of The Public Markets: At What Costs - The Effects Of Noisy Withdrawal On The Long Standing Attoney-Corporate Client Relationship, Todd J. Canni

St. Thomas Law Review

"Sarbanes-Oxley," this phrase has echoed in the minds of corporate attorneys for almost two years now. Over this period of time, most corporate attorneys have come to recognize the general breadth of this Act. Aside from having a basic understanding, however, do corporate attorneys know the true effects this Act and the corresponding proposal will have on the legal profession and the companies they represent? The scope of this article is concerned with just that. Specifically, this examination concerns the U.S. Securities and Exchange Commission's proposed "noisy withdrawal" provision. Briefly, noisy withdrawal refers to the final measures an attorney would …

What Caused Enron? A Capsule Social And Economic History Of The 1990s, John C. Coffee Jr.

Faculty Scholarship

The sudden explosion of corporate accounting scandals and related financial irregularities that burst over the financial markets between late 2001 and the first half of 2002 – Enron, WorldCom, Tyco, Adelphia and others – raises an obvious question: Why now? What explains the concentration of financial scandals at this moment in time? Much commentary has rounded up the usual suspects and placed the blame on a decline in business morality, an increase in "infectious greed," or other similarly subjective trends that cannot be reliably measured. Although none of these possibilities can be dismissed out of hand, approaches that simply reason …