Digital Commons Network^™

Bridging The Expectations Gaap In Financial Reporting, Neal F. Newman

Faculty Scholarship

The true nature of auditing publicly traded companies’ financial statements has been somewhat of an enigma to the general public. Due to this mystery, an “expectations gap” has formed between the public expectations of auditors’ roles and what the auditor actually does in their analysis of financial statements. Auditors are an extremely important piece of the financial reporting puzzle because they determine whether or not a company’s financial statements are a fair and accurate reflection of the company’s financial position, a determination that can be a major influence on how the financial strength of a company is perceived. Newman’s Article …

Capital Formation, The Sec, And Accredited Investors, Neal F. Newman, Lawrence J. Trautman, Brian Elzweig

Faculty Scholarship

Protecting the investing public, while simultaneously facilitating the efficient flow of capital needed by all new and growing businesses continues as a primary responsibility of the U.S. Securities and Exchange Commission (SEC). Enhancing the capital formation process is a necessary step in the creation of jobs and growth of any economy. Central to the SEC’s regulatory schematic is the proposition that some particularly sophisticated and wealthy investors require less protection than those with less knowledge, experience, and resources. During December 2023, for just the third time, the SEC staff issued a report examining the status of the natural person accredited …

Deepfakes Can Ruin Lives And Livelihoods – Would Owning The ‘Rights’ To Our Own Faces And Voices Help?, Graeme W. Austin, Jane C. Ginsburg

Faculty Scholarship

Not that long ago, the term “deepfake” wasn’t in most people’s vocabularies. Now, it is not only commonplace, but is also the focus of intense legal scrutiny around the world.

Known in legal documents as “digital replicas”, deepfakes are created by artificial intelligence (AI) to simulate the visual and vocal appearance of real people, living or dead.

Unregulated, they can do a lot of damage, including financial fraud (already a problem in New Zealand), political disinformation, fake news, and the creation and dissemination of AI-generated pornography and child sexual abuse material.

For professional performers and entertainers, the proliferation and increasing …

Present Case Studies Highlighting Practical Implications Of Architectural Design Choices, Emily Barnes, James Hutson

Faculty Scholarship

The interpretability of deep neural networks (DNNs) has become a crucial focus within artificial intelligence and machine learning, particularly as these models are increasingly used in high-stakes applications such as healthcare, finance, and autonomous driving. This article explores the impact of architectural design choices on the interpretability of DNNs, emphasizing the importance of transparency, trust, and accountability in AI systems. By presenting case studies and experimental results, the article highlights how different architectural elements—such as layer types, network depth, connectivity patterns, and attention mechanisms—affect model interpretability and performance. The discussion is structured into three main sections: real-world applications, architectural trade-offs, …

Specialist Directors, Yaron Nili, Roy Shapira

Faculty Scholarship

What determines the effectiveness of corporate boards? Corporate legal scholars usually approach this question by focusing on directors’ incentives, such as counting how many directors are independent or whether the roles of the CEO and Chair are separated. Yet on the ground, the focus has been shifting to directors’ skill sets and experience. Investors, regulators, and courts are now pressuring companies to appoint directors with specific types of expertise. In response, more and more companies are adding what we term “specialist directors”: a DEI director, a climate director, a cyber director, and so on. These changes in board composition could …

The Limits Of Individual Prosecutions In Deterring Corporate Fraud, Samuel W. Buell

Faculty Scholarship

Fifteen years after the largest financial scandal and economic crisis in a century, discussion of the problem of corporate crime too often borders on cliché. Endless calls from Congress, the media, the public, many scholars, and even the Justice Department itself, to recommit, over and over, to locking up more managers and executives to deter corporate wrongdoing portray the problem as relatively straightforward and blame legislative and executive failure of will. Through examination of the litigation record from over 100 prosecutions spanning the period from the 2008 financial crisis to the present, this Article presents evidence that relying on individual …

Enterprise, Liability, And Insolvency: An Essay In Honor Of Aaron Twerski, Edward Janger

Faculty Scholarship

No abstract provided.

How Do Prosecutors "Send A Message"?, Steven Arrigg Koh

Faculty Scholarship

The recent indictments of former President Trump are stirring national debate about their effects on American society. Commentators speculate on the cases’ impact outside of the courtroom — on the 2024 election, on political polarization, and on the future of American democracy. Such cases originated in the prosecutor’s office, begging the question of if, when, and how prosecutors should consider the societal effects of the cases they bring.

Indeed, prosecutors often publicly claim that they “send a message” when they indict a defendant. What, exactly, does this mean? Often, their assumption is that such messaging goes in one direction: indictment …

Social Enterprise Governance Post-Sox, Alina Ball

Faculty Scholarship

Social enterprises-nonprofit and for-profit businesses that use market-based strate­ gies to achieve social change for marginalized populations-demonstrate a new para­ digm for doing business in the United States. The Sarbanes-Oxley Act of 2002 ("SOX"), which transformed financial reporting and heightened internal controls for public com­ panies, has, perhaps unintentionally, also had an outsized influence on the development of social enterprise governance. The primary impact of SOX is found in the state-level auditing and reporting reforms imposed on large nonprofits. Moreover, "benefit re­ ports," the lynchpin of social enterprise state legislation, also mirror the SOX emphasis on transparency through third-party assessment. …

Reparations For Racial Wealth Disparities As Remedy For Social Contract Breach, Martha M. Ertman

Faculty Scholarship

Acute crises such as the COVID-19 pandemic and the 2008 financial meltdown exposed and exacerbated chronic racial wealth disparities. Those disparities accumulated over time as government and private actions—often involving contracts—systemically benefitted White Americans and institutions at the expense of African-Americans. This essay focuses on a private law mechanism—loan contracts—as one important contributor to systemic racial wealth disparities, labels particular lending contracts and related government action as breaches of the social contract, and proposes a restitution-based form of reparations as a remedy for that breach.

Crime And The Corporation: Making The Punishment Fit The Corporation, John C. Coffee Jr.

Faculty Scholarship

The debate over corporate criminal liability has long involved a fight between proponents who argue that corporate liability is necessary for effective deterrence and opponents who claim that it “punishes the innocent.” This Article agrees and disagrees with both sides. Corporate criminal liability could play a critical role in establishing an effective deterrent to organizational misconduct, but today it largely fails. Currently, we have a system that combines Deferred Prosecution Agreements, Non-Prosecution Agreements, and extraordinarily generous sentencing credits for compliance plans that have failed, and the result is a system that is more carrots than sticks. The evidence seems clear …

Board Gatekeepers, Yaron Nili

Faculty Scholarship

For the last decade, investors, scholars, and regulators have turned to independent directors in key leadership positions as a means to safeguard corporate boards’ ability to serve as a robust check on management’s power. As a result, a vast majority of public companies’ boards are now led by an Independent Chair, or, alternatively, include a Lead Independent Director.

These ostensible outsiders—which this Article calls “board gatekeepers”—are meant to be even more empowered and detached from management compared to the rest of the board. This allows them to serve an independent gatekeeping function—a necessary guardrail against management’s ability to exert undue …

Prosocial Fraud, Julia Y. Lee

Faculty Scholarship

This Article identifies the concept of prosocial fraud--that is, fraud motivated by the desire to help others. The current incentive-based legal framework focuses on deterring rational bad actors who must be constrained from acting on their worst impulses. This overlooks a less sinister, but more endemic species of fraud that is not driven by greed or the desire to take advantage of others. Prosocial fraud is induced by prosocial motives and propagated through cooperative norms. This Article argues that prosocial fraud cannot be effectively deterred through increased sanctions because its moral ambiguity lends itself to self-deception and motivated blindness. The …

Whistleblowers: Implications For Corporate Governance, Deborah A. Demott

Faculty Scholarship

Often overlooked in academic accounts of corporate governance and the actors who populate governance structures, whistleblowers are no more visible in formal governance frameworks. Within a corporation, whistleblowers may be lower-rank employees, not directors or officers; they may report perceptions of wrongdoing to others within the corporation or inform governmental or other actors who are externally situated. Nonetheless, it is striking how often retrospective accounts of corporate scandals involve episodes of internal whistleblowing associated with governance and compliance failures. This paper argues that incorporating whistleblowers into formal governance structures could spur more proactive involvement by directors in monitoring compliance with …

Examining Indenture Trustee Duties, Steven L. Schwarcz

Faculty Scholarship

This Chapter examines the duties of indenture trustees appointed under bond indentures. Although their post-default duties generally are subject to a prudent-person standard, indenture trustees have relatively little legal guidance concerning pre-default duties. The rise of activist investors, however, is making it increasingly critical to identify and understand how to perform those duties. This Chapter seeks to provide that understanding.

The Criminalization Of Foreign Relations, Steven Arrigg Koh

Faculty Scholarship

Overcriminalization has rightly generated national condemnation among policymakers, scholars, and practitioners alike. And yet, such scholarship often assumes that the encroachment of criminal justice stops at our borders. This Article argues that our foreign relations are also at risk of overcriminalization due to overzealous prosecution, overreaching legislation, and presidential politicization—and that this may be particularly problematic when U.S. criminal justice supplants certain nonpenal U.S. foreign policies abroad. This Article proposes three key reforms— presidential distancing, prosecutorial integration, and legislative de-escalation—to assure a principled place for criminal justice in foreign relations.

Executive Pay Clawbacks And Their Taxation, David I. Walker

Faculty Scholarship

Executive pay clawback provisions require executives to repay previously received compensation under certain circumstances, such as a downward adjustment to the financial results upon which their incentive pay was predicated. The use of these provisions is on the rise, and the SEC is expected to soon finalize rules implementing a mandatory, no-fault clawback requirement enacted as part of the Dodd-Frank legislation. The tax issue raised by clawbacks is this: should executives be allowed to recover taxes previously paid on compensation that is returned to the company as a result of a clawback provision? This Article argues that a full tax …

Intended Injury: Transferred Intent And Reliance In Climate Change Fraud, Wes Henricksen

Faculty Scholarship

No abstract provided.

Detecting Corporate Environmental Cheating, Seema Kakade, Matt Haber

Faculty Scholarship

As evidenced by the Volkswagen diesel emissions scandal, corporations cheat on environmental regulations. Such scandals have created a surge in the academic literature in a wide range of areas, including corporate law, administrative law, and deterrence theory. This article furthers that literature by focusing on one particular area of corporate cheating—the ability to learn of the cheating in the first place. Detecting corporate cheating requires significant information about corporate behavior, activity, and output. Indeed, most agencies have broad statutory authority to collect such information from corporations, through targeted records requests, and inspection. However, authority is different from ability. The corporate …

Addressing The Auditor Independence Puzzle: Regulatory Models And Proposal For Reform, Martin Gelter, Aurelio Gurrea-Martínez

Faculty Scholarship

Auditors play a major role in corporate governance and capital markets. Ex ante, auditors facilitate firms’ access to finance by fostering trust among public investors. Ex post, auditors can prevent misbehavior and prevent financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors must perform their functions in an independent manner. Unfortunately, auditors are often subject to conflicts of interest, for example, resulting from the provision of nonaudit services but also because of the mere fact of being hired and paid by the audited company. Therefore, even if …

Complex Compliance Investigations, Veronica Root Martinez

Faculty Scholarship

Whether it is a financial institution like Wells Fargo, an automotive company like General Motors, a transportation company like Uber, or a religious organization like the Catholic Church, failing to properly prevent, detect, investigate, and remediate misconduct within an organization’s ranks can have devastating results. The importance of the compliance function is accepted within corporations, but the reality is that all types of organizations—private or public—must ensure their members com­ply with legal and regulatory mandates, industry standards, and internal norms and expectations. They must police thousands of members’ compli­ance with hundreds of laws. And when compliance failures occur at these …

Indenture Trustee Duties: The Pre-Default Puzzle, Steven L. Schwarcz

Faculty Scholarship

This Article addresses a topic at the intersection of finance, agency, contract, and trust law: the pre-default duties of an indenture trustee for bondholders. The existing scholarship on indenture trustee duties focuses on the post-default scenario, when the indenture trustee is required to act as a prudent person in like circumstances on behalf of the bondholders. No prior scholarship addresses an indenture trustee’s predefault duties. It is critical to try to define those duties because activist investors in the $42-trillion-plus bond market increasingly are making pre-default demands on indenture trustees, requiring them to know how to respond.

Class Action Squared: Multistate Actions And Agency Dilemmas, Elysa Dishman

Faculty Scholarship

As the Supreme Court continues to restrict the reach of private class actions, numerous commentators have championed public enforcement actions by state attorneys general (AGs) as a superior alternative to hold corporations accountable for misconduct. While AG actions fill some of the void left by the forced retreat of the private class action, few scholars have seriously considered whether the agency problems that exist in private class actions also occur in AG actions. And, until now, no scholar has recognized the unique agency problems that arise when AGs act together in multistate actions.

Multistate actions are made up of two …

Professionals, Politicos, And Crony Attorneys General: A Historical Sketch Of The U.S. Attorney General As A Case For Structural Independence, Jed Handelsman Shugerman

Faculty Scholarship

We assume that the nineteenth century was an era of patronage, and the twentieth century marked the rise of professionalization. But the Office of the Attorney General reveals an opposite pattern — a troubling rise of cronyism in the DOJ from the early twentieth century.

This Article uses the rough categories of “professional,” “politico,” and “insider” or “crony,” based on each attorney general's background and how he or she rose to the office (rather than based upon their performance in the office.) Most AGs in the nineteenth century were "politicos" (major established political figures) or "professionals" (experienced lawyers relatively separate …

Regulating Offshore Finance, William J. Moon

Faculty Scholarship

From the Panama Papers to the Paradise Papers, massive document leaks in recent years have exposed trillions of dollars hidden in small offshore jurisdictions. Attracting foreign capital with low tax rates and environments of secrecy, a growing number of offshore jurisdictions have emerged as major financial havens hosting thousands of hedge funds, trusts, banks, and insurance companies.

While the prevailing account has examined offshore financial havens as “tax havens” that facilitate the evasion or avoidance of domestic tax, this Article uncovers how offshore jurisdictions enable corporations to evade domestic regulatory law. Specifically, recent U.S. Supreme Court cases restricting the geographic …

What Is ‘Dark Money’? 5 Questions Answered, Richard Briffault

Faculty Scholarship

With the 2020 campaign season upon us, “dark money” is again in the news.

Maine’s Republican Sen. Susan Collins has decried what she contends is a “dark money” campaign against her. Montana’s Gov. Steve Bullock has made opposition to dark money a centerpiece of his Democratic presidential campaign.

But what exactly is “dark money,” and why is it considered a problem?

As a law professor who studies campaign finance, I’d like to answer those questions and explain how improved disclosure laws could shed some light on dark money.

Regulation A+: New And Improved After The Jobs Act Or A Failed Revival?, Neal Newman

Faculty Scholarship

This piece is a follow-up to a previous article that I wrote on Regulation A. In April of 2012, then President Barack Obama signed into law the Jumpstart our Business Start Ups (JOBS) Act. Under the JOBS Act’s Title IV, Congress made revisions to a private offering exemption referred to as Regulation A with the intention of reviving an exempt offering option that was close to dormant. The primary Regulation A criticism being that issuers were required to do too much in terms of providing business and financial disclosure where the most the issuer could raise though a Regulation A …

Risk And Anxiety: A Theory Of Data Breach Harms, Daniel Solove, Danielle K. Citron

Faculty Scholarship

In lawsuits about data breaches, the issue of harm has confounded courts. Harm is central to whether plaintiffs have standing to sue in federal court and whether their claims are viable. Plaintiffs have argued that data breaches create a risk of future injury from identity theft or fraud and that breaches cause them to experience anxiety about this risk. Courts have been reaching wildly inconsistent conclusions on the issue of harm, with most courts dismissing data breach lawsuits for failure to allege harm. A sound and principled approach to harm has yet to emerge, resulting in a lack of consensus …

Why Do Prosecutors Say Anything? The Case Of Corporate Crime, Samuel W. Buell

Faculty Scholarship

Criminal procedure law does not require prosecutors to speak outside of court. Professional regulations and norms discourage and sometimes prohibit prosecutors from doing so. Litigation often rewards strategic and tactical maintenance of the element of surprise. Institutional incentives encourage bureaucrats, especially those not bound by procedural requirements of administrative law, to decline to commit themselves to future action. In the always exceptional field of corporate crime, however, the Department of Justice and federal line prosecutors have developed practices of signaling and describing their exercise of discretion through detailed press releases, case filings, and policy documents. This contribution to a symposium …

Reconceptualizing The Whistleblower's Dilemma, Miriam Baer

Faculty Scholarship

No abstract provided.