Law Commons^™

Heart Of Darkness: The Problem At The Core Of The Us Proxy System And Its Solution, David C. Donald

David C. Donald

Voting rights are a shareholder’s main legal channel to exercise control internally over the company in which she invests her savings. Under the corporate law of the US states, a shareholder is someone registered on the stockholders’ list, not a person who has title to shares. When in the 1970s transferring paper certificates became impossible on high-volume markets, Congress ordered that the market’s securities be put into the vaults of a central depository and that claims against the depository’s accounts be transferred rather than the shares themselves. Once this was done, however, issuers no longer knew who owned their shares; …

A "New" Fiduciary Duty For Stockbrokers? Keeping The Dodd-Frank Rule Debate In Perspective, Robert N. Rapp

Robert N Rapp

No abstract provided.

Is Three A Crowd? The Role Of The Courts In Sec Settlements, Samantha A. Dreilinger

samantha a dreilinger

In August 2009 Judge Jed Rakoff made the unprecedented decision to reject a settlement proposed by the SEC and Bank of America. Although Judge Rakoff eventually approved the agreement, his decision appears to have sparked a trend of judicial scrutiny for SEC settlements. In contrast with the long tradition of judicial deference, some courts are now requiring evidence that the proposed provisions are "fair, reasonable and in the public interest." In order to promote justice, judges are also questioning light penalties and why executives are not being held accountable for the alleged misconduct of a corporate defendant. Critics of this …

Is The Public Utility Holding Company Act A Model For Breaking Up The Banks That Are Too-Big-To-Fail?, Roberta S. Karmel

Roberta S. Karmel

ABSTRACT FOR “IS THE PUBLIC UTILITY HOLDING COMPANY ACT A MODEL FOR BREAKING UP THE BANKS THAT ARE TO-BIG-TO-FAIL?”

BY ROBERTA S. KARMEL

During the financial crisis of 2007-08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital …

Confidential Witnesses In Securities Litigation, Gideon Mark

Gideon Mark

This Article examines the two primary issues associated with the almost universal use by plaintiffs of confidential witnesses in class action securities litigation. The first issue is whether the information provided by such witnesses should be steeply discounted in light of a 2007 decision by the United States Supreme Court concerning the pleading of scienter in securities cases. The second issue is whether the identities of confidential witnesses should be discoverable in advance of trial. This Article concludes that: (1) courts should not discount information provided by confidential witnesses for use in securities fraud complaints if the witnesses are described …

A Japanese Calpers Or A New Model For Institutional Investor Activism? Japan's Pension Fund Association And The Emergence Of Shareholder Activism In Japan, Bruce Aronson

Bruce Aronson

If activist institutional investors are arguably the primary external monitors of management under leading corporate governance systems in the United States and the United Kingdom, who might assume that role in other countries? And, more importantly, what activist shareholder strategies may be possible under different corporate governance systems and operating environments that are generally less supportive of shareholder activism than the United States and the United Kingdom? This Article seeks to address that question through a comparison of the well-known strategy of CalPERS with that of a rare, real-world example of institutional investor activism outside of the “Anglo-Saxon” model—Japan’s Pension …

The Dangerous Illusion Of International Financial Standards And The Legacy Of The Financial Stability Forum, Cally Jordan

Cally Jordan

In the aftermath of the Asian Financial Crisis, and the criticism directed towards the International Monetary Fund, in particular, for not having seen it coming, the Financial Stability Forum (FSF) was created in 1999 under a mandate from the G7 ministers of finance and central bank governors. The Asian Financial Crisis arose suddenly, spread rapidly and spared neither developed nor developing economies in the region, although some fared much better than others. In retrospect, the causes of the crisis were obvious and the consequences predictable. “Contagion” entered the financial lexicon. Thus the role of the FSF was to promote financial …

The Financial Reform Act: Will It Succeed In Reversing The Causes Of The Subprime Crisis And Prevent Future Crises?, Charles W. Murdock

Charles W. Murdock

Summary: The Financial Reform Act: Will It Succeed in Reversing the Causes of the Subprime Crisis and Prevent Future Crises? By: Professor Charles W. Murdock

The current financial crisis, which could have plunged the world into a financial abyss similar to the Great Depression, is far from resolved. The financial institutions, which this article asserts caused the crisis, have returned to profitability and have paid billions of dollars in bonuses, while ordinary Americans have borne the brunt of the meltdown, with formal unemployment hanging around the 10% mark. This has caused some to comment that profits have been privatized and …

The Rise And Fall Of Managerial Adaptive Responses To Incentive Pay, Sharon Hannes

Sharon Hannes

A commonly-voiced argument ties the current financial crisis to prevailing executive compensation practices. Huge stock-option packages and annual bonuses, the claim goes, caused managers to concentrate on the short-run and overlook the downside of risk-taking. But why did crisis emerge only recently, even though such incentive pay schemes are hardly a new phenomenon? This paper argues that for a long period of time, from the beginning of the 1990s until the beginning of the twenty-first century, managers employed a variety of adaptive tactics in response to option-based compensation and other risk-inducing pay schemes. These practices enabled executives to enrich themselves …

Insider Trading As Misfeasance: The Yielding Of The Fiduciary Requirement, Joanna B. Apolinsky

Joanna B Apolinsky

Mark Cuban is a billionaire entrepreneur and active investor. He has also made news of late as a defendant in an action brought against him by the Securities Exchange Commission (SEC) for insider trading. The SEC alleged that Cuban violated §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 when he sold his Mamma.com stock after the company’s CEO informed him of material, confidential information regarding a planned securities offering by Mamma.com. Prior to informing Cuban of the offering, Mamma.com’s CEO first secured Cuban’s assurance that he would keep the information confidential. Cuban agreed. And he ended the …

A Justified Assault Upon The Citadel Of Privity And The First Amendment, Joseph G. Bunn Esq.

Joseph G Bunn Esq.

The active involvement of credit rating agencies (“CRAs”) in the structured finance market and the recent financial crisis is an adequate basis for investors to pursue claims against CRAs for negligent misrepresentation. Traditionally, CRAs have qualified for protection from suit by investors under the privity doctrine and under the First Amendment. CRAs qualified for protection under the privity doctrine because CRAs are not typically in a contractual relationship with investors who utilize their ratings. CRAs qualified for protection under the First Amendment because courts viewed their ratings as “speech” regarding public matters. However, this dual protection is limited in certain …

Stock Broker Standards Of Conduct – Principles, Rules And Fiduciary Duties, Thomas Lee Hazen

Thomas Lee Hazen

In recent years there has been concern as to the adequacy of broker-dealer regulation. SEC and self regulatory organization rulemaking addresses specific types of broker-dealer conduct but by and large the regulation has been based on principles and standards rather than voluminous detailed rules specifying prohibited conduct. In particular, a good deal of broker-dealer conduct is addressed under the umbrella of regulating according to fair and just principles of trade. Also, much of the SEC’s rulemaking authority is based on the ability to prohibit fraudulent, manipulative, and deceptive devices. It also has been suggested that broker-dealers should be subject to …

Stock Broker Standards Of Conduct – Principles, Rules And Fiduciary Duties, Thomas Lee Hazen

Thomas Lee Hazen

In recent years there has been concern as to the adequacy of broker-dealer regulation. SEC and self regulatory organization rulemaking addresses specific types of broker-dealer conduct but by and large the regulation has been based on principles and standards rather than voluminous detailed rules specifying prohibited conduct. In particular, a good deal of broker-dealer conduct is addressed under the umbrella of regulating according to fair and just principles of trade. Also, much of the SEC’s rulemaking authority is based on the ability to prohibit fraudulent, manipulative, and deceptive devices. It also has been suggested that broker-dealers should be subject to …

Analysis Of The 2010 Sec -- Dell Inc Accounting Fraud Settlement, Barrie Hansen Jd (Hons)

Barrie Hansen JD (Hons), LLM

Quis custodiet ipsos custodes? “Who shall guard the guards?” Juvenal, Satires The rule of law is dependent on public perception that there is consistency or parity in the application and enforcement of the law. The Securities and Exchange Commission (SEC) has recently been in sharp focus because of a perception that it has been ineffective in enforcing the law. The SEC should, as a matter of principle and public policy, be required to achieve a better result for injured parties than they would have otherwise achieved under the common law. Justice Mason of the High Court of Australia in Lowe …

Financial Market Regulation After The Crisis: The Case For Hedge Fund Regulation Via Basel Iii, Wulf A. Kaal Ph.D.

Wulf A. Kaal Ph.D.

Hedge funds have been blamed for their part in the financial market crisis of 2008-09. The exact role and the scope of hedge funds’ involvement in the financial crisis is unclear. Regulators increasingly scrutinize the hedge fund industry worldwide. Regulation of hedge funds could help minimize moral hazard, social externalities and systemic risk generated by the hedge fund industry. The paper evaluates recent regulatory changes including the US Dodd-Frank Act, the European Union Directive on Alternative Investment Fund Managers and other pertinent regulation. Using the methodological tool of New Institutional Economics, the paper provides an impact analysis of regulatory changes, …

Disintermediating Avarice: A Legal Framework For Commercially Sustainable Microfinance, Steven L. Schwarcz

Steven L Schwarcz

Although microfinance has emerged as a key tool to alleviate poverty, the need for microfinance lending vastly exceeds the amount of funds that can be raised from charitable donors. Commercial bank lending is supplementing donor money, but microfinance loans made by banks are expensive and sometimes even exploitive. This article examines how innovative legal structures can enable microfinance loans to be funded directly from lower-cost, and virtually limitless, capital market sources by removing, or “disintermediating,” the need for a bank intermediary. In that context, the article identifies and attempts to resolve the resulting law-and-business issues of first impression and also …

Effectuating Disclosure Under The Williams Act, Ronald J. Colombo

Ronald J Colombo

The importance of adequate, timely disclosure of critical information to investors and the capital markets has never been more greatly appreciated. In furtherance of such disclosure, within the specific context of rapid stock accumulations that implicate potential changes in corporate control, Congress passed the Williams Act in 1968. Unfortunately, thanks largely to an early Supreme Court decision interpreting the Act, the remedies available to private litigants foster noncompliance and gamesmanship. Fortunately, this decision is open to reinterpretation – and arguably ripe for relegation as bad law. Such a turn of events would give rise to a remedial regime that furthers, …

Lessons From Single-Company Event Studies: The Importance Of Controlling For Company-Specific Events, Scott D. Hakala

Scott D Hakala

Single-company event studies are commonly employed in applied practice, such as in analyzing market efficiency, reliance, and damages in securities litigation. However, the presence of significant company-specific events among the observations used to estimate the market model results in significantly biased, overstated standard errors (a well-known omitted variables problem) and less reliable coefficient estimates in such studies. This is a frequently over-looked or neglected issue that renders the statistical inferences in single-company event studies employing using more traditional event study techniques biased and often unreliable. This paper demonstrates through simulation and actual examples that, even allowing for errors in implementation, …

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

Barbara Black

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission the authority to deal with 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 brokers and dealers. Second, section 921 grants the SEC the 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 …

Comment On Enterprise Duty To Serve Underserved Markets, David J. Reiss

David J Reiss

FHFA invited further comment on the merit of considering properties without affordable use restrictions as part of the Enterprises’ duty to serve, noting that affordable housing preservation “encompasses efforts to keep unsubsidized properties in good condition while maintaining affordability for low- and moderate-income households.” (Page 32102)

FHFA should be certain that any aid given to buildings without affordable use restrictions will actually be passed on in large part to their tenants, whether through lower rents or improved conditions. I question whether that is in fact the case.

There are two main rationales for subsidizing multifamily buildings without affordable use restrictions. …

Shaping Reforms And Business Models For The Otc Derivatives Market. Quo Vadis?, Diego Valiante

Diego Valiante

Regulators around the globe are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. The author highlights risks that may affect the value chain of a derivative transaction and weaken the economic and legal rationales that justify their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in …

The Trouble With Investment Banking: Cluelessness, Not Greed, William C. Bunting

W. C. Bunting

We assume that the set of marketable financial instruments can be divided into two distinct categories: (1) easy-to-price and (2) difficult-to-price, and then isolate two behavioral effects as most important with respect to securities trading in difficult-to-price securities; specifically, the house-money-effect and the earned-money-effect. It is shown that these behavioral effects discourage profitable investment in research effort. We then argue that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor should not apply to investment banks that issue/underwrite difficult-to-price securities. We also advocate for the return of the private investment banking partnership as the most sensible way in which to …

Taking Stock -- Salary And Options Too: The Looting Of Corporate America, Kenneth R. Davis

Kenneth R. Davis

Abstract “Taking Stock – Salary and Options Too: The Looting of Corporate America” Executive compensation has come to mean corporate greed. CEO pay has soared to incomprehensible levels. Even during the current financial crisis, more CEOs saw pay increases than cuts. Public resentment to multi-million dollar paychecks swelled to outrage when AIG and Merrill Lynch used bailout funds to dispense enormous bonuses to executives. The looting of America’s corporations has led to numerous strategies to curb executive compensation. These strategies include heightened corporate disclosure requirements, tax incentives, say-on-pay, and shareholder input into the process for nominating directors. All these strategies …

Note, A Free Pass For Foreign Firms? An Assessment Of Sec And Private Enforcement Against Foreign Issuers, Natalya Shnitser

Natalya Shnitser

While proponents of the bonding hypothesis have posited that foreign firms crosslist in the United States to signal compliance with the strict U.S. corporate governance regime, these scholars have taken the enforcement of U.S. securities laws largely for granted. This Note presents an empirical examination of previously unexplored data on the enforcement of U.S. securities laws against foreign issuers. The results suggest that relative to domestic issuers, foreign issuers in the United States have benefited not only from a more lax set of rules, but also from a more forgiving public enforcement agency. At the same time, U.S. courts have …

An Antidote For Poison Puts: A Eulogy For A Management Entrenchment Device, David Hudson

David Hudson

Poison puts are a type of event risk covenant commonly found in financing agreements. Lenders, both as bondholders and banks, utilize this provision as one layer of protection. However, poison puts can also be utilized to entrench a corporation’s management. The provision grew in popularity with the growth of the leveraged buyout boom of the 1980’s, but was frequently ignored during the subsequent economic growth period and merger activity that accompanied it. With the recent collapse in credit markets, companies and shareholders have challenged the provision’s interpretation and enforceability. These challenges have come in tandem with lenders taking more aggressive …

How To Avoid The Constraints Of Rule 10b-5(B): A First Circuit Guide For Underwriters, Eric H. Franklin

Eric H. Franklin

HOW TO AVOID THE CONSTRAINTS OF RULE 10b-5(b): A FIRST CIRCUIT GUIDE FOR UNDERWRITERS

If an underwriter knows that a prospectus contains a material misrepresentation, may that underwriter use the prospectus to sell securities, or would that expose the underwriter to liability under Rule 10b-5(b)? The First Circuit’s surprising and rather disconcerting answer was delivered on March 10, 2010 in Securities and Exchange Commission v. Tambone. In Tambone, the First Circuit held that the SEC could not hold underwriters liable for such misrepresentations if they did not draft the prospectus. Ostensibly, this holding is nothing more than a judicial check …

Quagmire: Is The Sec Stuck In A Misguided War Against Pipe Financing?, Douglas Hoffer

Douglas Hoffer

A popular non-traditional capital formation option is the “PIPE” deal: Private Investment in Public Equity. Over the last ten years, companies raised more than $100 billion using PIPE transactions. The Securities and Exchange Commission (“SEC”) has increased its regulatory oversight of PIPE transactions as they have become more popular. The SEC believes that some PIPE investors who take a short position in a PIPE issuer’s publicly traded shares violate Section 5 of the Securities Act by selling unregistered securities, and that PIPE investors who trade on knowledge of an impending PIPE transaction are guilty of insider trading. The purpose of …

Lessons Learned From Bernard Madoff: Why We Should Partially Privatize The Barney Fife’S At The Sec, Mark S. Klock

Mark S Klock

Financial markets do not function well when fraud is pervasive. Around September of 2009, the investigations into the SEC examinations of Bernard Madoff Investment Securities, LLC were completed and released to the public. The simple facts reveal an alarming level of incompetence and lack of financial literacy on the part of the guardians of the integrity of our financial markets. I suggest two important tools for addressing these problems. One is to supplement enforcement of anti-fraud rules with more private attorney generals by expressly creating a private right of action for aiding and abetting violations of securities laws. This will …

The Fox And The Ostrich: Is Gaap A Game Of Winks And Nods?, Arthur Acevedo

Arthur Acevedo

The fox is frequently described as sly, cunning and calculating in world literature. It is often associated with behavior that seeks advantage through trickery and pretext. The ostrich on the other hand, has been portrayed as cowardly and irrational. Its character defect is epitomized when it sticks its head in the sand at the first sign of trouble. The Financial Accounting Standards Board (FASB) can be described as the fox; the Securities Exchange Commission (SEC), the ostrich. This article examines the creation of accounting principles by the fox and the failure to govern by the ostrich. History demonstrates that the …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

How Incentives Drove the Subprime Crisis

In order to address any systemic problem, whether the goal is to change the system, regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular …