Law Commons^™

Using The Actual-Trader Model In Federal Securities Cases To Meet Daubert Standards And To Offset Inflationary Gains Against Inflationary Losses, Ran Wei, Ricardo Cossa, Mark Zmijewski

Ran Wei

Aggregate damages in securities class action lawsuits have two distinct elements: inflation in the prices of the subject company’s securities and the trading behavior of the subject company’s investors. Experts typically have not been able to use statistical and empirically-based methods to measure the trading behavior of all investors in the class. In this paper we outline a methodology, the actual-trader model, to quantify aggregate damages for non-institutional investors. This methodology provides appropriate and sufficient empirical foundation for the aggregate damage calculations in securities class action lawsuits. When implemented appropriately, we believe this methodology meets Daubert and other standards of …

Criminal Insider Trading: Prosecution, Legislation, And Justification, Steven Brody

Steven Brody

Since the passage of the Securities Exchange Act of 1934, insider trading has been codified as a federal crime. For many years, however, civil cases were rare, and criminal prosecutions resulting in prison terms were nearly unheard of. Yet during the 1980’s, white collar crime—and insider trading in particular—became the subject of more public scrutiny than it had ever previously received. During this period, major developments occurred in the criminalization, prosecution, and sentencing of those who had committed securities fraud. High profile cases of inside traders like Ivan Boesky and Dennis Levine made targets of federal prosecutions household names and …

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

Marco Ventoruzzo

One of the most crucial, but systematically neglected, comparative differences between corporate law systems in Europe and in the United States, as crucial as often neglected, 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 …

Implications Of Reputation Economics Of Regulatory Reform Of The Credit Rating Industry, Paul Lasell Bonewitz

Paul Lasell Bonewitz

Credit rating agencies have for years maintained that they would never intentionally issue or maintain inaccurate ratings due to the damage their reputation, and therefore their business, would suffer as a result. The reputation of credit rating agencies perhaps never suffered more than when thousands of structured debt securities proved to hold inflated ratings in the run-up to the credit crisis. Yet credit rating agencies remain as engrained as ever in the global financial system. What is more, Congressional testimony shows that credit rating agencies had the ability to rate more accurately than they did, but intentionally failed to do …

Myths About Mutual Fund Fees: Economic Insights On Jones V. Harris, D. Bruce Johnsen

D. Bruce Johnsen

Mutual funds stand ready at all times to sell and redeem common stock to the investing public for the net value of their assets under management. In the language of transaction cost economics, they are open-access common pools subject to virtually free investor entry and exit. The Investment Company Act (1940) requires mutual funds to be managed by an outside advisory firm pursuant to a written contract, which normally pays the adviser a small share of net asset value, say, one-half of one percent per year. Following 1970 amendments to the Investment Company Act imposing a fiduciary duty on advisers …

Essay: Justice Sotomayor On The Supreme Court: A Boon For Business?, Dana M. Muir, David Baumer, Stephanie Greene, Gideon Mark, Robert E. Thomas

Dana M. Muir

In this essay, five business law professors with specialties in five different doctrinal areas analyze Justice Sonia Sotomayor’s jurisprudence in those areas and consider the implications of her appointment to the Supreme Court. Each of the areas, intellectual property, antitrust, securities, ERISA, and employment law, involves an area of federal law of significant importance to businesses. Although employment law also is a matter of state law, this essay focuses on the federal employment law statutes. Based on our analysis, we believe that Justice Sotomayor will approach business cases from a neutral perspective. Overall, we find support for the generally accepted …

The Regulation Of Structured Debts: Why? What? And How?, Cyrus C. Y. Chu

Cyrus C. Y. Chu

This article contributes to the legal theoretical foundation of the regulation of structured notes. We shall first anatomize the most typical kind of structured note, the collateralized debt obligation (CDO). We analyze the similarity between a CDO and a constructed pledged mortgage, point out the embedded fuzzy information behind this structured mortgage, and then identify the implicit externality of this mortgage construction. We argue that CDOs can be treated as properties instead of contracts, and the usual notion of numerus clausus does support more severe regulations on such properties. Most existing literature has emphasized the moral hazard problem of investment …

More Muscle Behind Regulation Sho? Short Selling And The Regulation Of Stock Borrowing Programs, Douglas M. Branson

douglas m branson

Since at least 2004, with the adoption of Regulation SHO, the SEC has waged a campaign against naked short selling and the stock price manipulation that often accompanies it. They have also proposed sales price restrictions (uptick rules), or circuit breakers to dampen down the market volatility associated with the unprecedented levels of short selling we have seen in the past year. This article outlines some of those regulatory efforts and their effects, concluding with a recommendation of one additional regulation designed to hold short sellers to adherence with Regulation SHO.

Bottom-Up: An Alternative Approach For Investigating Corporate Malfeasance, Susan B. Schwab

Susan B. Heyman

At least since the Enron scandal, the government has focused intensive efforts on developing a strategy to investigate and prosecute corporate malfeasance. The prevailing method has been a “top-down” approach: government agents provide companies with incentives to conduct internal investigations, coerce employee cooperation, and disclose privileged information. Although many have expressed concern about violations of constitutional rights and erosions of privilege, the current system faces another critical problem: the top-down strategy will become less effective at unraveling corporate fraud as employees learn that it is not in their interest to cooperate. Further, the approach aims deterrence at the wrong people …

What’S In A Name? The Role Of Danielson In The Taxation Of Credit Card Securitizations, Grace S. Lee

Grace S Lee

While the doctrine of substance over form has been a part of tax law for over seventy years, courts look disfavorably upon taxpayers who invoke the doctrine to argue against the forms of their own transactions under what is commonly referred to as the Danielson rule. Although the Danielson rule appears sound on its face, it holds less force when applied outside of its original context. In particular, the Danielson rule should not apply when the form given to a transaction is given for non-tax reasons, such as to achieve a particular accounting treatment. The taxation of credit card securitizations …

What’S In A Name? The Role Of Danielson In The Taxation Of Credit Card Securitizations, Grace S. Lee

Grace S Lee

While the doctrine of substance over form has been a part of tax law for over seventy years, courts look disfavorably upon taxpayers who invoke the doctrine to argue against the forms of their own transactions under what is commonly referred to as the Danielson rule. Although the Danielson rule appears sound on its face, it holds less force when applied outside of its original context. In particular, the Danielson rule should not apply when the form given to a transaction is given for non-tax reasons, such as to achieve a particular accounting treatment. The taxation of credit card securitizations …

Prioritizing Justice: Combating Corporate Crime From Task Force To Top Priority, Mary K. Ramirez

mary k ramirez

Inadequate law enforcement against corporate criminals appears to have created perverse incentives leading to an economic crisis – this time in the context of the subprime mortgage crisis. Prioritizing Justice proposes institutional reform at the Department of Justice in pursuing corporate crime. Presently, corporate crime is pursued nationally primarily through the DOJ Corporate Fraud Task Force and other task forces, the DOJ Criminal Division Fraud Section, and the individual U.S. Attorney’s Offices. Rather than a collection of ad hoc task forces that seek to coordinate policy among a vast array of offices and agencies, the relentless waves of corporate criminality …

The Supreme Court’S Impact On Securities Class Actions: An Empirical Assessment Of Tellabs, Adam C. Pritchard, Stephen Choi

Law & Economics Working Papers Archive: 2003-2009

Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). This decision clarified the law with respect to one of the most hotly contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a very lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we …

Re-Examining Investor Protection In The Eu And Us, John Ja Burke

John JA Burke

The year 2009 is a propitious time to evaluate systems of investor protection in financial markets as global bank losses exceed the 1 trillion mark and market losses equally exceed the 1 trillion mark. Prior to the Global Financial Crisis, the European Union enacted sweeping legislation to reform its system of investor protection. The Markets in Financial Instruments Directive [MiFID] is the regulatory equivalent of the deregulatory 1987 “Big Bang” that shaped the current European financial markets. It also applies to one of the world’s largest trading regions. This article examines select investor protection provisions of MiFID and their analogues …

From Lily Bart To The Boom Boom Room: How Wall Street’S Social And Cultural Response To Women Has Shaped Securities Regulation, Christine Sgarlata Chung

Christine Sgarlata Chung

In Edith Wharton’s 1905 novel House of Mirth, Lily Bart learns in one brutal moment what happens to women who get tangled up with the stock market. Though she is beautiful and well-born, Lily is vulnerable when she seeks salvation in the stock market – she has no family to support her, no fortune of her own, no training in business matters, and no socially acceptable means of acquiring money, save marriage. When the husband of a friend (Gus Treanor) offers to help Lily by speculating in the stock market, Lily agrees. And when Treanor begins presenting Lily with money, …

The Effects Of Devaluation Of The Tenge Upon The Kazakhstan Economy, John Ja Burke

John JA Burke

This article examines the probable effect of the February 2009 devaluation of the Tenge on the Kazakhstan economy. Conventional wisdom holds that currency devaluation increases exports, protects domestic production, and preserves foreign exchange currency reserves. While the latter states the obvious, the causal relation between currency devaluation and increased export revenue and increased domestic production, though logically valid, requires the passage of time to measure. In the context of Kazakhstan, the question of devaluation and its effects also must be examined within the “Dutch Disease” model, as Kazakhstan is an oil dependent country. History teaches that devaluing the Tenge is …

What Law Schools Should Teach Future Transactional Lawyers: Perspectives From Practice, Michael A. Woronoff

Michael A Woronoff

Since at least the 1980’s, law schools have been chided for doing a poor job at teaching skills. This criticism has been accompanied by pressure to increase their emphasis on skills training. The pressure increased with the publication of the McCrate Report in 1992, and then again with the publication of the Carnegie Report in 2007. This article is based on my remarks given on June 10 at the 2009 mid-year meeting of the AALS Conference on Business Associations. In those remarks, I respond to the questions “Are law schools teaching students adequate transactional skills?” and “From the standpoint of …

From Lily Bart To The Boom Boom Room: How Wall Street’S Social And Cultural Response To Women Has Shaped Securities Regulation, Christine Sgarlata Chung

Christine Sgarlata Chung

In Edith Wharton’s 1905 novel House of Mirth, Lily Bart learns in one brutal moment what happens to women who get tangled up with the stock market. Though she is beautiful and well-born, Lily is vulnerable when she seeks salvation in the stock market – she has no family to support her, no fortune of her own, no training in business matters, and no socially acceptable means of acquiring money, save marriage. When the husband of a friend (Gus Treanor) offers to help Lily by speculating in the stock market, Lily agrees. And when Treanor begins presenting Lily with money, …

From Lily Bart To The Boom Boom Room: How Wall Street’S Social And Cultural Response To Women Has Shaped Securities Regulation, Christine Sgarlata Chung

Christine Sgarlata Chung

In Edith Wharton’s 1905 novel House of Mirth, Lily Bart learns in one brutal moment what happens to women who get tangled up with the stock market. Though she is beautiful and well-born, Lily is vulnerable when she seeks salvation in the stock market – she has no family to support her, no fortune of her own, no training in business matters, and no socially acceptable means of acquiring money, save marriage. When the husband of a friend (Gus Treanor) offers to help Lily by speculating in the stock market, Lily agrees. And when Treanor begins presenting Lily with money, …

Protecting Foreign Investors From International Securities Fraud, Derek N. White

Derek N White

This article discusses the subject matter jurisdiction of national courts in a little-known type of international securities cause of action that has vexed courts of the developed world. The cause of action is labeled the “foreign-cubed class action”, which is brought when a dispute arises regarding purported improprieties in an international securities transaction that contains foreign investors who purchase securities of foreign issuers on foreign stock exchanges. Notice the three “foreign” elements of the transaction ("foreign" meaning foreign to the court presiding over the action).

The number of foreign-cubed class actions brought in U.S. courts has risen sharply over the …

Lifting The Veil: Pressures Mount For Climate Change Disclosures, Richard Faulk

Richard Faulk

Measures from Sarbanes-Oxley to climate change legislation will pervasively transform the manner in which American businesses relate to shareholders and consumers. Capping a month of extraordinary changes, the National Association of Insurance Commissioners adopted a rule that mandates broad disclosures by insurance companies regarding the impact of climate change on their financial stability – thereby enlisting the insurance industry as a ‘‘partner’’ in the enforcement of global and national climate change policies.

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 …

New Governance And Hedge Fund Regulation: Shorting Federalism Or Bernie’S Nightmare?, Juraj Alexander

Juraj Alexander

Current proposals for reform of the financial markets regulation usually build on the same paradigm as the pre-crisis regulation. This paper, in the field of hedge funds and other alternative investment funds, proposes an alternative regulatory structure based on the new governance scholarship. The proposal consists in allowing, within certain constraints, the coexistence and competition of multiple regulatory frameworks for hedge and other alternative investment funds. A framework could be private or public, domestic or foreign, institutionalized or not, and would be subject to authorization by the respective regulators. Terms of such authorization would be negotiated between the industry and …

Securities Class Actions Move North: A Doctrinal And Empirical Analysis Of Securities Class Actions In Canada, Adam C. Pritchard, Janis P. Sarra

Law & Economics Working Papers Archive: 2003-2009

A number of Canadian provinces recently have adopted legislation providing shareholders with a claim for secondary market fraud. Although the legislation has some similarities to the “fraud on the market” class action found in the United States, the laws have some important differences. This article compares securities class actions in Canada and the United States, highlighting the differences between the two regimes that are likely to have important strategic consequences for class action attorneys and issuers. The article also collects and analyzes data on the securities class actions that have been filed to date against Canadian issuers in both Canada …

London As Delaware?, Adam C. Pritchard

Law & Economics Working Papers Archive: 2003-2009

Regulatory competition has long driven the path of corporate law in the federal system of the United States. Now, jurisdictional competition has spread to exchange listings. New York took an early lead in that competition in the 1990s, but has now been overtaken by London. Can London prevail in the competition for stock listings in the long term? This essay explores that question through the insights offered by Delaware’s dominance in the market for corporate listings. Delaware has prevailed by offering corporate directors a predictable body of that credibly shields directors from the vagaries of political backlash in times of …

Direct And Derivative Claims In Securities Fraud Litigation, Richard A. Booth

Working Paper Series

In the typical securities fraud class action under Rule 10b-5, the plaintiff class consists of buyers who seek damages equal to the difference between the price paid for the stock during the fraud period and the lower price that prevails after corrective disclosure. The argument here is that this claim is really an amalgam of direct and derivative claims and that the derivative claims should result in recovery by the corporation for the benefit of all stockholders. There are three types of losses that arise in the typical stock-drop action. First, part of the loss may be attributable to lower …

Toxic Assets: Untangling The Web, Margarita S. Brose, Bill Nichols

Margarita S Brose

No abstract provided.

Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence, Alicia Davis Evans

Law & Economics Working Papers Archive: 2003-2009

A common belief is that individual investors are noise traders that distort stock prices. Because accurate share prices are important for economic functioning, the market effect of retail investors has significant regulatory implications. This paper, employing a new NYSE retail trading data set and the R2 metric of share price informedness, contributes to the debate by demonstrating that as the proportion of trading by individual investors increases, the R2 of firms decreases. Adherents of the R2 methodology hold that lower R2's imply more accurate stock prices. The results of an instrumental variable estimation suggest that this relationship is a causal …

The Road Not Taken: Rethinking Securities Regulation And The Case For Federal Merit Review, Daniel Morrissey

Dan Morrissey

Abstract of Morrissey Article The Article assesses the causes of the current financial meltdown and finds that it has resulted from insufficient regulation of the capital markets. The securities legislation of the 1930s enacted in response to the crisis of that era was never strong enough to prevent another severe economic collapse. Even the disclosure-based protection it did afford investors was undermined during the deregulatory movement of the last quarter century. Policy makers must now enact measures that were proposed but passed over during the New Deal reforms so that securities may not be offered or sold if they present …

Eliminating Securities Fraud Class Actions Under The Radar, Barbara Black

Barbara Black

At least since Basic, Inc. v. Levinson, the business community and many influential scholars have challenged the existence of the securities fraud class action on a variety of grounds. Recently, two proposals have been advanced to “fix” the problem of “abusive” securities fraud class actions. One proposal requires arbitration of all securities fraud actions; the other eliminates the corporate defendant in most actions. Proponents assert that shareholders should have the right to adopt these proposals through amendment of the company’s certificate of incorporation. Both these proposals have attracted more than academic interest. In reality, adoption of either proposal would substantially …