Securities Law Commons^™

Managing Risk On A $25 Million Bet: Venture Capital, Agency Costs, And The False Dichotomy Of The Corporation, Robert P. Bartlett Iii

ExpressO

An implicit dichotomy of the corporation exists in legal scholarship. On one side of the dichotomy rests the publicly-held corporation suffering from a significant conflict of interest between its managers and dispersed shareholders; on the other side, the closely-held corporation plagued by inter-shareholder conflict.

This Article argues that understanding the agency problems that can exist within a firm demands a rejection of this traditional dichotomy and the theories of the firm built upon it. Using venture capital finance, this Article demonstrates for the first time how this dichotomy obscures how all firms - public and private - often face the …

Who Will Control Frankenstein?: The Korean Chaebol's Corporate Governance, Jeong Seo

Cardozo Journal of International and Comparative Law

In a chaebol, because a dominant family exercises control with only a small equity-holding, a sharp disparity exists between cashflow rights and voting rights. The controller reduces managerial agency costs but creates his own agency costs. Furthermore, the disparity exacerbates the controller's agency costs. Outsider shareholders' voting rights are ineffectual in eradicating this problem. Therefore, external monitoring devices over the chaebol controller are required.

Korea has relied on government regulation-including attempts to change chaebols' ownership structures-to address this problem. Unfortunately, without well-functioning capital markets, the regulation has proved ineffective. As observed in the SK scandal, a market for …

The Dutch Auction Myth, Peter B. Oh

ExpressO

The initial public offering process is under assault. Critics of this process have woven a complex set of interconnected objections to the orthodox method for conducting IPOs, pricing of shares, and allocating them to preferred investors. These critics instead point to online auctions as an alternative IPO method that can provide more equitable access, efficient prices, and egalitarian allocations. These claims rest on Google’s recent IPO and W.R. Hambrecht + Co.’s OpenIPO mechanism, conventionally regarded as impure variants of what is known as a descending-bid or Dutch auction (Dutch IPO).

This article assesses the empirical and theoretical case for Dutch …

Entrenched Managers & Corporate Social Responsibility, Shane M. Shelley

ExpressO

A growing number of academics have suggested U.S. corporate governance laws bestow too much power on managers. Much of the research focuses on the relationship between corporate governance arrangements, which supply a means to managerial power, and the financial performance of corporations. This exclusive focus on financial performance may be misguided. Although profits serve as a proxy for the benefits corporations provide society, they do not always adequately reflect the costs of the activities that generated them. In this sense, financial performance may not give an accurate, or at least complete, picture of the real value of corporations. Whether managers …

Overvalued Equity And The Case For An Asymmetric Insider Trading Regime, Thomas A. Lambert

ExpressO

The forty-year debate over whether insider trading should be regulated has generally proceeded in all-or-nothing terms: Either all insider trading should be permitted (subject only to private restrictions imposed by issuers themselves), or none should. This Article argues for an asymmetric insider trading policy under which insider trading that decreases the price of an overvalued stock is generally permitted, but insider trading that increases the price of an undervalued stock is generally prohibited. Concluding that the net investor benefits of price-decreasing insider trading exceed those of price-enhancing insider trading, the Article argues that an asymmetric insider trading regime likely represents …

The Marginal Incentive Of Insider Trading: An Economic Reinterpretation Of The Case Law, Kristoffel R. Grechenig

ExpressO

Commentators on insider trading are divided into two camps, one in favor of regulation, the other in favor of deregulation. The arguments for the two positions are manifold but not irreconcilable. I show that important gains to social welfare come with insider trading on negative information (sales), whereas losses often result from the use of positive information (purchases). Thus, I look at a regulation that allows insiders to use negative but not positive non-public information. Because positive information will be disclosed much sooner than negative information, the marginal incentive (and marginal gain to social welfare, respectively) of insider trading as …

Equal Treatment Of Foreign Shareholders In Transnational Securities Class Action Against A Foreign Issuer—A Chinese Example, Clark Yao

ExpressO

As the world economy and financial markets become increasingly more integrated, cross-boarder securities transaction becomes a daily event. Because Unite States has the world’s largest and arguably most liquid capital markets, it has attracted a significant number of foreign companies to cross-list their stocks in a U.S. stock exchange. Unavoidably, such transactions will not only bring out fortune, but also disputes between transacting parties. Relying on the powerful federal securities law , U.S. investors who have bought or sold such stocks have routinely sued foreign stock issuers through class action when the stock prices went down, alleging their loss is …

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 …

Helping Those Who Are Helping Us: Sarbanes-Oxley Whistleblower Protection And Its Interplay With Arbitration, Adam Fisher

Cardozo Journal of Conflict Resolution

The accounting profession took a major blow to its credibility in 2002 when numerous scandals surfaced on the front pages of newspapers seemingly everyday. The most notable stories told of two women who, despite the enormous pressure and harassment they knew they would face, came forward to reveal the ugly truth behind the facades of America's corporate skyscrapers. Cynthia Cooper and Sherron Watkins, employees at WorldCom and Enron respectively, blew the whistle on major accounting frauds at these companies. Their employers' retaliation was harsh and swift, revealing the truth about how todays' corporate juggernauts operate.

Remapping The Charitable Deduction, David Pozen

Faculty Scholarship

If charity begins at home, scholarship on the charitable deduction has stayed at home. In the vast legal literature, few authors have engaged the distinction between charitable contributions that are meant to be used within the United States and charitable contributions that are meant to be used abroad. Yet these two types of contributions are treated very differently in the Code and raise very different policy issues. As Americans' giving patterns and the U.S. nonprofit sector grow increasingly international, the distinction will only become more salient.

This Article offers the first exploration of how theories of the charitable deduction apply …

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 …

Rediscovering The Economics Of Loss Causation , Richard Kaplan, Madge Thorsen, Scott Hakala

ExpressO

Abstract This article explores the economic principles and theories underlying loss causation in the context of securities fraud litigation. It explains the difference between “investment loss” and recoverable “inflationary loss” and posits that the latter consists of the difference between inflation in stock prices caused by the fraud at the time of purchase and inflation in the price at the time of sale. It reviews scenarios in which inflationary loss due to fraud may occur and would be recognized as a matter of economic theory as well as a matter of law. It urges that Dura v. Broudo Pharmaceuticals, 125 …

Model Of Time-Inconsistent Misconduct: The Case Of Lawyer Misconduct, Manuel A. Utset

Scholarly Publications

No abstract provided.

Reform Of Public Company Disclosure In Europa, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

After The Revolution In Corporate Law, Roberta Romano

Journal of Legal Education

No abstract provided.

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 …

Markets For Markets: Origins And Subjects Of Information Markets, Miriam A. Cherry, Robert L. Rogers

ExpressO

No abstract provided.

Breaking The Bank: Revisiting Central Bank Of Denver After Enron And Sarbanes-Oxley, Celia Taylor

ExpressO

No abstract provided.

Is The Dutch Auction Ipo A Good Idea?, Anita I. Anand

ExpressO

The Google IPO raised the question of whether Dutch auctions are preferable to the traditional bookbuilding method of financing. Some argue that Dutch auctions make public offerings more efficient in terms of price discovery by leaving less money on the table. They further argue that Dutch auctions are more fair, since underwriters do not allocate securities to preferred clients, thereby allowing for a more equitable allocation among institutional and retail investors. I suggest that the Dutch auction is not necessarily more fair and may in fact lead to less efficient capital markets. I argue that reform of the current system …

Can Regulation Of Insider Trading Be Effective?, Alexandre Padilla

ExpressO

While there is a very prolific literature showing that the regulation of insider trading is by and large ineffective when it comes to discourage individuals from trading on non-public information, almost no work has been done on whether insider trading regulation can be effective. This paper attempts to fill that gap by investigating whether the regulation of insider trading can be effective. First, we show why insider trading regulation cannot be effective. Second, we see to what extend the empirical studies are consistent with our analysis.

What Makes Asset Securitization "Inefficient"?, Kenji Yamazaki

ExpressO

Despite the damage caused by the recent Enron scandal , the asset securitization market has been vibrant and has become a popular financing alternative . A number of academics emphasize its merits and suggest that it is a more favorable way of financing, and Congress’s proposal to make sales of asset in securitization immune from characterization as secured transactions under the Bankruptcy Reform Act of 2001 (the “Reform Act”) almost materialized when the Enron scandal hit the scene. Conversely, there have been accusations that securitization is not a legitimate way of financing because, for example, it fosters fraudulent transactions.

Why …

Demythologizing The Stock Exchange: Reconciling Self-Regulation And The National Market System, Onnig H. Dombalagian

University of Richmond Law Review

No abstract provided.

Voluntary Vs Mandatory Corporate Governance: Towards An Optimal Regulatory Framework, Anita I. Anand

ExpressO

This article fills a gap in the legal literature by comparing mandatory corporate governance regimes to voluntary corporate governance regimes. It encourages market participants, including regulators, to acknowledge that firms have incentives to adopt enhanced governance practices voluntarily and to make disclosure about the same. The article argues that an optimal governance regime is a hybrid one in which adoption of best practice guidelines is voluntary but disclosure of corporate governance practices is mandatory. Such a regime is optimal because it balances the benefits and costs to all stakeholders, particularly issuers and investors. The cost analysis should be completed by …

Insider Trading: Hayek, Virtual Markets And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

Insider Trading: Hayek, Virtual Markets, And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

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: …

The Legal Status Of “Dump & Sue”: Should Plaintiffs And Their Attorneys Be Prohibited From Trading The Stock Of Companies They Sue? – A Law And Economics Approach, Moin A. Yahya

ExpressO

There is some evidence that plaintiffs and their attorneys are profitably short-selling the stock of the companies they intend to sue. The status of such short sales is undecided in the law. Lawsuits against companies can cause large drops in market value, and hence such an action by the plaintiff should cause concern. Plaintiffs, however, are not traditional insiders, and they do not owe the shareholders any fiduciary duties. They can therefore consent to their attorneys also short-selling the stock of the defendant corporation. The attorneys need to receive such permission to avoid misappropriating the information concerning their client’s decision …

The "Duty" To Be A Rational Shareholder, David A. Hoffman

ExpressO

How and when do courts determine that corporate disclosures are actionable under the federal securities laws? The applicable standard is materiality: would a (mythical) "reasonable investor" have considered the disclosures important. As I establish through empirical and statistical testing of 500 cases analyzing the materiality standard, judicial findings of immateriality are remarkably common, and have been stable over time. Materiality's scope results in the dismissal of a large number of claims, and creates a set of cases in which courts attempt to explain and defend their vision of who is, and is not, a "reasonable investor." Thus, materiality provides an …

Time-Inconsistent Management & The Sarbanes-Oxley Act, Manuel A. Utset

Scholarly Publications

No abstract provided.

Securing Truth For Power: Informational Strategy And Regulatory Policy Making, Cary Coglianese

ExpressO

No abstract provided.