Securities Law Commons^™

Quieting The Shareholders' Voice, Randall Thomas, James D. Cox, Fabrizio Ferri

Vanderbilt Law School Faculty Publications

The integrity of shareholder voting is critical to the legitimacy of corporate law. One threat to this process is proxy "bundling, " or the joinder of more than one separate item into a single proxy proposal. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote and forces them to either reject the entire proposal or approve items they might not otherwise want implemented.

In this Paper, we provide the first comprehensive evaluation of the anti-bundling rules adopted by the Securities and Exchange Commission ("SEC") in 1992. While we find that …

The Failure Of Liability In Modern Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

In April 2015, the Department of Justice charged Navinder Sarao for his role in causing the Flash Crash-the near-1,000-point drop-and- rebound in the Dow Jones Index that roiled markets in May 2010. Sarao, a small-time British trader operating out of his parents' suburban basement, stood accused of putting together a string of illusory, fake orders that fooled markets enough to spark the largest single-day drop in the index's history. Commentators rightly contest whether a bit-player like Sarao could have unleashed a near-catastrophe on U.S. securities markets single-handedly. Yet, the complaint-and its causal account- point to a troubling dilemma facing scholars …

Insider Trading And Market Structure, Yesha Yadav

Vanderbilt Law School Faculty Publications

This Article argues that the emergence of algorithmic trading raises a new challenge for the law and policy of insider trading. It shows that securities markets comprise a cohort of algorithmic “structural insiders” that – by virtue of speed and physical proximity to exchanges – systematically gain first access to information and play an outsize role in price formation. This Article makes three contributions. First, it introduces and develops the concept of structural insider trading. Securities markets increasingly rely on automated traders utilizing algorithms – or pre-programmed electronic instructions – for trading. Policy allows traders to enjoy important structural advantages: …

Corporate Darwinism: Disciplining Managers In A World With Weak Shareholder Litigation, Randall S. Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

Because representative shareholder litigation has been constrained by numerous legal developments, the corporate governance system has developed new mechanisms as alternative means to address managerial agency costs. We posit that recent significant governance developments in the corporate world are the natural consequence of the ineffectiveness and inefficiency of shareholder suits to address certain genre of managerial agency costs. We thus argue that corporate governance responses evolve to fill voids caused by the inability of shareholder suits to monitor and discipline corporate managers.

We further claim that these new governance responses are themselves becoming stronger due in part to the rising …

Unsponsored Adrs Falling Through The Cracks: Adapting A Domestic Securities Regime To A Global Marketplace, Sarah Dotzel

Vanderbilt Journal of Entertainment & Technology Law

Investing in the securities market has become a commonplace activity for expert and amateur investors alike. As more and more companies transcend national boundaries with their business activities, investment in their securities becomes coveted by international investors. Since securities are regulated on a country-by-country basis, it is unclear which law applies when conflict arises. In an attempt to clarify one such situation, simplify the application of US securities laws, and respect the legal regimes of other nations, the Morrison decision created an unclear test which leaves investors in unsponsored American Depositary Receipts (ADRs), one of the most common international trading …

How Algorithmic Trading Undermines Efficiency In Capital Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

This Article argues that the rise of algorithmic trading undermines efficient capital allocation in securities markets. It is a bedrock assumption in theory that securities prices reveal how effectively public companies utilize capital. This conventional wisdom rests on the straightforward premise that prices reflect available information about a security and that investors look to prices to decide where to invest and whether their capital is being productively used. Unsurprisingly, regulation relies pervasively on prices as a proxy for the allocative efficiency of investor capital.

Algorithmic trading weakens the ability of prices to function as a window into allocative efficiency. This …

Form Vs. Function In Rule 10b-5 Class Actions, Amanda M. Rose

Vanderbilt Law School Faculty Publications

The Supreme Court’s widely anticipated decision last term in Halliburton Co. v. Erica P. John Fund, Inc. did little to change the fundamental landscape of securities fraud litigation in the United States. Rule 10b-5 class actions premised on the “fraud-on-the-market” presumption of reliance may still be brought, although it is now clear that defendants may present evidence of lack of price distortion to rebut that presumption at the class certification stage. Halliburton does, however, raise a variety of new questions that will keep plaintiffs’ lawyers and defense counsel fighting for years to come. Determining the answers to these questions will …

Better Bounty Hunting, Amanda M. Rose

Vanderbilt Law School Faculty Publications

The SEC’s new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits — rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the …

Power To The People: How The Sec Can Empower The Crowd, R. Kevin Saunders, Ii

Vanderbilt Journal of Entertainment & Technology Law

Crowdfunding emerged as a heralded capital-formation mechanism at a time when capital markets desperately need it, but is it actually viable? Following passage of the JOBS Act and issuance of proposed rules by the SEC, equity crowdfunding will soon become reality. When signing the JOBS Act, President Obama touted it as a means "to increase American job creation and economic growth," but that will only hold true for Title III, Crowdfunding, if the SEC creates an attractive market for high-quality projects. The SEC's proposed rules impose a heavy disclosure burden relative to a low maximum offering amount, offering a poor …

Understanding Causation In Private Securities Lawsuits: Building On Amgen, James D. Cox

Vanderbilt Law Review

The securities antifraud provision is a bastard. It has no indisputable parentage; its existence is attributed to a federal statute, but its features are borrowed from state law, a body of law that the enacting Congress presumably believed was inadequate.' Why would Congress borrow from state law that it considered deficient? Even though the antifraud provision has come of age largely through judicial construction similar to the laudatory process that underlies our common law, critics attack the antifraud provision like no comparable common-law development. To many scholars, private antifraud suits are not viewed as a net benefit, but as a …

Setting Attorneys' Fees In Securities Class Actions: An Empirical As, Lynn A. Baker, Michael A. Perino, Charles Silver

Vanderbilt Law Review

n 1995, Congress overrode President Bill Clinton's veto and enacted the Private Securities Litigation Reform Act ("PSLRA"), a key purpose of which was to put securities class actions under the control of institutional investors with large financial stakes in the outcome of the litigation.' The theory behind this policy, set out in a famous article by Professors Elliot Weiss and John Beckerman, was simple: self-interest should encourage investors with large stakes to run class actions in ways that maximize recoveries for all investors. These investors should naturally want to hire good lawyers, incentivize them properly, monitor their actions, and reject …

Policing Public Companies: An Empirical Examination Of The Enforcement Landscape And The Role Played By State Securities Regulators, Amanda Rose, Larry J. Leblanc

Vanderbilt Law School Faculty Publications

Multiple different securities law enforcers can pursue U.S. public companies for the same misconduct. These enforcers include a variety of federal agencies, class action attorneys, and derivative litigation attorneys, as well as fifty separate state regulators. Scholars and policy makers have increasingly questioned whether the benefits of this multienforcer approach are worth the costs, or whether a more coordinated and streamlined securities enforcement regime might lead to efficiency gains. How serious are these concerns? And what role do state regulators play in the enforcement mix? Whereas the enforcement efforts of the Securities and Exchange Commission and class action lawyers have …

State Enforcement Of National Policy: A Contextual Approach (With Evidence From The Securities Realm), Amanda M. Rose

Vanderbilt Law School Faculty Publications

This Article addresses a topic of contemporary public policy significance: the optimal allocation of law enforcement authority in our federalist system. Proponents of competitive federalism have long argued that assigning concurrent enforcement authority to states and the federal government can lead to redundant expense, policy distortion, and a loss of democratic accountability. A growing literature responds to these claims, trumpeting the benefits of concurrent state-federal enforcement - most notably the potential for state regulators to remedy under-enforcement by captured federal agencies. Both bodies of scholarship are right, but also incomplete. What is missing from this rather polarized debate is a …

The Social Network And The Crowdfund Act: Zuckerberg, Saverin, And Venture Capitalists' Dilution Of The Crowd, John S. (Jack) Wroldsen

Vanderbilt Journal of Entertainment & Technology Law

By virtue of Title III of the JOBS Act, signed into law on April 5, 2012, crowdfunding could become a powerful, even revolutionary, force to finance start-up companies. It democratizes entrepreneurs' access to seed capital and converts the masses of Internet users into potential retail venture capitalists. Many have cautioned, though, that crowdfunding poses serious investment risks of start-up companies failing, committing fraud, and being mismanaged. Accordingly, the JOBS Act includes numerous disclosure obligations designed to mitigate such downside risks.

But what has been overlooked, and what this Article analyzes from a venture capitalist perspective, is that even if a …

Dodd-Frank's Say On Pay: Will It Lead To A Greater Role For Shareholders In Corporate Governance?, Randall S. Thomas, Alan R. Palmiter, James F. Cotter

Vanderbilt Law School Faculty Publications

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, Dodd-Frank mandated such votes at public companies. The first year of "say on pay" under the new legislation may have changed the dialogue and give-and-take in the shareholder-management relationship at some companies, particularly on the question of executive pay.

We study the evolution of shareholder voting on "say on pay" - beginning in 2006 as a fledgling shareholder movement to get "say on pay" on the corporate ballot, evolving as a handful of companies and later the financial firms receiving …

Toward A Public Enforcement Model For Directors' Duty Of Oversight, Renee M. Jones, Michelle Welsh

Vanderbilt Journal of Transnational Law

This Article proposes a public enforcement model for the fiduciary duties of corporate directors. Under the dominant model of corporate governance, the principal function of the board of directors is to oversee the conduct of senior corporate officials. When directors fail to provide proper oversight, the consequences can be severe for shareholders, creditors, employees, and society at large. Despite general agreement on the importance of director oversight, courts have yet to develop a coherent doctrine governing director liability for the breach of oversight duties. In Delaware, the dominant state for U.S. corporate law, the courts tout the importance of board …

Intraportfolio Litigation, Amanda Rose, Richard Squire

Vanderbilt Law School Faculty Publications

The modern trend is for investors to diversify. Shareholders who own one S&P 500 firm tend to own many of the others as well. This trend casts doubt on the traditional compensation and deterrence rationales for legal rules that hold corporations liable for the acts of their agents. Today, when A Corp sues B Corp (for breach of contract, theft of trade secrets, or any other legal wrong), many of the same shareholders own both the plaintiff and the defendant. For these shareholders, damages just shift money from one pocket to another, minus of course lawyer fees. We offer here …

Unreliable Securities For Retirement Income Security: Certifying The Erisa Stock-Drop Class, Lauren N. Fromme

Vanderbilt Law Review

Catherine Stevens had built her retirement savings "a dollar at a time over a lifetime of hard work" when it was "reduced to virtually zero" at Enron's collapse. "I feel very strongly that we have all been wronged," she said. Her plans for a secure future had been destroyed. Almost eight years after Enron's failure, stories like Catherine's persist, and employee retirement income security remains as comforting as an imaginary friend. A falling stock market in the wake of financial finagling leaves many employee retirement plans dangerously insecure. Employees like Catherine who bet their futures on their company's stock have …

Life After Morrison: Extraterritoriality And Rico, R. D. Mello

Vanderbilt Journal of Transnational Law

For years, the federal courts of appeals have borrowed heavily from securities law jurisprudence in developing a framework for analyzing claims under the Racketeer Influenced and Corrupt Organizations Act (RICO). Last year, in the case of Morrison v. National Australia Bank, the Supreme Court issued a ground-breaking opinion that rejected decades of lower court precedent related to the extraterritorial application of U.S. securities laws and reemphasized the vitality of the presumption against extraterritoriality. Because of the parallel development of securities law and RICO jurisprudence, Morrison will have significant consequences for the application of RICO in cases involving foreign defendants and …

Trimming The "Judicial Oak": Rule 10b5-2(B)(1), Confidentiality Agreements, And The Proper Scope Of Insider Trading Liability, Ryan M. Davis

Vanderbilt Law Review

In recent years the Securities and Exchange Commission, commonly known as the SEC, has been involved in a number of high- profile suits that have attracted a good deal of media attention. Among those prosecuted by the Commission are hedge fund billionaire and Galleon Group founder Raj Rajaratnam, investment/Ponzi- scheme guru Bernie Madoff, television host and magazine publisher Martha Stewart, and colorful Dallas Mavericks owner Mark Cuban. Although such notable suits may simply be the SEC's attempt to justify its own existence and role in the market it polices in light of the financial disasters of the past decade, these …

Lying And Getting Caught: An Empirical Study Of The Effect Of Securities Class Action Settlements On Targeted Firms, Randall Thomas, Lynn Bai, James Cox

Vanderbilt Law School Faculty Publications

The ongoing Great Recession has triggered numerous proposals to improve the regulation of financial markets and, most importantly, the regulation of organizations such as credit rating agencies, underwriters, hedge funds, and banks, whose behavior is believed to have caused the credit crisis that spawned the economic collapse. Not surprisingly, some of the reform efforts seek to strengthen the use of private litigation . Private suits have long been championed as a necessary mechanism not only to ompensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a …

The Multienforcer Approach To Securities Fraud Deterrence: A Critical Analysis, Amanda M. Rose

Vanderbilt Law School Faculty Publications

Participants in the U.S. capital markets can be sued for securities fraud by a mishmash of enforcers, including the SEC, class action plaintiffs, and state regulators. Does this multi-enforcer approach make sense from a deterrence perspective? This Article suggests that the answer is probably no. Although in theory there are conditions under which a multi-enforcer approach would promote optimal deterrence, it is unclear at best that those conditions exist in the United States. And further empirical research, while warranted, is unlikely to resolve the issue definitively. The status quo tends to persevere in the face of this sort of irreducible …

Greater Mutual Fund Transparency In India, Stephen P. Smith

Vanderbilt Journal of Transnational Law

India has been one of the darlings among emerging market economies over the past decade. It has experienced dizzying economic growth that has lifted great numbers of Indians out of poverty and changed the economic outlook of much of its populace. For the first time, many Indians have excess funds to save or invest, and the Indian mutual fund industry has enjoyed an explosion in popularity as a result of this economic boom, particularly among first time mutual fund investors.

One of the most important mechanisms for investor protection in any capital market is the provision of information to investors …

The Use Of Mortgage-Backed Securities In International Comparative Perspective: Lessons And Insights, Csaba Rusznak

Vanderbilt Journal of Transnational Law

The secondary mortgage market in the United States has helped millions of people purchase homes over the past half century. Following the burst of the real estate bubble and the credit crisis, it is important for American policymakers not to lose sight of the importance that the secondary mortgage market has played in increasing home ownership. The financial engineering in the form of securitization that led to the success of the secondary mortgage market needs to be preserved, although it should also be reworked so that the externalization of unappreciated risk is reduced and the possibility of a large-scale financial …

Auditing The Pcaob: A Test To The Accountability Of The Uniquely Structured Regulator Of Accountants, Michael A. Thomason, Jr.

Vanderbilt Law Review

After a slew of highly publicized corporate accounting scandals during the early 2000s at prominent companies-including Enron, WorldCom, Adelphia, and Tyco-public confidence in the integrity of financial reporting by public companies was undoubtedly shaken. Several major financial reporting frauds demonstrated serious weaknesses with the then self-regulated accounting profession, including the failure of auditors to detect those companies that were "cooking their books." The collapse of several prominent companies not only affected top executives, who often were subjected to civil and criminal charges, but also produced harsh consequences for several other constituencies who relied on the integrity of the accounting firms …

Star Creation: The Incubation Of Mutual Funds, Alan R. Palmiter, Ahmed E. Taha

Vanderbilt Law Review

Mutual fund incubation is a process by which new funds are initially operated out of public view. The high-performing funds are then marketed to investors, and the low-performing funds are quietly terminated. This selection process is not revealed to investors, thus creating the illusion that the successful funds' returns were the result of skill rather than luck. Also, some fund companies subsidize their incubator funds in ways that do not continue after the funds are sold to the public. As a result, the high returns of successful incubator funds generally do not persist after the funds are marketed to investors. …

Attorneys, Accountants, And Bankers, Oh My! Primary Liability For Secondary Actors In The Wake Of "Stoneridge", Robert J. Grubb

Vanderbilt Law Review

Mervin "Buddy" Schwartz, Jr., embodied the American Dream. A Pennsylvania resident, Schwartz began working for Hershey Foods in 1961 as a maintenance mechanic.' He eventually became a member of the local union's executive board. A hard worker providing for his family, Schwartz had a thirteen-year perfect attendance record and often worked overtime. He even managed to attend night classes and obtained an associate's degree in Bible studies.

Lacking any financial training, Buddy Schwartz relied on the retirement plan and 401k5 Hershey provided for his retirement. Because he contributed the maximum allowable amount out of each paycheck to his 401k, he …

Beyond Economics: The U.S. Recognition Of International Financial Reporting Standards As An International Subdelegation Of The Sec's Rulemaking Authority, Jacob L. Barney

Vanderbilt Journal of Transnational Law

A final rule promulgated by the Securities and Exchange Commission (SEC) in 2008 allowing foreign private securities issuers to prepare SEC-required financial disclosures under international financial reporting standards (IFRS) as promulgated by the International Accounting Standards Board (LASB) is a highly significant event for U.S. and global capital markets. However, surprisingly few questions have been asked regarding the SEC's legal authority to take such an unprecedented step.

This Note assesses the recent SEC action with regard to IASB from two perspectives--traditional administrative law, with particular emphasis on delegations by government entities to private parties, and international law, with particular emphasis …

Mapping The American Shareholder Litigation Experience, Randall Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those …

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, …