Securities Law Commons^™

Ghosting The Crowd, Andrew A. Schwartz

Washington and Lee Law Review

Crowdfunded companies are legally bound to provide investors with an annual report—but most don’t. This “ghosting of the crowd” violates federal securities laws and raises the risk of opportunism by entrepreneurs, who are more prone to misbehave if no one is watching. Most ominously, it threatens the very viability of the investment crowdfunding market, as investors who are ghosted by one company are less likely to invest in another.

This Article reports on the embarrassing record of noncompliance with the annual report rule imposed by the Jumpstart Our Business Startups (“JOBS”) Act of 2012 and Regulation Crowdfunding, and proposes a …

Regulating Robo-Advisors In An Age Of Generative Artificial Intelligence, Daniel Schwarcz, Tom Baker, Kyle Logue

Washington and Lee Law Review

New generative artificial intelligence (“AI”) tools can increasingly engage in personalized, sustained, and natural conversations with users. This technology has the capacity to reshape the financial services industry, making customized expert financial advice broadly available to consumers. However, AI’s ability to convincingly mimic human financial advisors also creates significant risks of large-scale financial misconduct. Which of these possibilities becomes reality will depend largely on the legal and regulatory rules governing “robo-advisors” that supply fully automated financial advice to consumers.

This Article consequently critically examines this evolving regulatory landscape, arguing that current U.S. rules fail to adequately limit the risk that …

Introduction—Corporate And Securities Law Responses To Climate Change: Law And Political Economy Perspectives, Sarah C. Haan, Faith Stevelman

Scholarly Articles

This introductory essay has two parts. First, we address differences between the Law and Economics perspective and the Law and Political Economy (LPE) perspective on business and securities law and climate change. For example, an LPE approach—with its concern for discerning winners and losers and how power operates through law—rejects the facile separation of public and private law concerns. LPE repudiates the common notion that business law is and should solely be about maximizing shareholder wealth, with all else falling to government ex post. Indeed, elsewhere we have written about this as a misleading and harmful “separate spheres” conceit (Stevelman …

Mandatory Public Reason-Giving In Corporate Governance, Sarah C. Haan

Scholarly Articles

Since the late 1970s, corporate governance law has incorporated a growing number of mandates that require corporate boards to explain to their shareholders the reasons behind their decision-making. These mandates do more than merely require boards to disclose certain decisions. They compel boards to publicly state why they have made a particular choice.

Public reason-giving is a core democratic value that recognizes the accountability of a representative body to its constituents. It provides a basis for constituents to assess the quality of leaders’ decision-making and to engage with that decision-making in effective ways. In corporations, public reason-giving facilitates the shareholder’s …

Corporate Governance Speech, Sarah C. Haan

Scholarly Articles

The State has always regulated the intra-firm communications that make corporate governance possible, most commonly by mandating disclosures of information by a corporation to its shareholders. Some such laws are labeled “securities regulation,” but securities regulation is a broad category that extends to speech by actors who are outside the corporate enterprise as well. Also, the conventional securities regulation category does not capture all such laws; other examples, including information forcing mandates, can be found in state corporate law. This Article uses the term “corporate governance speech” to describe the communications among shareholders, directors, and officers through which corporate governance …

The Sound Of Silence In Corporate Director Resignations, Asaf Eckstein, Ziv Granov

Washington and Lee Law Review

This Article seeks to provide an in-depth theoretical, empirical, and policy analysis of an underdeveloped topic in corporate law: director departure. We argue that outspoken director resignations are an integral aspect of effective corporate governance. Disgruntled corporate directors who disagree with the firm’s policies or practices alert shareholders to internal misconduct, encouraging market reactions that pressure the company to make necessary changes. Disclosure of conflict is particularly important in mitigating information asymmetry between shareholders and management, allowing investors to promptly react to relevant events within the firm.

Despite the governance benefits of resignations in protest, we show that outspoken director …

New, Derivative: Third-Party Litigation Finance And Derivatives Regulation, Martin Flores

Washington and Lee Law Review Online

Litigation finance is globally abundant and largely unregulated in the United States. The mechanics behind third-party litigation finance are simple: The funder fronts litigation costs in exchange for a promised share of the proceeds if the litigant succeeds. While the normative debate about the value of these contracts in society endures, the litigation finance industry has new players in hedge funds and other opaque investment firms seeking high returns from risky litigation. Many scholars agree on whether to regulate these third-party litigation finance firms. The key debate rages on how to rein in an unbridled industry.

To add to this …

Disclosure, Greenwashing, And The Future Of Esg Litigation, Barbara Ballan, Jason J. Czarnezki

Washington and Lee Law Review

The Environmental, Social, and Governance (“ESG”) disclosure movement is expanding both voluntarily, as businesses choose to disclose this information, and mandatorily, as government agencies impose disclosure requirements. As ESG disclosure expands, so do the litigation risks. “Greenwashing” refers to presenting false or misleading environmental or sustainability (i.e., “green”) qualities of products, services, or practices. Businesses may greenwash consumers as well as investors with false and misleading ESG disclosures in advertising, securities filings, or other public statements activating greenwashing litigation from investors and consumers. This Article addresses (1) the laws and regulations that cover consumer and securities greenwashing litigation, (2) how …

Brief Of Amici Curiae Corporate And Securities Law Experts: Central Maine Power Company V. Maine Commission On Government Ethics And Election Practices, Sarah C. Haan

Scholarly Articles

Amici submit this brief to share expertise on corporate governance and securities laws and practices that relate directly to the lower court’s narrow-tailoring analysis of the Maine statute at the center of this case. While all participating amici may not agree with every statement in the brief, all amici agree that the Act’s 5% equity ownership threshold is not arbitrary and that ownership of 5% or more of a U.S. entity’s equity by a foreign government or a foreign-government-influenced entity presents a foreign influence on the U.S. entity’s governance and decision-making.

The Sec's Spac Solution, Karen Woody, Lidia Kurganova

Scholarly Articles

The SPAC craze has ebbed and flowed over the past few years, creating fortunes and ruining others. The SEC stepped into the mix in 2022 and proposed rules governing SPACs. The proposed rules artfully balance the interests of investor protection while retaining some of the featured characteristics of SPACs as innovative ways to take companies public. This Article details the history of SPACs, including their benefits and risks, and analyzes the SEC’s proposed rules, arguing that the SEC is well within its Congressional authority to regulate SPACs, and that the proposed rules are both well-tailored and necessary.

Safe Harbors In The Shadows: Extending 10b5-1 Plans To Cover Shadow Trading, Karen E. Woody, M. Cole Davidson

Scholarly Articles

Insider trading, or trading while in possession of material nonpublic information, remains the legal conundrum it has been for over four decades. The governing rule prohibiting insider trading is Rule 10b-5, passed in 1943 by the Securities and Exchange Commission (SEC) in order to clarify Section 10(b) of the Securities Exchange Act. Notably, neither Rule 10b-5 and Section 10(b) mention the term “insider trading.” In fact, scholars and historians have opined that insider trading was not considered by Congress as one of the aims of Section 10(b) or Rule 10b-5. Without any statutory guidance regarding insider trading, the legal contours …

Brief Of First Amendment And Securities Law Scholars As Amici Curiae In Support Of Respondent: National Center For Public Policy Research V. Securities And Exchange Commission, Sarah C. Haan

Scholarly Articles

Amici are law professors with significant expertise in corporate and securities law, and constitutional law, particularly regarding the First Amendment. They have published extensive analyses about the Shareholder Proposal Rule, shareholder voting, corporate democracy, First Amendment “coverage,” the constitutionality of mandatory disclosures, and various related issues. Amici thus have particular expertise in the First Amendment issues raised by the parties in this case.

Amici submit this brief to respond to Intervenor National Association of Manufacturers’ extreme argument that Rule 14a-8 violates the First Amendment. This position ignores—and NAM repeatedly overlooks—the vital function of proxy solicitation in modern corporate governance and …

Temporary Securities Regulation, Anita K. Krug

Washington and Lee Law Review

In times of crisis, including during the 2020–2021 global pandemic, the U.S. Securities and Exchange Commission (SEC) has engaged in a type of securities regulation that few scholars have acknowledged, let alone evaluated. Specifically, during recent market crises, the SEC adopted rules that are temporary, designed to help the securities markets and their participants— both public companies and public investment funds, such as mutual funds and ETFs—weather the crisis at hand but go no further. Once that goal has been accomplished, these rules usually expire, replaced by the permanent rules that they temporarily supplanted. Although the temporary-rulemaking endeavor is laudable—and …

A Tale Of Two Regulators: Antitrust Implications Of Progressive Decentralization In Blockchain Platforms, Evan Miller

Washington and Lee Law Review Online

Competition regulators have identified the potential for blockchain technology to disrupt traditional sponsor-led platforms, like app stores, that have received increased antitrust scrutiny. Enforcement actions by securities regulators, however, have forced blockchain-based platforms to adopt a strategy of progressive decentralization, delaying decentralization objectives in favor of the centralized model that competition regulators hope they will disrupt. This regulatory tension, and the implications for blockchain’s procompetitive potential, have yet to be explored. This Article first identifies the origin of this tension and its consequences through a competition law lens, and then recommends that competition regulators account for this tension in monitoring …

Profiting From Our Pain: Privileged Access To Social Impact Investing, Cary Martin Shelby

Scholarly Articles

Social impacting investing has become the latest trend to permeate the financial markets. With massive anticipated funding gaps for sustainable development goals, and a millennial-driven thirst for doing good while doing well, this trend is likely to continue in the coming decades. This burgeoning industry is poised to experience yet an additional boost, since it provides an alternative mechanism for private actors to “profit from our pain,” particularly in the wake of the COVID-19 pandemic and the Black Lives Matter movement.

As to be expected, the law has not sufficiently adapted to this new wave of innovation. Scholars have thus …

Real Insider Trading, Michael A. Perino

Washington and Lee Law Review

In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. The debate has, to this point, been based mostly on anecdote and conjecture rather than empirical evidence. This Article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess …

The Independent Board As Shield, Gregory H. Shill

Washington and Lee Law Review

The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’être lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead.

Numerous defects in the design and practice of the independent board …

Profiteering Off Public Health Crises: The Viable Cure For Congressional Insider Trading, Charles L. Slamowitz

Washington and Lee Law Review Online

This article takes an approachable, forward-thinking, and academic dive into congressional insider trading in the wake of the coronavirus (COVID-19) pandemic. After a confidential briefing by the Senate Health Committee warned of COVID-19, massive stock sell-offs by members of Congress and their spouses suddenly ensued. Some senators even publicly disparaged COVID-19’s viral effects while their own shares were being offloaded. By the time the American people were made aware of its dangers, vast investment holdings by congressional insiders had already been sold. Shockingly, it is unclear if congressional insiders trading on confidential coronavirus information are actually breaking the law. Congress …

The New Insider Trading, Karen E. Woody

Scholarly Articles

Pursuant to the SEC’s Rule 10b-5, in order to obtain a conviction for insider trading based upon a tipper-tippee theory, the government must prove that the tipper received a personal benefit for the tip, and that the tippee knew about that benefit. The last five years of blockbuster insider trading cases have focused on this seemingly nebulous personal benefit test, and the Supreme Court has been unable to clear the muddy waters. As a result, the parameters of insider trading remain hard to pin down and often shift depending on the facts of the most recent case. Two terms ago, …

Adversarial Failure, Benjamin P. Edwards

Washington and Lee Law Review

Investors, industry firms, and regulators all rely on vital public records to assess risk and evaluate securities industry personnel. Despite the information’s importance, an arbitration-facilitated expungement process now regularly deletes these public records. Often, these arbitrations recommend that public information be deleted without any true adversary ever providing any critical scrutiny to the requests. In essence, poorly informed arbitrators facilitate removing public information out of public databases. Interventions aimed at surfacing information may yield better informed decisions. Although similar problems have emerged in other contexts when adversarial systems break down, the expungement process to purge information about financial professionals provides …

Boards In Information Governance, Faith Stevelman, Sarah C. Haan

Scholarly Articles

This Article focuses on the evolving role of boards of directors. It charts the decline of the two leading, twentieth-century conceptual frameworks shaping corporate boards’ roles: agency cost theory, which produced the limited “monitoring board,” and “separate realms” theory, which ceded board responsibility for matters other than profit maximization to government regulation. Hedge fund activism and wild stock market swings have exposed the limits of the board’s role in agency cost theory. The 2020 pandemic, economic crises, investors’ demands for socially responsible stewardship, and corporations’ own political activism have rendered separate realms thinking untenable.

Although much theorizing in corporate law …

Chancery’S Greatest Decision: Historical Insights On Civil Rights And The Future Of Shareholder Activism, Omari Scott Simmons

Washington and Lee Law Review

This article builds upon the author's remarks at the 2018-2019 Lara D. Gass Annual Symposium: Civil Rights and Shareholder Activism at Washington and Lee University School of Law, February 15, 2019.

Shareholder activism—using an equity stake in a corporation to influence management—has become a popular tool to effectuate social change in the twenty-first century. Increasingly, activists are looking beyond financial performance to demand better corporate performance in such areas as economic inequality, civil rights, human rights, discrimination, and diversity. These efforts take many forms: publicity campaigns, litigation, proxy battles, shareholder resolutions, and negotiations with corporate management. However, a consensus on …

Social Activism Through Shareholder Activism, Lisa M. Fairfax

Washington and Lee Law Review

This article is based on the author's keynote address at the 2018-2019 Lara D. Gass Annual Symposium: Civil Rights and Shareholder Activism at Washington and Lee University School of Law, February 15, 2019.

In 1952, the SEC altered the shareholder proposal rule to exclude proposals made “primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The SEC did not reference civil rights activist James Peck or otherwise acknowledge that its actions were prompted by Peck’s 1951 shareholder proposal to Greyhound for desegregating seating. Instead, the SEC indicated that its change simply reflected a codification …

From Public Policy To Materiality: Non-Financial Reporting, Shareholder Engagement, And Rule 14a-8’S Ordinary Business Exception, Virginia Harper Ho

Washington and Lee Law Review

This article builds upon the author's remarks at the 2018-2019 Lara D. Gass Annual Symposium: Civil Rights and Shareholder Activism at Washington and Lee University School of Law, February 15, 2019.

In 2017, shareholder proposals urging corporate boards to report on their climate-related risk made headlines when they earned majority support from investors at ExxonMobil, Occidental Petroleum, and PPL. The key to this historic vote was the support of Blackrock, State Street, and Vanguard, which broke with management and cast their votes behind the proposals. The 2018 proxy season saw several more climate-related proposals earn majority support, and in 2018 …

How Did We Get Here? Dissecting The Hedge Fund Conundrum Through An Institutional Theory Lens, Cary Martin Shelby

Scholarly Articles

This article dissects both the origins and resulting harms of what the author terms the "hedge fund conundrum," in which institutional investors, such as pension plans and endowments, have consistently increased hedge fund allocations over the past decade despite pervasive evidence of excessive fees and subpar returns. It then utilizes an historical institutionalist lens to examine how lawmakers may have enabled a conundrum of this magnitude. By and large, this phenomenon is a symptom of regulatory loopholes that have permitted the private hedge fund market to increase in "publicness" through its expanding access and subsequent harm to retail investors. Such …

Myth Of The Attorney Whistleblower, Carliss N. Chatman

Scholarly Articles

Notwithstanding the political grandstanding and legal regimes put in place to prevent the next Enron, this article explores whether attorney whistleblower provisions provided in the Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission in the Representation of an Issuer and in the Model Rules of Professional Conduct are effective. When faced with attorney involvement in Enron, Congress passed § 307 of the Sarbanes Oxley Act (Sarbanes), which required the Securities and Exchange Commission (SEC) to amend its standards governing the conduct of attorneys practicing before the SEC. In response, the SEC and the American Bar Association …

The Gatekeepers Of Crowdfunding, Andrew A. Schwartz

Washington and Lee Law Review

Securities crowdfunding is premised on two core policy goals: inclusivity and efficiency. First, crowdfunding is conceived as an inclusive system where all entrepreneurs are given a chance to pitch their idea to the “crowd.” Second, crowdfunding is supposed to be an efficient way to channel funds from public investors to promising startup companies. There is a fundamental tension between these two policy goals, however. A totally inclusive system would ensure that platforms list any and every company that wants to participate. But platforms need to curate and select the companies they list in order to establish a reputation as a …

Cash For Your Conscience: Do Whistleblower Incentives Improve Enforcement Of The Foreign Corrupt Practices Act?, Amy Deen Westbrook

Washington and Lee Law Review

No abstract provided.

The Leidos Mixup And The Misunderstood Duty To Disclose In Securities Law, Matthew C. Turk, Karen E. Woody

Washington and Lee Law Review

This Article concerns the recent Supreme Court case, Leidos,Inc. v. Indiana Public Retirement System (Leidos), and examines the broader issues that it raised for securities law. The consensus among scholars and practitioners is that Leidos presented a direct conflict among the circuit courts over a core question of securities law—when a failure to comply with the SEC’s disclosure requirements can constitute fraud under Rule 10b-5. This Article provides a much different interpretation of the case. It begins by demonstrating that the circuit split which is presumed to have brought Leidos to the Supreme Court does not in fact exist. …

A Legal Frankenstein’S Monster: The Complete Bar Order In Securities Fraud Class Action Lawsuits, Jonathan C. Stanley

Washington and Lee Law Review

No abstract provided.