Securities Law Commons^™

The Dynamics Of Contract Evolution, Mitu Gulati, Stephen J. Choi, Eric A. Posner

Faculty Scholarship

Contract scholarship has given little attention to the production process for contracts. The usual assumption is that the parties will construct the contract ex nihilo, choosing all the terms so that they will maximize the surplus from the contract. In fact, parties draft most contracts by slightly modifying the terms of contracts that they have used in the past, or that other parties have used in related transactions. A small literature on boilerplate recognizes this phenomenon, but little empirical work examines the process. This Article provides an empirical analysis by drawing on a data set of sovereign bonds. The authors …

Cds Zombies, Anna Gelpern, Mitu Gulati

Faculty Scholarship

This paper examines the contract interpretation strategies adopted by the International Swaps and Derivatives Association (ISDA) for its credit derivatives contracts in the Greek sovereign debt crisis. The authors argue that the economic function of sovereign credit default swaps (CDS) after Greece is limited and uncertain, partly thanks to ISDA’s insistence on textualist interpretation. Contract theory explanations for textualist preferences emphasise either transactional efficiency or relational factors, which do not fit ISDA or the derivatives market. The authors pose an alternative explanation: the embrace of textualism in this case may be a means for ISDA to reconcile the competing political …

The Eurozone Debt Crisis: The Options Now, Mitu Gulati, Lee C. Bechheit

Faculty Scholarship

The Eurozone debt crisis is entering its third year. The original objective of the official sector’s response to the crisis -- containment -- has failed. All of the countries of peripheral Europe are now in play; three of them (Greece, Ireland and Portugal) operate under full official sector bailout programs.

The prospect of the crisis engulfing the larger peripheral countries, Spain and Italy, has sparked a new round of official sector containment measures. These will involve active intervention by official sector players such as the European Central Bank in order to preserve market access for the affected countries.

This article …

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

The Evolution Of Contractual Terms In Sovereign Bonds, Stephen J. Choi, Mitu Gulati, Eric A. Posner

Faculty Scholarship

In reaction to defaults on sovereign debt contracts, issuers and creditors have strengthened the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem in which debtors need to be forced to repay debts in good states of the world; debtors need to be granted partial relief from debt payments in bad states; debtors may attempt to exploit divisions among creditors in order to opportunistically reduce their debt burden; debtors may engage in excessively risky activities using …

Regulatory Techniques And Liability Regimes For Asset Managers, Deborah A. Demott

Faculty Scholarship

No abstract provided.

The Extraterritorial Provisions Of The Dodd-Frank Act Protects U.S. Taxpayers From Worldwide Bailouts, Michael Greenberger

Faculty Scholarship

The significant extraterritorial scope of the derivatives regulation within the Dodd-Frank Wall Street Reform and Consumer Protection Act promises to foster rigorous international standards for financial regulation that will restore transparency and stability to the global derivatives market. At present, that market exceeds $700 trillion notional value, or over ten times the world GDP. Despite opposition from Wall Street to the present extraterritorial application of almost all of Dodd-Frank’s derivatives regulation, the plain language of the statute requires implementing that regulation on an appropriate extraterritorial basis in order to protect U.S. taxpayers from bailing out financial institutions engaging in foreign …

Gender And Securities Law In The Supreme Court, Lyman Johnson, Michelle M. Harner, Jason A. Cantone

Faculty Scholarship

The 2010 appointment of Elena Kagan to the United States Supreme Court meant that, for the first time, three female justices would serve together on that court. Less clear is whether Justice Kagan’s gender will really matter in how she votes as a justice. This question is an especially visible aspect of a larger issue: do female judges display gendered voting patterns in the cases that come before them?

This article makes a novel contribution to the growing literature on female voting patterns. We investigated whether female justices on the United States Supreme Court voted differently than, or otherwise influenced, …

The Political Economy Of Dodd-Frank: Why Financial Reform Tends To Be Frustrated And Systemic Risk Perpetuated, John C. Coffee Jr.

Faculty Scholarship

A good crisis should never go to waste. In the world of financial regulation, experience has shown – since at least the time of the South Sea Bubble three hundred years ago – that only after a catastrophic market collapse can legislators and regulators overcome the resistance of the financial community and adopt comprehensive "re-form" legislation. U.S. financial history both confirms and conforms to this generalization. The Securities Act of 1933 and the Securities Exchange Act of 1934 were the product of the 1929 stock-market crash and the Great Depression, with their enactment following the inauguration of President Franklin Roosevelt …

The Law And Economics Of Blockholder Disclosure, Lucian A. Bebchuk, Robert J. Jackson Jr.

Faculty Scholarship

The Securities and Exchange Commission is currently considering a rulemaking petition that advocates tightening the rules under the Williams Act, which regulates the disclosure of large blocks of stock in public companies. In this Article, we explain why the Commission should not view the proposed tightening as a merely "technical" change needed to meet the objectives of the Williams Act, provide market transparency, or modernize its regulations. The drafters of the Williams Act made a conscious choice not to impose an inflexible 5% cap on pre-disclosure accumulations of shares to avoid deterring investors from accumulating large blocks of shares. We …

Like Moths To A Flame - International Securities Litigation After Morrison: Correcting The Supreme Court's Transactional Test, Marco Ventoruzzo

Faculty Scholarship

Because of the broad jurisdiction American courts have asserted in cases arising under the Securities Exchange Act of 1934, they have been called a Shangri-la for “foreign-cubed” class actions with little connection to the United States. Over the past forty years, the standards used by American courts to determine their jurisdiction in international securities disputes have evolved, culminating in the U.S. Supreme Court’s Morrison decision of 2010. The new transactional test promulgated in Morrison replaced all of its predecessor tests, from a test measuring whether the conduct in question took place in the United States to a test measuring whether …

The Plight Of The Individual Investor In Securities Class Actions, David H. Webber

Faculty Scholarship

Individual investors victimized by securities fraud have no voice in directing class actions brought on their behalf once institutional investors obtain lead plaintiff appointments. The same holds for state-level transactional class actions claiming breaches of fiduciary duty by boards of directors in connection with mergers and acquisitions. In theory, the interests of institutional and individual investors align, nullifying the need for a separate voice for individuals; one rationale for the lead plaintiff modifications of the Private Securities Litigation Reform Act of 1995 was that individuals would benefit from the sophistication of institutional investor lead plaintiffs. But in practice, individual investors’ …

Securities Class Actions Against Foreign Issuers, Merritt B. Fox

Faculty Scholarship

This Article addresses the fundamental question of whether, as a matter of good policy, it is ever appropriate that a foreign issuer be subject to the U.S. fraud-on-the-market private damages class action liability regime, and, if so, by what kinds of claimants and under what circumstances. The bulk of payouts under the U.S. securities laws arise out of fraud-on-the-market class actions – actions against issuers on behalf of secondary market purchasers of their shares for trading losses suffered as a result of issuer misstatements in violation of Rule 10b-5. In the first decade of this century, foreign issuers became frequent …

Federalizing Fiduciary Duty: The Altered Scope Of Officer Fiduciary Duty Following Orderly Liquidation Under Dodd-Frank, Dorothy S. Lund

Faculty Scholarship

The financial crisis of 2008 ushered in a new era of regulatory reform in the United States. The failure of several large banks prompted Congressional scrutiny ofthe U.S. bank regulatory system. Many critics highlighted the government's failure to intervene to prevent Lehman Brothers' insolvency, which resulted in economic turmoil not yet resolved. Against this backdrop, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in July 2010.

Dodd-Frank mandates institutional changes to minimize economic instability and establishes regulatory processes to guide the government's response to future bank failures. At the heart of the regulation is the Orderly …

Delaware Court Of Chancery: Change, Continuity – And Competition, John C. Coffee Jr.

Faculty Scholarship

For Delaware, it is the best of times and the worst of times. The institutional prestige of the Delaware Court of Chancery has never been higher. Under the leadership of Chancellors Allen, Chandler and Strine, the court has converted many (and possibly most) of the academics, who once tended to be skeptical of Delaware. Academics and practitioners alike have been impressed by both the depth and thoughtfulness of the court of chancery's decisions and the hardworking style of its vice chancellors (who regularly seem able to turn out lengthy decisions in days that would take many federal circuit courts months …

Direct And Indirect U.S. Government Debt, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

In-House Counsel’S Role In The Structuring Of Mortgage-Backed Securities, Steven L. Schwarcz, Shaun Barnes, Kathleen G. Cully

Faculty Scholarship

The authors introduce the financial crisis and the role played by mortgage-backed securities. Then describe the controversy at issue: whether, in order to own and enforce the mortgage loans backing those securities, a special-purpose vehicle “purchasing” mortgage loans must take physical delivery of the notes and security instruments in the precise manner specified by the sale agreement. Focusing on this controversy, the authors analyze (i) the extent, if any, that the controversy has merit; (ii) whether in-house counsel should have anticipated the controversy; and (iii) what, if anything, in-house counsel could have done to avert or, after it arose, to …

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

Chapman Dialogue And Law Review Symposium Keynote Address: Ex Ante Versus Ex Post Approaches To Financial Regulation, Steven L. Schwarcz

Faculty Scholarship

Ideal financial regulation would work ex ante, to prevent financial failures. Once a failure occurs, there may already be economic damage, and it may be difficult to stop the failure from spreading and becoming systemic. The reality, though, is that preventing financial failures should be only one role for regulators. Even an optimal prophylactic regulatory regime cannot anticipate and prevent every failure. This paper, which formed my Chapman Dialogue Address at Chapman University School of Law and the keynote speech at Chapman Law Review’s 2011 Symposium on the Future of Financial Regulation, attempts to contrast fundamental differences between ex ante …

Information Asymmetry And Information Failure: Disclosure Problems In Complex Financial Markets, Steven L. Schwarcz

Faculty Scholarship

Disclosure of information has been a key to regulation of the financial markets in the United States. Indeed, some have argued that the ‘exclusive focus [of federal securities regulation] is on full disclosure’ (Hazen, 2005). Yet there is relatively little dispute that although most if not all of the risks giving rise to the collapse of the market for structured securities backed by subprime mortgages were disclosed, the disclosure was ineffective. Disclosure failed because of the complexity of those securities and transactions.

This chapter examines disclosure’s insufficiency in addressing information asymmetry, arguing that complexity can cause information failure. There are …

Regulating Systemic Risk: Towards An Analytical Framework, Steven L. Schwarcz, Iman Anabtawi

Faculty Scholarship

The global financial crisis demonstrated the inability and unwillingness of financial market participants to safeguard the stability of the financial system. It also highlighted the enormous direct and indirect costs of addressing systemic crises after they have occurred, as opposed to attempting to prevent them from arising. Governments and international organizations are responding with measures intended to make the financial system more resilient to economic shocks, many of which will be implemented by regulatory bodies over time. These measures suffer, however, from the lack of a theoretical account of how systemic risk propagates within the financial system and why regulatory …

Drafting A Model Collective Action Clause For Eurozone Sovereign Bonds, Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

In the wake of the Eurozone sovereign debt crisis, the European financial authorities announced last November that all Eurozone sovereign bonds issued after mid-2013 must contain an identical collective action clause (CAC) in order, if necessary, to facilitate a restructuring of those
instruments.

CACs in sovereign bonds have been the subject of considerable attention over the last ten years. They were introduced into sovereign bonds governed by U.S. law only in early 2003. Yet a surprising number of versions of the clause can be found in modern sovereign bonds.

The history of the research and development of this contractual provision …

Keynote Address: A Regulatory Framework For Managing Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This accessible analysis of systemic risk regulation was delivered as the keynote speech at an October 20, 2011 European Central Bank conference on regulation of financial services. Many regulatory responses, like the Dodd-Frank Act in the United States, consist largely of politically motivated reactions to the financial crisis, looking for villains (whether or not they exist). To be most effective, however, the regulation must be situated within a more analytical framework. In this speech, I attempt to build that framework, showing that preventive regulation is insufficient and that regulation also must be designed to limit the transmission of systemic risk …

Political Risk And Sovereign Debt Contracts, Mitu Gulati, Stephen J. Choi, Eric A. Posner

Faculty Scholarship

Default on sovereign debt is a form of political risk. Issuers and creditors have responded to this risk both by strengthening the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and by creating terms that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem in which debtors need to be forced to repay debts in good states of the world; debtors need to be granted partial relief from debt payments in bad states; debtors may attempt to exploit divisions among creditors in order to opportunistically reduce …

Potentially Perverse Effects Of Corporate Civil Liability, Samuel W. Buell

Faculty Scholarship

Inadequate civil regulatory liability can be an incentive for public enforcers to pursue criminal cases against firms. This incentive is undesirable in a scheme with overlapping forms of liability that is meant to treat most cases of wrongdoing civilly and to reserve the criminal remedy for the few most serious institutional delicts. This effect appears to exist in the current scheme of liability for securities law violations, and may be present in other regulatory structures as well. In this chapter for a volume on "Prosecutors in the Boardroom," the author argues that enhancements of the SEC's enforcement processes likely would …

The Paradoxes Of Dodd-Frank, James D. Cox

Faculty Scholarship

No abstract provided.

Securities Class Actions As Public Law, James D. Cox

Faculty Scholarship

The Political Economy of Fraud on the Market provides a wide-ranging criticism of and thoughtful reforms for securities class actions....However, both their critique of contemporary class actions and their model of the reforms they propose leave unexamined a good many matters relevant to both the criticism and reform of securities class actions....Bratton and Wachter earn high marks for being less passionate and much more thoughtful than others in the chorus calling for reform; indeed, their observations are among the most thoughtful to be found in this area. Nonetheless, their analysis is incomplete in many important areas, and in addition to …

Activist Distressed Debtholders: The New Barbarians At The Gate?, Michelle M. Harner

Faculty Scholarship

The term “corporate raiders” previously struck fear in the hearts of corporate boards and management teams. It generally refers to investors who target undervalued, cash-flush or mismanaged companies and initiate a hostile takeover of the company. Corporate raiders earned their name in part because of their focus on value extraction, which could entail dismantling a company and selling off its crown jewels. Today, the term often conjures up images of Michael Milken, Henry Kravis or the movie character Gordon Gekko, but the alleged threat posed to companies by corporate raiders is less prevalent—at least with respect to the traditional use …

Overwhelming A Financial Regulatory Black Hole With Legislative Sunlight: Dodd-Frank’S Attack On Systemic Economic Destabilization Caused By An Unregulated Multi-Trillion Dollar Derivatives Market, Michael Greenberger

Faculty Scholarship

It is now accepted wisdom that it was the non-transparent, poorly capitalized and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008.[1] Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized OTC derivative guarantees of the subprime housing market; and the guarantors’ multi-trillion dollar interconnectedness with thousands of other OTC derivatives’ counterparties within that OTC market (through interest rate, currency, foreign exchange, and …

Will The Cftc Defy Congress's Mandate To Stop Excessive Speculation In Commodity Markets And Aid And Abet Hyperinflation In World Food And Energy Prices: Analysis Of The Cftc's Proposed Rules On Speculative Position Limits, Michael Greenberger

Faculty Scholarship

On January 26, 2011, the Commodity Futures Trading Commission issued the Notice of Proposed Rulemaking on Position Limits for Derivatives pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The proposed rules are designed to implement the historic Congressional mandate of the Commodity Exchange Act, as amended by Section 737 of the Dodd-Frank Act, to ban excessive speculation from the derivatives market, i.e., the speculation which exceeds the need for liquidity by commercial handlers hedging price risk in these markets. Section 737 is the result of multi-year consideration by Congress, during which a strong consensus was reached …