Securities Law Commons^™

Keynote Address: Identifying And Managing Systemic Risk: An Assessment Of Our Progress, Steven L. Schwarcz

Faculty Scholarship

This short address attempts to provide a succinct overview, critiquing how well the Dodd-Frank Act identifies and manages systemic risk.

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 …

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.

What Happened To The "Up-Tick" Rule?, Constantine N. Katsoris

Faculty Scholarship

No abstract provided.

Is Our Economy Safe? A Proposal For Assessing The Success Of Swaps Regulation Under The Dodd-Frank Act, Michael Greenberger

Faculty Scholarship

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The central goal of the Dodd-Frank Act is to ensure that all standardized derivates products are regulated. The Act requires these trades be fully transparent and backed by adequate capital. The central question for evaluating the success of the Dodd-Frank Act is simple but profound: Has the Dodd-Frank Act made the economy any safer from the threat of another economic meltdown? This paper introduces a number of metrics that can be used to assess the success of the Dodd-Frank Act.

Fiduciary Exemption For Public Necessity: Shareholder Profit, Public Good, And The Hobson's Choice During A National Crisis, Robert J. Rhee

Faculty Scholarship

This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of …

Too Big To Fail?: Recasting The Financial Safety Net, Steven L. Schwarcz

Faculty Scholarship

Government safety nets in the United States and abroad focus, anachronistically, on problems of banks and other financial institutions, largely ignoring financial markets which have become major credit sources for consumers and companies. Besides failing to protect these markets, this narrow focus encourages morally hazardous behavior by large institutions, like AIG and Citigroup, that are "too big to fail." This paper examines how a safety net should be recast to protect financial markets and also explains why that safety net would mitigate moral hazard and help resolve the too-big-to-fail dilemma.

Is "Pay-To-Play" Driving Public Pension Fund Activism In Securities Class Actions? An Empirical Study, David H. Webber

Faculty Scholarship

The recent emergence of public pension funds as frequent lead plaintiffs in securities class actions has prompted speculation that the funds’ litigation activism is driven by “pay-to-play”. “Pay-to-play” posits that public pension funds are driven by politician board members to obtain lead plaintiff appointments in securities class actions because of campaign contributions made by plaintiffs’ lawyers to those board members. This paper provides a comprehensive analysis of the securities litigation activity of 111 such funds from the years 2003 through 2006. Three of the paper’s findings cast doubt on the “pay-to-play” theory, including that: (1) politicians and political control negatively …

Voting Power Without Responsibility Or Risk--How Should Proxy Reform Address The Decoupling Of Economic And Voting Rights?, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Promoting Innovation: The Law Of Publicly Traded Corporations, Merritt B. Fox

Faculty Scholarship

Improving economic welfare requires that society’s scarce savings be allocated among proposed real investment projects in a way that appreciates the prospects of promising new innovations. Corporate and securities law help structure important elements of this process of allocation. This article sketches out an approach based upon a seemingly paradoxical analogy of a market economy’s overall finance process to the way a hierarchical organization gathers and processes relevant bits of information dispersed among many individuals in order to make decisions. It thereby takes advantage of important thinking in communications and organizational theory about how to make organizations sensitive to the …

Let The Securities And Exchange Commission Outsource Enforcement By Litigation: A Proposal, Tamar Frankel

Faculty Scholarship

The stories of Stanford's suspected Ponzi scheme, and Madoff s proven scheme, as well as the Securities and Exchange Commission's lenient settlements with very large suspected violators, and its focus on the numerous, small accused, have raised questions about the Commission's enforcement resources. This Article suggests that the Commission outsource civil cases against very large defendants when the examination of the defendant finds signs of wrongdoing under the securities acts. The Commission already outsources two types of legal services and the United States government practices extensive outsourcing. This article suggests that with appropriate limitations and controls outsourcing of enforcement litigation …

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

Faculty Scholarship

One of the most crucial, but systematically neglected, comparative differences between corporate law systems in Europe and in the United States 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 vast body of scholarly work …

Fiduciaries With Conflicting Obligations, Steven L. Schwarcz

Faculty Scholarship

This Article examines the dilemma of a fiduciary acting for parties who, as among themselves, have conflicting commercial interests - an inquiry fundamentally different from that of the traditional study of conflicts between fiduciaries and their beneficiaries. Existing legal principles do not fully capture this dilemma because agency law focuses primarily on an agent’s duty to a given principal, not on conflicts among principals; trust law focuses primarily on gratuitous transfers; and commercial law generally addresses arm’s length, not fiduciary, relationships. The dilemma has become critically important, however, as defaults increase in the multitude of conflicting securities (e.g., classes of …

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

Faculty Scholarship

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 compensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a chorus …

Distorting Legal Principles, Steven L. Schwarcz

Faculty Scholarship

Legal principles enable society to order itself by preserving broadly based expectations. Sometimes, however, parties transact in ways that are so inconsistent with generally accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. Such a distortion might occur, for example, if a normally mandatory legal rule were unexpectedly treated as a default rule. This article explores the problem of distorting legal principles, initially focusing on rehypothecation, a distortion whose uncertainty and confusion contributed to the downfall of Lehman Brothers and the resulting global financial crisis. But not all distortions are, on …

The Market Reaction To Legal Shocks And Their Antidotes: Lessons From The Sovereign Debt Market, Michael Bradley, James D. Cox, Mitu Gulati

Faculty Scholarship

In October 2000 a hedge fund holding an unpaid debt claim won an enormous victory against the debtor, the Republic of Peru, through an opportunistic interpretation of the common pari passu clause by a Brussels court. This development was met by charges from policy makers and practitioners that the court's decision (its novel interpretation of the pari passu clause) would lead to a dramatic increase in the risks of holdout litigation faced by sovereign debtors. Over the ensuing years, multiple reform solutions were proposed including the revision of certain contractual terms, the filing of amicus briefs in a key case, …

Fending For Themselves: Why Securities Regulations Should Encourage Angel Groups, Abraham J. B. Cable

Faculty Scholarship

No abstract provided.

Regulating Complexity In Financial Markets, Steven L. Schwarcz

Faculty Scholarship

As the financial crisis has tragically illustrated, the complexities of modern financial markets and investment securities can trigger systemic market failures. Addressing these complexities, this Article maintains, is perhaps the greatest financial-market challenge of the future. The Article first examines and explains the nature of these complexities. It then analyzes the regulatory and other steps that should be considered to reduce the potential for failure. Because complex financial markets resemble complex engineering systems, and failures in those markets have characteristics of failures in those systems, the Article‟s analysis draws on chaos theory and other approaches used to analyze complex engineering …

Innovation After The Revolution: Foreign Sovereign Bond Contracts Since 2003, Mitu Gulati, Anna Gelpern

Faculty Scholarship

For over a decade, contracts literature has focused on standardization. Scholars asked how terms become standard, and why they change so rarely. This line of inquiry painted a world where a standard term persists until it is dislodged by another standard term, perhaps after a brief window of ferment before the second term takes hold. It also overshadowed the early insights of boilerplate theories, which described contracts as a mix of standard and customized terms, and asked why the mix might be suboptimal. This article brings the focus back to the mix. It examines the development of selected provisions in …

Short Selling And The News: A Preliminary Report On Empirical Study, Merritt B. Fox, Lawrence R. Glosten, Paul C. Tetlock

Faculty Scholarship

No subject in securities regulation has generated more heat and less light than short selling. A short sale is the sale of a share that is borrowed from a third party rather than owned by the seller. At a later time, the short seller extinguishes her obligation to this third party by “covering” – purchasing an identical share in the market and then returning it to the third party. If the share price drops, the cost of covering will be less than the proceeds received earlier from the sale and the short seller will make money. Politicians and CEOs rail …

Enhancing Investor Protection And The Regulation Of Securities Markets, John C. Coffee Jr.

Faculty Scholarship

This is the congressional testimony of Professor John C. Coffee, Jr., before the United States Senate Committee on Banking, Housing and Urban Affairs, March 10, 2009.

The Future Of The Securities And Exchange Commission As A Market Regulator, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

The Hardening Of Soft Law In Securities Regulation, Roberta S. Karmel, Claire Kelly

Faculty Scholarship

No abstract provided.

The Future Of The Securities And Exchange Commission As A Market Regulator, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Leverage In The Board Room: The Unsung Influence Of Private Lenders In Corporate Governance, Frederick Tung

Faculty Scholarship

The influence of banks and other private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or account for this lender influence. Corporate governance discourse has traditionally focused only on corporate law arrangements. The few existing accounts of creditors' influence over firm managers emphasize the drastic actions creditors take in extreme cases - when a firm is in serious trouble - but in fact, private lender influence is a routine feature of corporate governance even absent financial distress. …

Redesigning The Sec: Does The Treasury Have A Better Idea?, John C. Coffee Jr., Hillary A. Sale

Faculty Scholarship

Symposiums supply a snapshot in time. By observing the common assumptions and shared frameworks of a collection of scholars writing contemporaneously, one gains both insight into the intellectual world of a past era and the ability to measure its distance from our own. Twenty-five years ago the Virginia Law Review organized a noted symposium (the "1984 Symposium") to celebrate the 50th anniversary of the SEC. A number of prominent scholars participated, and its articles have been much cited.

Coping In A Global Marketplace: Survival Strategies For A 75-Year-Old Sec, James D. Cox

Faculty Scholarship

Notwithstanding cynicism to the contrary, data bears witness to the fact that government agencies come and go. There are multiple causes that give rise to their disappearance but among the most powerful is that conditions that first gave rise to the particular agency's creation no longer exist so that the regulatory needs that once prevailed are no longer present or that there is a better governmental response than Congress' earlier embraced when it initially created an independent regulatory agency to address the problems needing to be addressed. Certainly the more rigid the regulatory authority conferred on an agency has much …

The ‘Principles’ Paradox, Steven L. Schwarcz

Faculty Scholarship

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of …