Securities Law Commons^™

Spoofing And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Sue S. Guan

Faculty Scholarship

Nearly a century after the United States enacted its first securities laws, urgent questions remain as to the scope of manipulation law: whether manipulation is possible in principle, and if so, how the law should respond in practice. Sharp disagreement among courts, economists, and legal scholars as to whether trading or quoting activity constitutes illegal manipulation has led to a legal framework that lacks precision and cogency. Moreover, the poorly articulated normative basis for court rulings has resulted in enforcement that is both under-inclusive and over-inclusive in ways that do a poor job of discouraging socially harmful transactions and enabling …

Common Ownership: Do Managers Really Compete Less?, Merritt B. Fox, Menesh S. Patel

Faculty Scholarship

This Article addresses an important question in modern antitrust: when large investment funds have holdings across an industry, is competition depressed?

The question of the impact of common ownership on competition has gained much attention as the role of institutional shareholding has grown, with the funds of the three largest management companies holding in aggregate approximately 21% of the shares of a typical S&P 500 firm. It is a source of acute disagreement among scholars and policymakers, with some who believe common ownership does depress competition seeking antitrust law reforms that would significantly constrain how investment funds operate. Neglected in …

The Future Of Disclosure: Esg, Common Ownership, And Systematic Risk, John C. Coffee Jr.

Faculty Scholarship

The U.S. securities markets have recently undergone (or are undergoing) three fundamental transitions: (1) institutionalization (with the result that institutional investors now dominate both trading and stock ownership); (2) extraordinary ownership concentration (with the consequence that the three largest U.S. institutional investors now hold 20% and vote 25% of the shares in S&P 500 companies); and (3) the introduction of ESG disclosures (which process has been driven in the U.S. by pressure from large institutional investors). In light of these transitions, how should disclosure policy change? Do institutions and retail investors have the same or different disclosure needs? Why are …

The Giant Shadow Of Corporate Gadflies, Kobi Kastiel, Yaron Nili

Faculty Scholarship

Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Amazingly, a small group of individual shareholders wields unprecedented power to set corporate agendas and stands at the epicenter of our contemporary corporate governance ecosystem. In fact, the power of these individuals, known as “corporate gadflies,” continues to rise.

Corporate gadflies present a puzzling reality. Although public corporations in the United States are increasingly owned by large institutional investors, much of their corporate …

A Revised Monitoring Model Confronts Today's Movement Toward Managerialism, James D. Cox, Randall S. Thomas

Faculty Scholarship

There are many lessons to be drawn from the sweep of history. In law, the compelling story repeatedly told is the observable co-movement of law on the one hand, and economic, social, and political changes on the other hand. Aberrations, however, do arise but generally do not persist in the long term. Contemporary corporate law seems to be on the cusp of such an abnormality as legal developments and proposed reforms for corporate law are currently conflicting with the direction in which the host environment is moving. This article identifies a series of contemporary judicial and regulatory corporate governance developments …

Regulating Financial Guarantors, Steven L. Schwarcz

Faculty Scholarship

To improve financial regulation, scholars have engaged in extensive research over the past decade to try to understand why systemically important financial firms engage in excessive risk-taking. None of that research fully explains, however, the unusually excessive risk-taking by financial guarantors such as bond insurers, protection sellers under credit-default-swap (CDS) derivatives, credit enhancers in securitization transactions, and even issuers of standby letters of credit. With tens of trillions of dollars of financial guarantees outstanding, the potential for failure is massive. This Article argues that financial guarantor risk-taking is influenced by a previously unrecognized cognitive bias, which it calls “abstraction bias.” …

Securitizing Digital Debts, Christopher K. Odinet

Faculty Scholarship

The promise of financial technology (“fintech”) and artificial intelligence (“AI”) in broadening access to financial products and services continues to capture the imagination of policymakers, Wall Street, and the public. This has been particularly true in the realm of fintech credit where platform companies increasingly provide online loans to consumers, students, and small businesses by harnessing AI underwriting and alternative data. In 2019 alone fintech lenders represented nearly 50% of total non-credit card, unsecured consumer loan balances in the United States. One of the most prevalent ways fintech credit firms operate is by securitizing the online loans they help originate. …

Little Power Struggles Everywhere: Attacks On The Administrative State At The Securities And Exchange Commission, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Delaware's New Competition, William J. Moon

Faculty Scholarship

According to the standard account in American corporate law, states compete to supply corporate law to American corporations, with Delaware dominating the market. This “competition” metaphor in turn informs some of the most important policy debates in American corporate law.

This Article complicates the standard account, introducing foreign nations as emerging lawmakers that compete with American states in the increasingly globalized market for corporate law. In recent decades, entrepreneurial foreign nations in offshore islands have used permissive corporate governance rules and specialized business courts to attract publicly traded American corporations. Aided in part by a select group of private sector …

From Trulia To Akorn: A Ride On The Roller Coaster Of M&A Litigation, Pierluigi Matera, Ferruccio M. Sbarbaro

Faculty Scholarship

In recent years, M&A litigation has experienced a dramatic increase, culminating with a peak in 2015, when over 96. of publicly announced mergers were challenged in a shareholder lawsuit. A large number of these lawsuits were frivolous and vexatious, since most claims were filed by plaintiffs' attorneys just to extract some fees with little effort. Some abusive practices emerged, signalling an alarming exploitation of the system. One scheme that plaintiffs' attorneys put in place was the disclosure-only settlement. There, the stockholders obtained some modest supplemental disclosures, the plaintiff's attorneys got significant fee awards from the defendant directors and the defendant …

Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi, Ofer Eldar

Faculty Scholarship

A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions …

Short And Distort, Joshua Mitts

Faculty Scholarship

Pseudonymous attacks on public companies are followed by stock price declines and sharp reversals. These patterns are likely driven by manipulative stock options trading by pseudonymous authors. Among 1,720 pseudonymous attacks on mid- and large-cap firms from 2010 to 2017, I identify over $20.1 billion in mispricing. Reputation theory suggests these reversals persist because pseudonymity allows manipulators to switch identities without accountability.

Taking Compliance Seriously, John Armour, Jeffrey N. Gordon, Geeyoung Min

Faculty Scholarship

How can we ensure corporations play by the “rules of the game” – that is, laws encouraging firms to avoid socially harmful conduct? Corporate compliance programs play a central role in society’s current response. Prosecutors give firms incentives – through discounts to penalties – to implement compliance programs that guide and monitor employees’ behavior. However, focusing on the incentives of firms overlooks the perspective of managers, who decide how much firms invest in compliance.

We show that stock-based pay, ubiquitous for corporate executives, creates systematic incentives to short-change compliance. Compliance is a long-term investment for firms, whereas managers’ time horizon …

Board Compliance, John Armour, Brandon L. Garrett, Jeffrey N. Gordon, Geeyoung Min

Faculty Scholarship

What role do corporate boards play in compliance? Compliance programs are internal enforcement programs, whereby firms train, monitor and discipline employees with respect to applicable laws and regulations. Corporate enforcement and compliance failures could not be more high-profile, and have placed boards in the position of responding to systemic problems. Both case law on boards’ fiduciary duties and guidance from prosecutors suggest that the board should have a continuing role in overseeing compliance activity. Yet very little is actually known about the role of boards in compliance. This paper offers the first empirical account of public companies’ engagement with compliance …

A Mission Statement For Mutual Funds In Shareholder Litigation, Sean J. Griffith, Dorothy S. Lund

Faculty Scholarship

This Article analyzes the conduct of mutual funds in shareholder litigation. We begin by reviewing the basic forms of shareholder litigation and the benefits such claims might offer mutual fund investors. We then investigate, through an in-depth docket review, whether and how the ten largest mutual funds participate in shareholder litigation. We find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-term oriented mutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them …

Petition For Rulemaking On Short And Distort, John C. Coffee Jr., Joshua Mitts, James D. Cox, Peter Molk, Edward Greene, Randall S. Thomas, Meyer-Eisenberg, Robert B. Thompson, Colleen Honigsberg, Andrew Verstein, Donald C. Langevoort, Charles K. Whitehead

Faculty Scholarship

Today, some hedge funds attack public companies for the sole purpose of inducing a short-lived panic which they can exploit for profit. This sort of market manipulation harms average investors who entrust financial markets with their retirement savings. While short selling serves a critical function in the capital markets, some short sellers disseminate negative opinion about a company, inducing a panic and sharp decline in the stock price, and rapidly close that position for a profit prior to the price partially or fully rebounding. We urge the SEC to enact two rules which will discourage manipulative short selling. The petition …

Enhancing Efficiency At Nonprofits With Analysis And Disclosure, David M. Schizer

Faculty Scholarship

The U.S. nonprofit sector spends $2.54 trillion each year. If the sector were a country, it would have the eighth largest economy in the world, ahead of Brazil, Italy, Canada, and Russia. The government provides nonprofits with billions in tax subsidies, but instead of evaluating the quality of their work, it leaves this responsibility to nonprofit managers, boards, and donors. The best nonprofits are laboratories of innovation, but unfortunately some are stagnant backwaters, which waste money on out-of-date missions and inefficient programs. To promote more innovation and less stagnation, this Article makes two contributions to the literature.

First, this Article …

Insulating A Wto Investment Facilitation Framework From Isds, George A. Bermann, N. Jansen Calamita, Manjiao Chi, Karl P. Sauvant

Faculty Scholarship

The authors identify several ways in which a WTO investment facilitation framework for development can be insulated from investor-state dispute settlement provisions in international investment agreements, and suggest specific formulations in this respect.

Stakeholder Preferences And Priorities For The Next Wto Director General, Matteo Fiorini, Bernard Hoekman, Petros C. Mavroidis, Douglas Nelson, Robert Wolfe

Faculty Scholarship

The WTO is looking for a new Director-General (DG). What does the trade community think is needed? This paper reports on the results of an expert survey undertaken as part of a research project on global trade governance at the European University Institute to solicit views on what WTO members and the international trade community consider the most important attributes of candidates for the position, as well as views on the substantive policy and institutional reform priorities confronting the WTO – and thus the new DG. The results suggest strong support for someone with managerial and political experience, and a …

Making Sense Of The Arbitrator’S Ruling In Ds 316 Ec And Certain Member States – Measures Affecting Trade In Large Civil Aircraft (Article 22.6-Ec): A Jigsaw Puzzle With (At Least) A Couple Missing Pieces, Petros C. Mavroidis, Kamal Saggi

Faculty Scholarship

“The U.S. won a $7.5 Billion award from the World Trade Organization against the European Union, who has for many years treated the USA very badly on Trade due to Tariffs, Trade Barriers, and more. This case going on for years, a nice victory”, tweeted President Trump’s on October 3, 2019. The United States (US) won not only the highest amount of retaliation ever adjudicated in the history of the WTO but also an ongoing right to retaliate on an annual basis until such time as the EU had complied by either removing the subsidies it granted Airbus or somehow …

For Coöperation And The Abolition Of Capital, Or, How To Get Beyond Our Extractive Punitive Society And Achieve A Just Society, Bernard E. Harcourt

Faculty Scholarship

In hindsight, the term "capitalism" was always a misnomer, coined paradoxically by its critics in the nineteenth century. The term misleadingly suggests that the existence of capital produces a unique economic system or that capital itself is governed by economic laws. But that's an illusion. In truth, we do not live today in a system in which capital dictates our economic circumstances. Instead, we live under the tyranny of what I would call "tournament dirigisme": a type of state-directed gladiator sport where our political leaders bestow spoils on the wealthy, privileged elite.

We need to displace this tournament dirigisme with …

The New Mechanisms Of Market Inefficiency, Kathryn Judge

Faculty Scholarship

Mechanisms of market inefficiency are some of the most important and least understood institutions in financial markets today. A growing body of empirical work reveals a strong and persistent demand for “safe assets,” financial instruments that are sufficiently low risk and opaque that holders readily accept them at face value. The production of such assets, and the willingness of holders to treat them as information insensitive, depends on the existence of mechanisms that promote faith in the value of the underlying assets while simultaneously discouraging information production specific to the value of those assets. Such mechanisms include private arrangements, like …

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati

Faculty Scholarship

The textbook model of commercial contracts between sophisticated parties holds that terms are proposed, negotiated and ultimately priced by the parties. Parties reach agreement on contract provisions that best suit their transaction with the goal of maximizing the joint surplus from the contract. The reality, of course, is that the majority of the provisions in contemporary commercial contracts are boilerplate terms derived from prior transactions and even the most sophisticated contracting parties pay little attention to these standard terms, focusing instead on the price of the transaction. With standard-form or boilerplate contracts, this dynamic of replicating by rote the terms …

Competing For Votes, Kobi Kastiel, Yaron Nili

Faculty Scholarship

Shareholder voting matters. It can directly shape a corporation’s governance, operational and social policies. But voting by shareholders serves another important function—it produces a marketplace for votes where management and dissidents compete for the votes of the shareholder base. The competition over shareholder votes generates ex ante incentives for management to perform better, to disclose information to shareholders in advance, and to engage with large institutional investors.

Traditional corporate law has looked to a variety of “market forces” as a means of curbing the agency costs of public corporations. Yet, for various reasons, these market forces are, at best, an …

Anticipating Venezuela’S Debt Crisis: Hidden Holdouts And The Problem Of Pricing Collective Action Clauses, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

A creditor who asks for stronger enforcement rights upon its debtor’s default will rationally accept a lower interest rate reflecting the greater expected recovery the exercise of those rights provides. Over a dozen studies, however, have failed to document this basic relationship in the context of the collective action clause, a key provision in sovereign bonds. We conjecture that this failure is because enforcing the rights in question requires collective decision-making among anonymous creditors with different interests, impeding market predictions regarding future price effects. The pricing of rights that require collective enforcement thus turns on whether the market observes an …

Foreign Corruption As Market Manipulation, Gina-Gail S. Fletcher

Faculty Scholarship

No abstract provided.

Tepoel Lecture: Bond Trustees And The Rising Challenge Of Activist Investors, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Index Funds And The Future Of Corporate Governance: Theory, Evidence, And Policy, Lucian Bebchuk, Scott Hirst

Faculty Scholarship

Index funds own an increasingly large proportion of American public companies. The stewardship decisions of index fund managers—how they monitor, vote, and engage with their portfolio companies—can be expected to have a profound impact on the governance and performance of public companies and the economy. Understanding index fund stewardship, and how policymaking can improve it, is thus critical for corporate law scholarship. In this Article we contribute to such understanding by providing a comprehensive theoretical, empirical, and policy analysis of index fund stewardship.
/="/">
/="/">We begin by putting forward an agency-costs theory of index fund incentives. Stewardship decisions by …

Corporate Governance By Index Exclusion, Scott Hirst, Kobi Kastiel

Faculty Scholarship

Investors have long been unhappy with certain governance arrangements adopted by companies undertaking initial public offerings, such as dual-class voting structures. Traditional sources of corporate governance rules—the Securities and Exchange Commission, state law, and exchange listing rules—do not constrain these arrangements. As a result, investors have turned to a new source of governance rules: index providers.

This Article provides a comprehensive analysis of index exclusion rules and their likely effects on insiders’ decision-making. We show that efforts to portray index providers as the new sheriffs of the U.S. capital markets are overstated. Index providers face complex and conflicting interests, which …

The Specter Of The Giant Three, Lucian Bebchuk, Scott Hirst

Faculty Scholarship

This Article examines the large, steady, and continuing growth of the Big Three index fund managers — BlackRock, Vanguard, and State Street Global Advisors. We show that there is a real prospect that index funds will continue to grow, and that voting in most significant public companies will come to be dominated by the future “Giant Three.”
/="/">
/="/">We begin by analyzing the drivers of the rise of the Big Three, including the structural factors that are leading to the heavy concentration of the index funds sector. We then provide empirical evidence about the past growth and current status …