Securities Law Commons^™

Internalizing Outsider Trading, Ian Ayres, Stephen Choi

Michigan Law Review

Investing in the United States has become a hobby for many. Individual ownership of equity, moreover, has increased over the past decade due in part to the introduction of internet-based trading. While providing the possibility for greater returns compared with bank savings accounts, among other investment alternatives, the public capital markets also pose greater risks for investors. Many individual investors lack both the resources and the incentive to analyze the value of any particular security in the market. Such investors thus trade at a systematic disadvantage relative to more informed parties. In response, regulators have asserted that certain informational disparities …

Venture Capital On The Downside: Preferred Stock And Corporate Control, William W. Bratton

Michigan Law Review

When stock indices drop precipitously, when the startup companies fizzle out, and when it stops raining money on places like Wall Street and Silicon Valley, attention turns to downside contracting. Law and business lawyers, sitting in the back seat as mere facilitators on the upside, move up to the front and sometimes even take the wheel. The job is the same on both the upside and downside: to maximize the value of going concern assets. But what comes easily on the upside can be dirty work on the down, where assets need to be separated from dysfunctional teams of business …

The Anticompetitive Effect Of Passive Investment, David Gilo

Michigan Law Review

There are many cases in which a firm passively invests in its competitor. For example, Microsoft passively invested in $150 million worth of the nonvoting stock of Apple, its historic rival in the operating systems market. Also, in November 1998, Northwest Airlines, the nation's fourth-largest airline, purchased 14% of the common stock of Continental Airlines Inc., the nation's fifth-largest (and fastest growing) airline. Northwest competes with Continental on seven routes, serving 3.6 million passengers per year. In another example, TCI, the nation's largest cable operator, became a passive investor with a 9% stake (which can be increased, under the terms …

Pleading Under Section 11 Of The Securities Act Of 1933, Krista L. Turnquist

Michigan Law Review

The Securities Act of 1933 ("Securities Act") requires full and fair disclosure of the nature of securities sold in interstate and foreign commerce. Section 11 of the Securities Act prohibits false or misleading registration statements. It also provides buyers a private remedy for false or misleading statements against any signer of the registration statement, any partner or director of the issuer, any professional involved in preparing or certifying the statement, and any underwriter. The rule appears simple: if there is a material misstatement or omission in the registration statement, the buyer may sue the seller. Courts disagree, however, over how …

Empirical Insight And Some Thoughts On Future(S) Investigation: Comments On Mark West's 'Private Ordering At The World's First Futures Exchange', A.W. Brian Simpson

Michigan Law Review

Some considerable number of years ago, when I was in Chicago, I had a plan to undertake a general study of the origins of futures markets. They fascinated me for a variety of reasons, one being their bizarre nature: traders meeting together, usually in some form of ring, in order to sell, on a huge scale, quantities of commodities which they neither possess, nor intend to possess, to other traders, who have not the least wish to receive such commodities, and nowhere to put them if they did. At first sight it appears a weird perversion of the institution of …

A Public Choice Approach To Private Ordering: Rent-Seeking At The World's First Futures Exchange: Comments On Mark West's 'Private Ordering At The World's First Futures Exchange', Omri Yadlin

Michigan Law Review

The literature on private ordering systems has expanded exponentially over the last decade. Yet, very few scholars have actually attempted to define the term "private ordering" - a failure that sometimes leads to confusion. Some scholars identify private ordering with non-state ordering. According to this view, the private legal systems Robert Ellickson, Lisa Bernstein, McMillan & Woodruff, Mark West, and others have investigated are "private" simply because their norms are not manufactured or enforced by the state. The alternative view emphasizes the decentralized feature of private ordering systems. Robert Ellickson, for example, studied "how people manage to interact to mutual …

A Case-By-Case Approach To Pleading Scienter Under The Private Securities Litigation Reform Act Of 1995, Matthew Roskoski

Michigan Law Review

Securities fraud litigation under Rule lOb-5 threatens all publicly traded companies: according to the Stanford Securities Class Action Clearinghouse, in 1998 a securities fraud lawsuit was filed for nearly every day that the stock markets were open. Some of these lawsuits appear to be frivolous, triggered by inevitable fluctuations in stock prices (so-called "fraud by hindsight" complaints), while others represent legitimate efforts at private enforcement of the securities laws. Disposition on the pleadings is a critical defense strategy for all securities lawsuits. Securities fraud lawsuits that withstand a 12(b)(6) motion almost always settle, regardless of the actual merits of the …

The Efficient Norm For Corporate Law: A Neotraditional Interpretation Of Fiduciary Duty, Thomas A. Smith

Michigan Law Review

To economically oriented corporate law professors, distinguishing between directors' fiduciary duty to shareholders and a duty to the corporation1 itself smacks of reification - treating the fictional corporate entity as if it were a real thing. Now the orthodox view among corporate law scholars is that the corporate fiduciary duty is a norm that requires firm managers to "maximize shareholder value." Giving the corporation itself any serious role in the analysis of fiduciary duty, the thinking goes, obscures scientific insight with bad legal metaphysics. Some recent scholarship and legislation, such as constituency statutes, have challenged this "shareholder primacy" view. Contestants …

Private Ordering At The World's First Futures Exchange, Mark D. West

Michigan Law Review

Modern derivative securities - financial instruments whose value is linked to or "derived" from some other asset - are often sophisticated, complex, and subject to a variety of rules and regulations. The same is true of the derivative instruments traded at the world's first organized futures exchange, the Dojima Rice Exchange in Osaka, Japan, where trade flourished for nearly 300 years, from the late seventeenth century until shortly before World War II. This Article analyzes Dojima's organization, efficiency, and amalgam of legal and extralegal rules. In doing so, it contributes to a growing body of literature on commercial self-regulation while …

The Political Economy Of Statutory Reach: U.S. Disclosure Rules In A Globalizing Market For Securities, Merritt B. Fox

Michigan Law Review

This Article addresses the appropriate reach of the U.S. mandatory securities disclosure regime. While disclosure obligations are imposed on issuers, they are triggered by transactions:- the public offering of, or public trading in, the issuers' shares. Share transactions are taking o n an increasingly transnational character. The barriers to a truly global market for equities continue to lessen: financial information is becoming increasingly globalized and it is becoming increasingly inexpensive and easy to effect share transactions abroad. There are approximately 41,000 issuers of publicly traded shares in the world. For an ever larger portion of these issuers, there will be …

Realigning Corporate Governance: Shareholder Activism By Labor Unions, Stewart J. Schwab, Randall S. Thomas

Michigan Law Review

Labor unions are active again - but this time as capitalists. The potential strength of union pension funds has long been noted, but until recently unions have held their stock passively or invested in union-friendly companies. In the 1990s, however, unions have become the most aggressive of all institutional shareholders. In most cases, it is hard to find a socialist or proletarian plot in what unions are doing with their shares. Rather, labor activism is a model for any large institutional investor attempting to maximize return on capital. Unions, union pension funds, individual union members, and labor-oriented investment funds are …

Securities Disclosure In A Globalizing Market: Who Should Regulate Whom, Merritt B. Fox

Michigan Law Review

One of the most dramatic examples of increasing interaction across national boundaries in recent years has been the burgeoning volume of transnational transactions in corporate equities. Most developed capitalist countries impose affirmative obligations on issuers of corporate equity to disclose certain information about themselves. While these obligations are imposed on issuers, they are triggered by transactions. The growth in transnational transactions is thus increasingly raising difficult issues concerning the reach of differing national regimes. Given the magnitude of legal resources devoted to compliance with such disclosure regulations, they promise to feature prominently in the larger discussion of the role of …

Directorial Fiduciary Duties In A Tracking Stock Equity Structure: The Need For A Duty Of Fairness, Jeffrey J. Hass

Michigan Law Review

Part I of this article briefly describes the key distinctions between a tracking stock corporation and a conventional corporation. It then touches on the reasons why corporations have adopted tracking stock equity structures. Part II articulates the unique legal challenges presented by a tracking stock equity structure. Part III discusses the disclosure that tracking stock corporations have made with respect to these challenges. Part IV briefly summarizes the fiduciary duties of care and loyalty and explores why these duties are ill-equipped to address these challenges. Part V presents the duty of fairness and discusses the duty's elements in detail. In …

The Applicability Of Section 2462'S Statute Of Limitations To Sec Enforcement Suits In Light Of The Remedies Act Of 1990, Catherine E. Maxson

Michigan Law Review

This Note argues that section 2462's limitations period reaches all SEC civil suits for monetary fines but not those SEC actions seeking equitable relief. Part I interprets section 2462 and, in the process, demonstrates that the statute controls SEC enforcement suits for civil penalties. Part II argues that SEC actions requesting injunctions or disgorgement of profits, unlike those seeking monetary fines, are not subject to the time bar. Finally, Part III asserts that SEC administrative enforcement proceedings should not be immune from the statute of limitations found in section 2462 of title 28 because exempting administrative proceedings would be tantamount …

Cook And The Corporate Shareholder: A Belated Review Of William W. Cook's Publications On Corporations, Alfred F. Conard

Michigan Law Review

A Review of A Treatise on the Law of Stock and Stockholders, as Applicable to Railroad, Banking, Insurance, Manufacturing, Commercial, Business, Turnpike, Bridge, Canal, and Other Private Corporations by William W. Cook

The Obsolescence Of Wall Street: A Contextual Approach To The Evolving Structure Of Federal Securities Regulation, Joel Seligman

Michigan Law Review

As a matter of analytical style, this article illustrates a contextualist approach. For a considerable period of time, the dominant analytical style in corporate and securities .law has been a variant of economic, or law and economics, analysis. The virtue of this type of analysis is that it focuses on what its authors deem to be crucial variables and reaches conclusions derived from the core of a specific legal problem. The defect of this type of analysis is that so much is assumed or often assumed away.

Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, Bernard S. Black, John C. Coffee Jr.

Michigan Law Review

The two authors of this article have been on opposite sides of this debate, but both recognize that no single explanation is complete and that other factors, such as the self-interest of fund managers, the conflicts of interest faced by institutions who want to retain corporate business, cultural forces, collective action problems, and what we can call path dependence- the difficulty of changing the structure and behavior of highly evolved and specialized institutions - have causal roles in explaining shareholder passivity. The central question in research on American corporate governance is how these forces interact to produce the characteristic …

Insider Trading Deterrence Versus Managerial Incentives: A Unified Theory Of Section 16(B), Merritt B. Fox

Michigan Law Review

Part I of this article assesses the social costs of a crude rule of thumb. Because section 16(b) applies to a given class of paired transactions, it deters both transactions based on inside information and transactions not so based. Each time section 16(b) is stretched to include a class of paired transactions, it deters some additional innocent transactions. This side effect will take the form of officers' and directors' purchasing fewer shares in their own companies and refusing to accept as large a portion of their compensation in a form based on share price. There are strong theoretical and empirical …

A Monument To A Regulatory System, Norman S. Poser

Michigan Law Review

A Review of Securities Regulation by Louis Loss and Joel Seligman

Shareholder Passivity Reexamined, Bernard S. Black

Michigan Law Review

This article argues that shareholder monitoring is possible: It's an idea that hasn't been tried, rather than an idea that has failed. I defer to a second article currently in draft the question of whether more monitoring by institutional shareholders is desirable. Will direct shareholder oversight, or indirect oversight through shareholder-nominated directors, improve corporate performance, prove counterproductive, or, perhaps, not matter much one way or the other? What are the benefits and risks in giving money managers - themselves imperfectly monitored agents - more power over corporate managers? If more shareholder voice is desirable, how much more and …

Looking A Gift Of Stock In The Mouth: Donative Transfers And Rule 10b-5, Carol J. Sulcoski

Michigan Law Review

This Note explores whether a gift of stock can constitute a "sale" for the purposes of section lO(b) of the 1934 Act and rule lOb-5 promulgated thereunder. Part I reviews the relevant 1934 Act provisions, and concludes that although the statute's language and legislative history do not mention gifts of stock as such, they support the inclusion of gifts within the statute's scope. Part II examines a limited line of cases holding that a bona fide charitable gift is not a sale under section 16(b) of the 1934 Act. This Part concludes that section 16(b) cases are not dispositive of …

The Unimportance Of Being Efficient: An Economic Analysis Of Stock Market Pricing And Securities Regulation, Lynn A. Stout

Michigan Law Review

Part I of this article describes how perceptions that market efficiency is an important regulatory objective have influenced the development of securities law. For illustration, Part I examines the role of market efficiency goals in recent debates on the scope of insider trading liability, on trading in stock index futures, and on mandatory disclosure of merger negotiations. Part II then evaluates the notion that more efficient stock markets necessarily produce more optimal resource allocation. A closer look at the economic consequences of stock prices suggests that the principal function of stock prices is not resource allocation but rather the redistribution …

Shareholders Versus Managers: The Strain In The Corporate Web, John C. Coffee Jr.

Michigan Law Review

Part I will seek to understand why firms trade in the stock market at a substantial discount from their asset value. It will answer that existing theories of the firm have not given adequate attention to a critical area where shareholders and managers have an inherent conflict, one that the existing structure of the firm does not resolve or mitigate. Despite the significant changes in the internal structure of the corporation over the last half century that have been described by business historians, there remains a deep internal strain between shareholders, on the one hand, and managers and employees, on …

Materiality, Law Reform, And Regulation By Prosecution, Michael Rosenzweig

Michigan Law Review

A Review of Regulation by Prosecution: The Securities & Exchange Commission Versus Corporate America by Roberta S. Karmel

A Banker's Adventures In Brokerland: Looking Through Glass-Steagall At Discount Brokerage Services, Michigan Law Review

Michigan Law Review

Several banks have recently entered or announced their intention to enter the discount brokerage business, and the Federal Reserve Board is considering a rule listing discount brokerage as an acceptable bank holding company activity. The securities industry has contested this entry, asserting that the Glass-Steagall Act requires separation between investment and commercial banking. Though the Act does mandate some division between the two lines of business, this Note argues that bank discount brokerage services do not violate the Act. Part I examines the competing "accommodation" and "agency" interpretations of the relevant statutory sections, concluding that the agency interpretation, which permits …

The Effect Of Insider Trading Rules On The Internal Efficiency Of The Large Corporation, Robert J. Haft

Michigan Law Review

Academics have hotly debated these justifications for years, and none of the three has achieved universal acclaim. This Article suggests another perspective: Prohibiting insider trading may enhance business decision-making in large corporations. With the exception of proponents of the Business Property view, analysts have focused on how an insider trading rule affects the national securities markets and traders in those markets. The internal governance of the large corporation is a different matter, one deserving separate consideration.

The Sec And The Public Interest, Michigan Law Review

Michigan Law Review

A Review of The SEC and the Public Interest by Susan M. Phillips and J. Richard Zecher

Sec Disciplinary Proceedings Against Attorneys Under Rule 2 ( E ), Michigan Law Review

Michigan Law Review

This Note reassesses SEC authority to discipline attorneys under rule 2( e ). Part I explores the history of rule 2( e) proceedings against attorneys and the troublesome policy issues raised by the SEC's new approach to rule 2(e) enforcement. Part II examines the SEC's claim that general rulemaking provisions give it authority to discipline attorneys. The Note concludes that a proper construction of statutes and case law bars rule 2( e) proceedings against attorneys.

Social Investing And The Law Of Trusts, John H. Langbein, Richard A. Posner

Michigan Law Review

In Part I, after presenting a brief primer on the economics of securities markets, we analyze the economic and policy issues presented by social investing. We conclude that the usual forms of social investing involve a combination of reduced diversification and higher administrative costs not offset by net consumption gains to the investment beneficiaries. Social investing may therefore be economically unsound even though there is no reason to expect a portfolio constructed in accordance with the usual principles of social investment to yield a below-average rate of return - provided that administrative costs are ignored.

Part II relates our policy …

The Sec And Corporate Disclosure: Regulation In Search Of A Purpose, Michigan Law Review

Michigan Law Review

A Book Notice about The SEC and Corporate Disclosure: Regulation in Search of a Purpose by Homer Kripke