Securities Law Commons^™

Arrow's Theorem And The Exclusive Shareholder Franchise, Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

In this essay, we contest one of the main arguments for restricting corporate board voting to shareholders. In justifying the limitation of the franchise to shareholders, scholars have repeatedly turned to social choice theory—specifically, Arrow’s theorem—to justify the exclusive shareholder franchise. Citing to the theorem, corporate law commentators have argued that lumping different groups of stakeholders together into the electorate would result in a lack of consensus and, ultimately, the lack of coherence that attends intransitive social choices, perhaps even leading the corporation to self-destruct. We contend that this argument is misguided. First, we argue that scholars have greatly overestimated …

Shareholders In The Jury Box: A Populist Check Against Corporate Mismanagement, Ann M. Scarlett

All Faculty Scholarship

The recent subprime mortgage disaster exposed corporate officers and directors who mismanaged their corporations, failed to exercise proper oversight, and acted in their self-interest. Two previous waves of corporate scandals in this decade revealed similar misconduct. After the initial scandals, Congress and the Securities and Exchange Commission attempted to prevent the next crisis in corporate governance through legislative and regulatory actions such as the Sarbanes-Oxley Act of 2002. Those attempts failed. Shareholder derivative litigation has also failed because judges accord corporate executives great deference and thus rarely impose liability for breaches of fiduciary duties.

To prevent the next crisis in …

The Future Of Securitization, Steven L. Schwarcz

Faculty Scholarship

Securitization, a process in which firms can raise low-cost financing by efficiently allocating asset risks with investor appetite for risk, has been one of the most dominant and fastest-growing means of capital formation in the United States and the world. The subprime financial crisis, however, has revealed certain defects with how securitization is sometimes utilized. This article examines these defects and the extent they can, and should, be remedied going forward.

Monitoring Of Corporate Groups By Independent Directors, Adam C. Pritchard

Articles

Both the United States and Korea have reformed their corporate governance in recent years to put increasing responsibilities on independent directors. Independent directors have been found to be an important force protecting the interests of shareholders when it comes time to make certain highly salient decisions, such as firing a CEO or selling the company. This article compares the role of independent directors in the US and Korean systems. I argue that the US may have placed regulatory burdens on independent directors that they are unlikely to be able to satisfy, given their part-time status. By contrast, in the chaebol …

Mapping The American Shareholder Litigation Experience, Randall Thomas, James D. Cox

Vanderbilt Law School Faculty Publications

In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those …

A New Look At Judicial Impact: Attorneys' Fees In Securities Class Actions After Goldberger V. Integrated Resources, Inc., Theodore Eisenberg, Geoffrey P. Miller, Michael A. Perino

Cornell Law Faculty Publications

Judicial impact studies have generally found widespread compliance by lower courts. Often, however, these studies employ relatively insensitive measures of compliance, limit their focus to compliance with Supreme Court precedent, and only occasionally examine the impact of judicial decisions on the ultimate consumers of those rulings - the members of society who are subject to them. Significant questions thus remain, such as whether and to what extent lower courts in fact comply with precedent and what if any role fear of reversal plays in compliance. To address these gaps, we use regression analysis to examine how the district courts in …

The Sec In A Time Of Discontinuity., Joel Seligman

Scholarship@WashULaw

In Jack Coffee and Hillary Sale’s article, Redesigning the SEC: Does the Treasury Have a Better Idea?, the authors address the dominant reality today—that “[t]he natural superiority of the U.S. model for securities regulation is no longer an article of faith” and analyze whether the Department of the Treasury Blueprint provides a wiser structure of financial regulation.

Jim Cox in Coping in a Global Marketplace: Survival Strategies for a 75-Year-Old SEC similarly begins, “data bear witness to the fact that government agencies come and go,” but highlights the complexities of creating an international approach to accounting standards.

Judge Easterbrook begins …

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 …

Talking The Talk, Or Walking The Walk? Outcome-Based Regulation Of Transnational Investment, Jerry Ellig, Houman B. Shadab

Articles & Chapters

Today, individual U.S. retail investors have virtually limitless opportunities to invest their money, with a notable exception: they cannot directly invest in securities of foreign issuers and still be protected under U.S. law. This missing opportunity deprives U.S. investors of the ability to fully diversify their investments and also imposes undue costs and risks upon investors seeking to invest directly overseas. This Article shows that a Securities and Exchange Commission ("SEC") policy of "mutual recognition" of foreign regulatory regimes that achieve investor protection outcomes comparable to those of the SEC would solve this problem. A foreign issuer or other entity …

From Loyalty To Conflict: Addressing Fiduciary Duty At The Officer Level, Usha Rodrigues

Scholarly Works

Conflicts of interest are the quintessential agency cost-the constant, lurking danger that agents may seek their own personal gain, rather than the good of the corporation. Yet many corporate employees lack knowledge as to exactly what constitutes a conflict of interest. This ignorance facilitated the kind of fraud seen in Enron, WorldCom, and the options backdating scandals, and may help explain the out-sized payouts that many high-level corporate officers received even as the financial institutions they headed verged on self-destruction. Each case required not only affirmative fraudulent behavior on the part of a few, but also the tacit acceptance of …

New Governance In The Teeth Of Human Frailty: Lessons From Financial Regulation, Cristie Ford

All Faculty Publications

New Governance scholarship has made important theoretical and practical contributions to a broad range of regulatory arenas, including securities and financial markets regulation. In the wake of the global financial crisis, question about the scope of possibilities for this scholarship are more pressing than ever. Is new governance a full-blown alternative to existing legal structures, or is it a useful complement? Are there essential preconditions to making it work, or can a new governance strategy improve any decision making structure? If there are essential preconditions, what are they? Is new governance “modular” – that is, does it still confer benefits …

Keynote Address: The Case For A Market Liquidity Provider Of Last Resort, Steven L. Schwarcz

Faculty Scholarship

This short paper, prepared as a keynote address, explains why the credit crunch is fundamentally a story about financial markets, not banks. Its cause was a collapse of securitization and other debt markets, which have become major sources of financing for consumers and companies. Deprived of this financing, consumers have had difficulty purchasing homes and automobiles, and companies have had difficulty purchasing inventory and making capital investments, causing the real economy to shrink. This paper examines how these financial markets should be protected. Although already subject to many prescriptive regulatory protections, these markets evolve faster than regulation can adapt. The …

Reinventing The Sec By Staring Into Its Past, James D. Cox

Faculty Scholarship

No abstract provided.

Keynote Address: The Conflicted Trustee Dilemma, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

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 …

Do Differences In Pleading Standards Cause Forum Shopping In Securities Class Actions?: Doctrinal And Empirical Analyses, James D. Cox, Randall S. Thomas, Lynn Bai

Faculty Scholarship

No abstract provided.

Keynote Address: Understanding The ‘Subprime’ Financial Crisis, Steven L. Schwarcz

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 …

The Coroner’S Inquest: Ecuador’S Default And Sovereign Bond Documentation, Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

Conventional wisdom is that sovereigns will rarely, if ever, default on their external debts in circumstances where it is clear that they have the capacity to pay. The first line of defense against the errant sovereign is its concern about reputation. It may have to tap the external debt markets again in the future; and there is the fear that the markets will extract revenge. But reputational constraints do not always work because some governments heavily discount future costs in favor of current benefits. When reputational constraints fail, however, a second line of defense is supposed to come into play. …

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 …

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. …