Securities Law Commons^™

Automating Securities Class Actions Settlements, Jessica M. Erickson

Law Faculty Publications

Securities class actions are supposed to vindicate the rights of investors injured by corporate fraud. Yet, despite multimillion- or even multibillion- dollar settlements, many injured investors never receive a dime in compensation. To receive money from a settlement in a securities class action, investors must comply with a cumbersome claims process, documenting their transactions in the defendant corporation’s stock and detailing their losses. Faced with this hurdle, many investors never claim their shares of the settlement funds. Courts continue to insist that investors comply with cumbersome claims processes because they do not think they have another way to accurately identify …

Reconstructing The Corporation: A Mutual-Control Model Of Corporate Governance, Grant M. Hayden, Matthew T. Bodie

All Faculty Scholarship

The consensus around shareholder primacy is crumbling. Investors, long assumed to be uncomplicated profit-maximizers, are looking for ways to express a wider range of values in allocating their funds. Workers are agitating for greater voice at their workplaces. And prominent legislators have recently proposed corporate law reforms that would put a sizable number of employee representatives on the boards of directors of large public companies. These rumblings of public discontent are echoed in recent corporate law scholarship, which has cataloged the costs of shareholder control, touted the advantages of nonvoting stock, and questioned whether activist holders of various stripes are …

Central Clearing Of Financial Contracts: Theory And Regulatory Implications, Steven L. Schwarcz

Faculty Scholarship

To protect economic stability, post-crisis regulation requires financial institutions to clear and settle most of their derivatives contracts through central counterparties, such as clearinghouses associated with securities exchanges. This Article asks whether regulators should expand the central clearing requirement to non-derivative financial contracts, such as loan agreements. The Article begins by theorizing how and why central clearing can reduce systemic risk. It then examines the theory’s regulatory and economic efficiency implications, first for current requirements to centrally clear derivatives contracts and thereafter for deciding whether to extend those requirements to non-derivative contracts. The inquiry has real practical importance because the …

Fintech And The Innovation Trilemma, Yesha Yadav, Chris Brummer

Vanderbilt Law School Faculty Publications

Whether in response to roboadvising, artificial intelligence, or crypto-currencies like Bitcoin, regulators around the world have made it a top policy priority to supervise the exponential growth of financial technology (or "fintech") in the post-Crisis era. However, applying traditional regulatory strategies to new technological ecosystems has proven conceptually difficult. Part of the challenge lies in the tradeoffs involved in regulating innovations that could conceivably both help and hurt consumers and market participants alike. Problems also arise from the common assumption that today's fintech is a mere continuation of the story of innovation that has shaped finance for centuries.

This Article …

Proxy Advisor Influence In A Comparative Light, Andrew F. Tuch

Scholarship@WashULaw

The reform of proxy advisors is on the U.S. regulatory agenda, with debate focusing on the extent of influence that these actors exert over institutional investors and corporate managers. But the debate examines the U.S. position in isolation from other systems. If we broaden our focus, we see that the factors usually cited for proxy advisors’ influence exist similarly in the United Kingdom but that proxy advisors there exert significantly weaker influence than they do in the United States. Why this difference when we would expect a similar role for proxy advisors in both systems based on the presence of …

The Foundations Of Anglo-American Corporate Fiduciary Law, Andrew F. Tuch

Scholarship@WashULaw

How does legal doctrine form, why does it change, and why do doctrines with a common starting point, in legal systems with a shared heritage, diverge? This essay reviews and critiques a book by David Kershaw that addresses these questions. The book charts the evolution of corporate fiduciary law in the United Kingdom and United States and, comparing the two systems, explains how and why the respective legal regimes evolved as they did. Kershaw weighs in on contested U.S. scholarly debates, confronting the common claim that doctrinal change is less the product of internal logic or strict precedent than a …

Reassessing Self-Dealing: Between No Conflict And Fairness, Andrew F. Tuch

Scholarship@WashULaw

Scholars have long disagreed on which of two rules is more effective when a fiduciary engages in self-dealing. Some defend the “strict” no-conflict rule, which categorically bans self-dealing. Others prefer the “flexible” and “pragmatic” fairness rule, which allows self-dealing if it is fair to beneficiaries. The centrality of this debate cannot be overstated: corporate law as a field is fundamentally concerned with self-dealing by fiduciaries. Yet a lack of firm data means that this debate has dragged on for decades, with no end in sight. This article makes a simple but powerful point: the entire debate is somewhat misguided because, …

Boilerplate And The Impact Of Disclosure In Securities Dealmaking, Jeremy Mcclane

Vanderbilt Law Review

Capital markets dealmaking, like many kinds of business transactions, is built on a foundation of copied and recycled language what many call boilerplate. Regulators and the bar periodically call for less reliance on boilerplate, but despite these pressures, boilerplate remains a fixture of ever-growing securities disclosures. This Article explores why boilerplate persists and how it affects investors, showing that boilerplate may have a more complex role than commonly recognized. This Article does so by developing a theory on the effect of boilerplate in securities disclosure-a context that is little studied despite a wealth of literature on boilerplate in other settings--and …

What's Wrong With Jumpstart(Ing) Our Business Startups (Jobs) Act?, Lynnise E. Pantin

Faculty Scholarship

Lack of access to financial capital is a barrier for many entrepreneurs who seek to grow their business venture. In an effort to democratize the entrepreneurial ecosystem, Congress and the Obama Administration enacted the JOBS Act, which implements and regulates crowdfunding. The democratic nature of the online crowdfunding platforms is a seemingly attractive solution to structural and institutionalized barriers to fundraising within the entrepreneurship ecosystem. Although the JOBS Act is a laudable step, the legislation does not in practice help entrepreneurs and herein lies one of its greatest shortcomings. The JOBS Act is unduly burdensome and is yet another barrier …

Dark Trading At The Midpoint: Does Sec Enforcement Policy Encourage Direct Feed Arbitrage?, Robert P. Bartlett Iii, Justin Mccrary

Faculty Scholarship

Prevailing research in market microstructure posits that liquidity providers bypass queue lines on exchanges by offering liquidity in dark venues with de minimis sub-penny price improvement, thus exploiting an exception to the penny quote rule. We show that (a) the SEC enforces the quote rule to prevent sub-penny queuejumping in dark pools unless trades are “pegged” to the NBBO midpoint and (b) the documented increase in dark trading due to investor queue-jumping stems from increased midpoint trading. Although encouraging pegged midpoint orders can subject traders to direct feed arbitrage, we estimate that less than 2% of shares traded per year …

Delegating Portfolio Management To Index Creators: The Consequences For Corporate Governance, Dorothy S. Lund

Faculty Scholarship

The recent popularity of index investing and corresponding influx of assets into passively managed mutual funds has generated a large literature in law and in finance about the implications for securities markets, antitrust, corporate governance, and beyond. But few have explored the index landscape itself. Professor Robertson’s article is an important exception, and her findings — in particular, that indices are more diverse and dynamic than many would have expected — have implications for all of these debates.

Nonvoting Shares And Efficient Corporate Governance, Dorothy S. Lund

Faculty Scholarship

A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement among scholars and investors about whether nonvoting stock is beneficial or harmful. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight, and therefore increase agency costs. By contrast, proponents contend that nonvoting shares may provide benefits that exceed these agency costs, such as enabling corporate insiders to pursue their long-term vision for the company without interference from outside shareholders.

This Article offers a novel perspective on this …

What Can We Learn From Stock Prices? Cash Flow, Risk And Shareholder Welfare, Joshua Mitts

Faculty Scholarship

Price is expected cash flows discounted at the risk-free rate plus an additional discount for risk exposure. Price equivalency does not always imply welfare equivalency: shareholders are not necessarily indifferent between a price increase of $1 from higher cash flows and the same $1 increase from lower risk exposure. Even in complete markets, if managers enjoy private benefits of control, the social planner may prefer lower risk exposure to a price-equivalent increase in firm value from greater investor protection. This has implications for event studies, the trade-off between principal costs and agency costs, and the link between macroeconomic risk and …

Activist Directors And Agency Costs: What Happens When An Activist Director Goes On The Board?, John C. Coffee Jr., Robert J. Jackson Jr., Joshua Mitts, Robert Bishop

Faculty Scholarship

We develop and apply a new and more rigorous methodology by which to measure and understand both insider trading and the agency costs of hedge fund activism. We use quantitative data to show a systematic relationship between the appointment of a hedge fund nominated director to a corporate board and an increase in informed trading in that corporation’s stock (with the relationship being most pronounced when the fund’s slate of directors includes a hedge fund employee). This finding is important from two different perspectives. First, from a governance perspective, activist hedge funds represent a new and potent force in corporate …

Informed Trading And Cybersecurity Breaches, Joshua Mitts, Eric L. Talley

Faculty Scholarship

Cybersecurity has become a significant concern in corporate and commercial settings, and for good reason: a threatened or realized cybersecurity breach can materially affect firm value for capital investors. This paper explores whether market arbitrageurs appear systematically to exploit advance knowledge of such vulnerabilities. We make use of a novel data set tracking cybersecurity breach announcements among public companies to study trading patterns in the derivatives market preceding the announcement of a breach. Using a matched sample of unaffected control firms, we find significant trading abnormalities for hacked targets, measured in terms of both open interest and volume. Our results …

Global Settlements: Promise And Peril, John C. Coffee Jr.

Faculty Scholarship

In 2010, Morrison v. National Australia Bank Ltd. destabilized the world of securities litigation by denying those who purchased their securities outside the U.S. the ability to sue in the U.S. (as they had previously often done). Nature, however abhors a vacuum, and practitioners and other jurisdictions began to seek ways to regain access to U.S. courts. Several techniques have emerged: (1) expanding settlement classes so that they are broader than litigation classes and treating the location of the transaction as strictly a merits issue that defendants could waive; (2) adopting U.S. law as applicable to securities issued abroad by …

Judges And Judgment: In Praise Of Instigators, Kathryn Judge

Faculty Scholarship

This Essay is about mutual funds. Because of that, it may put many to sleep long before we get to the heart of the matter. I encourage you right now to stay awake, or at least keep one eye propped open. For embedded in this story about mutual funds, rent seeking, the challenge of separating the good and the bad, and the even greater challenge of respecting autonomy in an environment where so many choices seem to be bad ones, is the story of a judge. That judge is the Honorable Richard A. Posner, aka RAP, Dick, Professor Posner, the …

Financial Contracting With The Crowd, Usha Rodrigues

Scholarly Works

Equity crowdfunding is broken. The current model imposes too many burdens on entrepreneurs in exchange for too little money. For alternative models, this Article looks to the time-tested venture capital financial contract, and the recent experience of initial coin offerings (ICOs). ICOs made headlines over the past two years, as the means by which blockchain technology companies raised billions of dollars to launch new cryptocurrency ventures. Although their novelty as a monetary and investing device is well known, ICOs also presented significant, unappreciated insights into financial contracting.

ICOs furnished an unprecedented experiment into how bargains would look if entrepreneurs raised …

Abolish Ice . . . And Then What?, Peter L. Markowitz

Articles

In recent years, activists and then politicians began calling for the abolition of the United States’s interior immigration-enforcement agency: U.S. Immigration and Customs Enforcement (ICE). Many people have misinterpreted the call to “Abolish ICE” as merely a spontaneous rhetorical device used to express outrage at the current Administration’s brutal immigration policies. In fact, abolishing ICE is the natural extension of years of thoughtful organizing by a loose coalition of grassroots immigrant-rights groups. These organizations are serious, not only about their literal goal to eliminate the agency, but also about not replacing it with another dedicated agency of immigration police. Accordingly, …

The Second Circuit's Curious Journey Through The Law Of Tippee Liability For Insider Trading: Newman To Martoma, Andrew C. Spacone

Roger Williams University Law Review

No abstract provided.

Digital Realty Trust V. Somers: Whistleblowers And Corporate Retaliation, Susan B. Heyman

Law Faculty Scholarship

No abstract provided.

After Corwin: Down The Controlling Shareholder Rabbit Hole, Ann Lipton

Publications

As Delaware has developed its doctrine with respect to controlling shareholders, its view of their relationship to directors has evolved. This evolution has produced some pronounced inconsistencies with respect to the weight placed on director approval of controlling shareholder action. The recent Delaware Supreme Court decisions in Corwin v. KKR Financial Holdings LLC, Kahn v. M & F Worldwide Corp., and C & J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust introduced further uncertainty into the mix by making the determination as to whether a transaction involves a controlling shareholder practically outcome-determinative of …

Fact Or Fiction: Flawed Approaches To Evaluating Market Behavior In Securities Litigation, Ann Lipton

Publications

Courts entertaining class actions brought under Section 10(b) of the Securities Exchange Act are required to make numerous factual judgments about the economic effects of the alleged misconduct. For example, they must determine whether and for how long publicly-available information has exerted an influence on security prices, and whether an alleged fraud caused economic harm to investors. Judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect.

Over the years, courts have developed a variety of …

What We Talk About When We Talk About Shareholder Primacy, Ann Lipton

Publications

No abstract provided.

Beyond The Numbers: Substantive Gender Diversity In Boardrooms, Yaron Nili

Faculty Scholarship

No abstract provided.

Revolving Elites: The Unexplored Risk Of Capturing The Sec, James D. Cox, Randall S. Thomas

Faculty Scholarship

Fears have abounded for years that the sweet spot for capture of regulatory agencies is the "revolving door" whereby civil servants migrate from their roles as regulators to private industry. Recent scholarship on this topic has examined whether America's watchdog for securities markets, the Securities and Exchange Commission (SEC), is hobbled by the long-standing practices of its enforcement staff exiting their jobs at the Commission and migrating to lucrative private sector employment where they represent those they once regulated. The research to date has been inconclusive on whether staff revolving door practices have weakened the SEC' s verve. In this …

The Enduring Distinction Between Business Entities And Security Interests, Ofer Eldar, Andrew Verstein

Faculty Scholarship

What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, …

Engineered Credit Default Swaps: Innovative Or Manipulative?, Gina-Gail S. Fletcher

Faculty Scholarship

Credit default swaps (“CDS”) are, once again, making waves. Maligned for their role in the 2008 financial crisis and condemned by the Vatican, investors are once more utilizing CDS to achieve results of questionable market benefit. A CDS is a financial contract that allows investors to “bet” on whether a borrower will default on its loan. However, rather than waiting to see how their bets pan out, some CDS investors are collaborating with financially distressed borrowers to guarantee the profitability of their CDS positions—“engineering” the CDS’ outcome. Under the CDS contract, these collaborations are not prohibited, yet they have roiled …

The Conflicted Advice Problem: A Response To Conflicts & Capital Allocation, Gina-Gail S. Fletcher

Faculty Scholarship

No abstract provided.

Mandatory Disclosure In Primary Markets, Andrew A. Schwartz

Publications

Mandatory disclosure—the idea that companies must be legally required to disclose certain, specified information to public investors—is the first principle of modern securities law. Despite the high costs it imposes, mandatory disclosure has been well defended by legal scholars on two theoretical grounds: ‘Agency costs’ and ‘information underproduction.’ While these two concepts are a good fit for secondary markets (where investors trade securities with one another), this Article shows that they are largely irrelevant in the context of primary markets (where companies offer securities directly to investors). The surprising result is that primary offerings—such as an IPO—may not require mandatory …