Securities Law Commons^™

Insider Trading, Tamar Frankel

SMU Law Review

This article focuses on the nature and position of corporate insiders. The discussion leads to a suggestion that one punishment of insiders who misappropriated what is not theirs—the information—is to disqualify them for a position of corporate power.

Will Fifty Years Of The Sec’S Disgorgement Remedy Be Abolished?, Roberta S. Karmel

SMU Law Review

SEC v. Texas Gulf Sulphur was the first case holding that equitable relief, and specifically disgorgement, can be obtained by the SEC in a federal court action for an injunction against insider trading. Such ancillary equitable relief has been obtained in numerous cases during the fifty years since Texas Gulf was decided. But, the continued availability of the remedy of disgorgement has been thrown into question by the recent Supreme Court case of Kokesh v. SEC, in which the Supreme Court held disgorgement to be a penalty for purposes of the federal statute of limitations. The Court identified, but …

From Texas Gulf Sulphur To Laudato Si’: Mining Equitable Principles From Insider Trading Law, Michael J. Kaufman

SMU Law Review

In SEC v. Texas Gulf Sulphur, the Second Circuit declared that all investors trading on impersonal exchanges should have equal access to material information, and therefore anyone who possesses material inside information must either turn it over to the investing public or not trade. The broad reach of that insider trading prohibition sent shock waves throughout the financial markets and encountered significant judicial resistance from the Supreme Court.

Although the Supreme Court initially rejected the insider trading prohibition announced in Texas Gulf Sulphur, the fundamental equitable trading principles underlying that decision have endured. This article shows that TGS was …

Thinking Fast And Slow About The Concept Of Materiality, Mark J. Loewenstein

SMU Law Review

Determining whether, for securities law purposes, a misrepresentation or omission is material raises interesting questions. The Court of Appeals in SEC v. Texas Gulf Sulphur Co. provided some guidance on materiality, and the U.S. Supreme Court has weighed in several times in the past 50 years. This article first discusses what Texas Gulf Sulphur contributed to the doctrine of materiality, then briefly considers other dimensions of the doctrine, and finally moves to its thesis: The doctrine of materiality should take into account important psychological insights and heuristics that may affect the way that a fact finder decides whether a misrepresentation …

From Texas Gulf Sulphur To Chiarella: A Tale Of Two Duties, Donald C. Langevoort

SMU Law Review

This short essay tells the story of two distinct journeys begun in SEC v. Texas Gulf Sulphur—one dealing with insider trading, the other with corporate liability for false corporate publicity. The first involves the “equal access” principle planted therein and then harshly discarded by the Supreme Court twelve years later in Chiarella v. United States. My claim is that marketplace egalitarianism never had much traction in the period from TGS to Chiarella, and was largely dead by the time the Court officially extinguished it. By that time, it played mainly a boogeyman role. The second journey had a different fate: …

Martoma And Newman: Valid Corporate Purpose And The Personal Benefit Test, Jonathan R. Macey

SMU Law Review

The law of insider trading in the United States is fundamentally grounded on a theory of property rights in information. Those to whom property rights in information have been allocated may trade without violating the prohibitions on trading contained in § 10(b) of the Securities Ex- change Act. Similarly, those who use material, nonpublic information for a valid corporate purpose have not violated the law. On the other hand, those who pilfer for personal gain material inside information belonging to a corporation do so at their legal peril. Those with property rights in inside information may authorize others to trade …

Taming Rule 10b-5-1: The Unfinished Business Of Texas Gulf Sulphur, Daniel J. Morrissey

SMU Law Review

Insider trading has shaped both the evolution of the Securities Exchange Commission (SEC) and the current state of securities law. The injustice of insider trading, especially as felt by everyday shareholders and investors, mandated action by government regulators. Consequently, the SEC enacted Rule 10b-5—a prohibition and prosecution on any corporate officials’ use of material, non-public information for private profit. In SEC v. Texas Gulf Sulphur Co., Rule 10b-5 grew into the sanction on insider trading that it is known as today. As case law whet Rule 10b-5’s reach on in- sider trading, corporate executives became increasingly concerned that necessary business …

Texas Gulf Sulphur And The Genesis Of Corporate Liability Under Rule 10b-5, Adam C. Pritchard, Robert Thompson

SMU Law Review

This Essay explores the seminal role played by SEC v. Texas Gulf Sulphur Co. in establishing Rule 10b-5’s use to create a remedy against corporations for misstatements made by their officers. The question of the corporation’s liability for private damages loomed large for the Second Circuit judges in Texas Gulf Sulphur, even though that question was not directly at issue in an SEC action for injunctive relief. The judges considered both, construing narrowly “in connection with the purchase or sale of any security,” and the requisite state of mind required for violating Rule 10b-5. We explore the choices of the …

The Statutory Authority For Court-Ordered Disgorgement In Sec Enforcement Actions, Donna M. Nagy

SMU Law Review

What empowers the U.S. Securities and Exchange Commission to seek, and federal district courts to order, the disgorgement of ill-gotten gains from securities law violators? The short answer, which stood virtually un- challenged for nearly forty-six years, is that federal courts may award disgorgement, at the request of the SEC, pursuant to the broad equitable powers that Congress conferred in the jurisdictional provisions of the federal securities laws. During the 2017 oral argument in Kokesh v. SEC, however, five Justices of the U.S. Supreme Court interjected statements ex- pressing varying degrees of skepticism. The tenor of the questions during …

A Birthday Toast To Texas Gulf Sulphur, Manning G. Warren Iii

SMU Law Review

This article commemorates the fiftieth anniversary of the Second Circuit’s Texas Gulf Sulphur decision by examining the impact of the case on insider trading law in the United States. The author begins by discussing the SEC’s opinion, In the Matter of Cady, Roberts & Co., which laid the foundation for the Texas Gulf Sulphur decision by creating a federal duty to disclose material nonpublic information or abstain from trading securities. The author then posits that the SEC, in its Cady, Roberts decision, rejected judicially developed common law fiduciary duty to disclose based on trust and confidence, and, by administrative fiat, …

Disgorgement In Insider Trading Cases: Fy2005-Fy2015, Verity Winship

SMU Law Review

For about 50 years—at least since Texas Gulf Sulphur—the SEC has ordered defendants to disgorge their profits from transactions that violated the securities laws. Despite disgorgement’s long history, in its 2017 opinion in Kokesh v. SEC, the U.S. Supreme Court put two aspects of the remedy on the table. It applied a five-year statute of limitations to disgorgement. It also reopened old questions about agencies’ power to seek remedies not specified in statute. This article provides data to inform these debates over the agency’s use of disgorgement and the effects of Kokesh. It reports the results of an empirical study …

The Case Against Passive Shareholder Voting, Dorothy S. Lund

Faculty Scholarship

American investors have begun to embrace the reality that academics have been championing for decades — that a broad-based, passive indexing strategy is superior to picking individual stocks or investing in actively managed funds. But there are several reasons to believe that the rise of passive investing will have harmful consequences for firm governance, shareholders, and the economy. First, because passive funds seek only to match the performance of an index — not outperform it — they lack a financial incentive to ensure that each of the companies in their very large portfolios are well-run. Second, passive funds face an …

Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Faculty Scholarship

More than eighty years after federal law first addressed stock market manipulation, federal courts remain fractured by disagreement and confusion about manipulation law's most foundational questions. Only last year, plaintiffs petitioned the Supreme Court to resolve a sharp split among the federal circuits concerning manipulation law's central question: whether trading activity alone can ever be considered illegal manipulation under federal law. Academics have been similarly confused economists and legal scholars cannot agree on whether manipulation is possible in principle; let alone on how, if it is, to address it properly in practice.

This Article offers an analytical framework for understanding …

Implementing Shared-Use Of Mining Infrastructure To Achieve The Sustainable Development Goals, Perrine Toledano, Nicolas Maennling

Columbia Center on Sustainable Investment Staff Publications

Many of the Sustainable Development Goals will only be achieved if the population has access to basic services, such as access to water, power, transport, and telecommunications. However, in many developing countries there is a lack of infrastructure to guarantee these services and there are insufficient public funds to finance growing needs. In resource-rich countries, the mining sector can play a key role in increasing access to infrastructure. Mining-related infrastructure is often developed to serve the exclusive need of the investors, but if it is shared and developed to serve the broader needs and uses of the host economy it …

Does Shareholder Voting Matter? Evidence From The Takeover Market, Paul Mason, Usha Rodrigues, Mike Stegemoller, Steven Utke

Scholarly Works

Voting rights are a basic shareholder-protection mechanism. Outside of the core voting requirements state law imposes (election of directors and votes on fundamental changes), federal law grants shareholders additional voting rights. But these rights introduce concomitant costs into corporate governance. Each grant of a voting right thus invites the question: is the benefit achieved worth the cost the vote imposes?

The question is not merely a theoretical one. Recently the SEC, concerned about Nasdaq’s potential weakening of shareholder voting protections, has lamented that little evidence exists on the value of the shareholder vote. This Article provides that evidence. It examines …

Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Articles

More than eighty years after federal law first addressed stock market manipulation, the federal courts remain fractured by disagreement and confusion concerning manipulation law's most foundational issues. There remains, for example, a sharp split among the federal circuits concerning manipulation law's central question: Whether trading activity alone can ever be considered illegal manipulation under federal law? Academics have been similarly confused-economists and legal scholars cannot agree on whether manipulation is even possible in principle, let alone on how to properly address it in practice.

Guardians Of The Galaxy: How Shareholder Lawyers Won Big For Their Clients And Vindicated The Integrity Of Our Economy, Daniel J. Morrissey

Loyola of Los Angeles Law Review

Securities class actions are the most economically significant form of litigation. Highly skilled lawyers expend huge sums and relentless efforts in these matters but because of the costs involved and the potential for enormous liability very few of them ever make it to trial. This Article is the story of one that did, a mammoth fraud where a jury returned a $1.5 billion verdict that, with interest, increased to almost $2.5 billion by the time the case reached the appellate court.

There the Court upheld the shareholders’ theory that their damages could be measured by the excessive amounts they had …

Caremark's Hidden Promise, Ezra Wasserman Mitchell

Loyola of Los Angeles Law Review

In re Caremark, decided in 1996, established for the first time a director’s duty to monitor under Delaware law. A significant amount of jurisprudence and commentary has developed. Almost all of this literature parses the language of the case and those following, and disregards the underlying claims for damages. As a result of this linguistic focus, many have concluded that the duty to monitor largely is toothless and, importantly, deals only with claims of failure to monitor legal risk. A duty to monitor business risk has been disavowed.

Following the money reveals a different story. Classifying the cases according to …

From Texas Gulf Sulphur To Laudato Si': Mining Equitable Principles From Insider Trading Law, Michael Kaufman

Faculty Publications & Other Works

In SEC v. Texas Gulf Sulphur, the Second Circuit declared that all investors trading on impersonal exchanges should have equal access to material information, and therefore anyone who possesses material inside information must either turn it over to the investing public or not trade. The broad reach of that insider trading prohibition sent shock waves throughout the financial markets and encountered significant judicial resistance from the Supreme Court.

Although the Supreme Court initially rejected the insider trading prohibition announced in Texas Gulf Sulphur, the fundamental equitable trading principles underlying that decision have endured. This article shows that TGS …

Whistling Loud And Clear: Applying Chevron To Subsection 21f Of Dodd–Frank, Shaun M. Bennett

Washington and Lee Law Review

This Note addresses a circuit court split arising from a portion of the anti-retaliation provisions in the Dodd–Frank Wall Street Reform and Consumer Protection Act. Subsection 21F’s retaliation prohibitions apply to those employers whose employees make required or protected disclosures under the Sarbanes–Oxley Act of 2002 (SOX) or any other rule or regulation under the SEC’s jurisdiction. SOX provides anti -retaliation protections — similar to those available under Dodd–Frank — for employees of publicly traded companies who report misconduct. However, SOX expressly affords protections to those who provide information to “a Federal regulatory or law enforcement agency; any Member of …

Canons Of Construction For Dysfunctional Statutes: A Comment On Bennett, Paul G. Mahoney

Washington and Lee Law Review

No abstract provided.

Comment On Whistling Loud And Clear: Applying Chevron To Subsection 21f Of Dodd–Frank, Sarah C. Haan

Washington and Lee Law Review

No abstract provided.

Shareholder Voting And The Symbolic Politics Of Corporation As Contract, Matthew T. Bodie, Grant M. Hayden

All Faculty Scholarship

American corporations are structured in such a way that shareholders, and shareholders alone, have the right to vote in all significant corporate decisions. Over the years, this exclusive shareholder franchise has been supported by an ongoing procession of justifications. But as those arguments have fallen by the wayside, shareholder primacists have circled back and latched upon a final argument for the special voting status of shareholders, arguing that this fundamental feature of corporate governance is the product of the set of freely-bargained-for agreements among all corporate constituents. Because this set of agreements reflects the preferences of all parties to the …

Personal Benefit Has No Place In Misappropriation Tipping Cases, Merritt B. Fox, George N. Tepe

Faculty Scholarship

The Supreme Court’s decision in Salman v. United States left unanswered an important issue concerning the reach of Rule 10b-5’s prohibitions with respect to trades based on a tip of material inside information: in cases based on the misappropriation theory, is it necessary to show that the tipper enjoyed a personal benefit of which the trader was aware? The personal benefit test was originally developed in the context of tipping cases based on the classical theory of insider trading. The Supreme Court in Salman explicitly said that it was not reaching the matter of whether the test should be extended …

The Commodification Of Cryptocurrency, Neil Tiwari

Michigan Law Review

Cryptocurrencies are digital tokens built on blockchain technology. This allows for a product that is fully decentralized, with no need for a third-party intermediary like a government or financial institution. Cryptocurrency creators use initial coin offerings (ICOs) to raise capital to build their tokens. Cryptocurrency ICOs are problematic because they do not fit neatly within either of two traditional categories—securities or commodities. Each of these categories has their own regulatory agency: the SEC for securities and the CFTC for commodities. At first blush, ICOs seem to be a sale of securities subject to regulation by the SEC, but this is …

The Up-C Revolution, Gregg D. Polsky, Adam H. Rosenzweig

Scholarly Works

Over the past few years, a revolutionary new tax structure, known as the Up-C, has become increasingly popular, particularly in instances where an LLC is being taken public. In such an Up-C IPO, a newly formed C corporation is placed on top of the existing LLC, which continues to operate the business. Shares of the C corporation are sold to new investors, and the proceeds are used by the C corporation to buy an interest in the LLC. Meanwhile, the legacy owners of the LLC (typically, founders and private investment funds) retain their interests in the LLC, while receiving exchange …

The Fiduciary Principle Of Insider Trading Needs Revision, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

The Death Of Appraisal Arbitrage: Ending Windfalls For Deal Dissenters, William J. Carney, Keith Sharfman

Faculty Publications

In this article, we take note of a new and positive development in Delaware's law of appraisal: more robust enforcement of Section 262(h), which expressly excludes from fair value in appraisal litigation the value that is uniquely associated with the deal from which the shareholders seeking appraisal are dissenting. For public firms, this implies that deal dissenters are entitled to no more than the price that prevailed prior to the deal's announcement.

In a salutary development, the Delaware Chancery Court took this approach in its recent appraisal decision in Verition Master Fund Partners, Ltd. v. Aruba Networks, Inc., awarding …

Financial Exploitation Of The Elderly: An Overview Of Regulatory Action, Christine Lazaro

Faculty Publications

(Excerpt)

Financial exploitation of the elderly is a significant problem, which is only getting worse over time. A study by MetLife estimated that seniors lost $2.9 billion as a result of financial abuse, recognizing that the number was likely low due to underreporting of abuse. Each year, the elder population increases as the baby boomer generation ages. By the year 2050, it is estimated that 83.7 million people will be aged 65 or older, double what it was in 2012.

The Regulation Of Digital Investment Advice, Christine Lazaro

Faculty Publications

Digital investment advice, or robo-advice, is a growing trend in the financial services industry. It is expected that by 2022, robo-advisers will manage over $4 trillion in assets. Robo-advice covers a wide range of services, however all involve advice derived from algorithms. This article will discuss what robo-advice is as well as how it is regulated by the SEC and FINRA.