Securities Law Commons^™

Sunrise, Sunset: An Empirical And Theoretical Assessment Of Dual-Class Stock Structures, Andrew William Winden

UF Law Faculty Publications

A battle is brewing for control of America’s most dynamic companies. Entrepreneurs are increasingly seeking protection from interference or dismissal by public investors through the adoption of dual-class stock structures in initial public offerings. Institutional investors are pushing back, demanding that sucks structures be abandoned or strictly limited through subset provisions. The actual terms of dual-class stock structures, however, have been remarkably understudied, so the debate between proponents of prohibition and private ordering is ill-informed. This paper presents the first empirical analysis of the initial, or sunrise, and terminal, or sunset, provisions found in the charters of dual-class companies, with …

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

SMU Law Review

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 …

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 …

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 …

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 Coasian Firm And Insider Trading, Revisited, James C. Spindler

SMU Law Review

I present an economic model of insider trading building upon Haddock & Macey’s classic analysis of trading by the manager of a Coasian firm (i.e., a firm in which agency costs do not exist). Due to current shareholders’ status as expected sellers of shares, Coasian insider trading allows shareholders to expropriate outsiders via the managerial proxy and any signaling value of insider trading is eliminated by shareholders’ biased incentives. Adverse selection results. If a system of credible disclosure exists, an insider trading ban results in more disclosure, more efficient prices, and lower illiquidity costs. While the case for insider trading …

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, …

The Icarus Syndrome: How Credit Rating Agencies Lost Their Quasi Immunity, Norbert Gaillard, Michael Waibel

SMU Law Review

Subsequent to the 2007–2008 subprime crisis, the SEC and the US Senate discovered that it was common practice for major credit rating agencies (CRAs) to produce inflated and inaccurate structured finance ratings. A host of explanations were posited on how this was able to happen from the “issuer pays” model of CRAs and conflicts of interest to underscoring the CRA’s regulatory license and their ensuing insulation from legal liability. Historically, credit ratings were akin to opinions. However, when courts started to consider structured finance ratings as commercial speech in the 2000s, CRAs became more vulnerable to litigation. This article studies …

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 …

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

Articles by Maurer Faculty

What empowers the U.S. Securities and Exchange Commission (SEC) to seek, and federal district courts to order, the disgorgement of ill-gotten gains from securities law violators? The short answer, which stood largely unchallenged for 46 years, is that federal courts may award disgorgement, at the request of the SEC, pursuant to the 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 expressing varying degrees of skepticism. The tenor of the questions during the Kokesh argument, as …

Are Charter Schools The Second Coming Of Enron?: An Examination Of The Gatekeepers That Protect Against Dangerous Related-Party Transactions In The Charter School Sectors, Preston C. Green Iii, Bruce D. Baker, Joseph O. Oluwole

Indiana Law Journal

INTRODUCTION

OVERVIEW OF ENRON

A. ENRON AND DEREGULATION

B. THE LJM SPES

C. ENRON’S COLLAPSE

II: ENRON’S GATEKEEPER PROBLEMS

A. ARTHUR ANDERSEN

B. INDEPENDENT ANALYSTS

C. CREDIT RATING AGENCIES

D. ENRON’S BOARD OF DIRECTORS

E. SECURITIES AND EXCHANGE COMMISSION (SEC)

III: CHARTER SCHOOLS AND RELATED-PARTY TRANSACTIONS

A. CHARTER SCHOOL DEREGULATION AND PRIVATE INVESTORS

B. EXAMPLES OF ENRON-LIKE RELATED-PARTY TRANSACTIONS

1. IMAGINE SCHOOLS

2. IVY ACADEMIA CHARTER SCHOOL

3. AMERICAN INDIAN MODEL CHARTER SCHOOLS

4. GRAND TRAVERSE ACADEMY

5. PENNSYLVANIA CYBER CHARTER SCHOOL

C. THE FEDERAL GOVERNMENT, RELATED-PARTY TRANSACTIONS, AND THE NEED FOR STRONG GATEKEEPING

IV: CHARTER SCHOOL GATEKEEPERS

A. AUDITORS …

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 …

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 …

Texas Gulf Sulphur At Fifty—A Contemporary And Historical Perspective, Marc I. Steinberg

SMU Law Review

Fifty years ago, the Second Circuit decided perhaps the most important case under the U.S. securities laws – Securities and Exchange Commission v. Texas Gulf Sulphur. This decision focused on several landmark issues, including insider trading, company disclosure obligations, and the concept of materiality. Although a number of its rulings subsequently were rejected by the U.S. Supreme Court, others remain good law today. Indeed, the significance of Texas Gulf Sulphur’s analysis in large measure is evidenced by its continued vitality in the federal courts and SEC enforcement practice. From a comparative law perspective, Texas Gulf Sulphur also is …

From Tgs Conservatorships To Sarbanes-Oxley Fair Funds, Richard M. Buxbaum

SMU Law Review

While the TGS duo is justly known for its foundational work on the application of Rule 10b-5 to insider trading and corporate misstatements, two other aspects of the two cases are the focus of this contribution. The first is the development of the role of the SEC as conservator, derived originally from the equity side of federal bankruptcy law, but expanded to function as a general equitable remedy. That remedy faced difficult issues concerning the ranking of different victims of insider trading, in particular the status of an entity as a claimant in competition with victimized market participants. The second, …

Texas Gulf Sulphur: A Case Study On Responding To Market Rumors, Wendy G. Couture

SMU Law Review

This essay uses Texas Gulf Sulphur as a case study on an issue that companies continue to face today: whether, and how, to respond to market rumors. This essay analyzes the countervailing incentives that influence whether companies respond to market rumors, applies those pressures to the facts of Texas Gulf Sulphur, and concludes that counsel today would likely advise similarly situated companies to remain silent rather than respond to market rumors. Drawing therefrom, this essay argues that silence is not the socially optimal response and that the dueling pressures on companies should be adjusted to incentivize companies to respond to …

Constructive Ambiguity And Judicial Development Of Insider Trading, Jill E. Fisch

SMU Law Review

The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial law- making. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in Newman, Salman, and Martoma.

In the face of this uncertainty, many commentators have called for a legislative solution. This article argues, however, that the true challenge of insider trading regulation is a lack of consensus about the appropriate scope …

Texas Gulf Sulphur And Information Disclosure Policy, Onnig H. Dombalagian

SMU Law Review

Texas Gulf Sulphur’s bold ultimatum—"disclose or abstain”— enjoys an enduring place of prominence in discussions of insider trading law be- cause of the intuitive simplicity with which it asserts the expectations of investors in securities markets. As the law of information dissemination has developed into a distinct subset of federal securities law over the past fifty years, however, it is equally important to reflect on how the Texas Gulf Sulphur opinion has shaped the views of courts and regulators in crafting rules and guidelines for information disclosure. Indeed, Texas Gulf Sulphur anticipated—and continues to inform—contemporary debates relating to the dissemination …

Seeking An Objective For Regulating Insider Trading Through Texas Gulf Sulphur, James D. Cox

SMU Law Review

Data summarized in the opening of this article document shows that in- side trading is a growth industry. And, as deals get ever bigger, the growth curve becomes steeper as more the data confirms intuition that the more who know about a good thing the more who will seek to harvest its bene- fits. Even though insider trading appears to have thrived during the fifty years after Texas Gulf Sulphur, we gather in this symposium to celebrate the decision. But why? As developed below, the Second Circuit’s landmark decision gave way to the Supreme Court’s erection of a fiduciary frame- …

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.