November 20, 2010
More on the Materiality of Statistical Significance
Jay Brown has a post up summarizing some of the amicus brief in Matrixx v. Siracusano filed by 36 law and business faculty--he describes the case as "perhaps the most significant business case in the Supreme Court this term." I signed on to this brief and posted some additional thoughts here. You should check out the entire summary, but the part that jumped out at me was this quote from the brief:
Statistical significance assumes away, at least in the first instance, any contextual examination of the available information and presupposes that the market singularly relies on the presence or absence of a mathematically validated association between the drug and the adverse events at issue. The approach treats investors – whether analysts, institutional owners, or market professionals – as “nitwits unable to appreciate” the importance of any other information that could affect investment decisions.
November 19, 2010
We're Rich (Sort of)
General Motors IPO raised more than $20 billion, and the stock price stayed stable today, although it stayed near the issue price. Some are touting this a success validating the government's support of the company. Others are arguing we got away with one. Either way, this is a better outcome than many thought possible, so I consider a good day.
November 18, 2010
Creative Destruction & Too-Big-to-Fail
A former student of mine (who shall remain nameless) sent me the following:
Hooray! We’ve now passed 2009 in number of bank failures: 146 in 2010, versus 140 total in 2009! And just think – there’s seven more weeks in 2010! Thank goodness we’re in a recovery! Did you hear that CEOs can look forward to salary increases this year?
Now, this may all fall under "creative destruction"--but will what is ultimately created be too big to fail? Here's a related prediction I made elsewhere:
The financial crisis of 2008 is blurring the lines between the State and the private sector. While painful, this process may facilitate a re-examination of the state action doctrine. This Article argues that corporations have for some time been increasingly taking on roles as pseudo-governmental actors without incurring the accountability to the people generally associated with state action. This is happening via new governance, and while the recent financial crisis may suggest that the problems associated with new governance are waning, the reality is that the corporate consolidations likely to follow in the wake of the downturn - together with the government's oft-stated desire to divest its bailout stakes in private companies as soon as possible - will result in even more powerful corporate actors with an even greater ability to govern.
In arguably related news, the Bank of England has concluded that what banks need now is a "less intrusive" regulator while the FDIC "is conducting about 50 criminal investigations of former executives, directors and employees at U.S. banks that have failed since the start of the financial crisis."
November 17, 2010
Recreating Old Forms + Not Disclosing It = Bad Idea
The SEC today charged two New York firms, along with their former chief compliance officer, with "failing to have adequate policies and procedures to prevent misuse of nonpublic information." According to the SEC press release,
In its order instituting administrative proceedings, the SEC found that when BCM began preparing for an SEC examination in 2006, the firm discovered that it was missing pre-approval forms for more than 100 employee trades. Instead of producing the incomplete employee trading records to the SEC exam staff, BCM created new forms to replace the missing ones. BCM then produced the existing records along with the newly-created forms to the SEC examination staff without telling the staff what it had done. BCM also replaced incomplete compliance logs with newly-created completed logs and turned the completed logs over to SEC staff without disclosing what had been done. These compliance documents were particularly important because they were intended to address deficiencies identified in an earlier SEC exam of the firm.
Whether it's employment law, securities regulation or a note to get out of school, it's always a bad idea to make things up after the fact. Yet, given all the times when people get in trouble for doing such things, you have to wonder, how many people get away with it? I suspect it's more than we'd like to think.
November 16, 2010
The Creeping Bias For/Against Mandatory Arbitration...
As previously discussed on this site, the SEC (tasked with over 300 studies/rulemakings under Dodd-Frank) will not be anytime soon limiting the use of predispute, mandatory arbitration clauses in securities account agreements. See "SEC Chiefs Past and Present at Fordham," Sept. 28th. Shall other agency decisions slowly force mandatory arbitration into irreversible disrepute? Conversely, shall the Supreme Court exalt the practice at the expense of a time-honored exception thereto?
As it stands right now, Dodd-Frank flatly bans mandatory arbitration in whistleblower suits, while compelling studies that could lead to similar bans in securities and other forms of disputes. Thus, both the law's administrative mandates and express provisions serve to animate the White House's distrust of alternative dispute resolution in certain types of cases.
Meanwhile, on November 9th, the Supreme Court heard oral arguments on AT & T Mobility v. Concepcion, a class action that has survived two efforts by the telecommunications company to invoke the Federal Arbitration Act to preempt state laws. That decision could possibly kill the class action "out" in cases set for mandatory arbitration.
Clearly, something will soon tilt the balance for/against the practice. Yet, apart from marketing campaigns advanced by aggrieved litigants, little has been conclusively demonstrated that a policy favoring mandatory arbitration in commercial disputes hinders justice at the expense of the consumer or, in the aggregate, makes economic sense to the huge corporation. In short, there simply is no way of calculating how many settlements are encouraged by the status quo, nor how many dollars could have been gained/lost by taking the route of a jury trial. Noteworthy here is that just last week the S.D.N.Y. refused to vacate a $20.5 million award rendered in June by a FINRA panel against a Goldman Sachs subsidiary.
In the main, expertised arbitration panels can be said to hazardously lower the cost of entry to litigation while concurrently deterring frivolous claims. Meanwhile, unpredictable jury verdicts in commercial disputes may take years to occur but as a threat nonetheless often nudge corporations into compromise with their customers. Accordingly, the conventional wisdom on who benefits most from a jury trial or its alternative speaks more of faith than fact, and any rush to expand/condemn mandatory arbitration sounds more hazardous than doing nothing at all.
As Woody Allen once said, "More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly." My Speech to the Graduates, from Side Effects (1975). Personally, until the collective advantages and disadvantages of arbitration can be made universally known, I hope neither road is taken.
November 15, 2010
General Motors Ups IPO Offering
Following its strong performance in the last few quarters, the New York Times reports that General Motors has upped its planned offering price from the initial range of $26 to $29 to a new range of $32 to $33. This could lead to GM raising more than $11.8 billion.
To break even, the federal government needs to get an average price of about $44 per share for the 17.5% of GM the government owns. The Obama administration says it wants to sell the government's shares quickly, but to try and get full recovery for the American people.
Sounds like a good idea, but sometimes you can't get everything. In the past few years, trying to get yourself whole in the stock market has not been a very effective strategy for most. I just hope no one gets too greedy on this one.
November 14, 2010
Should Statistical Significance = Materiality?
A while back, Jay Brown asked me to sign on in support of a professors' brief in the upcoming Matrixx case arguing that statistical significance should not equate to materiality for purposes of Rule 10b-5. I agreed, and received a copy of the brief today. Meanwhile, I've been thinking a bit about presumptions, having just finished a short piece suggesting that the Supreme Court may have implicitly adopted a nexus-of-contracts presumption in terms of the theory of the corporation in CItizens United. (I'll hopefully have a link for that shortly.) So, while I predicted a while back that SCOTUS would find a failure to disclose facts not rising to the level of statistical significance to be immaterial, I now wonder whether the Court might not adopt some sort of presumption--recognizing the wide acceptance of statistical analysis (though it is clearly not without its critics), but also allowing the presumption to be rebutted where, for example (and as was apparently the case in Mattrix), the stock price falls by 24% upon disclosure of the previously omitted information. I'm not sure how much of a practical diference such a presumption would make in the end, but it would allow the Court to avoid having to either adopt a bright line rule of materiality (which would be contrary to its admonition against bright line rules in Basic) or appear to be "anti-science" by not giving some very meaningful weight to statistical analysis.