Business Law Prof Blog

More on Say-on-Pay

I recently posted some figures on the outcome of the say-on-pay shareholder votes mandated by the Dodd-Frank Act and new SEC Rule 14a-21. (This one has not been invalidated by the D.C. Circuit.) The Harvard Law School Forum on Corporate Governance and Financial Regulation has published a much more thorough analysis by Michael Littenberg, a partner at Schulte Roth & Zabel LLP. Among other things, he breaks down the vote by market capitalization, industry, and Institutional Shareholder Services recommendation. He concludes that “most companies made it through . . . [say-on-pay] . . . unscathed in 2011.” Definitely worth reading.

-Steve Bradford

The SEC, the D.C. Circuit, and the Rule of Law

Earlier this week, Steve posted an interesting list of many of the recent cases the SEC has lost in the D.C. Circuit (including the latest proxy access case).  Steve closed by noting that "an agency has to work really hard to lose this much," and that he was "inclined to think that the SEC simply doesn't care enough about the rule of law."  That may be true, but if a lack of respect for the rule of law is an issue here (and that's a big "if"), then I'd like to add that the D.C. Circuit may also be deserving of some criticism.  Steve himself notes that "the Financial Planning case is just bad statutory interpretation by the court."  To that one can add Brett McDonnell's comments regaring the proxy access case that I posted here (remember, we are talking about the court concluding that the SEC acted arbitrarily and capriciously):

The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them.  The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough.  It will almost always be possible to do that with any agency rulemaking.  Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still.  This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences.  Talk about judicial activism.

To this I would also add Jay Brown's take:

In some respects, the DC Circuit's decision … is a grave disappointment.  The SEC has the authority to adopt an access rule, that was confirmed in Dodd-Frank. The rule was carefully crafted and vetted over a year long process. The panel, however, didn't like the rule and imposed an almost impossible burden on the SEC.  It wasn't enough, for example, for the SEC to conclude that access could benefit boards and point to some studies making that point.  Instead, the Agency had to rely on the right studies.  The opinion criticized those used by the SEC but did not do the same with respect to those on the other side.  In other words, it is clear that the court agreed with one side but not the other.  One way or another that panel was going to strike down the rule. That the DC Circuit would issue a political decision is no real surprise.  The circuit is full of judges who likely were too controversial for their home state senators to nominate.  Without senators in Congress, DC has no politicians who can object to the White House nominees.  As a result, the White House has a free hand and can more easily appoint controversial idealogues…. What the case shows is how far behind the courts are with respect to the evolution of the corporate governance process.  Two of the [three] judges on the panel were appointed by President Reagan at the height of the law and economics movement.  That was the hey day of deregulation and the view that the market can resolve all issues.  The shallowness of that philosophy was brought home in the most recent recession.  But it is clear that this panel views interference in the management prerogative with disfavor and does not need much excuse to overturn it.

SJP

The Swashbuckler Problem: Rethinking Increased Liability

I have been a critic of BP and their role in the Deepwater Horizon disaster that dumped to 4.9 million barrels of oil into the Gulf Mexico, but that doesn’t mean I think we need a vast set of new laws to help avoid the problem in the future. In my research for a current project questioning the value of drastic new laws increasing penalties, while reducing the mens rea requirements, for environmental law violations, I came across an interesting article about Sarbanes-Oxley that I thought was worth passing along. Regardless of your views on Sarbanes-Oxley, it’s worth a look.

The article is ‘Left Behind’ after Sarbanes-Oxley, by Craig S. Lerner (George Mason University) & Moin A. Yahya (University of Alberta), and the pdf is available here:

The “Left Behind” from our title is an allusion to the series of novels that are based on the religious doctrine of Rapture — that is, the doctrine that believers will, “in the twinkling of an eye,” be taken body and soul into heaven. Left behind here on earth, according to this view, will then be the unbelievers and the unrighteous. Likewise, albeit on a rather more mundane note, we propose to ask whether, in the wake of criminal laws such as Sarbanes-Oxley, certain kinds of corporate executives may decide to flee the scene and, if they do, what sort of men and women will be left behind. We suggest that there may not only be growing numbers of risk-averse “bean counters,” there may also be an emerging class of entrepreneurs whom we call “swashbucklers.” These men and women have no special regard for the strictures of the criminal law and they may thrive in the post-Sarbanes-Oxley world.

More on this project later, but suffice it to say, my project has made me question a number of assumptions, and articles like the one above have me rethinking my views on a number of things, including this post from a few weeks ago.

--JPF

The SEC and the D.C. Circuit

The Court’s recent opinion in the proxy access case has received a lot of attention. Here are some posts from others reacting to that decision: Steve Bainbridge, Gordon Smith, J. W. Verret, Larry Ribstein. Steve Bainbridge has a summary of other responses here. I won't add to that ample commentary. But it seems the SEC is on a real losing streak in the D. C. Circuit. Here are the losses in the last dozen years that I’m aware of. I haven’t done extensive research, so there might be more.

• Business Roundtable v. SEC (“Business Roundtable II) (D.C. Cir. 2011)

SEC’s adoption of proxy access rule violated the Administrative Procedure Act because the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”

• American Equity Investment Life Ins. Co. v. SEC, 613 F.3d 166 (D.C. Cir. 2010)

SEC’s adoption of a rule excluding fixed index annuities from the Securities Act exemption for annuity contracts violated the Securities Act because the SEC failed to adequately consider the effects of the rule on efficiency, competition, and capital formation

• Financial Planning Ass’n v. SEC, 482 F.3d 481 (D.C. Cir. 2007)

SEC rule exempting certain brokers from the Investment Advisers Act was inconsistent with the Act

• Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006)

SEC attempt to regulate hedge fund advisors was inconsistent with the Investment Company Act and with the SEC’s own prior interpretations of the Act

• Chamber of Commerce v. SEC (Chamber of Commerce I), 412 F.3d 133 (2005)

SEC’s adoption of corporate governance rules for mutual funds violated the Administrative Procedure Act because the SEC didn’t adequately consider either the cost of the rules or alternatives to the rules.

• Chamber of Commerce v. SEC (Chamber of Commerce II) , 443 F.3d 890 (D.C. Cir. 2006)

SEC again violated the Administrative Procedure Act by readopting the same rules approximately two weeks after the prior opinion

• Teicher v. SEC, 177 F.3d 1016 (D.C. Cir. 1999)

SEC order barring individual convicted of securities fraud from becoming associated with an investment adviser exceeded its statutory authority.

That list doesn't even include the first  Business Roundtable case, 905 F.2d 406 (D. C. Cir. 1990), that held that the SEC exceeded its statutory authority under the Exchange Act in adopting the one share,one vote rule barring exchanges and NASDAQ from listing common shares with unequal voting rights.

You may not agree with the D.C. Circuit’s position in all of these cases. My personal opinion is that the Financial Planning case is just bad statutory interpretation by the court. But it seems to me that an agency has to work really hard to lose this much. J. W. Verret argues that the most recent opinion illustrates that the SEC “is an agency with too many lawyers and not enough economists.” With this string, I’m more inclined to think that the SEC simply doesn't care enough about the rule of law.

-Steve Bradford

Bushee, Jung, and Miller on Selective Investor Access to Management

Brian Bushee, Michael Jung, and Gregory Miller have posted “Do Investors Benefit from Selective Access to Management?” on SSRN.  Here is the abstract:

We examine whether investors benefit from “selective access” to corporate managers, which we define as the opportunity for investors to meet privately with management in individual or small-group settings. We focus on two potential opportunities for selective access advantages at invitation-only investor conferences: formal “off-line” meetings outside of the webcast presentation and CEO attendance at the conference. We find significant increases in trade sizes during the hours when firms provide off-line access to investors and after the presentation when the CEO is present, consistent with selective access providing investors with information that they perceive to be valuable enough to trade upon. We also find significant potential trading gains over three- to 30-day horizons after the conference for firms providing formal off-line access, suggesting that selective access can lead to profitable trading opportunities. While we cannot conclusively determine that managers are providing selective disclosure in these off-line settings, our evidence does suggest that selective access to management conveys more benefits to investors than public access even in the post-Reg FD period.

SJP

D.C. Court Strikes Down Proxy Access

Stephen Bainbridge pulls together some of the blogosphere reaction here.  I highlight the following from that post:

Mike Scarcella at The BLT:

The appeals court sided with the business groups’ lawyers, who argued that investors with special interests, including unions and state and local governments, would be likely to put the maximization of shareholder value second to other interests. “By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown.

Gordon Smith:

The opinion is a rather limited indictment of the proxy access proposal, relying on the lack of sufficient justification. The SEC is considering its options. While it might challenge the ruling, I suspect that the agency is more likely to produce a newly justified rule in the near future.

Brett McDonnell:

[L]et me briefly lament the D.C. Circuit's vacating of the proxy access rule....  The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them.  The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough.  It will almost always be possible to do that with any agency rulemaking.  Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still.  This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences.  Talk about judicial activism.

SJP

Padfield on "The Dodd-Frank Corporation" (UPDATE)

Just in time for the one-year anniversary of Dodd-Frank, I have posted an updated version of my latest piece, "The Dodd-Frank Corporation: More Than a Nexus of Contracts."  Here is the abstract:

Corporate theory matters. By way of example, I explain in this Essay how the Citizens United opinion can be read as a decision wherein the competing theories of the corporation played a dispositive role. Furthermore, some of the most important issues confronting courts and legislatures in the foreseeable future will involve questions about the nature of the corporation. In light of this, this Essay argues that the Dodd-Frank Wall Street Reform and Consumer Protection Act serves, in addition to all its other roles, as an important and novel data point in the on-going corporate theory debate. Specifically, I argue Dodd-Frank implicates corporate theory in two ways. First, it reaffirms yet again that corporations remain subject to significant government regulation as a matter of positive law - a fact that constitutes at least somewhat of a nuisance for contractarians. Second, and more importantly, Dodd-Frank’s formal recognition that at least some corporations have literally gotten too big to fail vindicates some of the most important normative assertions of concession theory broadly defined.

SJP

Still Figuring Out Twitter in the Financial Sector

The Dealbook reports that the Financial Regulatory Authority (Finra), recently announced the one-year suspension of broker (plus a $10,000 fine) who sent “misrepresentative and unbalanced” messages on Twitter.  This case sounds like it had a lot more going on, including the broker failing to disclose a number of significant things to the employer, but it once again points out that we still have a lot to figure out with social media in the financial sector (and most other places, for that matter).

It seems to me that it should be pretty clear that any financial advice obtained via Twitter is going to lack some disclosures.  If someone is using a post on Twitter as the only reason to buy or sell a stock, I'm not sure there is a whole lot we can do for that investor.  That doesn't mean we don't need some ground rules, but people don't need to freak out, either.  It's not Twitter that makes brokers play fast and loose any more than it does politicians. It simply provides quick and accessible evidence, and perhaps we should appreciate that more than we do.

H/T Compliance Building for the link to Daniel Schwartz, at Connecticut Employment Law Blog, who says  it well when he explains that post on Twitter can cause problems for employers,

[b]ut so can a letter to an editor in your local newspaper, or a notable call to a radio talk show or causing a scene at a presentation.

You don’t see advice that we ought to cut off mail service, or remove phones from employees’ offices, or stop allowing employees to attend seminars and presentations.  Rather, we outline a set of expectations as to what is proper business behavior and what is expected by the employer.

And yet, cutting off access to Twitter is exactly what some have suggested.  Such a blanket suggestion ignores the usefulness of this internet tool and is not consistent with the approach that companies use for other, more established forms of communication.  (Can you imagine a company now that required letters to be faxed instead of e-mailed?)

Now, perhaps using faxes would have helped protect Congressman Weiner from himself, but I rather doubt it.  The same is true for employer and investors. 

In the meantime, Finra provides this Guide to the Internet for Registered Representatives.  It is not especially clear how one should use social media, and it seems to group a number of social media together in a way that doesn't appreciate the different powers of the varying options, but these are the rules. And even when rules are dumb, if it relates to your livelihood, it's best to follow them. 

--JPF

A Thought on Say on Pay

As my colleague Steve Bradford noted, the SEC say-on-pay rule led to a 98.5% approval of executive compensation packages.  Steve Bainbridge answered Steve Bradford's question, "Is the 98.5% approval rate a strong argument against requiring companies to go through this exercise?," with "a resounding YES."

In addition to providing for the shareholder advisory vote on pay, the SEC rules also require shareholders (also in an advisory capacity) to vote on how often executive pay will be submitted to the shareholders for consideration.  

Personally, I think  this second vote has the idea right.  That is, there was a better rule that would provide shareholders options, without unduly wasting company and shareholder time:  the SEC should have simply required that companies subject to the rule ask their shareholders if they want an advisory vote on executive pay.  If the shareholders want it, then great.  If not, then the company doesn't have to deal with a regular process its shareholders don't want.  

I know a lot of people hate the entire concept, and that's reasonable, too.  But I think the SEC does add value from time to time, so I'm okay with some proposed rules to help shareholders particpate more in the process to the extent they are willing.  I just think that in some cases, it makes sense to ask shareholders what they want, rather than telling them.

-JPF  

Say on Pay-My View

In my post on Friday on say-on-pay, I asked, "Is the 98.5% approval rate a strong argument against requiring companies to go through this exercise? Or should we focus on the small number of companies where shareholders voted against management?"  Steve Bainbridge responds with a resounding vote against say-on-pay.

Just for the record, I am also opposed to say-on-pay. I'm just not sure the voting results are going to sway many people one way or the other. Those who support say-on-pay are going to say that the positive results at a few companies justify the cost imposed on all companies. Those opposed are going to say the overall cost isn't worth the few positive results, especially since those positive votes are non-binding. In any event, many proponents of say-on-pay seem to be motivated more by generalized notions of democracy drawn from the political sphere than by any weighing of the economic costs and benefits.

-Steve Bradford

Are institutional investors the new sheriff in town?

Over at the Harvard Forum, Chad Johnson has posted "Too Big to Fail or Too Big to Change."  Johnson does a nice job of compiling much of the "they-knew-what-they-were-doing-and-it's-called-fraud" evidence, and bemoans the "lack of criminal prosecutions of, and absence of truly significant fines levied against, the senior executives and companies responsible for igniting the subprime meltdown."  Johnson asks: "Are large, systemically important institutions and their ilk too big to be threatened with sanctions that approximate the size of the frauds perpetrated against the public? Has 'too big to fail' transformed into 'too big to challenge?'"  He then goes on to argue that, whether due to unwillingness or inability, the SEC's failures here have opened the door for institutional investors to play a greater role in providing some accountability (the noteworthy recent Bank of America settlement may be further evidence of that).  Finally, Johnson concludes by noting that perhaps it's time to give institutional investors some of the enforcement tools the SEC has seemingly failed to utilize, such as a more expansive rights of action against secondary actors and greater extraterritorial reach.  The entire post is worth a read.

SJP

More Pro-Business Decisions From the Roberts Court

The question of whether the Roberts Court can properly be characterized as pro-business is back in the news, with four recent cases taking center stage.  In Wal-Mart v. Dukes and AT&T v. Concepcion the Court limited the availability of class actions.  As my colleague Will Huhn notes, in American Electrical Power Co. v. Connecticut:

[T]he Supreme Court held that the Clean Air Act preempts the federal common law of nuisance, and accordingly the states lost on that point.  The Court did not reach the question of whether the state law of tort is preempted by the Clean Air Act, and the case was remanded to the lower courts for a ruling on that issue.

(For an arguably related story, see: "Nuclear Regulatory Commission Colluded with Industry to Weaken Safety Standards.")

Finally, in Janus Capital the Court again chipped away at Rule 10b-5.  As Jay Brown describes it: "The opinion ... is a piece of political decision making, more in line with a legislature than a court."

An Associated Press story noted:

Robin Conrad, the head of the legal arm of the U.S. Chamber of Commerce, dismissed the notion of a pro-business court as "a silly myth" that was undercut by a record of as many victories as losses in cases of interest to the Chamber of Commerce. Yet Conrad acknowledged that the group won the three cases — the class-action disputes and a successful effort to block a climate change suit by six states — that were "easily the most important business cases of the term."

SJP

When the SEC Should Apologize

Walter Pavlo has this to say at Forbes.com about the SEC's recent insider trading case against Dr. Sebastian De La Maza, which the SEC lost:

Look, you win some and you lose some.  When a defendant loses a case they stand before the judge and usually apologize for their behavior in order to get a lighter sentence.  It provides a sense of closure and respect for justice being served.  The SEC should issue its own apology to Dr. Sebastian De La Maza for wrongly accusing, and then defaming, an innocent man.  The jury has spoken….all we’re asking for is a little justice, to go with our justice system.  Dr. De La Maza has done nothing wrong and the record now reflects that.  All I’m asking is that the SEC’s website reflect that as well.

I am inclined to agree.  If the SEC wants to make bold statements about people before they prove the case, the SEC should correct the statements if a jury acquits. The SEC shouldn't need to apologize for what they allege in court; that's where they need to prove their case.  But pretrial media statements are not about proving their case. If they want to talk before the case, get it right, or fix it.   

--JPF

Practical Law Company Materials

A few months ago, I began receiving weekly updates on finance and corporate and securities law produced by the Practical Law Company. I’m sure the company sent me advertising at some point, but I didn’t check it out until one of our librarians convinced me to take a look. (The librarian in question also happens to be my fiancée, so I tend to listen to her a little more than our other librarians.) I was hesitant to add yet another service to the many products that already stream through my in-box: various daily and weekly updates on the law, blog posts, RSS feeds from newspapers and magazines. But this is something different, and I like it.

In addition to information on regulatory and other legal changes, the PLC update includes various checklists, practice notes, and samples from current deals. For example, my most recent Corporate and Securities Weekly Update includes practice notes on (1) reverse mergers, (2) structuring waterfall provisions in partnership and LLC agreements, and (3) merchant banking. My favorite recurring feature is something PLC calls the “risk factor of the week,” with actual risk factor language pulled from public filings. The weekly updates also include summaries of both public and private acquisition agreements, often featuring some of the contractual provisions in those deals.

Some of the practice notes, such as a recent due diligence checklist, don’t add much to what I already know, but would be very useful to students or inexperienced lawyers. Some of them, like the one on waterfall provisions, deal with topics I never touch on. But most of them are pretty interesting and, for a weekly, the quality is surprisingly good.

If you haven’t seen these, you might want to check them out. The Practical Law Company web site is here. In addition to the weekly updates, the web site has a variety of other content, including webinars, model documents, and handbooks. (As an academic, I don’t pay for the content I receive, so I’m not sure what PLC charges.)

-Steve Bradford

Peer-to-Peer Lending, Crowd-funding, and Securities Law

Stefan Padfield blogged yesterday about about peer-to-peer lending and the question of who is issuing the notes offered on peer-to-peer sites.

Peer-to-peer lending is just one part of the broader crowd-funding movement—business fundraising through small investments from a large number of investors. As I have previously noted, the SEC has promised to take a look at crowd-funding as part of its overall review of the impact of its regulations on small business fundraising.

Peer-to-peer lending, and crowd-funding in general, raise a number of issues under federal securities law. The first, and most obvious, issues relate to the registration requirements of the Securities Act. Are these sites offering securities and, if so, is there an exemption from the registration requirements of the Act? The issue in Stefan’s post falls within this general question.

But crowd-funding sites raise other potential issues as well. If the sites are offering securities , the sites themselves could be brokers, or even exchanges, within the meaning of the Securities Exchange Act. Alternatively, it is at least possible that crowd-funding sites are investment advisers subject to regulation under the Investment Advisers Act. The law on what constitutes a broker, exchange, or investment adviser is murky enough that there is no easy answer. That murkiness is partially because much of the relevant authority comes from no-action letters (See my earlier post on the problem with no-action letters.)

If the SEC wishes to facilitate peer-to-peer lending and other forms of crowd-funding, and it’s not clear to me that it really does, it’s going to take more than just an exemption from the Securities Act registration requirements. To be effective, any regulation is going to have to deal with these other issues as well. And Stefan’s post makes it clear that state blue sky law is also going to be a major issue. A federal exemption that does not preempt state law isn’t going to accomplish much.

I’m working on an article on crowd-funding that addresses all of these issues. When I have a full draft, which I hope will be within the next month, I will post the SSRN link for anyone who’s interested.

-Steve Bradford

Peer-to-Peer Lending: Who Is the Issuer?

Today's Wall Street Journal contains an article about the growth of peer-to-peer (P2P) lending.  However, there are still a number of states that have concluded that the P2P business model does not satisfy their securities laws.  Back in October, I was part of a panel discussing P2P lending at the Ohio Securities Conference, and Mark Heuerman, Registration Chief Council of the Ohio Securities Division, gave a great explanation for why Ohio is one of those state.  At least one of the problems, as far as Ohio is concerned, is that while the trading platform (for example, Lending Club) is the one filing the prospectus, Ohio views the actual issuer of the notes as being the individual or entity seeking the loan.  This creates a problem because under Ohio's merit review guidelines the Securities Division must conclude that "the business of the issuer is not fraudulently conducted," while the lending platform lacks the requisite information on the actual issuers to allow for such a finding.  In fact, Prosper Marketplace apparently disclosed as part of its 2009 prospectus amendment that "[i]nformation supplied by borrowers may be inaccurate or intentionally false."  You can view more details from Mark's presentation here.  P2P lending should be in the news some more before the end of the summer because the Dodd-Frank Act calls for the Government Accountability Office to issue a report on the subject by July 21.

SJP

Primary Liability Under Rule 10b-5: The Janus Capital Decision

The Supreme Court released its opinion in Janus Capital Group, Inc. v. First Derivative Traders today. The plaintiffs in the case were attempting to hold mutual funds’ investment adviser liable for alleged misstatements in the funds’ prospectuses. In a 5-4 decision, the Supreme Court held that the adviser “cannot be held liable because it did not make the statements in the prospectuses.”

Justice Thomas wrote the majority opinion, which noted that, in order to be liable under 10b-5, one must “make” a false statement. According to Justice Thomas, “one who prepares or publishes a statement on behalf of another is not its maker,” only the person who has “authority over the content of the statement and whether and how to communicate it.” The prospectuses were issued by the funds themselves, not by the adviser, so only the funds made the statements.

Justice Breyer, who wrote the dissent, noted that the adviser was actively involved in preparing and writing the allegedly fraudulent statements; among other things, the complaint alleged that the adviser drafted and reviewed the prospectuses, and disseminated them through its parent company’s web site. Breyer believed this was enough to conclude that the adviser “made” the fraudulent statements.

If this opinion does nothing else, it puts to rest the argument that lawyers might be liable as primary violators under Rule 10b-5 because they draft a document for a client that the lawyer knows to be false. The client in that case would have the ultimate authority over the statement, not the lawyer, so the lawyer would not be making any false statement. The Janus Capital opinion is also going to make it harder to impose primary liability on corporate employees for corporate statements they did not directly make.

The majority saw its decision as a logical progression from the Central Bank decision rejecting liability for aiding and abetting and the Stoneridge Investment Partners decision rejecting liability for tangential participants in the fraud on whom injured investors did not rely. Justice Breyer’s dissent argued that neither Central Bank nor Stoneridge compelled the majority’s conclusion. I think Breyer may be right on this point, but Central Bank, Stoneridge, and Janus Capital certainly present a consistent theme. And, like the other two opinions, Janus Capital is going to be required reading in every Securities Regulation course.

-Steve Bradford

2011 Marks a Century of State Securities Regulation

Back in March, the North American Securities Administrators Association (NASAA) joined state regulators around the country in observing the first state securities law, in Kansas, which went into effect on March 10, 1911.  According to the association:

The most recent NASAA statistics show that in 2009, state securities regulators collectively initiated nearly 2,300 enforcement actions, which led to more than $4.7 billion ordered returned to defrauded investors and 1,786 years in jail for convicted con artists. State securities regulators also conducted more than 1,800 investor education presentations nationwide.

In my limited experience, state sercurites regulators, at least here in North Dakota, seem to have a stronger focus on protecting investors than they do proving they are protecting investors.  That is, they seem to have their priorities right on who and what to pursue in fraud cases.  Perhaps that is because of the people in charge or because they have more limited resources, but it raises some interesting questions about exactly how enforcement should be handled and at what level.   

This look back at the Kansas statute reminds me of a helpful (and aptly named) piece on the history of blue sky laws from Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347 (1991). The article is availble in PDF via the Faculty Scholarship Series. Paper 1641.  http://digitalcommons.law.yale.edu/fss_papers/1641

In case you still want more on this, you should know, "NASAA plans to celebrate the centennial of state securities regulation at its annual conference, September 11-13, 2011 in Wichita, Kansas."

--JPF

Johnson on Securities Class Actions in State Court

Jennifer Johnson recently posted a paper on SSRN entitled, "Securities Class Actions in State Court."  Here is the abstract:

Over the past two decades, Congress has gradually usurped the power of state regulators to enforce state securities laws and the power of state courts to adjudicate securities disputes. This Paper evaluates the impact of Congressional preemption and preclusion upon state court securities class actions. Utilizing a proprietary database, the Paper presents and analyzes a comprehensive dataset of 1500 class actions filed in state courts from 1996-2010. The Paper first examines the permissible space for state securities class actions in light of Congressional preclusion and preemption embodied in the 1998 Securities Litigation Uniform Standards Act (SLUSA) and Class Action Fairness Act of 2005 (CAFA). The Paper then presents the state class action filing data detailing the numbers, classifications, and jurisdictions of state class action cases that now occupy the state forums. First, as expected, the data indicates that there are few traditional stock-drop securities class actions litigated in state court today. Second, in spite of the debate over the impact of SLUSA and CAFA on 1933 Act claims, very few plaintiffs attempt to litigate these matters in state court. Finally, the number of state court class actions involving merger and acquisition (M&A) transactions is skyrocketing and now surpasses such claims filed in federal court. Moreover, various class counsel file their M & A complaints in multiple jurisdictions. The increasingly large number of multi-forum M&A class action suits burden the defendants and their counsel, the judiciary and even plaintiffs’ lawyers themselves. The paper concludes that absent effective state co-ordination, further Congressional preemption is possible, if not likely.

SJP

A Good Gig If You Can Get It.

Over at DealBook, Steven Davidoff declares that while there is much wailing and gnashing of teeth about "excessive" regulation--when it comes to director and officer liability, "the truth is that they have about the same chance of being held liable for their poor management of a public firm as they have of being struck by lightning."  Davidoff goes on to note that, "[e]ven if there is liability or a settlement, it is almost always covered by insurance of directors and officers."

Add to the limited risk of personal liability the fact that it is at times seemingly impossible to get oneself fired as a director (See the WSJ here: "A surprising number of embattled CEOs, forced out for poor performance or legal problems, find a warm reception from outside corporate boards on which they sit."), as well as what at least some see as very limited board accountability to shareholders, and it should not come as a surprise that some see a corporate management culture where "CEOs and Boards Enrich Themselves While Bankrupting America."  (The WSJ story reports that, "The median direct compensation for directors at the top 200 companies on the Standard & Poor's 500 is $228,058."  Given that most of these directors in fact run other companies, as well as sit on other boards, the hourly rate here is probably pretty good.)

SJP