Wednesday, December 7, 2016
NASAA Request for Public Comment Regarding a Proposed Model Statute, a Proposed Model Rule, and a Proposed Solicitation of Interest Form to Permit Testing The Waters in Regulation A Tier 1 Offerings
Tuesday, December 6, 2016
In Salman v. United States, the Supreme Court revisits the question of tippee liability for insider trading, a topic which the Court has not addressed since Dirks v. SEC, 463 U. S. 646 (1983). Salman was convicted of insider trading based upon receiving material, non-public information as a gift through his brother-in-law who had received the information as a gift from his own brother. Continuing the tradition of the Roberts Court when hearing issues of securities regulation, the unanimous majority in a opinion authored by Justice Alito ruled to maintain the status quo. The Dirks test is noted on page 2 of the slip opinion: "The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty." To determine the existence of a breach of fiduciary duty, "the disclosure of confidential information without personal benefit is not enough." To establish the existence of a "personal benefit," the Court held that the tipper receives a personal benefit either when the tipper receives a financial benefit or when giving a gift of information to a trading relative or friend because "giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds." As Justice Alito writes on page 11 of the opinion, "Salman’s conduct is in the heartland of Dirks’s rule concerning gifts." As a result, Salman's conviction was affirmed.
Beyond standing as a reaffirmation of Dirks with minor clarification, Salman also stands for the proposition that if securities regulation is to evolve, such evolution will have to come from Congressional action, rather than from the Court. Because the opinion was unanimous, the confirmation of Judge Merrick Garland to the Court would have made little difference in the case, and it is unlikely that Donald Trump will appoint an activist justice in this area. As a result, we will likely be left with stale remakes of previous opinions for the foreseeable future, unless Congress decides to refresh and reinvent the existing regulation.
Monday, December 5, 2016
Jonathan R. Macey has posted Beyond the Personal Benefit Test: The Economics of Tipping by Insiders on SSRN with the following abstract:
Recent insider trading cases reveal a stark conceptual divided between the federal courts and the Securities and Exchange Commission (SEC) regarding liability for securities fraud in cases in which an insider (a "tipper") gives material non-public information to a market professional or close friend or other potential trader (a "tippee"). Following a landmark Supreme Court case called Dirks v. SEC, the federal courts do not impose liability on tippers or tippees unless there the tipper receives a consequential personal benefit or is a close friend or relative of the tippee. The SEC abjures this "personal benefit" requirement, and would define the concept of personal benefit so broadly as to remove it as an impediment to insider trading prosecutions. This Article explains the economic function of the personal benefit test as establishing the criterion upon which legitimate trading on the basis of material nonpublic information can be distinguished from venal or corrupt trading. The Article shows that the personal benefit test, while a valuable innovation to insider trading jurisprudence, is severely limited because it does not capture all of the various motivations that cause insiders to convey material nonpublic information to traders. This Article fills that gap by providing a complete taxonomy of tipping and trading, and explaining what the legal consequences of all of the various forms of insider trading.
Sunday, December 4, 2016
SEC Advisory Committee on Small and Emerging Companies to Hold Conference Call Meeting on December 7
Monday, November 28, 2016
The following law review articles relating to securities regulation are now available in paper format:
Eric C. Chaffee, Book review, Confounding Ockham's Razor: Minilateralism and International Economic Regulation (reviewing Chris Brummer, Minilateralism: How Trade Alliances, Soft Law, and Financial Engineering Are Redefining Economic Statecraft), 10 Brook. J. Corp. Fin. & Com. L. 319 (2016).
Jill I. Gross, The Customer's Nonwaivable Right to Choose Arbitration in the Securities Industry, 10 Brook. J. Corp. Fin. & Com. L. 383 (2016).
Roberta S. Karmel, The Challenge of Fiduciary Regulation: the Investment Adviser's Act after Seventy-Five Years, 10 Brook. J. Corp. Fin. & Com. L. 405 (2016).
Wednesday, November 23, 2016
Ye Wang has posted (Naked) Short Selling Around Earnings Announcement on SSRN with the following abstract:
Since short sellers are considered sophisticated traders and respond to corporate news and public information in a timely manner, corporate earnings announcements containing new information can be used to update the beliefs of short sellers and affect their investment strategies. Abnormal market reactions to earnings surprises are traditionally considered due to market mispricing or investor overreaction to unexpected corporate news; however, such mispricing is also determined by the functioning of the market microstructure. This paper uses an innovative dataset that includes detailed short sales information and fails-to-deliver (FTDs) at the settlement dates for all stocks listed in the New York Stock Exchange and NASDAQ to provide empirical evidence that the FTDs arising from naked short selling contribute to this mispricing around earnings announcements. Furthermore, this paper provides empirical evidence that, even after new regulation for restricting naked short sales, such misbehavior still causes price distortion during negative corporate events. This work also identifies multiple factors that could influence the (naked) short sales constraints of trading securities. The results show that institutional ownership, insider sales, short interests, and trading volume in a dark pool are important factors in the (naked) short sales of underlying stocks.
Jill E. Fisch, Jonah B. Gelbach, and Jonathan Klick have posted After Halliburton: Event Studies and Their Role in Federal Securities Fraud Litigation on SSRN with the following abstract:
Event studies have become increasingly important in securities fraud litigation after the Supreme Court’s decision in Halliburton II. Litigants have used event study methodology, which empirically analyzes the relationship between the disclosure of corporate information and the issuer’s stock price, to provide evidence in the evaluation of key elements of federal securities fraud, including materiality, reliance, causation, and damages. As the use of event studies grows and they increasingly serve a gatekeeping function in determining whether litigation will proceed beyond a preliminary stage, it will be critical for courts to use them correctly.
This Article explores an array of considerations related to the use of event studies in securities fraud litigation. It starts by describing the basic function of the event study: to determine whether a highly unusual price movement has occurred and the traditional statistical approach to making that determination. The Article goes on to identify special features of securities fraud litigation that distinguish litigation from the scholarly context in which event studies were developed. The Article highlights the fact that the standard approach can lead to the wrong conclusion and describes the adjustments necessary to address the litigation context. We use the example of six dates in the Halliburton litigation to illustrate these points.
Finally, the Article highlights the limitations of event studies – what they can and cannot prove – and explains how those limitations relate to the legal issues for which they are introduced. These limitations bear upon important normative questions about the role event studies should play in securities fraud litigation.
Itzhak Ben-David, Francesco A. Franzoni, and Rabih Moussawi have posted Exchange Traded Funds (ETFs) on SSRN with the following abstract:
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.