Securities Law Prof Blog

Interview with Vanguard's CEO

Today's NY Times has an interview with Vanguard CEO John Brennan.  Among the topics discussed:  the competitive landscape (Charles Schwab and Fidelity); SOX (he's a fan); and investor education.  See  A Fund Giant Not Fretting About No. 1.

Globalization of Capital Markets

Two stories in today's WSJ dealing with the globalization of the U.S. capital markets:  It reports that NYSE and Tokyo Stock Exchange are exploring an allliance, Behind a Link Of NYSE, Tokyo Are Two Friends, and that the likelihood of NASDAQ's bid for the LSE succeeding are down, Nasdaq Declines to RaiseIts Bid for LSE.

Another Stock Option BackDating Investigation

KB Homes is the latest to announce a formal SEC investigation into stock option backdating.  See SEC Begins Formal Probe Of KB Home Stock Options

SEC Approves Changes to BrokerCheck

On Jan. 18, 2007 the SEC approved NASD rule changes to NASD BrokerCheck dealing with the kinds of information about brokers that would be publicly available through the system. Most of the release discusses the rule change dealing with the reporting of "historic complaints," defined as customer complaints that are more than two years old and that have not been settled or adjudicated, as well as matters that have been resolved for less than $10,000 and are no longer reported on a registration form.  NASD will release historic complaints only if three conditions are met:  (1) the matter became a historic complaint after the implementation of the Rule; (2) the most recent historic complaint or currently reported customer complaint is less than ten years old; (3) the person has a total of three or more currently disclosable events. 

Re-Thinking Regulation in the Era of Global Securities Markets

SEC Chairman Cox spoke Jan. 25, 2007 at the Securities Regulation Institute on the challenges presented to the SEC by increasing globalization of the capital markets.  He stated:

The way for the United States to maintain robust investor protections while building healthy international markets is first, to ensure that our regulatory regime at home is both sturdy enough to withstand the onslaught of today's new technologies and the challenges of high volume cross border trading; second, to ensure that our regulations are in every respect cost-justified; and third, to cooperate with our fellow securities regulators abroad to implement agreed-upon regulatory objectives on a global level.

It's the Globalization, Stupid

NY Times commentary joins the debate over whether Wall Street is losing its competitive edge and says the other markets are just competing better as barriers between markets break down.  See About Those Fears of Wall Street’s Decline ...

No Progress in NASDAQ-LSE Talks

Negotiations have stalled over price in Nasdaq's quest to acquire the London Stock Exchange.  Saturday is the deadline for a negotiated deal.  See WSJ, LSE-Nasdaq Talks Look Unlikely
Amid Chasm Over Acquisition Price.

Competing Bidders for EOPT

In the contest to take over Equity Offices Property Trust, Blackstone raised its bid by 11%, coming back after Vornado had topped its initial bid last week.  Blaackstone says it doesn't want this to be the next RJR Nabisco battle.  See BlackstoneRaises Stakes In EOP Battle.

Critique of Socially Resonsible Investing

For a commentary on the "dark secrets" of socially responsible investing, see WSJ, What Should Bill Gates Do?

Empty Voting by Hedge Funds in the Spotlight

A lead story in the WSJ today focuses on "empty voting" by hedge funds -- the practice of borrowing shares and voting them -- and how it may influence voting contests.  The practice has been growing in recent years and has attracted the attention of the SEC.  A study by Henry Hu and Bernard Black from the U. of Texas Law School studies empty voting in 22 instances worldwide from 2001-06.  See OUTSIDE INFLUENCE How Borrowed Shares .Swing Company Votes

Proxy Contest for Tribune Board?

The WSJ speculates that the Chandler family, the largest shareholder of the Tribune, may announce a proxy contest for more seats on the board as the Tribune considers proposals for its future, including a merger proposed by the Chandlers.  See Chandlers May Fight for More Tribune Board Seats.

NASAA Unveils Pro-Investor Legislative Agenda for the 110th Congress

The North American Securities Administrators Association (NASAA) today outlined a sweeping legislative agenda that supports efforts to advance investor protection and promote a strong and effective regulatory environment to maintain investor confidence in the capital markets.

NASAA’s legislative agenda seeks to preserve the authority of state regulators to protect investors; strengthen the mechanisms currently in place that provide redress to investors for wrongdoing by industry participants; maintain federal laws designed to insure corporate accountability and shareholder confidence; promote sound and effective regulatory initiatives; and improve the scope and breadth of investor education efforts.

Codification of Interpretations to Research Analysts and Research Reports Rule 2711

Executive Summary:
NASD has filed for immediate effectiveness a proposed rule change to codify certain interpretations under Rule 2711 (Research Analysts and Research Reports). The interpretations include many that previously were set forth in two joint interpretive memoranda. The proposed rule changes also include additional interpretations regarding the definition of research report, the distribution of third-party research through soft-dollar arrangements, and the supervisory requirements with respect to the distribution of both member research and third-party research. This Notice also contains two additional interpretations of the Rule 2711 provisions that prohibit research analysts from participating in the solicitation of investment banking business and road show presentations.  See the complete Rule Filing.

SEC Charges Florida Man with Unauthorized Use of Other's Online Accounts

On January 25, the Commission filed a complaint in the  United  States
   District Court for the Middle District of Florida charging  twenty-one
   year old Aleksey Kamardin with participating in a fraudulent scheme to
   manipulate the prices of numerous stocks through the unauthorized  use
   of other people's online brokerage accounts.

   The complaint  alleges  that  between  July  13  and  Aug.  25,  2006,
   Kamardin, or others acting in concert, commandeered the online trading
   accounts of unwitting investors at various broker-dealers,  liquidated
   existing equity positions and, using the resulting proceeds, purchased
   thinly traded stocks in order to  create  the  appearance  of  trading
   activity and pump up the price of the stocks.  The  complaint  further
   alleges that in seventeen instances, Kamardin,  in  his  own  account,
   bought shares in the thinly traded issuer just prior to or at the same
   time that compromised accounts were made to buy shares,  creating  the
   false appearance of market activity.  Shortly  after  the  intrusions,
   Kamardin sold all of his shares at the inflated  prices.  In  all  but
   three of these instances, Kamardin realized a profit from his trading,
   netting a total profit of $82,960.

      The SEC's Office of Investor Education and Assistance  has  previously
   issued an investor  alert,  available  on  the  SEC's  website,  which
   provides tips for avoiding becoming a victim of an  online  intrusion.
   

SEC, Euronext Regulators Sign Regulatory Cooperation Arrangement

Today, the Securities and Exchange Commission and the College of Euronext Regulators announce the signing of a comprehensive arrangement to facilitate cooperation in market oversight in view of the pending combination between the NYSE Group, Inc. and Euronext N.V. into NYSE Euronext, Inc. Through this Memorandum of Understanding (MOU), the regulators express their commitment to close cooperation and collaboration to promote investor protection, foster market integrity, and maintain investor confidence and systemic stability in connection with the regulation of the combined group.

MOU will not go into effect until publication by Euronext Paris S.A. of a declaration that the thresholds for acceptance of the NYSE Euronext offer have been reached.

The authorities making up the College of Euronext Regulators are the

Authority for the Financial Markets (AFM), Netherlands;
Autorité des Marchés Financiers (AMF), France;
Banking Finance and Insurance Commission (CBFA), Belgium;
Comissão do Mercado de Valores Mobiliários (CMVM), Portugal; and
Financial Services Authority (FSA), United Kingdom.

See the Memorandum of Understanding for further information.

SEC Extends Compliance Dates for Reg NMS

The Securities and Exchange Commission has extended for a limited period of time three of the future compliance dates for Rule 610 and Rule 611 of Regulation NMS. The Commission is extending the three compliance dates to give automated trading centers additional time to complete the rollout of their new or modified trading systems. The Completion Date of Oct. 8, 2007, remains unchanged.

Rule 610 is intended to assure fair access to quotations, limit fees for accessing quotations, and require self-regulatory organizations (SROs) to prohibit their members from displaying quotations that lock or cross quotations previously displayed by other markets. Rule 611 requires trading centers to establish policies and procedures to prevent “trade-throughs” – the execution of trades at prices inferior to the best-priced quotations displayed by automated trading centers. Automated trading centers must operate trading systems that comply with the automated response and other requirements of Regulation NMS. The trading systems can be operated by an SRO or operated by a broker-dealer that displays its quotes on the NASD’s Alternative Display Facility.

The Commission has extended the Trading Phase Date until March 5, 2007 (previously Feb. 5, 2007), the Pilot Stocks Phase Date until July 9, 2007 (previously May 21, 2007), and the All Stocks Phase Date until Aug. 20, 2007 (previously July 9, 2007).

EBay Announces Big Stock BuyBack

EBay announced it would buy back up to 2 billion of its shares over the next two years, amid concerns that scams on its auctions market will harm its reputation.  See eBay Announces Aggressive Buyback .

Merill Lynch CEO Got $48 Million in Pay

Merill Lynch's CEO, Stan O'Neal, received total compensation of $48 million in 2006, up 30% from 2005, making him the second highest paid CEO on Wall St.  (Goldman Sach's CEO got $54 million.)  See WSJ, Merrill's $48 Million Chief.

U.S. Markets Face Increasing Foreign Competition

The WSJ examines the central finding of several recent studies that received wide attention -- that increased regulation of U.S. markets is decreasing its competitive edge -- and finds that the increased competition results from other competitive forces.  Foreign markets have improved their performance, including increasing their own regulation, to provide more competition.  See In Call to Deregulate Business, a Global Twist.

Amex Hires Investment Banker

The American Stock  Exchange has hired Morgan Stanley to advise it on strategies for going public or merging with another exchange, either domestic or foreign.  See WSJ, Amex Hires Morgan Stanley, Prepares for an IPO or Merger.

7th Circuit Dismisses Complaint against Accountants

The Seventh Circuit affirmed the lower court's dismissal of a complaint against PricewaterhouseCoopers for negligent misrepresentations and securities fraud.  Plaintiff alleged that the accounting firm made false statements about the financial worth of its client, Anicom, during negotiations involving the sale of plaintiff's assets for Anicom stock.  The negligent misrepresentation failed because plaintiff failed to allege that Anicom's primary intent in retaining the accountant's services was to influence the plaintiff, a requirement under state law.  A fraudulent cover-up allegation failed because it did not meet the heightened pleading requirements of FRCP 9(b).  The securities fraud claim failed because of failure to plead loss causation under Dura -- the drop in the stock price resulted from disclosure of misstatements in 1998, and the plaintiff's allegations involved the 1997 financial statements. Tricontinental Industries v. PricewaterhouseCoopers, 2007 WL 102985 (7th Cir. 1/17/07).

SEC Open meeting Agenda

OPEN MEETING - WEDNESDAY, JANUARY 31, 2007 - 2:00 P.M.

   The subject matter of the Open Meeting scheduled for January 31, 2007,
   at 2:00 p.m. will be

   1. The Commission will  consider  whether  to  propose  amendments  to
   extend its interactive data  voluntary  reporting  program  to  permit
   mutual funds to submit as exhibits to  their  registration  statements
   supplemental tagged information contained in the  risk/return  summary
   section  of  their  prospectuses.  The  risk/return  summary   section
   contains key mutual fund information, including investment  objectives
   and strategies, risks, and costs.

   2. The Commission will consider whether to propose rules to  implement
   provisions of the Credit Rating Agency Reform Act of 2006.

NYSE Warns Margin Customers

The NYSE issued a warning to investors, as part of its Informed Investor Series, that customers who buy shares on margin may lose their rights to vote some of the shares in their account.  It explains that brokerage firms have the right to pledge or loan the securities of a margin customer, and with the shares goes the right to vote.  Although this is not an issue when not many of the margin customers wish to vote their shares, it has been an issue in some recent contested elections.  See Margin Customers: Know Your Shareholder Rights on Proxies and Dividends.

SEC Approves New NASD Arbitration Code for Customer Disputes

Today, after a long wait, the SEC approved the NASD's rewrite of the Code of Arbitration.  A complete re-write of the Code to make it more user-friendly, there are now three separate codes -- one for customer disputes, one for industry disputes, and one for mediations (which had been approved by the SEC earlier).  Among the substantive changes are: broader authority for arbitrators to impose sanctions; enhanced qualifications for Arbitrator Chairs; changes in discovery procedures; and improved arbitrator selection provisions.  See the SEC's press release and its Order; see also the NASD's press release.

Backlash against Management LBOs

WSJ reports on recent instances where independent directors or shareholders have resisted efforts to take corporations private.  See The New Activist Investors.

BuyBack Statistics

WSJ reports on recent statistics on corporate buybacks of their own shares.  While tripling from 2003-2006, the numbers are now flat from last spring.  See Buybacks Lag, Squeeze Looms For Earnings.

NYSE Completes Move to Electronic Trading

NYSE completes today its move toward electronic trading.  Investors benefit from reduced trading times; floor traders look for new line of work.  See The NYSE: Faster (and Lonelier).

Increased Number of Pay for Performance Shareholder Resolutions

Shareholder resolutions linking executive pay to performance are being introduced by shareholders  at twice as many corporations as previously, WSJ reports.  See More Pressure on Executive Pay   

Sullivan & Cromwell Deals with Low Morale

WSJ reports on steps taken by Sullivan & Cromwell to deal with the high rate of attrition among junior associates, around 30%.  Steps include partners' returning associates' phone calls, more free lunches, and better performance reviews.  See Does 'Thank You' Help Keep Associates?

Trial Begins in Accounting Fraud Case

WSJ reports that a trial in Miami is about to begin as investors of a failed financial services company sue BDO Seidman LLP, alleging that the accounting firm failed to detect fraud.  BDO Seidman says that the requested relief -- $170 million -- could put the accounting firm out of business.  See BDO Prepares to Fight Lawsuit, With Survival Possibly at Stake.

SEC Prime Bank Fraud Case

SEC v. INTERNATIONAL FIDUCIARY CORPORATION, S.A., ET AL.

   On January 19, acting on the Commission's motion, Judge  Gerald  Bruce
   Lee of the U.S. District Court for the Eastern District  of  Virginia,
   appointed Roy M. Terry,  Jr.,  Esq.  as  Receiver  over  International
   Fiduciary Corporation, S.A. (IFC). IFC is one of four defendants in an
   alleged Prime Bank, pyramid scheme case that the Commission  filed  on
   an emergency basis on Dec. 4, 2006.

The Commission has alleged that IFC and the three other defendants  in the case defrauded over 180 investors in a fraudulent  "Prime Bank" scheme which  appears  to  have  raised at  least  $18.2
   million to date.  For additional information on the SEC's pleadings in this matter,  see
   Litigation Release No. 19934 (Dec. 5, 2006).

      

SEC Has no Opinion on H-P Resolution re Corporate Elections

The SEC declined to express an opinion on HP's efforts to keep a shareholders resolution regarding access to the corporate ballot for elections off its proxy statement and, contrary to expectations, said it would not take up the matter at a Commission meeting later this month.  See Activist Holders Gain Ground in Quest for Access to Ballots.

Spitzer Backs Report Recommending Less SOX Regulation

Yesterday we reported on the Bloomberg-Schumer report  that found that the U.S. capital markets were losing their competitive edge and calling for re-examination of the implementation of SOX.  Reflecting his new role as Governor of New York, Eliot Spitzer backed the report's recommendations and said that SOX demonstrated the "powerful law" of unintended consequences.  See Why Spitzer Is Backing Study.

Contested Board Election at Ceridian Expected

WSJ reports that William Ackerman, principal of a hedge fund, is expected to announce that he will run a new slate of directors for Ceredian.  He has been advocating for a spinoff of its subsidiary.  See Ackman to Run Own SlateOf Directors at Ceridian.

Oral Argument Set For Tellabs

Oral argument for Tellabs, Inc. v. Makor Issues & Rights, Ltd. (Docket 06-484) is scheduled for March 28, 2007.  The issue before the Court is: To what extent, if any, must the court consider or weigh competing inferences in determining whether complaint asserting claim of securities fraud has alleged facts sufficient to establish "strong inference" that defendant acted with scienter, as required under PSLRA?

Bloomberg-Schumer Report on Financial Markets' Competitiveness

NYC Mayor Michael Bloomberg and NY Senator Charles Schumer issued a report  that warns that "if we do nothing, within ten years while we will remain a leading regional financial center, we will no longer be the financial capital of the world." It finds, among other things, that:  the U.S. regulatory framework is a "thicket of complicated rules, rather than a streamlined set of commonly understood principles."  It calls for re-examination of SOX implementation, legal reforms to reduce meritless litigation, and easing immigration restrictions. 

SEC Charges 13 with Aiding and Abetting Financial Fraud

SEC CHARGES THIRTEEN INDIVIDUALS WITH AIDING  AND  ABETTING  FINANCIAL
   FRAUD AT U.S. FOODSERVICE:The Commission  filed  enforcement  actions  late  last  week  against thirteen  individuals  alleging  they  aided  and  abetted  a  massive
   financial fraud  by  signing  and  returning  materially  false  audit
   confirmations sent to them by the auditors of  the  U.S.  Foodservice,
   Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.).  All  of  the
   individuals charged, Carl Allen,  Gary  Bell,  Donald  Childers,  John
   Crowder, Joseph Grendys, Anthony Holohan, Chris  Jakubek,  John  King,
   Steve LeBarron, Patrick Penderghast, Frank Riggio, Michael Smith,  and
   Richard Vecchia, were employees of or agents for vendors that supplied
   U.S. Foodservice.

Summary Judgment in Ponzi Scheme Case

On January 16, the Commission was awarded summary judgment  against  a
   hedge fund, Sterling Watters Group LP (Fund),  its  general  partners,
   Sterling Watters Capital Advisors, LLC, and Sterling  Watters  Capital
   Management, Inc., and these entities'  principal,  Angelo  Haligiannis
   (Haligiannis). Judge Richard J. Holwell of the  Southern  District  of
   New York found that, although the Fund had been losing money since  at
   least 2000 and was virtually insolvent by the third quarter  of  2003,
   the defendants  distributed  fraudulent  offering  materials,  account
   statements,  newsletters  and  marketing  materials  that   materially
   misstated  the  Fund's  returns  and   assets,   including   materials
   indicating that the Fund had $180 million in assets, at a  time  when,
   in fact, it had less than $170,000. The Court concluded that by  early
   2004, the  Fund  had  effectively  devolved  into  a  "Ponzi"  scheme.
   Haligiannis pled guilty to  parallel  criminal  charges  in  September
   2005, but failed to appear for his sentencing  in  January  2006,  and
   currently remains a fugitive.

   The Court granted the Commission's motion  for  permanent  injunctions
   against violations of Section 17(a) of  the  Securities  Act,  Section
   10(b) of the Exchange Act and  Rule  10b-5  thereunder,  and  Sections
   206(1) and 206(2) of  the  Investment  Advisers  Act;  and  found  the
   defendants  jointly  and  severally   liable   for   disgorgement   of
   $15,635,862,  plus  prejudgment  interest,  and  a  civil  penalty  of
   $15,000,000.

New Proxy rules on Internet Access

INTERNET AVAILABILITY OF PROXY MATERIALS

   On January 22, the Commission issued a release adopting amendments  to
   the proxy rules under Section 14 of the Exchange Act that permit,  but
   do  not  require,  companies  and  other  persons   conducting   proxy
   solicitations to satisfy the Rule 14a-3 requirement to  furnish  proxy
   materials by posting those proxy materials on an Internet Web site and
   providing shareholders with notice of the Internet availability of the
   materials.  (Rels.  34-55146;  IC-27671;  File   No.   S7-10-05)   The
   Commission also issued a release that proposes the universal  Internet
   availability of proxy materials. (Rels. 34-55147; IC-27672;  File  No.
   S7-03-07).

More on Take Two Options Scandal

The WSJ gives further details on the options backdating at Take Two Interactive Software.  The company blames the former CEO and failures in corporate governance for a six-year history of option backdating.  See Take-Two Claims Former CEO Backdated Stock Options.

Subpeonas Issued in Online Gambling Probe

The NY Times reports that the government has issued subpoenas to four investment banks that had underwritten IPOS for online gambling sites, as part of its crackdown against online gambling. See Gambling Subpoenas on Wall St.

NASD Members Approve NYSE Merger

NASD members approved the proposed merger with the regulatory arm of NYSE by a vote of 2671-1440.  NASD campaigned hard for the merger in the face of opposition by small firms fearful they would lose their voice in the combined SRO.  WSJ, NASD Approves Tie-Up With NYSE on Oversight

First IPO of 07 Makes Spy Planes

AeroVironment, a high tech research company that creates unmanned spy planes for the Dept of Defense, plans to list its shares on NASDAQ in its IPO estimated at $107.2 million, kicking off the IPOs for 2007.  See WSJ, AeroVironment Kicks Off '07 IPOs.

New International ETFs Soon

WSJ reports that the SEC is accelerating the process to allow the American Stock Exchange and NYSE Group to introduce new ETFs that invest in international securities.  See SEC Moves to Accelerate
International ETF Trades

UBS to Open in China

UBS plans soon to become the first full-service brokerage firm owned by a foreignerin China, opening in Beijing.  The stock markets in Beijing and Shenzhen are booming, and Chinese stock markets are valued at over $1 trillion.  WSJ also discusses the regulators' efforts to improve investors' confidence in the Chinese markets.  See China Opens Door to UBS

Russian Stock Market Boom

Investors credit Mr. Putin for the seven-year rally of the Russian stock market.  Publicly traded Russian stocks are now valued at over $1 trillion.  See WSJ, Investors Credit Putin As They Pile Up Profits

Duties of Directors in IPOs

The Duties of Directors in 'Irrationally Exuberant' Initial Public Offerings 

CHEE KEONG LOW
Chinese University of Hong Kong - School of Accountancy
--------------------------------------------------------------------------------

Virginia Law & Business Review, Forthcoming 
   
 
Abstract:      
Information asymmetry between various parties has traditionally been advanced as the principal reason why initial public offerings are, on average, under priced. Two agency explanations for this under pricing exist, namely, that investment bankers find it less costly to market initial public offerings that are under priced and the quid pro quos that underwriters receive from buy-side clients in return for allocating such issues to them. More recently, proponents of behavioural finance have sought to document the exploitation by owners of companies of this asymmetry for the maximization of their personal wealth.

Using data for the 190 initial public offerings in Hong Kong over the four-year period from January 2003 to December 2006, this paper examines the duties of directors with respect to the issue of shares by companies and sets the case for a possible breach of such duties where the initial public offering is significantly under priced. It argues that, rather than being viewed as a 'success', the excessive rates of over-subscription for shares during an initial public offering, and the associated short-run under pricing thereof, should more appropriately be viewed as a loss for the company for which its directors ought to be held accountable.

Milberg Indictment

The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation 

BRUCE H. KOBAYASHI
George Mason University School of Law
LARRY E. RIBSTEIN
University of Illinois College of Law
--------------------------------------------------------------------------------
January 2007

U Illinois Law & Economics Research Paper No. LE07-001
George Mason Law & Economics Research Paper No. 07-04 
   
 
Abstract:      
The indictment of the Milberg, Weiss firm and two of its named partners for allegedly illegal payments to lead plaintiffs stands at the intersection of important recent developments in both the expanding criminalization of corporate conduct and the federalization of corporate law. Many have noted the irony and hypocrisy of the Milberg firm's alleged use of illegal tactics to prosecute corporate illegality. However, the more important hypocrisy is that Milberg's prosecutors are essentially paying the same witness - Vogel - that Milberg is being prosecuted for paying. This case illustrates the need to need to develop coherent standards regarding payments to litigants and witnesses. These standards should take account of the incentive effects of the payments, rather than being based on a desire to discourage or encourage particular types of actions.

Non-GAAP Accounting

SEC Scrutiny and the Evolution of Non-GAAP Reporting 

KALIN KOLEV
New York University - Leonard N. Stern School of Business
CAROL A. MARQUARDT
CUNY Baruch College
SARAH E. MCVAY
New York University - Department of Accounting, Taxation & Business Law
--------------------------------------------------------------------------------
January 2007

   
 
Abstract:      
We empirically examine the effects of intensified scrutiny over non-GAAP reporting on the quality of non-GAAP earnings exclusions. We find that, on average, exclusions are of higher quality (i.e., more transitory) following intervention by the Securities and Exchange Commission (SEC) into non-GAAP reporting. We further find that firms that stopped releasing non-GAAP earnings numbers after the SEC intervention had lower quality exclusions in the pre-intervention period. These results are consistent with the SEC's objectives of improving the quality of non-GAAP earnings figures. However, when we decompose total exclusions into special items and other exclusions, we find evidence that the quality of special items has decreased in the post-intervention period, which suggests that managers adapted to the new disclosure environment by shifting more recurring expenses into special items. This suggests that there may be unintended consequences arising from the heightened scrutiny over non-GAAP reporting.

SEC Uptick Rule

On Sundays we will be higlighting recent scholarship in the area.  For an empirical study that supports the SEC's deregulation of the Short-Sales Rule, see The Uptick Rule of Short Sale Regulation - Can It Alleviate Downward Price Pressure from Negative Earings Shocks? 

LYNN BAI
Duke University - Fuqua School of Business
--------------------------------------------------------------------------------
December 2006

   
 
Abstract:      
This paper examines the effect of the uptick rule (including the bid test applicable to NASDAQ stocks) of short sale regulations on stock prices and short selling activities immediately after negative earnings surprises that occurred during the period of May to November 2005. It compares price paths and short selling activities of stocks restricted by the uptick rule with stocks that were exempted from the rule as a result of the SEC's Pilot Program. The study has not found any evidence that prices of stocks subject to the rule declined at a slower speed than prices of exempted stocks at times of stress. The two groups of stocks had similar levels of short sale volumes despite the rule's prohibition on short selling at minus or zero-minus ticks. For NYSE and AMEX stocks, our study shows that market short orders whose immediate executions were barred by the uptick rule found execution opportunities against the upcoming buy orders within 15 minutes after their conversion into limit orders at the legally shortable price. For NASDAQ stocks, our study shows that up bids occurred with high frequency after negative earnings surprises and jointly with price improvements they offered generous execution opportunities to short sale orders.