October 8, 2007
Change in Lead Counsel in Fannie Mae Fraud Class Action
The role of political donations in the appointment of lead counsel in private securities litigation is in the spotlight, as the Ohio Attorney General changes law firms in the Fannie Mae class action. The Attorney General's office says there was a professional difference on strategy and tactics, but others wonder if political donations by plaintiffs' securities attorneys played a part. WSJ, Lead Counsel In Fannie Suit Is Switched Out.
October 7, 2007
O'Hare on Retail Investor Remedies
Retail Investor Remedies Under Rule 10b-5, by JENNIFER O'HARE, Villanova University School of Law, is posted on SSRN. Here is the abstract:
This paper assesses the private remedies available under Rule 10b-5 to retail investors who have been defrauded by false corporate disclosures. After comparing the treatment received by retail investors to the treatment received by institutional investors, I identify several areas in which the federal securities laws disfavor retail investors who have been defrauded by false corporate disclosures, including the creation of a two-tiered system of investor remedies for securities fraud. Institutional investors are permitted to pick and choose which law and forum offers them the most attractive chance for recovery, but retail investors typically do not have this opportunity. They are forced to sue under federal law in federal court. I then show that disfavored treatment could lead retail investors to question the fairness of the federal securities laws, contributing to a loss of investor confidence in U.S. markets. I conclude by exhorting policymakers to recognize that the securities fraud class action significantly disadvantages retail investors. Policymakers need to become much more aware of the plight of the defrauded retail investor when considering reforms to private securities fraud litigation and when determining enforcement initiatives.
Lambert on Insider Trading
A Middle Ground Position in the Insider Trading Debate: Deregulate the Sell Side, by THOMAS A. LAMBERT, University of Missouri at Columbia - School of Law, is posted on SSRN. Here is the abstract:
Participants in the forty-year debate over whether insider trading should be liberalized have generally treated insider sales the same as insider purchases - they have argued that all such insider transactions should be either regulated or liberalized. This article contends that there is a principled basis for treating price-decreasing insider trading (e.g., insider sales) more leniently than price-increasing insider trading (e.g., insider purchases). Because equity overvaluation is more likely than equity undervaluation to occur and persist and is more likely to occasion harm to the corporate enterprise when it does occur, corporate constituents (managers and shareholders) would likely value a policy that permits price-decreasing insider trading more than a policy that permits price-increasing insider trading. Thus, the majoritarian default rule may be an asymmetric policy under which price-decreasing insider trading is generally permitted while price-increasing insider trading is generally forbidden.
Karmel on FINRA
Is the Financial Industry Regulatory Authority a Government Agency?, by ROBERTA S. KARMEL, Brooklyn Law School, is posted on SSRN. Here is the abstract:
The National Association of Securities Dealers, Inc. (“NASD”) and NYSE Group, Inc. (“NYSE”) have combined their regulatory operations into a new entity called the Financial Industry Regulatory Authority (“FINRA”). Although both the NASD and the NYSE have long histories as self-regulatory organizations (“SROs”), subject to increasingly pervasive and statutorily based SEC regulation, the creation of FINRA poses a question long lurking in the structure and operation of the NASD: was the NASD for all practical purposes a government agency, and if so, what are the constitutional and administrative law ramifications of such a conclusion for its new incarnation, FINRA? This article will discuss a number of issues in an attempt to answer these questions: the constitutional issues inherent in the FINRA's status as an SRO; cases addressing the NASD's or NYSE's immunity from suit for their regulatory decisions and functions; the right of persons under NASD investigation to claim deprivation of their Fifth Amendment rights; the status of NASD arbitration facilities; the constitutional and administrative due process rights of persons subject to FINRA investigations and enforcement actions and FINRA rule-making; and the status of SRO rules in cases posing preemption and antitrust issues. The article will conclude that as long as the securities industry, rather than the SEC, controls the governance of FINRA and the selection of its Board of Governors, FINRA will not be a government entity, but since FINRA will be exercising delegated governmental functions with regard to discipline and rule-making, fundamental constitutional and administrative law protections should be afforded to persons affected by these activities.
Seyhun on Insider Trading
Insider Trading and Effectiveness of Chinese Walls in Securities Firms, by HASAN NEJAT SEYHUN, University of Michigan at Ann Arbor - Finance , is posted on SSRN. Here is the abstract:
This study investigates the profitability of insider trading around the times when investment bankers appoint their representatives to the board of directors. If Chinese Walls at security firms are somewhat porous, then the presence of investment bankers on the boards is expected to increase the information efficiency of the clients' stocks and reduce the profitability of insider trading. Consistent with expectations, arrival of investment bankers on the boards of directors eliminates the profitability of insider trading, and reduces both the bid-ask spreads and volatility. These effects are temporary and they are reversed when the representatives depart. The finding that Chinese Walls are porous has a number of important economic, legal, and regulatory implications.