Sunday, February 10, 2008
Are We Wrong About 10b-5? Insights from a Signaling Model of Fraud-on-The-Market, by JAMES C. SPINDLER, University of Southern California Law School, was recently posted on SSRN. Here is the abstract:
I formulate a model of the fraud on the market private class action arising under Rule 10b-5. In a strategic game between managers, current shareholders, and potential purchasers of a firm's shares, I show that Rule 10b-5 functions under a range of likely specifications to create separation in signaling. Other specific findings include: fraud is not necessarily a product of managerial moral hazard; 10b-5 compensates plaintiffs fully where litigation penalties are borne by the firm; the compensatory and deterrent functions of 10b-5 are complementary; liability feedback effects upon share price are necessary to the proper formulation of damages; pocket-shifting criticisms of 10b-5 are wrong; and frequent litigation is not necessarily a symptom of a broken antifraud regime.