Monday, February 11, 2008
The SEC settled charges today against William G. Williams ("Williams") for unlawful insider trading in the securities of Chemed Corporation ("Chemed"). The SEC alleged that, shortly before the April 30, 2007 post-closing public announcement regarding Chemed's quarterly earnings and improved 2007 guidance numbers (the "Announcement"), Williams misappropriated material non-public information concerning the earnings and guidance from a senior financial executive officer while in Florida. The complaint alleges that, on the basis of this material, non-public information, Williams purchased Chemed common stock. According to the complaint, the price of Chemed shares increased materially after the Announcement, and Williams sold his Chemed shares, realizing illicit profits of approximately $28,550. Without admitting or denying the allegations in the complaint, Williams consented to the entry of a final judgment enjoining further violations and ordering him to disgorge his illegal trading profits and pay a civil penalty in an amount equal to his trading profits.
William Lerach, one of the plaintiffs' securities lawyers that corporate management most despised, was sentenced to two years in prison (exactly what prosecutors requested) and two years' probation, as well as agreeing to forfeit $7.75 million in ill-gotten gains and pay a $250,000 fine. In an interview with the Wall St. Journal, Lerach stood by his guilty plea, but said that no one had previously been prosecuted for what he saw as "ethical violations." Lerach and his law firm paid kickbacks to named plaintiffs in class actions. WSJ, Lerach Gets Two-Year Sentence For Role in Kickback Scheme.
What will Microsoft do, now that the Yahoo board has formally rejected its $45 billion offer as "massively" undervaluing the company? Likely next moves range from the aggressive, such as starting a proxy contest or a tender offer, to more conciliatory, like increasing its bid. Its strategy likely includes meeting with Yahoo's large shareholders to enlist their support. Since Microsoft's announcement, short-term oriented hedge funds have reportedly been buying Yahoo shares. NYTimes, Yahoo Bidder Wants a More Aggressive Microsoft; WSJ, Yahoo's Rejection Pressures Microsoft To Mull a New Bid.
Shareholder activists at some corporations are seeking to include on the management proxy statement this year shareholder resolutions that management assert relate to the ordinary business operations of the company. At several corporations the board is asked to provide information about its succession planning policies. At others, shareholders seek more information about subprime mortgage practices and risk assessment policies. WSJ, Shareholder Backlash Emerges on Subprime Mess.
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.
Going Private But Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-Private Decisions, by ROBERT P. BARTLETT III, University of Georgia Law School, was recently posted on SSRN. Here is the abstract:
This article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment. Prior studies of this issue generally suffer from a mistaken assumption that by going private, a publicly-traded firm necessarily immunizes itself from SOX. In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC-reporting obligations and, as a consequence, most of the substantive provisions of SOX. This paper thus explores a previously unexamined natural experiment: To the extent SOX contributed to the rise in going-private transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of SOX-free finance.
Using a unique dataset of going-private transactions, this paper examines the financing decisions of 453 going-private transactions occurring in the eight year period surrounding the enactment of SOX. Although SOX-free forms of subordinated debt-financing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt in structuring going-private transactions after SOX was enacted. Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small- and medium-sized transactions, while significantly increasing for large-sized transactions. These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms. They also strongly suggest that non-SOX factors were the primary impetus for the name brand buyouts commonly evoked as evidence that SOX has harmed the competitiveness of U.S. capital markets.
The New Internationalization of US Securities Regulation: Improving the Prospects for a Trans-Atlantic Marketplace, by ERIC J. PAN, Yeshiva University - Benjamin N. Cardozo School of Law, was recently posted on SSRN. Here is the abstract:
In 2007, the Securities and Exchange Commission (SEC) announced several new rules and proposals that will have the effect of reducing barriers to the cross-border issuance, investment and trading of securities. In addition to new rules pertaining to deregistration and accounting, the SEC is in the process of developing a detailed proposal concerning mutual recognition treatment for foreign exchanges and broker-dealers seeking access to the US market.
In what can be best described as a new internationalization of US securities regulation, the SEC is embracing regulatory concepts and strategies that, until recently, were most often associated with the European Union's single market project: convergence, harmonization and mutual recognition. Just as these concepts have been applied to great effect in the European Union to bridge regulatory differences among the various EU member states, US adoption of these concepts and strategies raises the prospect of progress toward the development of a trans-Atlantic marketplace, creating benefits for US and EU issuers and investors alike. Given the impact such a regime would have on the development of the cross-border market, this essay explains why the SEC is undertaking this regulatory program right now, the status of the SEC's program and some of the challenges facing the program.
Fiduciary Duties for Activist Shareholders, by IMAN ANABTAWI, University of California, Los Angeles - School of Law, and LYNN A. STOUT, University of California, Los Angeles - School of Law, was recently posted on SSRN. Here is the abstract:
Corporate law and scholarship generally assume that public corporations are controlled by professional managers, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely-held firms, many experts argue shareholders have no duties at all.
The most important trend in corporate governance today, however, is the move toward shareholder democracy. Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly-growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders.
Laws Against Bubbles: An Experimental-Asset-Market Approach to Analyzing Financial Regulation, by ERIK F. GERDING, University of New Mexico School of Law, was recently posted on SSRN. Here is the abstract:
This article analyzes the effectiveness of proposed and actual securities, financial, and tax laws designed to prevent, or dampen the severity of asset price bubbles, including laws designed to mitigate excessive speculation. The article employs experimental asset market research to measure the effectiveness of these anti-bubble laws in correcting mispricings. Experimental asset markets represent complex simulations of stock markets in which subjects trade securities over a computer network. These markets allow scholars to test causal links between legal policies and market effects in ways that empirical research alone cannot. With these virtual markets, researchers can identify asset price bubbles - when prices of assets diverge from fundamental values - with a certainty that is beyond the capacity of empirical studies.
The article places anti-bubble laws in the following template, which maps onto microeconomic (including behavioral finance) and macroeconomic research on bubble formation:
(1) laws that aim to provide information to investors on fundamental value of assets: these laws require enhanced disclosure or investor education either to focus investor attention on information on fundamental value rather than noise or to remedy information asymmetries that lead to asset mispricing;
(2) laws that attempt to short circuit positive feedback loops: these anti-bubble laws attempt to dampen the positive feedback created when investors chase rising asset prices and include transaction taxes, circuit breakers and laws that attempt to restrict access of investors to certain markets or channel less sophisticated investors to less risky assets;
(3) removal of legal restrictions on arbitrage; and
(4) laws that restrict credit to investors to curb speculation (e.g., margin regulations).
Experimental (and empirical) evidence suggests the effectiveness of many laws in eliminating bubbles is weak.
This article argues for greater use of experimental asset market research in corporate and securities law scholarship and provides a model for an analysis of the validity of experimental results.
Perceptions of Fairness of Securities Arbitration: An Empirical Study, by JILL GROSS, Pace Law School, and BARBARA BLACK, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
This Report to the Securities Industry Conference on Arbitration (SICA) documents the results of the authors' empirical study, through a one-time mailed survey, of survey participants' perceptions of fairness of securities Self-Regulatory Organization (SRO) arbitrations involving customers. The survey was designed to assess participants' perceptions of the: (1) fairness of the SRO arbitration process; (2) competence of arbitrators to resolve investors' disputes with their broker-dealers; (3) fairness of SRO arbitration as compared to their perceptions of fairness in securities litigation in similar disputes; and (4) fairness of the outcome of arbitrations. We conclude that survey participants have divided views about the fairness of securities arbitration based on their most recent experience with the process. When asked about their overall impressions of securities arbitraiton, survey participants were more negative. For almost every question in the survey, statistical analysis reveals that customers have a more negative perception of the process than non-customers. Part I of this report provides an Executive Summary of our findings. Part II details the Background of the survey's development. Part III describes the Methodologies and Procedures we implemented to conduct the survey. Part IV identifies the Error Structure potentially contained in our methodologies. Part V contains our Findings as to each survey question, including, for many questions, breakdowns that isolate responses of customers only and compares them to all other categories of survey participants, as well as comparisons of regional differences among survey participants. We conclude in Part VI by noting the complexities of the findings.
Hands-Off Options, by JESSE M. FRIED, University of California, Berkeley - School of Law, was recently posted on SSRN. Here is the abstract:
Despite recent reforms, public company executives can still use inside information to time their stock sales, secretly boosting their pay. They can also still inflate the stock price before selling. Such insider trading and price manipulation imposes large costs on shareholders. This paper suggests that executives' options be cashed out according to a pre-specified, gradual schedule. These hands-off options would substantially reduce the costs associated with current equity arrangements while imposing little burden on executives.