February 15, 2009
Frankel on Examinations of Market Intermediaries
Regulating the Financial Markets by Examinations, by Tamar Frankel, Boston University School of Law, was recently posted on SSRN. Here is the abstract:
This Essay proposes changing future government examinations of market intermediaries and focusing on bubbles and crashes as the main dangers to the financial system and the economy. Prior substantive regulation has an undesirable effect on innovations and freedom of the markets. Regulating after a crash (when the "horse has left the barn") is undesirable and ineffective. Therefore, the Essay proposes tighter and closer examinations somewhat different from the current ones: (1) Examine more frequently when market prices rise (not when the have fallen); (2) Examine entities that are too large to fail; those that are highly leveraged; those whose shares-prices rise steadily with little or no fluctuation; and entities that have obtained exemptions from regulation. (3) Examiners should search for violations of the law (and the spirit of the law), but not economic or financial rationalizations. (4) Examiners should be experts, highly paid and incentivized to remain in government employ. Expert information about the markets will hopefully reduce the impact of bubbles and inevitable crashes and the loss of investors trust that decimates the financial system.
Greenfield on Choice in Corporate Law
Corporate Law and the Rhetoric of Choice, by Kent Greenfield, Boston College Law School, was recently posted on SSRN. Here is the abstract:
Rhetorically, the notion of choice has always been a powerful one in politics and law. This essay is intended to offer a note of caution about its use. Despite its progressive hue of individual freedom, the rhetoric of choice increasingly tends to be a notion used to defend and uphold existing matrices of economic and social power. This is because the rhetoric of choice is an excellent way to support exiting power relationships. The assertion that people acting within such power relationships are simply choosing their current situation undermines efforts to change those relationships. The powerful stay powerful; the weak stay weak. This is true in a number of areas, from discussions about school vouchers, to debates about tort reform, to the disagreements surrounding the regulation of pornography.
The dependence on choice rhetoric also exists in corporate law, where the school of thought currently dominant in corporate law doctrine holds that the corporation is best seen as a voluntary arrangement among all the various stakeholders of the corporation. The rhetoric of choice is thus a powerful tool to fight against any reform of current relationships within the corporation that would embolden and empower stakeholders traditionally left out of the corporate power structure. Those involved with the corporation, whether shareholders, employees, or communities, have chosen their position, and thus should not complain when they do not receive more than what they explicitly contracted to receive. In this way, the notion of choice is used to bolster a view of corporate law that protects those already within the corporate power structure and excludes important stakeholders from corporate decision-making. The rhetoric of choice is used in the same way in corporate law discourse as it is used elsewhere by the right-to justify or bolster existing matrices of economic and social power.
Colombo on Secondary Actors in Securities Fraud
Cooperation with Securities Fraud, by Ronald J. Colombo, Hofstra University - School of Law, was recently posted on SSRN. Here is the abstract:
Secondary actors, such as lawyers, accountants, and bankers, are oftentimes critical players in securities fraud. The important question of their liability to private plaintiffs has been, and remains, one of considerable confusion. In Stoneridge Inv. Partners LLC v. Scientific-Atlanta, Inc., the U.S. Supreme Court could have, but failed to, dispel some of this confusion.
Contrary to the common understanding, Stoneridge did not foreclose liability on the part of secondary actors who manage to remain anonymous participants in securities fraud. Read carefully, Stoneridge instead held that proximity to fraud should drive the liability determination.
Although "proximity" is itself an indefinite concept, we are not without tools in deciphering it. For we have at our disposal a well-developed, long-tested method of analyzing proximity with an eye toward the just imposition of culpability: moral theology's "principles of cooperation." By turning to these principles, we have at our fingertips a ready-made set of factors to consider in assessing whether one's conduct should be deemed proximate versus remote to another's fraud.
The principles of cooperation also provide a framework around which we can organize securities fraud jurisprudence in general. For the insights gleaned from the principles regarding moral culpability in many respects parallel the conclusions reached by courts and commentators construing liability under the securities laws. Perhaps, in addition to the assistance it provides us in resolving the difficult issue of proximity, this framework could serve as a useful aid in resolving other, and future, securities fraud questions.
Krawiec on the Rogue Trader
The Return of the Rogue, by Kimberly D. Krawiec, University of North Carolina at Chapel Hill - School of Law, was recently posted on SSRN. Here is the abstract:
The rogue trader - a figure that captured public attention in the 1990s - has returned to the spotlight, largely due to two phenomena. First, market volatility stemming from problems in the U.S. mortgage market spilled over into stock, commodity, and derivative markets worldwide, causing large losses at many financial institutions and bringing to light previously hidden unauthorized positions. Second, the rogue trader has returned to prominence due to domestic and international regulatory changes that have forced banks worldwide to focus more attention on operational risk, an important component of which is rogue trading.
Although critics have raised a number of objections to the Basel II operational risk provisions, few have examined those requirements as a species of enforced self-regulation. This Article contends that, of the many regulatory options for addressing operational risk available to the Basel committee, it arguably chose the worst - an enforced self-regulatory regime that is unlikely to substantially alter the success with which financial institutions manage operational risk. That regime also carries with it the threat of high costs, a false sense of security, and perverse incentives. Particularly with respect to the low frequency, high impact events - including rogue trading - that are the greatest operational risk concern to many, attempts at enforced self-regulation are unlikely to produce capital set-asides sufficient to avoid threats to bank stability and soundness. This is because those financial institutions with the highest operational risk are unlikely to credibly assess that risk and set aside adequate capital under a regime of enforced self-regulation.