Sunday, September 30, 2012
On November 5, 2012, the U.S. Supreme Court will hear oral argument in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (No. 11-1085), in which plaintiff brought a Rule 10b-5 class action alleging material misstatements about the safety of two products used to treat anemia. In this appeal from the 9th Circuit, the defendants assert that at the class certification stage plaintiff must prove materiality and defendants must be allowed to present evidence rebutting the applicability of the fraud on the market theory. The courts of appeals have split on this issue.
This week an amicus brief in support of plaintiff was filed by a group of law professors who teach civil procedure or securities regulation. The brief agrees with the plaintiff that proof of materiality is neither required nor appropriate at the class certification stage, either to assure that common questions predominate under F.R.C.P. 23(b)(3) or to invoke the fraud on the market presumption under Basic. The brief sets forth the history of Rule 23(b)(3) to show that the drafters had securities fraud class actions in mind. It also sets forth the underlying principles of market manipulation that were familar to the drafters of section 10(b). (Download No. 11-1085 bsac Civil Procedure and Securities Law Professors)
Making Sure 'The Buck Stops Here': Barring Executives for Corporate Violations, by Peter J. Henning, Wayne State University Law School, was recently posted on SSRN. Here is the abstract:
There have been persistent complaints about managerial accountability since the advent of the financial crisis in 2008, especially the lack of criminal prosecutions of senior executives. In contrast, there is widespread criticism of “overcriminalization” and the use of criminal punishments to accomplish what are viewed as regulatory goals, such as corporate compliance. So while there is frustration at the lack of prosecutions, there are complaints that there are too many prosecutions. The criminal law is a poor means to engage in oversight of corporate governance, especially of senior managers who are largely insulated from day-to-day decision-making that often triggers violations. In this article, I offer a modest means to police management of public companies and large investment firms by enhancing the authority of the Securities and Exchange Commission to seek the removal of executives when the company has engage in persistent or serious misconduct, even if the individuals were not directly implicated in a violation. This authority already exists in a limited form in certain industries, and a wider application of it could be a way to address concerns about managerial accountability for corporate criminal conduct.
The Trouble with Basic: Price Distortion after Halliburton, by Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics, was recently posted on SSRN. Here is the abstract:
Many commentators credit the Supreme Court’s decision in Basic, Inc. v. Levinson, which allowed courts to presume reliance rather than requiring individualized proof, with spawning a vast industry of private securities fraud litigation. Today, the validity of Basic’s holding has come under attack as scholars have raised questions about the extent to which the capital markets are efficient. In truth, both these views are overstated. Basic’s adoption of the Fraud on the Market presumption reflected a retreat from prevailing lower court recognition that the application of a reliance requirement was inappropriate in the context of impersonal public market transactions. And, contrary to arguments currently being made to the Supreme Court in the Amgen case, FOTM does not require a strong degree of market efficiency – merely that market prices respond to information.
The Basic decision had another less widely recognized effect, however; it began shifting the nature of private securities fraud claims from transaction-based claims to market-based claims, a shift that was completed by the Court’s later decision in Dura. The consequence of this shift was to convert the nature of the plaintiff’s harm from a corruption of the investment decision to one of transacting at a distorted price.
The legal significance of price distortion was at the heart of the Halliburton decision. The lower court confused two temporally distinct concepts: ex ante price distortion, which is part of the reliance inquiry and ex post price distortion, which is a component of loss causation.
The Supreme Court limited its holding in Halliburton to identifying this confusion, leaving examination of the appropriate role of price distortion for future cases. In Amgen, the Court may be forced to tackle this question. This Article argues that Amgen highlights the incongruity of considering price distortion at the class certification stage and provides an opportunity for the Court to reconsider and reject Basic’s insistence on retaining a reliance requirement
Friday, September 28, 2012
The SEC announced the panelists who will participate in the agency’s October 2 market technology roundtable that will discuss the relationship between the operational stability and integrity of the securities markets and the ways that market participants design, implement, and manage complex and interconnected trading technologies.
The morning portion of the event will focus on the prevention of errors, including discussion about current best practices and the practical constraints for creating, deploying, and operating systems used to automatically generate and route orders, match trades, confirm transactions, and disseminate data. The afternoon panel discussion will focus on error response, with experts discussing how the market might employ independent filters, objective tests, and other real-time processes or crisis-management procedures to detect, limit, and stop erroneous market activities when they occur.
See here for the schedule and speakers.
Thursday, September 27, 2012
The SEC charged a former analyst at a Boston-based investment bank with illegally tipping a close friend with confidential information about clients involved in impending mergers and acquisitions. According to the SEC, Jauyo “Jason” Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive nonpublic information about the deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped his longtime college friend Victor Chen of Sunnyvale, Calif., with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.
According to the SEC’s complaint filed in U.S. District Court for the Northern District of California, Lee was first privy to information about Leerink’s client Syneron Medical Ltd., which was negotiating an acquisition of Candela Corporation in 2009. He later learned that Leerink’s client Somanetics Corporation was in the process of being acquired by Covidien plc. in 2010. As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly and exchanged dozens of phone calls and text messages. Some of the calls took place from Lee’s office telephone at Leerink. Lee had a duty to preserve the confidentiality of the information that he received in the course of his employment at Leerink.
The SEC alleges that Lee and Chen violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against Lee and Chen.
The SEC charged Goldman, Sachs & Co. and one of its former investment bankers with “pay-to-play” violations involving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor. This marks the first SEC enforcement action for pay-to-play violations involving “in-kind” non-cash contributions to a political campaign.
According to the SEC’s order against Goldman Sachs, Neil M.M. Morrison was a vice president in the firm’s Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008. Morrison also was substantially engaged in working on Cahill’s political campaigns from November 2008 to October 2010. Morrison at times conducted campaign activities from the Goldman Sachs office during work hours and using the firm’s phones and e-mail. Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions. Nevertheless, Goldman Sachs subsequently participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees.
While the SEC’s case against Morrison continues, Goldman Sachs agreed to settle the charges by paying $7,558,942 in disgorgement, $670,033 in prejudgment interest, and a $3.75 million penalty.
The U.S. Supreme Court granted certiorari in Gabelli v. SEC (11-1274) to address the following question:
Section 2462 of Title 28 of the United States Code provides that "except as
otherwise provided by Act of Congress" any penalty action brought by the
government must be "commenced within five years from the date when the
claims first accrued." (emphasis added). This Court has explained that "[i]n
common parlance a right accrues when it comes into existence." United States v.
Lindsay, 346 U.S. 568, 569 (1954).
Where Congress has not enacted a separate controlling provision, does the
government's claim first accrue for purposes of applying the five-year limitations
period under 28 U.S.C. § 2462 when the government can first bring an action for a
The case comes from the Second Circuit, SEC v. Gabelli, No. 10-3581-cv(L) (decided Aug. 1, 2011).(Download Gabelli.080111) In that case the SEC alleged that Gabelli, the portfolio manager of a mutual fund, and Alpert, the chief operating officer for the fund's adviser, failed to disclose that the adviser, while prohibiting most fund investors from engaging in market-timing, secretly permitted one investor to market time in exchange for an investment in a hedge fund managed by Gabelli. The alleged conduct took place from 1999 until 2002. The SEC alleged that after the market timing stopped, the defendants continued to mislead the fund's board of directors and fund investors about these activities and that, because of this deception, the SEC did not discover the activity until late 2003.
The SEC filed its complaint in April 2008. The district court dismissed the claims in substantial part, some on the merits, others on statute of limitations grounds. The Second Circuit, however, applied the discovery rule to hold that the statute of limitations did not accrue until the claim was discovered or could have been discovered with reasonable diligence, by the plaintiff: "since fraud claims by their very nature involve self-concealing conduct, it has been long established that the discovery rule applies where, as here, a claim sounds in fraud" (citing the Supreme Court's opinion in Merck & Co. v. Reynolds). The court contrasted the discovery rule with the equitable tolling doctrine of fraudulent concealment, where a plaintiff may benefit from equitable tolling, even when a claim has already accrued, if the defendant took specific steps to conceal the activities from plaintiff, and is available for non-fraud claims.
Accordingly, the Court held that since the SEC alleged fraud claims under the Advisers Act, the discovery rule defines when the claim accrues and that the SEC need not plead that the defendants took affirmative steps to conceal their fraud. The court dismissed the defendants' argument that Section 2462 did not expressly state a discovery rule, citing previous decisions that for claims in fraud a discovery rule is read into the statute. Finally, the court ruled as premature the defendants' assertion that the SEC's claims could have been discovered, with reasonable diligence, within the five-year limitations period, because the lapse of a limitations period is an affirmative defense that defendants must plead and prove.
Wednesday, September 26, 2012
The SEC charged three former bank executives in Nebraska for participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis. One of the executives and his son also are charged with insider trading. The SEC alleges that Gilbert G. Lundstrom, who was the CEO and chairman of the board at Lincoln, Neb.-based TierOne Bank, along with president and chief operating officer James A. Laphen and chief credit officer Don A. Langford played a role in TierOne understating its loan-related losses as well as losses on real estate repossessed by the bank. TierOne had expanded into riskier types of lending in Las Vegas and other high-growth geographic areas in Arizona and Florida, and the bank was experiencing a significant rise in high-risk problem loans. TierOne’s primary banking regulator, the Office of Thrift Supervision (OTS), directed TierOne to maintain higher capital ratios as a result of the bank’s increase in high-risk problem loans. To appear to comply with the heightened capital requirements, Lundstrom, Laphen, and Langford disregarded information showing that the collateral securing certain TierOne loans and real estate repossessed by the bank was overvalued due to the bank’s reliance on stale and inadequately discounted appraisals. The losses were understated by millions of dollars in multiple SEC filings.
Monday, September 24, 2012
The SEC charged Tyco International Ltd. with violating the Foreign Corrupt Practices Act (FCPA) when subsidiaries arranged illicit payments to foreign officials in more than a dozen countries. The SEC alleges that subsidiaries of the Swiss-based global manufacturer perpetuated schemes that typically involved payments of fake “commissions” or the use of third-party agents to funnel money improperly to obtain lucrative contracts. Overall, Tyco reaped illicit benefits amounting to more than $10.5 million as a result of the paid to win business.
Tyco, whose securities are publicly traded in the U.S., agreed to pay more than $26 million to settle the SEC’s charges and resolve a criminal matter announced today by the U.S. Department of Justice.
The SEC alleges that Tyco subsidiaries operated 12 different illicit payment schemes around the world starting before 2006 and continuing until 2009. The most profitable scheme occurred in Germany, where agents of a Tyco subsidiary paid third parties to secure contracts or avoid penalties or fines in several countries. These payments were falsely recorded as “commissions” in Tyco’s books and records when they were in fact bribes to pay off government customers. Tyco’s benefit as a result of these illicit payments was more than $4.6 million.
According to the SEC’s complaint, Tyco’s subsidiary in China signed a contract with the Chinese Ministry of Public Security for $770,000 but reportedly paid approximately $3,700 to the “site project team” of a state-owned corporation to be able to obtain the contract. This amount was improperly recorded as a commission. Tyco’s subsidiary in France recorded payments to individuals from 2005 to 2009 for “business introduction services.” However, one of the individuals receiving payments was a security officer at a government-owned mining company in Mauritania, and many of the earlier payments were deposited in the official’s personal bank account in France. In Thailand, Tyco’s subsidiary had a contract to install a CCTV system in the Thai Parliament House in 2006, and paid more than $50,000 to a Thai entity that acted as a consultant. The invoice for the payment refers to “renovation work,” but Tyco is unable to ascertain what, if any, work was actually done.
The SEC’s complaint alleges that Tyco’s books and records were misstated as a result of the misconduct, and Tyco failed to devise and maintain internal controls sufficient to detect the violations. The complaint also alleges that the payments by the sales agent to Turkish government officials violated the anti-bribery provisions of the FCPA.
In arriving at the settlement, the Commission considered Tyco’s extensive efforts to identify and remediate its wrongdoing. Tyco conducted a global review and internal investigation for potential FCPA violations and voluntarily disclosed its findings to the SEC while implementing significant, broad-spectrum remedial measures. Tyco consented to a proposed final judgment that orders the company to pay $10,564,992 in disgorgement and $2,566,517 in prejudgment interest. Tyco also agreed to be permanently enjoined from violating Section 13(b)(2)(A), Section 13(b)(2)(B), and Section 30A(a) of the Securities Exchange Act of 1934.
In the parallel criminal proceedings, the Justice Department entered into a Non-Prosecution Agreement with Tyco in which the company will pay a penalty of approximately $13.68 million.
FINRA censured and fined Merrill Lynch, Pierce, Fenner & Smith Inc. $500,000 for supervisory failures that allowed widespread deficiencies in filing hundreds of required reports, including customer complaints, arbitration claims, and related U4 and U5 filings, and for its failure to file the required reports.
FINRA found that:
- From 2007 to 2011, Merrill Lynch failed to file or timely file more than 650 required reports, including customer complaints and customer settlements.
- From 2005 to 2011, Merrill Lynch failed to report or timely report customer complaints, and related Forms U4 and Forms U5 between 23 percent and 63 percent of the time.
- Merrill Lynch failed to adequately train and supervise personnel responsible for customer complaint tracking and reporting, and did not have systems in place to identify the high volume of customer complaints that were not being acknowledged or reported as required. As a result, Merrill Lynch failed to acknowledge nearly 300 customer complaints in a timely manner.
- Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received for approximately three years.
- From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100 percent of the time.
- From 2007 through 2010, Merrill Lynch failed to file related Forms U4 and U5 between 28 percent and 79 percent of the time.
Sunday, September 23, 2012
Greed, Envy, and the Criminalization of Insider Trading, by John P. Anderson, Mississippi College School of Law, was recently posted on SSRN. Here is the abstract:
In October 2011, a U.S. District Court sentenced Raj Rajaratnam to 11 years in federal prison for insider trading. This was the longest sentence for insider trading in U.S. history, but it was significantly less than the 19 to 24-year term requested by the government. Such harsh prison terms (equal in some cases to those meted out for murder or rape) require sound justification in a liberal society. Yet jurists, politicians and scholars have failed to offer a clear articulation of either the economic harm or the moral wrong committed by the insider trader.
This article looks to fill this gap by offering a rigorous analysis of insider trading, its criminalization, and its punishment from multiple economic and moral perspectives. This analysis reveals that of the three forms of insider trading currently proscribed under Section 10(b) of the Securities Exchange Act, two are economically harmful and morally impermissible, but surprisingly one is not (Classical Non-Promissory Insider Trading, where the insider trades on material non-public information while having made no promise not to trade). Having reached this conclusion, alternative justifications or explanations for criminalizing Classical Non-Promissory Insider Trading are explored.
Virtue theory is considered as offering an alternative justification for the criminalization of Classical Non-Promissory Insider Trading. In particular, the vice of greed is considered. It is concluded that while insider trading does often reflect the vice of greed, a moralistic contempt for this character flaw cannot justify the criminalization of otherwise morally innocent conduct because this would violate the firmly held liberal Harm Principle famously articulated J.S. Mill.
But even if the criminalization of Non-Promissory Classical insider trading cannot be justified, it remains for it to be explained. The socio-psychological theory of cognitive dissonance (as articulated by Dan Kahan and Eric Posner) is entertained as an explanation for how morally innocent conduct such as Non-Promissory Classical Insider Trading might first become criminalized and then later perceived to be immoral by a population. Under the theory, actors generally regarded as moral innocents may initially be targeted for punishment as scapegoats in the wake of a disastrous or harmful social event. Over time, to avoid cognitive dissonance between the belief that conduct is morally permissible and the act of punishing it, society’s shared belief in the moral permissibility of the conduct is simply dropped.
This theory of cognitive dissonance fails to explain, however, why Non-Promissory Classical insider traders would be targeted as scapegoats to begin with. The moralistic contempt for the vice of greed in insider traders (already discussed) offers one motivation, but the public’s own vice of envy concerning the easy money made by insiders may offer another. Since neither motivation supplies a justification for criminalization in a liberal democracy, and since envy in particular has its own harmful effects on society, the Article concludes on the cautionary note that we should perhaps rethink our laws and reconsider our attitudes concerning Non-Promissory Insider Trading.
Hedge Fund Manager Registration Under the Dodd-Frank Act – An Empirical Study, by Wulf A. Kaal,
University of St. Thomas, Minnesota - School of Law, was recently posted on SSRN. Here is the abstract:
For the last three decades, the SEC has repeatedly yet unsuccessfully attempted to register hedge fund managers. Resolving the tension between the industry and regulators regarding the appropriate level of regulatory oversight, the Dodd-Frank Act mandates hedge fund adviser registration as well as increased record-keeping and disclosure. To provide guidance for policy makers, this article presents the results of the first survey study after the SEC’s registration effective date, March 30, 2012.
The author and a team of four research assistants contacted a population of 1,264 private fund advisers that registered with the SEC before the registration effective date. The entire population was approached via fax, in an electronic survey via email, and in phone interviews. Respondents (n=) answered questions designed to evaluate the long-term effect of reporting and disclosure rules on private funds and the private fund industry. The survey questions assess strategic responses of the hedge fund industry, investigate the possible long-term effects of hedge fund registration, quantify compliance cost, assess compliance measures, investigate the implications of disclosure requirements in the Dodd-Frank Act pertaining to hedge funds, evaluate the effect of the regulatory regime on assets under management, and assess the effect of the regulatory regime on profitability.
The results reported in this study suggest that the Dodd-Frank Act registration and disclosure requirements and the SEC’s implementation of these requirements create several areas of concern for the hedge fund industry. Despite these concerns, the hedge fund industry appears to be only moderately affected and seems to be adapting well to the regulatory environment after the enactment of the Dodd-Frank Act.
Friday, September 21, 2012
SEC Obtains Emergency Order Freezing Assets of Broker Charged with Insider Trading in Burger King Stock
The SEC obtained an emergency court order to freeze the assets of a stockbroker who used nonpublic information from a customer and engaged in insider trading ahead of Burger King’s announcement that it was being acquired by a New York private equity firm. According to the SEC, Waldyr Da Silva Prado Neto, a citizen of Brazil who was working for Wells Fargo in Miami, learned about the impending acquisition from a brokerage customer who invested at least $50 million in a fund managed by private equity firm 3G Capital Partners Ltd. and used to acquire Burger King in 2010. Prado misused the confidential information to illegally trade in Burger King stock for $175,000 in illicit profits, and he tipped others living in Brazil and elsewhere who also traded on the nonpublic information.
The SEC obtained the asset freeze in U.S. District Court for the Southern District of New York. The agency took the emergency action to prevent Prado from transferring his assets outside of U.S. jurisdiction. Prado recently abandoned his most current job at Morgan Stanley Smith Barney, put his Miami home up for sale, and began transferring all of his assets out of the country.
Thursday, September 20, 2012
The SEC alleged that H. Thomas Davis, Jr. breached his fiduciary duty to Mercer Insurance Group and its shareholders when he shared confidential details about the company’s negotiations to be acquired by United Fire. Davis tipped his friend and business associate Mark W. Baggett, and Baggett later tipped his golfing partner Kenneth F. Wrangell. Baggett and Wrangell made more than $83,000 in illicit profits when they traded on that confidential information illegally.
According to the SEC release:
When contacted by SEC investigators about his suspicious trading, Wrangell promptly offered significant cooperation. He provided truthful details acknowledging his own trading and entered into a cooperation agreement that resulted in direct evidence being quickly developed against Baggett and Davis. This cooperation enabled the SEC to swiftly reach settlements with all three individuals to recover ill-gotten monetary gains.
“By making the choice to cooperate with the SEC and voluntarily provide all of the necessary evidence at the outset of the investigation, Wrangell saved the SEC time and resources and himself a larger penalty,” said William P. Hicks, Associate Director in the SEC’s Atlanta Regional Office.
In settling the SEC’s charges, Davis agreed to be jointly and severally liable for disgorgement of Baggett’s insider trading profits of $41,584.45 plus prejudgment interest as well as to pay a penalty of $41,584.45. Davis also agreed to be barred from serving as an officer or director of a publicly-traded company. Baggett agreed to pay disgorgement and a penalty in amounts that will be determined by the court. Wrangell agreed to fully disgorge his ill-gotten gains of $42,521.55 plus prejudgment interest. Due to his extensive cooperation, the additional penalty that Wrangell is required to pay on top of that disgorgement amount has been reduced to $11,380.39. All three neither admit nor deny the allegations, and their settlements are subject to court approval.
Wednesday, September 19, 2012
The Senate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT has taken an interest in computerized trading and will conduct a hearing Sept. 20 on “Computerized Trading: What Should the Rules of the Road Be?”
The witnesses will be Mr. David Lauer, Market Structure and High-Frequency Trading Consultant, Better Markets; Mr. Andrew Brooks, Head of U.S. Equity Trading, T. Rowe Price; Mr. Chris Concannon, Partner and Executive Vice President, Virtu Financial, LLC; and Mr. Larry Tabb, Founder and CEO, TABB Group. Their written statements are posted on the Committee's website.
According to the Wall Street Journal, David Lauer "is part of a growing chorus of industry insiders blowing the whistle on approved trading techniques that they say are designed by the traders who derive the most benefit. " WSJ, High-Speed Trading in the Spotlight
Tuesday, September 18, 2012
The Central States Law Schools Association asked me to post this notice of its upcoming Conference:
Annual Scholarship Conference
Cleveland-Marshall College of Law
The Central States Law Schools Association 2012 Scholarship Conference will be held October 19 and 20, 2012 at the Cleveland-Marshall College of Law, in Cleveland, Ohio. We invite law faculty from across the country to submit proposals to present papers or works in progress.
The purpose of CSLSA is to foster scholarly exchanges among law faculty across legal disciplines. The annual CSLSA conference is a forum for legal scholars, especially more junior scholars, to present working papers or finished articles on any law-related topic in a relaxed and supportive setting where junior and senior scholars from various disciplines are available to comment. More mature scholars have an opportunity to test new ideas in a less formal setting than is generally available for their work.
To allow scheduling of the conference, please send an abstract of no more than 500 words to Secretary Missy Lonegrass at Missy.Lonegrass@law.lsu.edu by September 22, 2012. Any late submissions will be considered on a space available basis only.
For those who are interested, the CSLSA mentorship program pairs interested junior scholars with more senior mentors in their fields of expertise to provide feedback on their presentations or papers. To participate in the mentorship program as either a mentor or mentee, please contact Vice-President Elizabeth Young at firstname.lastname@example.org.
In keeping with tradition, CSLSA is able to pay for one night’s lodging for presenters from member schools. If a school is interested in joining CSLSA and has not received an invoice, please contact Treasurer Carolyn Dessin at email@example.com.
For more information about CSLSA, visit our website at http://cslsa.us/
Sunday, September 16, 2012
Efficient Markets and the Law: A Predictable Past and an Uncertain Future, by Henry T.C. Hu, University of Texas at Austin - School of Law, was recently posted on SSRN. Here is the abstract:
This article analyzes the manifold situations in which the efficient-market hypothesis (EMH) has influenced — or has failed to influence — federal securities regulation and state corporate law, and the prospective roles for the EMH in these contexts. In federal securities regulation, the EMH has offered a theoretical construct to accompany the general belief in the value of accurate and complete information that has animated the US Securities and Exchange Commission (SEC) since its creation. Specific applications of the EMH have been straightforward and predictable: For instance, its tenets as to market processing of public information helped motivate the streamlining of procedural requirements as to corporate disclosures and, more controversially, as to private securities class action lawsuits. In state corporate law, the EMH has influenced developments as to takeovers and the corporate objective. In contrast, the EMH and related learning have failed to sufficiently inform governmental actions to address financial illiteracy.
Belief in the EMH and the value of efficient markets has weakened in the face of recent market anomalies and stress. The May 2010 flash crash is not easily reconciled with the EMH, and related phenomena such as high frequency trading involve an equity market microstructure far different from the microstructure at the time the EMH emerged. Actions motivated by the global financial crisis (GFC), such as the SEC short-selling ban in September 2008, arguably suggest a greater willingness to subordinate market efficiency in favor of other governmental goals.
A range of important EMH-related issues loom beyond those associated with financial illiteracy, the equity market microstructure, and governmental goals. Foremost are those relating to the informational predicate on which market efficiency rests. One key aspect of the informational predicate relates to the disclosure challenges associated with financial innovations (such as asset-backed securities) and business entities heavily involved in financial innovation activities (such as certain money center banks). The “intermediary depiction model” that the SEC has always used is inadequate in financial innovation--related contexts. Another key aspect relates to the massive amounts of information that the Dodd-Frank Act requires to be provided to governmental bodies.