Saturday, February 22, 2014
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending February 21, 2014).
The following law review articles relating to securities regulation are now available in paper format:
Robert B. Ahdieh, Reanalyzing Cost-Benefit Analysis: Toward a Framework of Function(s) and Form(s), 88 N.Y.U. L. Rev. 1983 (2013).
Lynn A. Baker, Michael A. Perino and Charles Silver, Setting Attorneys' Fees in Securities Class Actions: An Empirical Assessment, 66 Vand. L. Rev. 1677 (2013).
James D. Cox, Understanding Causation in Private Securities Lawsuits: Building on Amgen, 66 Vand. L. Rev. 1719 (2013).
John C.P. Goldberg, and Benjamin C. Zipursky, The fraud-on-the-market Tort, 66 Vand. L. Rev. 1755 (2013).
Anita K. Krug, Escaping Entity-Centrism in Financial Services Regulation, 113 Colum. L. Rev. 2039 (2013).
Monday, February 17, 2014
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending February 14, 2014).
Eva Micheler has posted Intermediated Securities and Legal Certainty on SSRN with the following abstract:
This contribution shows that holding securities through chains of intermediaries compromises the ability of investors to exercise their rights. This problem is not remedied by Geneva Securities Convention (‘the Convention’ or ‘GSC’). It will be argued in the paper that research should be carried out to determine if a mechanism can be created that enables ultimate investors to hold securities directly. Further work on creating a harmonized set of rules at a functional level will not improve legal certainty, reduce systemic risk or enhance market efficiency. The problems associated with the current framework are a function of the process of intermediation itself. Legal and systemic risk and market efficiency are adversely affected by the number of intermediaries operating in this context. Law cannot help here. Structural reform can. It is worth investigating if a framework can be created that allows for securities to be held directly by ultimate investors.
Ronald J. Gilson and Reinier Kraakman have posted Market Efficiency after the Financial Crisis: It's Still a Matter of Information Costs on SSRN with the following abstract:
Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007-2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble – as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007-2008. Yet informational efficiency is related to fundamental efficiency – if all information relevant to determining a security’s fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the securities market price operate without friction, fundamental and informational efficiency coincide. But where all value-relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value.
Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.
Jennifer M. Pacella has posted Bounties for Bad Behavior: Rewarding Culpable Whistleblowers under the Dodd-Frank Act and Internal Revenue Code on SSRN with the following abstract:
In 2012, Bradley Birkenfeld received a $104 million reward or “bounty” from the Internal Revenue Service (“IRS”) for blowing the whistle on his employer, UBS, which facilitated a major offshore tax fraud scheme by assisting thousands of U.S. taxpayers to hide their assets in Switzerland. Birkenfeld does not fit the mold of the public’s common perception of a whistleblower. He was himself complicit in this crime and even served time in prison for his involvement. Despite his conviction, Birkenfeld was still eligible for a sizable whistleblower bounty under the IRS Whistleblower Program, which allows rewards for whistleblowers who are convicted conspirators, excluding only those convicted of “planning and initiating” the underlying action. In contrast, the whistleblower program of the Securities and Exchange Commission (“SEC”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was modeled after the IRS program, precludes rewards for any whistleblower convicted of a criminal violation that is “related to” a securities enforcement proceeding. Therefore, because of his conviction, Birkenfeld would not have been granted a bounty under Dodd-Frank had he blown the whistle on a violation of the federal securities laws, rather than tax evasion. This Article will explore an area that has been void of much scholarly attention — the rationale behind providing bounties to whistleblowers who have unclean hands and the differences between federal whisteblower programs in this regard. After analyzing the history and structure of the IRS and SEC programs and the public policy concerns associated with rewarding culpable whistleblowers, this Article will conclude with various observations justifying and supporting the SEC model. This Article will critique the IRS’s practice of including the criminally convicted among those who are eligible for bounty awards by suggesting that the existence of alternative whistleblower incentive structures, such as leniency and immunity, are more appropriate for a potential whistleblower facing a criminal conviction. In addition, the IRS model diverges from the legal structure upon which it is based, the False Claims Act, which does not allow convicted whistleblowers to receive a bounty. In response to potential counterarguments that tax fraud reporting may not be analogous to securities fraud reporting, this Article will also explore the SEC’s recent trend of acting increasingly as a “punisher” akin to a criminal, rather than a civil, enforcement entity like the IRS. In conclusion, this Article will suggest that the SEC’s approach represents a reasonable middle ground that reconciles the conflict between allowing wrongdoers to benefit from their own misconduct and incentivizing culpable insiders to come forward, as such persons often possess the most crucial information in bringing violations of the law to light.
M. Saleh Jaberi has posted Solving Securities Exchange Disputes by Means of Ombudsmen: Does It Work? on SSRN with the following abstract:
Alternative dispute resolution (ADR) is often used is in financial market and securities exchange disputes. Brokerage firms in Australia and the United Kingdom use ADR methods in the form of the financial ombudsman services to deal with stock market disputes. The processes and outcomes of these ombudsmen’s activities are governed by special rules, and their techniques include mediation, negotiation and the “determination” procedure to solve referred disputes. This article analyses these procedures, and the proportionality of the ombudsman framework for solving securities exchange disputes. This research has identified number of shortcomings in the ombudsman system, and recommends replacing it with arbitration.
Peter R. Reilly has posted Ralph Lauren, Transnational Bribery, and Voluntary Disclosure Under the Foreign Corrupt Practices Act: When Is It Strategically Wise (or Not) to Self-Report FCPA Violations to the SEC? on SSRN with the following abstract:
On April 22, 2013, the U.S. Securities and Exchange Commission (“SEC”) announced a non-prosecution agreement (“NPA”) with Ralph Lauren Corporation in connection with bribes paid to government officials in Argentina. The SEC decided not to charge the corporation with violations of the Foreign Corrupt Practices Act (“FCPA”) due to the company’s response to the situation, including: (1) the prompt reporting of the violations on its own initiative; (2) the completeness of the information provided; and (3) the “extensive, thorough, and real-time cooperation” put forth during the SEC investigation. While the SEC and various legal commentators suggest the case stands for the proposition that “substantial and tangible” benefits will accrue to companies that self-report FCPA violations and cooperate fully with the SEC, this article arrives at a very different assessment of the matter. Specifically, the article suggests that (1) it might not have been a good idea, from a business perspective, for Ralph Lauren Corporation to self-report the potential violation to the SEC; and (2) the non-prosecution agreement negotiated to resolve the matter — the SEC’s first-ever NPA awarded in an FCPA case — also might not have been in the best interest of the company. In other words, this article suggests that, under current SEC policy, a company’s ability and willingness to self-report to and cooperate with the government is not always strategically wise in the context of FCPA enforcement.
The article explores, through the lens of the Ralph Lauren case, the factors that companies and their counsel must consider when making the difficult and critical calculation of whether or not to voluntarily disclose a potential FCPA violation to the SEC. I investigate the policies and programs used by the SEC to entice voluntary reporting and cooperation, as well as the kinds of results and rewards that might be achieved therefrom. I demonstrate that although the risks associated with voluntary disclosure tend to be concrete and predictable, the rewards have heretofore been largely uncertain — a calculus that militates against disclosure. I conclude that in order to increase the likelihood that companies will self-report FCPA violations in the future, and thereby assist in eradicating the scourge of transnational bribery worldwide, the SEC must be far more transparent: Its policies, pronouncements, rules, and regulations must provide more certain, specific, and calculable incentives to companies for volunteering to come forward. Simply put, companies will not come forward in large numbers, or on significant FCPA matters, until they can determine with certainty and specificity that the rewards obtained will outweigh the risks involved. The article concludes with reform measures that can and should be implemented within the SEC to bring about such transparency. Implementing these changes would benefit everyone involved — the companies and their counsel, the regulatory agencies, and, perhaps most important of all, the people and institutions throughout the world currently suffering the ill effects of transnational bribery.
Charles Korsmo has posted Market Efficiency and Fraud on the Market: The Promise and Peril of Halliburton on SSRN with the following abstract:
This spring, the Supreme Court will hear Halliburton v. Erica P. John Fund, the most important securities law case in a quarter century. The Court will reconsider Basic v. Levinson and the fraud-on-the-market doctrine, the doctrine that has made the modern securities fraud class action possible. I argue that — contrary to the claims of the parties and of several of the Justices — the Court need not pass judgment on the efficient capital markets hypothesis in order to pass judgment on the fraud-on-the-market doctrine. It is possible to accept the efficient capital markets hypothesis and reject the fraud-on-the-market doctrine, or to reject the efficient capital markets hypothesis and accept the fraud-on-the-market doctrine. I further demonstrate that it is not only unnecessary, but would also be profoundly unwise for the Justices to wade into the debate over market efficiency. While market efficiency is of little relevance to the debate over the fraud-on-the-market doctrine, it is central to numerous other contemporary legal debates, many of which are of far more fundamental importance than the fraud-on-the-market doctrine. Any Supreme Court pronouncements on market efficiency would be certain to resurface in these debates in ways the authors would not intend.
John P. Anderson has posted Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform on SSRN with the following abstract:
The SEC is poised to take action in the face of compelling evidence that corporate insiders are availing themselves of rule-sanctioned Trading Plans to beat the market. These Trading Plans allow insiders to trade while aware of material nonpublic information. Since the market advantage insiders have enjoyed from Plan trading can be traced to loopholes in the current regulatory scheme, increased enforcement of the existing rules cannot address the issue. But simply tweaking the existing rule structure to close these loopholes would not work either. This is because the SEC adopted the current rule as a part of a delicate compromise with the courts in the “use versus possession” debate over the proper test of scienter for insider trading liability. The current rule reflects the SEC’s preferred test (mere “awareness”), but it provides for Trading Plans as an affirmative defense in order to pass judicial scrutiny. Thus, any attempt to simply close the loopholes in Trading Plans while maintaining the awareness test would upset this delicate compromise. Only a comprehensive change to the current insider trading enforcement regime can address the issue.
The reform proposed here begins with the recognition that Plan trading is generally done with the firm’s awareness and consent. Such trading is therefore a form of Non-Promissory Insider Trading. Since there are strong arguments that there is no moral wrong or economic harm done by Non-Promissory Insider Trading, the regulatory regime should openly embrace it as a permissible form of compensation through firm-sanctioned Modified Trading Plans, so long as there is adequate disclosure. Though such liberalization would represent a radical departure from the current enforcement regime, it would be within the SEC’s rulemaking authority and would be consistent with Supreme Court precedent. Most importantly, it would dramatically improve the current enforcement regime in terms of justice, clarity, efficiency and coherence.
It is sometimes said there is nothing like a good crisis for effecting much needed change. The current media attention and public scrutiny over corporate insiders’ exploitation of rule-sanction Trading Plans may be just the crisis to spur the SEC to adopt a more rational and just approach to insider trading enforcement. The outline for such reform has been proposed here.
Charles Korsmo has posted High-Frequency Trading: A Regulatory Strategy on SSRN with the following abstract:
High-frequency trading – a new form of lightning-fast computerized trading conducted without direct human intervention – has remade American stock markets in the past decade, increasing trading volume enormously while dramatically reducing the costs of buying and selling stock. Even so, high-frequency trading is controversial, raising the specter of market manipulation and unfair trading advantages. The most unique and serious risk is the risk of extreme spikes and crashes in stock prices. The most dramatic of these was the so-called “Flash Crash” of May 6, 2010, which brought wide public attention to so-called high-frequency trading for the first time. In the space of only fifteen minutes, the stock market plunged to the single biggest intraday point loss in its history and then, even more astonishingly, almost completely recovered. This unprecedented event brought fresh scrutiny to so-called high-frequency trading, which is widely believed to have played a crucial role in the debacle. Despite a welter of subsequent regulatory proposals, the legal literature has been nearly silent with regard to this new frontier of securities litigation. In response, this Article proposes the broad outlines for a strategy for regulation of the risks of high-frequency trading. For risks that are already well understood, I would rely on best practices regulation. For risks that are novel and not yet fully understood, I would rely on a combination of ex post liability and structural reforms – including a consolidated system for tracking market activity and improved circuit breakers for arresting extreme market movements. The proposed regulatory regime would reassure the public and prevent the most extreme dangers associated with high-frequency trading, while still preserving the benefits of high-frequency trading and the incentives for market participants to develop improved best practices.
Dale A. Oesterle has posted Bankruptcy Planning is Not Material? on SSRN with the following abstract:
Several recent judicial decisions have held that bankruptcy planning discussions by boards of directors do not have to be disclosed to the public trading markets under the obligations of the United States federal securities acts. The discussions, the courts held, are not "material." It is hard to imagine anything more important to investors than bankruptcy planning discussions by boards of directors. At issue is why courts are engaging in a legal fiction to amend a federal rule on disclosure obligations.
Samuel S Guzik has posted SEC Crowdfunding Rulemaking Under the Jobs Act -- An Opportunity Lost? on SSRN with the following abstract:
On April 5, 2012, President Barack Obama signed into law the JOBS Act of 2012, intended to facilitate capital formation for small business, widely viewed as the principal engine of job creation in the United States. One of the JOBS Act’s more controversial provisions, Title III, created an exemption from registration of the offer and sale of "crowdfunded" securities under the Securities Act of 1933, allowing the sale of securities to an unlimited number of unaccredited investors without registration, on an Internet-based platform, through intermediaries which are either registered broker-dealers or SEC licensed "funding portals." Title III provided for a number of built-in investor protections, including limitations on the amount invested, limitation on the amount an issuer may raise in a 12 month period ($1 million), detailed financial and non-financial disclosure in connection with the offering, and ongoing annual issuer disclosure. Congress left much of the details of Title III in the hands of the SEC, to be fleshed out in the rulemaking process.
More than 18 months later, on October 23, 2013, in a 585 page release, the Commission approved the issuance of proposed Title III rules for public comment, with the comment period expiring in February 2014.
The following commentary addresses certain choices and challenges of the SEC in the ongoing Title III rulemaking process, evaluating a number of key areas where proposed rulemaking has in many instances exacerbated the inherent cost and complexity inherent in the Title III structure created by Congress, and suggesting alternative approaches in the rulemaking process as the SEC undertakes to finalize Title III rules.
Sobhesh Kumar Agarwalla, Joshy Jacob, and Jayanth Rama Varma have posted High Frequency Manipulation at Futures Expiry: The Case of Cash Settled Indian Single Stock Futures on SSRN with the following abstract:
Futures markets are known to be vulnerable to manipulation, and despite the presence of a variety of mechanisms to prevent such manipulation, instances of market manipulation have been found in some of the largest and most liquid futures markets worldwide. In 2013, the Securities and Exchange Board of India identified a case of alleged manipulation (in September 2012) of the settlement price of cash settled single stock futures based on high frequency circular trading. As is well known, it is easy for any well-endowed manipulator to manipulate the price; the real challenge for the manipulator is to make the manipulation profitable. The use of high frequency circular trading of the form alleged in the SEBI order makes many forms of manipulation profitable, and makes futures market manipulation a much bigger problem than previously thought.
As argued by Pirrong (2004), it is more practical to detect and punish manipulation than to try and prevent it. We develop an econometric technique that uses high frequency data and which can be integrated with the automated surveillance system to identify suspected cases of high frequency manipulation at futures expiry. We then use these techniques to identify a few suspected cases of manipulation. Needless to say, human judgement needs to be applied to decide which, if any, of these cases need to be taken up for investigation (and, after that, possible prosecution). This judgement is beyond the scope of our paper, and we refrain from making any judgement on whether any of the identified cases constitutes actual market manipulation.
Daniel Hooper Smith has posted Subjective Falsity Under Section 11 of the Securities Act: Protecting Statements of Opinion on SSRN with the following abstract:
Subjective Falsity Under Section 11 of the Securities Act: Protecting Statements of Opinion discusses the Sixth Circuit’s strict liability decision in Indiana State District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc. for statements of opinion contained in registration statements, and its express departure from both the Second and Ninth Circuits. Consistent with the Second, Third, and Ninth Circuits, this Article proposes that both objective and subjective falsity should be the requisite pleading standard for section 11 opinion statement cases. This Article reaches this conclusion by examining the history of the Securities Act and section 11, pleading requirements, decisions of other circuits, current legal scholarship, and recently-implemented statutes and regulations. Additionally, this Article examines the detrimental effects that a strict liability holding will have on highly-regulated industries such as healthcare and finance. This case is currently pending before the Supreme Court, sub nom. Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, distributed for conference of February 21, 2014.
The following law review articles relating to securities regulation are now available in paper format:
James Maruna, Note, The Circuits Confused the Market: Why the Third Circuit's Malack Decision Confirms the Need for a Uniform Approach to the Fraud-Created-the-Market Theory, 11 DePaul Bus. & Com. L.J. 545 (2013).
Hillel Nadler, Comment, I Didn't Do It: Third-Party Debtors and the Securities Law Violation Exception to Discharge, 80 U. Chi. L. Rev. 1921 (2013).
Van S. Wiltz, Will the JOBS Act Jump-Start the Video Game Industry? Crowdfunding Start-Up Capital, 16 Tul. J. Tech. & Intell. Prop. 141 (2013).
Thursday, February 13, 2014