Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, October 17, 2014

This Week in Securities Litigation

Commissioner Gallagher on the Future of the SEC

On October 16, 2014 at Fordham Law School, Commissioner Daniel M. Gallagher delivered remarks on The Securities and Exchange Commission—the Next 80 Years.  Commissioner Gallagher stated in part:

Over the next eight decades, the SEC’s fate will be intertwined, as it always has been, with that of our capital markets.  Despite robust market activity over the last few years, the U.S. capital markets, the manner in which they are regulated, and the SEC itself collectively face an existential threat:  the encroaching imposition of so-called prudential regulation on markets wholly unsuited to that regulatory paradigm.  To put it simply, the manner in which the Commission responds to this encroachment, as well as to the unprecedented, decade-long burden placed upon us by a hundred Dodd-Frank Act mandates, will determine whether the SEC remains as relevant in the 21st century as it was in the 20th – and more importantly, whether our capital markets, still the best in the world despite an onslaught of self-inflicted frictions, can continue to be the drivers of economic growth and prosperity that they have been for so long. . . .

So what, in practice, does this mean?  First, we need to affirmatively engage Congress and the Administration and work with them to remove the useless or counterproductive elements of the Dodd-Frank Act.  The emphasis is on affirmatively engaging – we cannot remain passive observers, speaking only when spoken to by policymakers, and expect to succeed in reforming Dodd-Frank.  Second, we need to become a savvier agency – specifically, an agency that serves as an efficient overseer of the capital markets and an aggregator and analyzer of critical market information through the better use of technology.  Finally, we need to affirmatively engage other regulators and relevant policymakers in the critical policy debates of the day – and for that matter, of the past five years.  I have been doing so since the beginning of my term and have found that most stakeholders are receptive to our participation in such debates.  We can learn from their perspective, and they from ours.

October 17, 2014 | Permalink | Comments (0) | TrackBack (0)

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Sasha S. Hahn, Note, "Between" a Rock and a Hard Place: Martin Marietta v. Vulcan and the Rise of the Backdoor Standstill, 65 Hastings L.J. 1393 (2014).

Hillary A. Sale, J.P. Morgan:  An anatomy of Corporate Publicness, 79 Brook. L. Rev. 1629 (2014).

Emily von Werlhof, Student Article, With Sharia in Mind:  Developing the Islamic Financial Market in Pakistan, 7 Alb. Gov't L. Rev. 493 (2014).

October 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 7, 2014

Cumming, Leung & Rui on Board Gender Diversity and Securities Fraud

Douglas J. Cumming, T.Y. Leung, and Oliver M. Rui have posted Gender Diversity and Securities Fraud on SSRN with the following abstract:

We formulate theory and set forth a first-ever empirical analysis of the impact of board of director gender diversity on the broad spectrum of securities fraud, generating three main insights. First, the examined data show strong evidence consistent with the view that the importance of women on boards in mitigating securities fraud lies in the mechanism of diversity. Second, we show that the market response to fraud from a more gender-diverse board is significantly less pronounced. Third, we show that women are more effective in mitigating both the presence and severity of fraud in male-dominated industries, which again supports the notion of diversity. All our findings are robust to controls for endogeneity and propensity score matching, among other robustness checks.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Leibold on the Foreign Corrupt Practices Act

Annalisa Marie Leibold has posted Extraterritorial Application of the FCPA Under International Law on SSRN with the following abstract:

This article examines several recent case examples to show that the broad application of the Foreign Corrupt Practices Act (FCPA) jurisdiction is, in practice, in conflict with certain customary principles of international law. Generating new statistics on the enforcement of the FCPA against foreign corporations, I explore the proposition that the U.S. government’s targeting of foreign businesses, and the lack of prosecution of their U.S. counterparts, has the effect of giving U.S. companies an unfair competitive edge in the global marketplace. Finally, given the ease at which the U.S. government can bring charges against a foreign company coupled with the fact that most charges are settled as opposed to litigated, the FCPA looks more like an international anti-corruption business tax, rather than a domestic criminal law with limited extraterritorial applications. The consequences of this new "international business tax," namely the power of the U.S. federal government to determine who pays the tax, how much they pay, and when they pay are further explored.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Pacella on Whistleblowers

Jennifer M. Pacella has posted Advocate or Adversary? When Attorneys Act as Whistleblowers on SSRN with the following abstract:

In today’s era of relying on whistleblower tips as critical sources of fraud disclosure, the role of attorneys as whistleblowers has become increasingly muddled. The Securities and Exchange Commission has adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) allowing whistleblowers to collect bounties, or rewards, in exchange for information. Although Dodd-Frank generally excludes attorneys from eligibility for bounties, the statute provides exceptions making it possible for lawyers to blow the whistle and cash in on confidential client communications in certain circumstances. This Article will examine the SEC’s rules under Dodd-Frank, which incorporate by reference provisions from the Sarbanes-Oxley Act of 2002 (“SOX”) requiring attorneys to reveal client confidences in certain instances. This incorporation by reference results in a glaring inconsistency between the two statutes, as SOX was enacted at a time when whistleblower bounties were not yet available. This Article will suggest that lawyers who collect bounties have an obvious conflict of interest offending state ethical rules governing professional responsibility. This Article will highlight recent litigation supporting this argument, specifically the Second Circuit’s decision in Fair Laboratory Practices Associates v. Quest Diagnostics, which held that lawyers violate their ethical duties when using confidential client information to bring lawsuits under a related whistleblower statute, the False Claims Act, which also allows bounties. In light of these concerns, this Article will supplement existing whistleblower research by suggesting that attorneys are an improper fit for the bounty model. Rather, this Article proposes that attorneys are better suited to reinforce the goals of the “structural model,” a defining feature of SOX that was first explored by Professor Richard Moberly as a method of encouraging internal whistleblowing to challenge corporate cultures of silence in the face of fraud.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Langevoort on Fraud-on-the-Market

Donald C. Langevoort has posted Judgment Day for Fraud-on-the-Market: Reflections on Amgen and the Second Coming of Halliburton on SSRN with the following abstract:

The Supreme Court has reaffirmed the "fraud on the market" presumption of reliance, facilitating large scale class actions for this kind of securities fraud. This essay traces the road from its decision last year in Amgen to this year's reaffirmation in Halliburton II, and considers some of the issues that will emerge as lower courts struggle with Halliburton II's secondary holding -- that the issue of "price impact" is crucial to class certification, even if the burden of proof is on the defendants.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Haugh on Financial Crisis Prosecutions

Todd Haugh has posted The Most Senior Wall Street Official: Evaluating the State of Financial Crisis Prosecutions on SSRN with the following abstract:

This September marks six years since the collapse of Lehman Brothers and the height of the financial crisis. Recently, a growing debate has emerged over the Justice Department’s failure to criminally prosecute Wall Street executives for their role in creating the crisis. One side of that debate contends the government has failed to bring to justice individual wrongdoers — primarily the heads of banks operating in the mortgage-backed securities market — instead preferencing enforcement decisions that target corporations, resulting in punishments that are “little more than window-dressing.” The other side argues that cases against individuals are precluded by the realities of the federal criminal justice system, and that “corporate headhunting” will only inhibit meaningful regulatory reform.

It is difficult, however, to evaluate these competing claims without proper context. This Article explores the recent conviction and sentencing of Wall Street executive Kareem Serageldin as a means of providing that context. Although Serageldin has been trumpeted as the “the most senior Wall Street official” to be sentenced for conduct committed during the financial crisis, and his conviction was framed as a victory in punishing those accountable for the financial collapse, a critical look at his case reveals he committed only a mundane white collar crime marginally related to the crisis. This disconnect creates a unique lens through which to understand and evaluate the current state of — and debate surrounding — financial crisis prosecutions. And it ultimately highlights the merits, and shortfalls, of each camp’s arguments. The Article concludes by offering something largely absent from the current debate: specific proposals for how we might go about prosecuting individuals so as to prevent the next crisis.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Mohamed & Seelanatha on Australian Securities Markets

Ahmad E.M Mohamed and Senarath Lalithanada Seelanatha have posted The Global Financial Crisis (GFC), Equity Market Liquidity & Capital Structure: Evidence from Australia on SSRN with the following abstract:

This study investigates how the recent global financial crisis (GFC) has changed the relationship between equity market liquidity and the capital structure of firms listed on the Australian Securities Exchange (ASX). The study takes into account the recent GFC by splitting the sample period into pre-GFC, GFC and post-GFC periods. It has been suggested that firms whose stocks are liquid incur lower costs of issuing equity in comparison to those with less liquid stocks prefer equity to debt. This study employs least square panel regression analysis using a sample of 792 companies listed on the ASX during the period from 2003 to 2011. The study reveals that stock liquidity has a negative effect on leverage. However, this impact was negligible immediately after the crisis. The other important finding is the alteration of the roles of profitability and earning volatility. While profitability was negatively related to leverage before the GFC, it has become irrelevant in the post-GFC period. On the contrary, earnings volatility was not important during the pre-GFC period, but it has become negatively correlated with leverage in the post GFC period. Overall, the study has found that the relationship between leverage and the determinants of capital structure has been significantly changed by the GFC.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Avedian, Cronqvist & Weidenmier on the SEC

Arevik Avedian, Henrik Cronqvist, and Marc Weidenmier have posted Corporate Governance and the Creation of the SEC on SSRN with the following abstract:

We study the effects of the creation of the SEC on corporate governance. Established in 1934, the SEC effectively applied the listing standards of the NYSE to all regional stock exchanges in the U.S. We therefore examine the impact of the SEC by comparing non-NYSE listing firms before and after the landmark legislation was adopted, using the NYSE as a control group. Our estimates reveal that there was a 30 percent reduction in board independence, i.e., the creation of the SEC caused boards to become significantly less independent. We find no corresponding effects on firm valuations. Our evidence is consistent with a "substitution of governance mechanisms" hypothesis, i.e., firms endogenously trade off market-based (board) governance and government-sponsored (SEC) governance. The evidence has implications for changes to corporate governance regulations around the world.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Dhir on Board Diversity

Aaron A. Dhir has posted Homogeneous Corporate Governance Cultures on SSRN with the following abstract:

This is chapter 1 of Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press, forthcoming in 2015).

The lack of gender parity in the governance of business corporations has ignited a heated global debate, leading policymakers to wrestle with difficult questions that lie at the intersection of market activity and social identity politics. Challenging Boardroom Homogeneity draws on semi-structured interviews with corporate board directors in Norway and documentary content analysis of corporate securities filings in the United States to investigate empirically two distinct regulatory models designed to address diversity in the boardroom — quotas and disclosure.

The author’s study of the Norwegian quota model demonstrates the important role diversity can play in enhancing the quality of corporate governance, while also revealing the challenges diversity mandates pose. His analysis of the US regime shows how a disclosure model has led corporations to establish a vocabulary of “diversity.” At the same time, the analysis highlights the downsides of affording firms too much discretion in defining that concept. This book thus deepens ongoing policy conversations and offers new insights into the role law can play in reshaping the gendered dynamics of corporate governance cultures.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Billy Hopkins, Note, Fraud Created the Market: A Presumption Without Basis, 52 U. Louisville L. Rev. 529 (2014).

Thea Reilkoff, Note, Legislating Corporate Social Responsibility: Expanding Social Disclosure through the Resource Extraction Disclosure Rule, 98 Minn. L. Rev. 2435 (2014).

Ahmed E. Taha & John V. Petrocelli, Sending Mixed Messages: Investor Interpretations of Disclosures of Analyst Stock Ownership, 20 Psychol. Pub. Pol'y & L. 68 (2014).

The Nation State and Its Banks: The International Regulation of Financial Institutions, Financial Products, and Sovereign Debt, Introduction by David S. Marcou; articles by Rolf H. Weber, Douglas W. Arner, Evan C. Gibson, Simone Baumann, Christoph G. Paulus, John A.E. Pottow, Charles W. Mooney, Jr., Caroline Bradley, Stephen J. Lubben, Sarah Pei Woo, Jay Lawrence Westbrook, Anna Gelpern, Christian Hofmann. 49 Tex. Int'l L.J. 145-443 (2014).

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Chair White on Global Enforcement

On October 1, 2014 at the IOSCO 39th Annual Conference in Rio de Janiero, Chair Mary Jo White delivered remarks on The Challenge of Coverage, Accountability and Deterrence in Global Enforcement. In summarizing, the SEC's current approach to global enforcement, Chair White stated,

To meet that challenge, we must remain vigilant in combating fraud and other misconduct, whether in our own backyards or across the globe. We must continue to work together through the MMoU and our bilateral agreements, and we must assess these tools constantly, making sure that they are as effective as they can be in our rapidly changing world. We want the fraudsters who seek to prey on our investors and manipulate our markets to know that there is no place to run and no place to hide. The investors who place their faith and their trust in us deserve no less.

October 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, October 6, 2014

Commissioner Piwowar on Fiduciary Duties of Retail Investment Advisors

On September 30, 2014 in Washington, D.C., at the National Association of Plan Advisors D.C. Fly-In Forum, Commissioner Michael S. Piwowar delivered remarks on the fiduciary duties of retail investment advisors.

October 6, 2014 | Permalink | Comments (0) | TrackBack (0)

SEC, FINRA and the MSRB to Hold Compliance Outreach Program for Municipal Advisors

Details are available here.

October 6, 2014 | Permalink | Comments (0) | TrackBack (0)

IOSCO Issues a Report on Market-Based Financing for SMEs and Infrastructure

The International Organization of Securities Commissions (IOSCO) has published a report on capital market solutions in developed and emerging markets that have contributed to financing fro small and medium enterprises (SMEs) and infrastructure projects.  The press release is available here.

October 6, 2014 | Permalink | Comments (0) | TrackBack (0)

This Week in Securities Litigation

Thursday, October 2, 2014

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Quinn Curtis & John Morley, An Empirical Study of Mutual Fund Excessive Fee Litigation: Do the Merits Matter? 30 J.L. Econ. & Org. 275 (2014).

Thomas O. Gorman, Emerging Trends in FCPA Enforcement, 37 Fordham Int'l L.J. 1193 (2014).

Serena Y. Shi, Comment, Dragon's House of Cards: Perils of Investing in Variable Interest Entities Domiciled in the People's Republic of China and Listed in the United States, 37 Fordham Int'l L.J. 1265 (2014).

Zenichi Shishido, Does Law Matter to Financial Capitalism? The Case of Japanese Entrepreneurs, 37 Fordham Int'l L.J. 1087 (2014).

2013 Symposium, The Changing Politics of Central Banks, Keynote address by Daniel K. Tarullo; articles by Douglas R. Holmes and Annelise Riles. 47 Cornell Int'l L.J. 1-119 (2014).

October 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, September 25, 2014

Gennaioli, Martin & Rossi on Government Bonds

Nicola Gennaioli, Alberto Martin, and Stefano Rossi have posted Banks, Government Bonds, and Default: What Do the Data Say? on SSRN with the following abstract:

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

September 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Chauhan & Gautam on Mutual Funds

Tarini Chauhan and Jayant Gautam have posted An Analysis of Performance of Mutual Funds: Public Sector vs Private Sector on SSRN with the following abstract:

A mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with their objectives. Investors need to know how risky individual assets are and what their contribution to the total risk of a portfolio would be. Plenty of Mutual Funds are available where the investors can put their money. Before investing they want to know which fund gives more return, which fund is performing well, which fund is more risky etc. In this study the performance evaluation of balanced mutual funds scheme is carried out through risk adjusted performance measure by Sharpe’s, Treynor’s, Jensen’s Index which will ultimately help investors to choose the best mutual fund generating maximum return with minimum risk. Risk and return can be analyzed by finding out Average Return, Standard Deviation and Beta. The data used is monthly closing NAV recorded in the period starting from 1st April 2011 to 31st March 2012. Single year has been taken in the present times; it is tough to take any year as a normal year. The study reveals that private sector has performed better as compared to its counterpart in case of average return, standard deviation and beta. The risk-adjusted performance measures depicted poor performance of the sample schemes but public sector was preferred in this regard.

September 25, 2014 | Permalink | Comments (0) | TrackBack (0)