Monday, December 5, 2016
Jonathan R. Macey has posted Beyond the Personal Benefit Test: The Economics of Tipping by Insiders on SSRN with the following abstract:
Recent insider trading cases reveal a stark conceptual divided between the federal courts and the Securities and Exchange Commission (SEC) regarding liability for securities fraud in cases in which an insider (a "tipper") gives material non-public information to a market professional or close friend or other potential trader (a "tippee"). Following a landmark Supreme Court case called Dirks v. SEC, the federal courts do not impose liability on tippers or tippees unless there the tipper receives a consequential personal benefit or is a close friend or relative of the tippee. The SEC abjures this "personal benefit" requirement, and would define the concept of personal benefit so broadly as to remove it as an impediment to insider trading prosecutions. This Article explains the economic function of the personal benefit test as establishing the criterion upon which legitimate trading on the basis of material nonpublic information can be distinguished from venal or corrupt trading. The Article shows that the personal benefit test, while a valuable innovation to insider trading jurisprudence, is severely limited because it does not capture all of the various motivations that cause insiders to convey material nonpublic information to traders. This Article fills that gap by providing a complete taxonomy of tipping and trading, and explaining what the legal consequences of all of the various forms of insider trading.
Sunday, December 4, 2016
SEC Advisory Committee on Small and Emerging Companies to Hold Conference Call Meeting on December 7
Monday, November 28, 2016
The following law review articles relating to securities regulation are now available in paper format:
Eric C. Chaffee, Book review, Confounding Ockham's Razor: Minilateralism and International Economic Regulation (reviewing Chris Brummer, Minilateralism: How Trade Alliances, Soft Law, and Financial Engineering Are Redefining Economic Statecraft), 10 Brook. J. Corp. Fin. & Com. L. 319 (2016).
Jill I. Gross, The Customer's Nonwaivable Right to Choose Arbitration in the Securities Industry, 10 Brook. J. Corp. Fin. & Com. L. 383 (2016).
Roberta S. Karmel, The Challenge of Fiduciary Regulation: the Investment Adviser's Act after Seventy-Five Years, 10 Brook. J. Corp. Fin. & Com. L. 405 (2016).
Wednesday, November 23, 2016
Ye Wang has posted (Naked) Short Selling Around Earnings Announcement on SSRN with the following abstract:
Since short sellers are considered sophisticated traders and respond to corporate news and public information in a timely manner, corporate earnings announcements containing new information can be used to update the beliefs of short sellers and affect their investment strategies. Abnormal market reactions to earnings surprises are traditionally considered due to market mispricing or investor overreaction to unexpected corporate news; however, such mispricing is also determined by the functioning of the market microstructure. This paper uses an innovative dataset that includes detailed short sales information and fails-to-deliver (FTDs) at the settlement dates for all stocks listed in the New York Stock Exchange and NASDAQ to provide empirical evidence that the FTDs arising from naked short selling contribute to this mispricing around earnings announcements. Furthermore, this paper provides empirical evidence that, even after new regulation for restricting naked short sales, such misbehavior still causes price distortion during negative corporate events. This work also identifies multiple factors that could influence the (naked) short sales constraints of trading securities. The results show that institutional ownership, insider sales, short interests, and trading volume in a dark pool are important factors in the (naked) short sales of underlying stocks.
Jill E. Fisch, Jonah B. Gelbach, and Jonathan Klick have posted After Halliburton: Event Studies and Their Role in Federal Securities Fraud Litigation on SSRN with the following abstract:
Event studies have become increasingly important in securities fraud litigation after the Supreme Court’s decision in Halliburton II. Litigants have used event study methodology, which empirically analyzes the relationship between the disclosure of corporate information and the issuer’s stock price, to provide evidence in the evaluation of key elements of federal securities fraud, including materiality, reliance, causation, and damages. As the use of event studies grows and they increasingly serve a gatekeeping function in determining whether litigation will proceed beyond a preliminary stage, it will be critical for courts to use them correctly.
This Article explores an array of considerations related to the use of event studies in securities fraud litigation. It starts by describing the basic function of the event study: to determine whether a highly unusual price movement has occurred and the traditional statistical approach to making that determination. The Article goes on to identify special features of securities fraud litigation that distinguish litigation from the scholarly context in which event studies were developed. The Article highlights the fact that the standard approach can lead to the wrong conclusion and describes the adjustments necessary to address the litigation context. We use the example of six dates in the Halliburton litigation to illustrate these points.
Finally, the Article highlights the limitations of event studies – what they can and cannot prove – and explains how those limitations relate to the legal issues for which they are introduced. These limitations bear upon important normative questions about the role event studies should play in securities fraud litigation.
Itzhak Ben-David, Francesco A. Franzoni, and Rabih Moussawi have posted Exchange Traded Funds (ETFs) on SSRN with the following abstract:
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.
Tuesday, November 22, 2016
The following law review articles relating to securities regulation are now available in paper format:
Andrew C. Baker, Note, Single-Firm Event Studies, Securities Fraud, and Financial Crisis: Problems of Inference, 68 Stan. L. Rev. 1207 (2016).
Sarah Dotzel, Note, Unsponsored ADRs Falling Through the Cracks: Adapting a Domestic Securities Regime to a Global Marketplace, 18 Vand. J. Ent. & Tech. L. 849 (2016).
Yuliya Guseva, Destructive Collectivism: Dodd-Frank Coordination and Clearinghouses, 37 Cardozo L. Rev. 1693 (2016).
Michael Halberstam, The American Advantage in Civil Procedure? An Autopsy of the Deutsche Telekom Litigation, 48 Conn. L. Rev. 817 (2016).
Erich L. Schmitz, Halliburton II: A Missed Opportunity to Right the Wrong in Rule 10b-5 Based Class Actions, 14 DePaul Bus. & Com. L.J. 249 (2015).
Alexander R. Tiktin, Note, Broker-Dealer Law Reform: Financial Intermediaries in a State of Limbo, 81 Brook. L. Rev. 1205 (2016).
Chang-hsien Tsai, Legal Transplantation or Legal Innovation? Equity-Crowdfunding Regulation in Taiwan after Title III of the U.S. JOBS Act, 34 B.U. Int'l L.J. 233 (2016).
The Penn State Journal of Law & International Affair (“JLIA”) is conducting a call for papers for an upcoming publication in spring 2017. The publication will focus on areas of taxation, corporate law, banking and finance, and related subject areas. Current papers accepted for publication cover areas of international taxation, international financial regulation for cryptocurrencies, and regulations resulting from the global financial crisis.
JLIA is an interdisciplinary journal that is jointly published by Penn State’s Law School and the Penn State School of International Affairs. As a result, deference will be given to papers that incorporate international elements. However, papers with a purely domestic focus will be given full consideration based on their fit within the publication.
Submissions will be considered for publication on a rolling basis. Authors interested in submitting papers should refer to http://elibrary.law.psu.edu/jlia/policies.html for submission procedures and policies. Please note that text and citations should conform to The Bluebook: A Uniform System of Citation, and that submissions through ExpressO are the best way to ensure quick response times as it is the internal platform for reviewing all official submissions to JLIA.
Please direct all questions regarding this Call for Papers to Zach Bollman, Editor-in-Chief, at firstname.lastname@example.org or Camman Piasecki, Managing Editor of Articles, at email@example.com.
Thursday, November 17, 2016
Cary Martin Shelby has posted Closing the Hedge Fund Loophole: The SEC as the Primary Regulator of Systemic Risk on SSRN with the following abstract:
The 2008 financial crisis sparked a flurry of regulatory activity and enforcement in an attempt to reign in activity by banks, but other institutions have also been identified as potentially threatening to the stability of the financial markets. In particular, several empirical studies have revealed that systemic risk can be created and transmitted by hedge funds, which are private investment funds that have historically evaded regulation under the federal securities laws. In response to the risk created by hedge funds, Congress granted the Financial Stability Oversight Council (“FSOC”) authority under the Dodd-Frank Act of 2010 to designate hedge funds as Systemically Important Financial Institutions (“SIFIs”). Such a designation would automatically result in stringent capital constraints and limitations on liquidity risk on these nonbank institutions. However, in the over six years since FSOC has been granted this authority, it has failed to identify even one hedge fund as a SIFI. The council has encountered a variety of challenges such as criticisms to systemic risk studies sanctioned by FSOC, and massive resistance to the SIFI designation process by numerous industry participants. If this designation were applied to hedge funds it would severely limit the abilities of hedge fund advisers to pursue certain strategies. For these reasons, it is highly unlikely that FSOC will designate a hedge fund as a SIFI.
The inability of FSOC to regulate systemically harmful funds is particularly troubling because several post-financial crisis studies have revealed that systemic risk can still be created and transmitted by hedge funds. Given FSOC’s inability to close this hedge fund loophole, this Article argues that Congress should explore appointing the SEC as the primary regulator of systemically harmful funds because; (1) the transparency framework inherent in the federal securities laws can supply a more effective means for mitigating systemic risk than the prudential framework currently mandated for SIFIs, and (2) appointing the SEC in this regard would reduce the fragmentation of our current regulatory structure which has been extended and complicated by the creation of FSOC. While the federal securities laws are typically used to promote investor protection, this Article posits that enhancing transparency to hedge fund counterparties and investors can decrease systemic risk by empowering such market participants to better protect themselves against risk. Enhancing protection in this manner could in-turn weed out systemically harmful funds from the marketplace, without imposing the severe capital constraints that would be mandated under FSOC’s model. With respect to reducing the fragmentation of our current regulatory structure, this Article argues that lawmakers should dedicate resources to reforming our existing agencies instead of creating additional layers of ineffective regulation that could lead to repeated failures, undue complexities, and wasted resources.
Wednesday, November 16, 2016