Securities Law Prof Blog

Chair White and Various SEC Commissioners Offer Remarks at the "SEC Speaks" Conference

On February 21, 2014 at the “SEC Speaks” Conference in Washington, D.C., Chair Mary Jo White, Commissioner Luis A. Aguilar, Commissioner Daniel M. Gallagher, and Commissioner Kara M. Stein offered remarks on the state of the SEC.

Canadian Securities Administrators Release 2013 Enforcement Report

The Canadian Securities Administrators (CSA) released its 2013 Enforcement Report that summarizes enforcement actions taken by its members during 2013.

NASAA Letter to the SEC Objecting to State Preemption of Regulation A+ Offerings

The leadership of the North American Securities Administrators Association (NASAA) has sent a letter to the SEC objecting to preemption of state authority over small corporate offerings through the SEC's proposed rule regarding Regulation A+.  The letter in part states the following:

State regulators have particular strengths that uniquely qualify them to effectively oversee Regulation A+ offerings.  Because we are geographically close and accessible to both investors and local businesses, we are often in a better  position than the Commission to communicate with them about the offering to prevent abuse and improve the overall quality of the deal for investor and business alike. . . .

Our proximity to investors also puts us in the best position to deal aggressively with securities law violations when they do occur. States are typically the first responders for investors robbed or cheated out of their investments.  We and our state peers fielded more than 10,000 investor complaints and conducted more than 5,800 investigations in the last reporting year. The most serious violations we uncovered were criminally prosecuted, resulting in 1,361 years of incarceration. More than $694 million of misappropriated or lost wealth was returned  to investors in state-issued restitution orders. Notably, many of these cases originated from federal exemptions that preempt state review. Regulation D offerings, for example, were the most common product or scheme reported by the states in 2013. It is the fourth consecutive year Regulation D deals have topped the state list.

We cannot do our job – protect investors or help small businesses access capital and grow their companies – where the Commission attempts to prohibit our review as contemplated in the Regulation A+ Proposal.

Division of Trading And Markets Acting Director John Ramsay to Leave SEC

The press release is available here.

Stephen Luparello Named as Director of SEC’s Division of Trading and Markets

The press release is available here.

SEC Names Sharon Binger as Director of Philadelphia Regional Office

The press release is available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending February 21, 2014).

New in Print

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).

 

SEC to Hold Cybersecurity Roundtable

Details available here.

SEC Approves 2014 PCAOB Budget and Accounting Support Fee

Details available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending February 14, 2014).

Micheler on Intermediated Securities

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.

Gilson & Kraakman on Market Efficiency

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.

Pacella on Whistleblowing

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.

Jaberi on Securities Regulation and ADR

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.

Reilly on the FCPA

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.

Korsmo on Fraud on the Market

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.

Anderson on Insider Trading

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.

Korsmo on High-Frequency Trading

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.

Oesterle on Materiality and Bankruptcy Planning

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.