Securities Law Prof Blog

New in Print

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

Zachary Ahonen, Note, The Recent Financial Crisis and Its Impact on Interest Rate Swaps: A Road to Recovery through the Frustration of Commercial Purpose Doctrine, 24 Ind. Int'l & Comp. L. Rev. (2014).

Corey K. Brady, Comment, Standing on Ceremony: Can Lead Plaintiffs Claim Injury from Securities that They Did Not Purchase?, 81 U. Chi. L. Rev. 1079 (2014).

John C. Coffee, Jr., Extraterritorial Financial Regulation: Why E.T. Can't Come Home, 99 Cornell L. Rev. 1259 (2014).

Elisabeth de Fontenay, Do the Securities Laws Matter? The Rise of the Leveraged Loan Market, 39 J. Corp. L. 725 (2014). 

Michael P. Forrest & J.T. Norris, Bribery and China Go Together Like Yin and Yang, 44 Cumb. L. Rev. 423 (2013-2014).

Cary Martin, One Step Forward for Hedge Fund Investors: The Removal of the Solicitation Ban and the Challenges that Lie Ahead, 16 U. Pa. J. Bus. L. 1143 (2014).

Felix Mormann, Beyond Tax Credits: Smarter Tax Policy for a Cleaner, More Democratic Energy Future, 31 Yale J. on Reg. 303 (2014).

Matthew R. Quetsch, Note, Corporations and Hedging: Distinguishing Forwards from Swaps under the Commodity Exchange Act Post-Dodd Frank, 39 J. Corp. L. 895 (2014). 

Houman B. Shadab, Performance-Sensitive Debt: From Asset-Based Loans to Startup Financing, 16 U. Pa. J. Bus. L. 1077 (2014).

Christine E. Turner, Note, First Rejection, Then Dismissal: Reconsidering American Pipe Tolling for Securities Class Actions, 64 Duke L.J. 99 (2014). 

Park on Bondholders and Securities Class Actions

James J. Park has posted Bondholders and Securities Class Actions on SSRN with the following abstract:

Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance leading to fraud. This Article challenges this conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions. From 1996 through 2000, about 3% of securities class action settlements involved a bondholder recovery. From 2001 through 2005, the percentage of bondholder recoveries increased to about 8% of all securities class action settlements. Bondholders were involved in 4 of the 5 and 19 of the 30 largest securities class action settlements, and tended to recover in frauds associated with a credit downgrade. By 2005, almost half of all securities class actions alleged claims on behalf of all public investors, not just shareholders. The rise in bondholder recoveries is evidence that securities fraud has increased in severity over time, causing harm to a broader range of corporate stakeholders. Certain frauds can be understood as transferring wealth from bondholders to shareholders. In providing a remedy for such transfers, bondholder class actions are an example of the continuing evolution of the securities class action.

Chen, Hope, Li & Wang on International Markets

Feng Chen, Ole-Kristian Hope, Qingyuan Li, and Xin Wang have posted Flight to Quality in International Markets: Political Uncertainty and Investors’ Demand for Financial Reporting Quality on SSRN with the following abstract:

We examine whether international equity investors shift their portfolios toward stocks with higher financial reporting quality during periods of high political uncertainty. Our study is motivated by two primary factors. First, prior research shows evidence of investors’ “flight to quality” (e.g., to less risky securities) during periods of uncertainty. Second, recent theoretical research concludes that stocks with higher financial reporting quality are assessed as less sensitive to systematic risk (such as political uncertainty). We employ national elections as exogenous increases in systematic risk. Elections are accompanied by significantly increased political uncertainty that is largely outside the control of firms and investors. In addition, national elections take place at different points in time across countries, which controls for possible confounding events such as global macro-economic trends. Using a large international sample of mutual funds that focus on local markets, we find that international mutual-fund managers shift their equity holdings to stocks with higher financial reporting quality during election periods when political uncertainty is higher. The flight-to-quality effect is less pronounced for elections with larger expected electoral margins in the pre-election period (i.e., when the incumbent is more likely to win the elections) and for countries with higher transactions costs. In contrast, the effect is more pronounced when governments have greater involvement in the local economy. Our inferences are robust to alternative proxies for political uncertainty and financial reporting quality and to numerous other sensitivity analyses.

Brummer on Disruptive Technology and Securities Regulation

Chris Brummer has posted Disruptive Technology and Securities Regulation on SSRN with the following abstract:

Nowhere has disruptive technology had a more profound impact than in financial services — and yet nowhere more do academics and policymakers lack a coherent theory of the phenomenon, much less a coherent set of regulatory prescriptions. Part of the challenge lies in the varied channels through which innovation upends market practices. Problems also lurk in the popular assumption that securities regulation operates against the backdrop of stable market gatekeepers like exchanges, broker dealers and clearing systems — a fact scenario increasingly out of sync in 21st century capital markets.

This Article explains how technological innovation not only “disrupts” capital markets — but also the exercise of regulatory supervision over securities issuances and trading. It argues that an array of technological innovations in speed, interconnectivity and processing power are facilitating what can be understood as the disintermediation of the traditional gatekeepers that regulatory authorities have relied on (and regulated) since the 1930s for investor protection and market integrity. Effective securities regulation will thus require understanding the new market ecosystem, and 20th century administrative processes will have to be upgraded to account for a computerized (and often virtual) market microstructure that is subject to accelerating change. To provide context, the paper examines two basic categories of disruptive innovation: 1) the automated financial services that are transforming the meaning and operation of market liquidity and 2) the private markets — specifically, the dark pools, ECNs, 144A trading platforms, and crowdfunding websites — that are creating an ever-expanding array of alternatives for both securities issuances and trading.

New in Print

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

David K. Brown & Derek B. Swanson, Securities Regulation, 65 Mercer L. Rev. 1087 (2014).

Winthrop N. Brown, With This ring, I Thee Fence: How Europe's Ringfencing Proposal Compares with U.S. Ringfencing Measures, 45 Geo. J. Int'l L. 1029 (2014).

Stanislav Dolgopolov, The Maker-Taker Pricing Model and Its Impact on the Securities Market Structure: A Can of Worms for Securities Fraud?, 8 Va. L. & Bus. Rev. 231 2 (2014).

William O. Fisher, Predicting a Heart Attack: The Fundamental Opacity of Extreme Liquidity Risk, 86 Temp. L. Rev. 465 (2014).

Jaclyn Freeman, Note, Limiting SRO Immunity to Mitigate Risky Behavior, 12 J. on Telecomm. & High Tech. L. 193 (2014).

Stacy Goto Grant, Note, International Financial Regulation through the G20: The Proprietary Trading Case Study. 45 Geo. J. Int'l L. 1217 (2014).

Michael L. Hartzmark &H. Nejat Seyhun, Understanding the Efficiency of the Market for Preferred Stock, 8 Va. L. & Bus. Rev. 149 (2014).

Stephanie Ryder, Note, How to Prevent Future Flash Crashes and Restore the Ordinary Investors' Confidence in the Financial Market: The Implementation of Circuit Breakers and Speed Limits to Help Enforce the Market Access Rule, 12 J. on Telecomm. & High Tech. L. 265 (2014).

Gregory Scopino, Regulating Fairness: The Dodd-Frank Act's Fair Dealing Requirement for Swap Dealers and Major Swap Participants, 93 Neb. L. Rev. 31 (2014).

Robert D. "Bodie" Stewart, Note, Missing the Mark on Mark-to-Market: The Arguments Against the Camp Plan to Require Mark-to-Market Accounting for Non-Traded Speculative Derivatives, 45 Geo. J. Int'l L. 1323 (2014).

Andrew F. Tuch, Financial Conglomerates and Information Barriers, 39 J. Corp. L. 563 (2014).

Jackson, Jiang & Mitts on Information Dissemination

Robert J. Jackson Jr., Wei Jiang, and Joshua Mitts have posted How Quickly Do Markets Learn? Private Information Dissemination in a Natural Experiment on SSRN with the following abstract:

Using data from a unique episode in which the SEC disseminated securities filings to a small group of private investors before releasing them to the public, we provide a direct test of the process through which private information is impounded into stock prices. Because the delay between the time when the filings were privately distributed and when the filings were made public was randomly distributed, our setting provides a rare natural experiment for examining how markets process new private information. We find that it takes minutes — not seconds — for informed traders to incorporate fundamental information into stock prices. We also show that the private investors who had early access to fundamental information profited more, and convey more information into stock prices, when the delay before the filings are released to the public is longer. More importantly, the rate at which information is impounded into stock prices is more correlated with the length of the predicted delay before public release than the actual delay, suggesting that informed investors trade strategically. Our study serves as the modern counterpart to Koudijs’s (2014a) study on insider trading on eighteenth-century stock exchanges — except, in our case, week-long sailing voyages have been replaced by modern electronic transmission as the conduit for information flows.

Heese on SEC Enforcement

Jonas Heese has posted Government Preferences and SEC Enforcement on SSRN with the following abstract:

I examine whether political pressure by the government as a response to voters’ general interest in protecting employment is reflected in the enforcement actions by the Securities and Exchange Commission (SEC). Using labor intensity as a measure for a firm’s contribution to employment, I find that labor-intensive firms are less likely to be subject to an SEC enforcement action. Next, I show that labor-intensive firms are less likely to face an SEC enforcement action in presidential election years if they are located in politically important states. I also find evidence of a lower likelihood of SEC enforcement for labor-intensive firms that are headquartered in districts of senior congressmen that serve on committees that oversee the SEC. All of these results hold after controlling for firms’ accounting quality and two alternative explanations for firms’ favorable treatment by the SEC, i.e., firms’ location and political contributions. These findings suggest that voters’ interests drive political pressure on SEC enforcement — independent of firms’ lobbying for their special interests.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending January 23, 2015).

New in Print

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

Stephen J. Choi & Kevin E. Davis, Foreign Affairs and Enforcement of the Foreign Corrupt Practices Act, 11 J. Empirical Legal Stud. 409 (2014).

James T. Farris, Note, What You Do Not Know Can Hurt You: How the FINRA Expungement Process Is Endangering Future Investors Through a Lack of Information, 42 Hofstra L. Rev. 1227 (2014). 

Anneka Huntley, Note, RICO's Extraterritoriality After Morrison: Where Should We Go From Here?, 65 Hastings L.J. 1691 (2014).

Andrew A. Schwartz, Arbitration and the Contract Exchange, 29 Ohio St. J. on Disp. Resol. 299 (2014).

Michael P. Vandenbergh, Kaitlin Toner Raimi & Jonathan M. Gilligan, Energy and Climate Change: A climate Prediction Market, 61 UCLA L. Rev. 1962-2017 (2014).

Twenty-Seventh Annual Corporate Law Symposium: Crowdfunding Regulations and Their Implications, Articles by Adam S. Zimmerman, Geoffrey Christopher Rapp, Renee M. Jones, Jennifer J. Johnson, J.W. Verret, Samuel W. Buell, Douglas M. Branson & Verity Winship. 82 U. Cin. L. Rev. 381 (2013).