Securities Law Prof Blog

Rosenfeld on SEC Enforcement

David Rosenfeld has posted Admissions in SEC Enforcement Cases: The Revolution That Wasn't on SSRN with the following abstract:

In 2013, the SEC departed from its long-standing policy of settling enforcement matters on a no-admit/no-deny basis, and for the first time began to require admissions when settling certain cases. The new admissions policy was greeted with considerable concern by many who thought it would lead to fewer settlements, more litigation, and a decline in the effectiveness of SEC enforcement. After more than four years, a full assessment of the policy is in order. The SEC continues to report record enforcement numbers and has touted the admissions policy as a great success. However, this Article empirically demonstrates that the SEC has obtained admissions in a very small number of cases since adopting the new policy, and on only a few occasions in cases involving the most serious charges, namely scienter-based fraud. Moreover, it shows that the SEC has applied the new policy inconsistently and haphazardly, treating like cases differently—a problem that is compounded by a complete lack of transparency in the process. This Article contends that these trends reveal a deliberate strategy of accommodation on the part of the SEC, through which the agency has trumpeted a message of tough enforcement and public accountability, while in reality continuing business as usual. In light of these issues, this Article concludes that the admissions policy should be reconsidered or abandoned altogether.

Anderson on Insider Trading

John P. Anderson has posted Insider Trading and the Myth of Market Confidence on SSRN with the following abstract:

Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws. For example, in describing the motivating purpose and need for the Insider Trading and Securities Enforcement Act of 1988, Congress explained that insider trading “diminishes the public’s faith” in capital markets, adding that “the small investor will be—and has been—reluctant to invest in the market if he feels it is rigged against him.” In the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting over seventy insider trading cases in the wake of the 2008 financial crisis, emphasized that part of his job as the U.S. Attorney for the Southern District of New York was to aggressively prosecute insider trading cases “to bring people back to a level of confidence in the market.” Such expressions of the link between insider trading and market confidence, however, assume far more than they explain.

At least three claims seem implicit in the market confidence argument. First, a large portion of the general public shares the perception that insider trading is economically harmful and morally wrong. Second, this perception will lead potential market participants to stand on the sidelines of any market in which insiders are free to trade on their material nonpublic information. Third, this chilling effect upon market participation will be significant enough to result in an appreciable decrease in market liquidity and therefore an increase in the cost of capital for those who would put it to socially beneficial uses.

This Article challenges the validity of the market confidence claim as a justification for the regulation of insider trading on two grounds. First, insofar as it relies on a sociopsychological claim—that most investors perceive insider trading as economically harmful or morally wrong—it is subject to the problem of false consciousness (i.e., the psychological claim could be true though the shared belief is demonstrably false).

Second, even if the problem of false consciousness is set aside, the market confidence argument’s empirical claims must be proven. Empirical evidence for the market confidence theory is, however, decidedly weak. Studies testing public attitudes concerning insider trading have reflected more ambivalence than fear or indignation. Moreover, there is no clear pattern of market reaction to major insider trading prosecutions, news of pervasive insider trading highlighted by the press, major court decisions affecting the government’s power to enforce against insider trading, or the adoption of insider trading regulations in countries that did not previously regulate it. Perhaps more concerning for the market confidence theory, however, is the ease with which its proponents explain away data that conflicts with its claim by shifting explanations. The impression emerges that the market confidence theory is not just unproven, but worse, unprovable.

The Article concludes by cautioning against relying upon such an unproven or unfalsifiable claim as a justification for existing or expanded civil and criminal insider trading enforcement powers.

New Securities Law Articles in Print

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

Ryan H. Gilinson, Note, Clicks and Tricks: How Computer Hackers Avoid 10b-5 Liability, 82 Brook. L. Rev. 1305 (2017).

Allan Horwich, The Legality of Opportunistically Timing Public Company Disclosures in the Context of Sec Rule 10b5-1, 71 Bus. Law. 1113 (2016).

Wulf A. Kaal, The Post Dodd-Frank Act Evolution of the Private Fund Industry: Comparative Evidence from 2012 and 2015, 71 Bus. Law. 1151 (2016).

John K. Mickles, Note, If There's Something Strange in Your Workplace, Who Ya Gonna Call? The Second Circuit Expands Whistleblower Protection in Berman v. Neo@ogilvy LLC, 62 Vill. L. Rev. 357 (2017).

Brent T. Murphy, Note, A Textual Analysis of Whistleblower Protections Under the Dodd-Frank Act, 92 Notre Dame L. Rev. 2259 (2017).

Winship & Robbennolt on SEC Settlements

Verity Winship and Jennifer K. Robbennolt have posted An Empirical Study of Admissions in SEC Settlements on SSRN with the following abstract:

Transparency and accountability were the announced aims of the Securities and Exchange Commission (SEC) as it unveiled a new policy of requiring some enforcement targets to admit wrongdoing when they settled with the agency. The SEC had come under fire for allowing targets of enforcement to settle with the agency without admitting or denying wrongdoing. Critics, including prominent judges, put pressure on the agency to require admissions as a way to hold wrongdoers accountable, particularly in the long aftermath of the 2007-2008 financial crisis. In response, the agency announced a policy change in 2013: roughly speaking, it would require admissions when doing so would further public accountability. The empirical study reported here explores how the agency has implemented this policy. We identify and analyze SEC settlements in court and administrative proceedings announced between 2010 and 2016 that required any type of admission of wrongdoing from the settling target. The data set includes the full text of the underlying agreements between the SEC and the target. The resulting numbers are low: we identified 62 settlements containing admissions that were announced during our time period. A few of these settlements were in high-profile cases, but many were against individuals rather than entities, and 40% resulted in low or no monetary sanctions. These numbers, however, do not tell the whole story. We examine the text of the agreements to provide a more nuanced picture, revealing the prominent role of factual admissions, and identifying admissions of wrongdoing, knowledge, and recklessness.

Call for Papers: 2018 National Business Law Scholars Conference

National Business Law Scholars Conference
Thursday & Friday, June 21-22, 2018

Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 21-22, 2018, at the University of Georgia School of Law in Athens, Georgia.  A vibrant college town, Athens is readily accessible from the Atlanta airport by vans that depart hourly. Information about transportation, hotels, and other conference-related matters can be found on the conference website.

This is the ninth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world.  We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the legal academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission.

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by February 16, 2018.  Please title the email “NBLSC Submission – {Your Name}.”  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.”  Please specify in your email whether you are willing to serve as a panel moderator.  We will respond to submissions with notifications of acceptance shortly after the submission deadline. We anticipate circulating the conference schedule in May.

Keynote Speakers:

Paul G. Mahoney
David and Mary Harrison Distinguished Professor of Law
University of Virginia School of Law

Cindy A. Schipani
Merwin H. Waterman Collegiate Professor of Business Administration
Professor of Business Law
University of Michigan Ross School of Business

Featured Panels:

The Criminal Side of Business in 2018

Miriam Baer, Professor of Law, Brooklyn Law School
José A. Cabranes, U.S. Circuit Judge, U.S. Court of Appeals for the Second Circuit
Peter J. Henning, Professor of Law, Wayne State University School of Law
Kate Stith, Lafayette S. Foster Professor of Law, Yale Law School
Larry D. Thompson, John A. Sibley Professor in Corporate and Business Law, University of Georgia School of Law

A Wild Decade in Finance: 2008-18

William W. Bratton, Nicholas F. Gallicchio Professor of Law, University of Pennsylvania Law School
Giles T. Cohen, Attorney, Securities & Exchange Commission
Lisa M. Fairfax, Leroy Sorenson Merrifield Research Professor of Law, George Washington University Law School
James Park, Professor of Law, UCLA School of Law
Roberta Romano, Sterling Professor of Law, Yale Law School
Veronica Root, Associate Professor of Law, Notre Dame Law School

Conference Organizers:

Anthony J. Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia School of Law)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)

Robert Evans III Named Chief of the Office of International Corporate Finance in SEC’s Division of Corporation Finance

Details available here.

New Securities Law Articles in Print

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

Carlos Berdejo, Small Investments, Big Losses: The States' Role In Protecting Local Investors From Securities Fraud, 92 Wash. L. Rev. 567 (2017).

Matthew R. Stock, Student Article, Dodd-Frank Whistleblower Statute: Determining Who Qualifies as a "Whistleblower", 16 Fla. St. U. Bus. Rev. 131 (2017).

Zachary J. Gubler, A Unified Theory of Insider Trading Law, 105 Geo. L.J. 1225 (2017).

Andrew S. Hovestol, Comment, To Fund Or Not to Fund: Deficiencies in the Wisconsin Crowdfunding Act That Hamper the Viability of Intrastate Crowdfunding, 100 Marq. L. Rev. 1063 (2017).

Tom C.W. Lin, The New Market Manipulation, 66 Emory L.J. 1253 (2017).

Kenneth Oshita, Note, Home Court Advantage? The SEC and Administrative Fairness, 90 S. Cal. L. Rev. 879 (2017).

Victoria Pearce, Note, A Family Affair: Presumption of Benefit If Family Member?, 16 Fla. St. U. Bus. Rev. 175 (2017).

A. Joseph Warburton, Mutual Fund Capital Structure, 100 Marq. L. Rev. 671 (2017).

Au on SEC Enforcement

Shiu-Yik Au has posted The Effectiveness of SEC Enforcement in Deterring Financial Misconduct on SSRN with the following abstract:

This paper examines how the Securities and Exchange Commission’s (SEC) enforcement actions and whom they target deter future financial misconduct. An enforcement action reduces the incidence of misconduct in other firms in the same industry and metropolitan statistical area (MSA) in the future. Furthermore, an enforcement that punishes a guilty company has a larger deterrence effect on future misconduct than punishing an officer, auditor, attorney, or other entity. In addition, the results are robust to using alternative measures of financial misconduct such as restatements and Fscore. These results have several policy implications on how regulatory agencies can maximize the value of their enforcements.

Goeman on Shareholder Proposals

Carly Goeman has posted The Price Isn't Right: Shareholder Proposals as Opportunities for Institutional Investors to Restore Firm Value and Reduce Pharmaceutical Prices on SSRN with the following abstract:

Surging pharmaceutical prices in the United States create financial strain for patients, insurance companies, and state and federal governments. Regulatory delays and coverage denials due to product prices can also affect shareholders of pharmaceutical companies by depressing stock prices. While a number of industry leaders have acknowledged that dramatic price hikes can damage their businesses, many pharmaceutical companies have not demonstrated a willingness to scale back prices.

This Note considers the use of shareholder proposals to address drug pricing policies at the company level. While shareholders of most companies are generally unable to address pricing policies, a carve-out created by the Securities and Exchange Commission allows shareholders of publicly traded pharmaceutical companies to do so. This Note studies how shareholders can use the carve-out to push for price restraint by either causing a company to include a price restraint proposal in its proxy materials and annual meeting or causing management to negotiate with proponent shareholders in order to convince the shareholders to withdraw their proposals. By evaluating the success of prior attempts to impact drug prices through shareholder proposals, this Note concludes that institutional investors are the linchpin of shareholder success, whether that success is through a vote at the annual meeting or a compromise at the negotiation table. This Note therefore calls on institutional investors to evaluate their portfolios and consider using shareholder proposals to unlock firm value and relieve the financial pressure created by rapidly rising drug prices.

Anderson on Insider Trading

John P. Anderson has posted Insider Trading and the Myth of Market Confidence on SSRN with the following abstract:

Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws. For example, in describing the motivating purpose and need for the Insider Trading and Securities Enforcement Act of 1988, Congress explained that insider trading “diminishes the public’s faith” in capital markets, adding that “the small investor will be—and has been—reluctant to invest in the market if he feels it is rigged against him.” In the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting over seventy insider trading cases in the wake of the 2008 financial crisis, emphasized that part of his job as the U.S. Attorney for the Southern District of New York was to aggressively prosecute insider trading cases “to bring people back to a level of confidence in the market.” Such expressions of the link between insider trading and market confidence, however, assume far more than they explain.

At least three claims seem implicit in the market confidence argument. First, a large portion of the general public shares the perception that insider trading is economically harmful and morally wrong. Second, this perception will lead potential market participants to stand on the sidelines of any market in which insiders are free to trade on their material nonpublic information. Third, this chilling effect upon market participation will be significant enough to result in an appreciable decrease in market liquidity and therefore an increase in the cost of capital for those who would put it to socially beneficial uses.

This Article challenges the validity of the market confidence claim as a justification for the regulation of insider trading on two grounds. First, insofar as it relies on a sociopsychological claim—that most investors perceive insider trading as economically harmful or morally wrong—it is subject to the problem of false consciousness (i.e., the psychological claim could be true though the shared belief is demonstrably false).

Second, even if the problem of false consciousness is set aside, the market confidence argument’s empirical claims must be proven. Empirical evidence for the market confidence theory is, however, decidedly weak. Studies testing public attitudes concerning insider trading have reflected more ambivalence than fear or indignation. Moreover, there is no clear pattern of market reaction to major insider trading prosecutions, news of pervasive insider trading highlighted by the press, major court decisions affecting the government’s power to enforce against insider trading, or the adoption of insider trading regulations in countries that did not previously regulate it. Perhaps more concerning for the market confidence theory, however, is the ease with which its proponents explain away data that conflicts with its claim by shifting explanations. The impression emerges that the market confidence theory is not just unproven, but worse, unprovable.

The Article concludes by cautioning against relying upon such an unproven or unfalsifiable claim as a justification for existing or expanded civil and criminal insider trading enforcement powers.

Patel on Insider Trading

Menesh Patel has posted Does Insider Trading Law Change Behavior? An Empirical Analysis on SSRN with the following abstract:

Few issues in securities law have excited the popular imagination and generated scholarly interest like insider trading. Yet, a simple but foundational question about insider trading law has received relatively little scholarly attention: Does insider trading law actually influence the amount of insider trading that occurs? This Article tackles this question in the context of one of the highest-profile changes in insider trading law in decades — the Second Circuit’s seminal 2014 decision in United States v. Newman, which substantially weakened insider trading law concerning so called “tippee” liability. The Article’s empirical approach exploits Newman’s change in law to empirically evaluate the effects of changes in insider trading law on insider trading. The Article focuses on insider trading in advance of mergers announced in periods before and after Newman and, for its measure of the extent of insider trading, uses the runup in the stock price of the merger target in advance of the merger’s public announcement. Based on that measure, the Article finds that Newman had a dramatic effect on insider trading, with significantly greater insider trading occurring after Newman than before, thereby providing empirical evidence that insider trading is responsive to changes in insider trading law. The Article provides the first empirical analysis of whether and the extent to which a specific judicial change in insider trading law can influence the amount of insider trading beyond just the trading of corporate insiders. The Article’s empirical findings advance our understanding of the functioning of securities law and inform important policy debates concerning insider trading.

Ibrahim on Crowdfunding

Darian M. Ibrahim has posted Crowdfunding Without the Crowd on SSRN with the following abstract:

The final crowdfunding rules took three years for the SEC to pass, but crowdfunding — the offering securities over the Internet — is now a reality. But now that crowdfunding is legal, will it be successful? Will crowdfunding be a regular means by which new companies raise money, or will it be relegated to a wasteland of the worst startups and foolish investors? This Article argues that crowdfunding has greater chance of success if regulators abandon the idea that the practice does (and should) employ “crowd-based wisdom.” Instead, I argue that crowdfunding needs intermediation by experts that mirrors the successful forms of entrepreneurial finance (e.g., angel investing and venture capital) that have preceded it.

The final SEC rules move us in the right direction. At the heart of the crowdfunding experience lies the “funding portal,” or the website that will actually list the startup as an investment opportunity. Funding portals were originally conceived of as almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the sites. The final SEC rules permit some funding portal curation, which will allow funding portals to list, on the whole, companies with a better chance of success for investors to choose from.

This Article argues, however, this permitted curation does not go far enough, given a funding portal’s justified concern over becoming a broker-dealer. Thus, I suggest ways in which expert investors participating in crowdfunding offerings can and should use a site’s message boards and investment clubs to further guide unsophisticated investors toward better investment choices. At the same time, I acknowledge potential liability concerns for experts who do so. Together, on balance, careful curation by funding portals and nudging from expert investors will give crowdfunding a better chance of facilitating market successes while improving investor transparency by offering heightened guidance from industry experts.

 

NASAA Releases Annual Enforcement Report

Details are available here.

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

Details are available here.