The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

Report on parallel proceedings

Report of a Working Group considering the problems that arise from parallel proceedings, particularly in City fraud cases, within the national jurisdiction and ways in which those problems could be addressed. The Working Group was chaired by George Staple QC

Chiarella v. United States and its Indelible Impact on Insider Trading Law

Insider trading cases, which are typically prosecuted as securities fraud, carry a mystique rarely present in securities litigation. As a former U.S. Attorney for the Southern District of New York once observed, the cases involve \u27basically cops and robbers. . . .[d]id you get the information and did you trade on it? It is no wonder that each insider trading case featured in this symposium presents a captivating story. But for two distinct reasons, Chiarella v. United States occupies a special place in history. It was the first prosecution under the federal securities laws for the crime of insider trading. And the U.S. Supreme Court\u27s iconic holding--regarding the circumstances under which insider trading constitutes securities fraud--not only profoundly changed the law in 1980 but also continues to define insider trading\u27s contours right up to the present day. Chiarella\u27s facts are straightforward and memorable. The defendant was employed by a financial printing firm hired to publish announcements of takeover bids. On several occasions he managed to deduce from code names the identities of the actual companies, and then used that confidential information to surreptitiously purchase stock in the acquisition targets. After settling a civil securities fraud action brought by the Securities and Exchange Commission, Chiarella was indicted in New York federal court for criminal securities fraud, found guilty by a jury, and unsuccessfully appealed to the Second Circuit. The Supreme Court, however, overturned his conviction. While the case is famous, important aspects of Chiarella have gone unnoticed or been long since forgotten. This essay sets out to explore these aspects in order to better understand how a seemingly mundane SEC settlement involving just over $ 30,000 in ill-gotten gains morphed into a groundbreaking insider trading prosecution and Supreme Court decision. The exploration draws from a close analysis of the civil and criminal litigation record as well as interviews with most of the principal attorneys involved in the case at its various stages, all of whom went on to extraordinary careers in public service, private practice, or law teaching (with many toggling between two or all three). This distinguished cadre includes: Stanley S. Arkin, Judge Frank H. Easterbrook, Ralph C. Ferrara, Robert B. Fiske, Jr., Paul Gonson, Professor Donald C. Langevoort, Judge Jed S. Rakoff, Lee S. Richards III, John S. Siffert, and John Rusty Wing, and extends as well to their remembrances of Stephen Shapiro. Insider trading law in the U.S. is routinely depicted as judge-made or judicially created. The description is apposite. Although Congress statutorily authorized the SEC rule prohibiting fraud in connection with the purchase or sale of any security, it is courts that must determine, as a matter of federal common law, whether securities trading on the basis of material nonpublic information constitutes a deceptive device or contrivance under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and thus a fraud within Rule 10b-5\u27s prohibition. But the description also leaves unacknowledged the essential role of the SEC, DOJ, and defense attorneys in framing the arguments on which the judicial rulings are based. Nowhere have attorneys influenced the development of insider trading law more profoundly than in the various phases of the Chiarella litigation. This story therefore suggests, with no hint of exaggeration, that Chiarella\u27s indelible impact results as much from the case\u27s lawyering as from the ruling announced by the Court in its landmark decision

Fair or Foul?: SEC Administrative Proceedings and Prospects for Reform Through Removal Legislation

This Article catalogues the long list of criticisms of the Commission’s administrative proceedings. It also evaluates data describing the outcome of litigated matters and finds that, with the exception of insider trading cases, the Commission has an exceptionally high and statistically indistinguishable record of success in administrative and federal court proceedings alike. The data thus seem not to support the view that the Commission has a generalized home-court advantage in administrative proceedings. Nonetheless, the Commission’s virtually unfettered discretion in forum selection decisions, when it can assign cases to a forum that it controls, raises a plethora of institutional design concerns

Fairness, Efficiency and Insider Trading: Deconstructing the Coin of the Realm in the Information Age

Whether and how the federal securities laws should restrict insider trading is one of the most hotly debated topics in the securities law literature. Paradoxically, both the theoretical analysis and the legal rules concerning insider trading remain extraordinarily vague and ill-formed. What is the special character of insider trading that leads to this apparently irresolvable puzzle? In this Article, I argue that there is, in fact, nothing special about insider trading that creates this dilemma, but rather there is something special about the nature of information itself. Accordingly, this theoretical dilemma is not limited to insider trading regulation, but rather pervades all areas of intellectual property law. In this Article, I situate insider trading regulation within the larger body of intellectual property law by discussing three potential allocations of the property right in valuable inside information. First, inside information could be treated as a public resource, meaning that a person in possession of inside information could not legally exploit that advantage for personal profit. Such a regime would forbid some or all insider trading by forcing the disclosure to the marketplace of inside information prior to trading. I argue that regulators should reject this alternative because, despite it\u27s proponents\u27 tendency to justify the rule in terms of fairness, this proposal is unlikely to foster fairness in any meaningful way. Alternatively, the property right in valuable inside information could belong to issuers, as the producers of such information. I argue that regulators should reject this alternative because, despite its proponents? tendency to frame their arguments in terms of promoting informational efficiency, a legal regime treating inside information as the property of the issuer is unlikely to further that goal. In fact, such proposals assume an affirmative answer to a question that is fiercely debated in other areas of intellectual property law: does creating a property right in information producers incentivize additional production to the extent necessary to offset the social costs of excluding others from use of the information? Finally, the property right in valuable inside information could reside with outsider traders (traders who possess inside information, but are neither insiders nor constructive insiders of the issuer). I argue that regulators should pursue this alternative because, although there is no need to encourage issuers to create valuable inside information, the need to encourage the dissemination of such information to the marketplace has been recognized for many years. Accordingly, I propose in this Article a system of federal securities regulation that would permit trading by corporate outsiders who did not receive their information in a tip from an insider or constructive insider. Such a system, I argue, provides the hope of filling in the gaps left by the current disclose or abstain system, by encouraging the reflection of material information in stock market price without disclosure of the actual inside information. At the same time, this proposal avoids the perverse incentives and negative impacts on market efficiency attendant in a system that permits insider trading by corporate employees