Stoneridge Investment Partners v. Scientific-Atlanta: The Political Economy of Securities Class Action Reform

I begin in Part II by explaining the wrong turn that the Court took in Basic. The Basic Court misunderstood the function of the reliance element and its relation to the question of damages. As a result, the securities class action regime established in Basic threatens draconian sanctions with limited deterrent benefit. Part III then summarizes the cases leading up to Stoneridge and analyzes the Court\u27s reasoning in that case. In Stoneridge, like the decisions interpreting the reliance requirement of Rule 10b-5 that came before it, the Court emphasized policy implications. Sometimes policy implications are invoked to broaden the reach of the Rule 10b-5 cause of action. More recently, policy implications have been invoked to narrow its reach. Part IV explores the policy choices made by Congress in the express private causes of action in the securities laws, and the implications of those choices for securities fraud class actions under Rule 10b-5. The choices reflected in those explicit causes of action suggest that the Basic Court erred by failing to calibrate the damages measure in Rule 10b-5 class actions to accord with the attenuated version of reliance that it adopted. In secondary-market class actions, I argue, damages should be measured by disgorgement of unlawful gains rather than compensation of defrauded shareholders. Doing so would bring damages closer in line with social costs; more importantly, such a reform promises to make securities fraud class actions a more cost-effective mechanism for deterring fraud. I then turn in Part V to the question of who can reform securities class actions. Which institution-the Court, Congress, the SEC, or shareholders-is most likely to bring about the needed changes to the damages measure? The available evidence suggests that the three government actors in this list are largely paralyzed from overhauling securities class actions in a meaningful way. I argue that shareholders, the parties who bear the costs of the current regime, must take matters into their own hands. I briefly outline the path by which shareholders could opt out of the current dysfunctional class action regime, replacing it with a more precisely targeted deterrent scheme focused on disgorgement. Part VI concludes

The SEC at 70: Time for Retirement?

It has now been 70 years since congress created the SEC in the Securities Exchange Act of 1934. It has largely moved beyond the tasks that dominated much of its early agenda- the taming of the New York Stock Exchange, the reform of corporate bankruptcies and public utilities-and ensconced itself firmly as the arbiter of corporate disclosure and the primary enforcer of anti-fraud rules relating to the purchase and sales of securities. The following essay is based on a talk delivered at Notre Dame Law School last September at a conference marking the 70th anniversary of the establishment of the securities and Exchange Commission. The complete version of Professor Pritchard\u27s article appears at 80 Notre Dame Law Review 1073 (2005) in the Notre Dame Law Review\u27s The SEC at 70 sympoosium issue. Reprinted with permission © Notre Dame Law Review, University of Notre Dame. Law Quadrangle Notes is responsible for any errors that may occur in reprinting or editing this article

London as Delaware?

Regulatory competition has long driven the path of corporate law in the federal system of the United States. Now, jurisdictional competition has spread to exchange listings. New York took an early lead in that competition in the 1990s, but has now been overtaken by London. Can London prevail in the competition for stock listings in the long term? This essay explores that question through the insights offered by Delaware’s dominance in the market for corporate listings. Delaware has prevailed by offering corporate directors a predictable body of that credibly shields directors from the vagaries of political backlash in times of financial crisis. London’s performance during the recent financial crisis suggests that it – like New York – lacks the capacity to shield players in the financial system from the populist forces that seek retribution in the wake of economic reversals. In the long run, neither London nor New York is likely to enjoy a comparative advantage in the market for stock exchange listings

Corporate Governance, Capital Markets, and Securities Law

This chapter explores the dividing line between corporate governance and securities law from both historical and institutional perspectives. Section 2 examines the origins of the dividing line between securities law and corporate governance in the United States, as well as the efforts of the SEC to push against that boundary. That history sets the stage for section 3, which broadens the inquiry by examining the institutional connections between capital markets and corporate governance. Are there practical limits to the connection between securities law and corporate governance? The US again illustrates the point, as Congress has increasingly crossed the traditional boundary between securities law and corporate governance. I conclude by speculating on the future of the dividing line between corporate governance and securities law

Tender Offers by Controlling Shareholders: The Specter of Coercion and Fair Price

Taking your company private has never been so appealing. The collapse of the tech bubble has left many companies whose stock prices bordered on the stratospheric now trading at small fractions of their historical highs. The spate of accounting scandals that followed the bursting of the bubble has taken some of the shine off the aura of being a public company-the glare of the spotlight from stock analysts and the business press looks much less inviting, notwithstanding the monitoring benefits that the spotlight purports to confer. Moreover, the regulatory backlash against those accounting scandals has made the costs of being a public company higher than ever. The passage of the Sarbanes-Oxley Act of 2002 has brought a host of costly new requirements for public companies affecting both disclosure and corporate governance. Securities fraud class actions are booming, and rates for D&O insurance are correspondingly skyrocketing. Auditors\u27 fees have also spiked, reflecting the greater expectations imposed on accountants to ferret out corporate wrongdoing, and the commensurately greater risk of liability. Who needs it? As it happens, Delaware has a fire sale on going private for one group that might be particularly interested-controlling shareholders. In addition to the risks enumerated above, corporations with controlling stakes in subsidiaries have to worry about the risk of derivative litigation on behalf of minority shareholders. This risk arises from the fact that all of the controlling shareholder\u27s transactions with their controlled subsidiary are potentially subject to the entire fairness standard, the most demanding regime in corporate law. That same standard makes it difficult for controlling shareholders to escape the risks of derivative lawsuits (and other costs of holding a control bloc in a public subsidiary) because Delaware courts impose the entire fairness standard on mergers between parent corporations and their subsidiaries. The result is that, until recently, freeze-out mergers to eliminate minority shareholders have been procedurally complicated, expensive and a target for litigation. The Article proceeds as follows: Part I sketches the entire fairness regime, Part II traces the development of the tender offer/short-form alternative and Part III addresses objections to that alternative. I summarize the main points in a brief conclusion

Launching the Insider Trading Revolution: SEC v. Capital Gains Research Bureau

Securities and Exchange Commission v. Capital Gains Research Bureau, Inc.1 marked the resurgence of the SEC in the Supreme Court, sparking a decade-long winning streak there. The Capital Gains decision, although turning on an interpretation of the Investment Advisers Act of 1940,2 also gave the green light to the SEC to push the boundaries of its power in other areas. Moreover, Capital Gains suggested that the SEC could expand its power through agency and judicial interpretation of existing statutes and regulation, without resorting to the cumbersome rulemaking process under the Administrative Procedure Act, or still more daunting, seeking legislation. After its victory in Capital Gains, the SEC would push an aggressive interpretation of § 10(b) of the Exchange Act in the lower courts, particularly the Second Circuit, to crack down on insider trading. This Chapter uncovers the seeds of the SEC’s insider trading crusade in Capital Gains and how that opinion influenced subsequent securities jurisprudence. I proceed as follows. Section I provides background on the SEC and its relationship with the Supreme Court prior to Capital Gains. Section II follows the SEC’s Capital Gains enforcement action as it made its way up through the district court and the Second Circuit. Section III explores how the case unfolded in the Supreme Court. Section IV then assesses Capital Gains’ long-term impact. A brief Conclusion follows

Who Cares?

Jim Cox and Randall Thomas have identified an interesting phenomenon in their contribution to this symposium: institutional investors seem to be systematically leaving money on the table in securities fraud class actions. For someone who approaches legal questions from an economic perspective, the initial response to this claim is disbelief. As the joke goes, economists do not bend over to pick up twenty-dollar bills on the street. The economist knows that the twenty dollars must be an illusion. In a world of rational actors, someone else already would have picked up that twenty-dollar bill, so the effort spent bending over would be a waste. But Cox and Thomas provide persuasive evidence that the overwhelming majority of institutional investors cannot be bothered to file claims that would allow them to recover their share of the settlement in securities class actions

Self-Regulation and Securities Markets

Enron, Arthur Andersen, Tyco, ImClone, WorldCom, Adelphia - as American investors reel from accounting scandals and self-dealing by corporate insiders, the question of trust in the securities markets has taken on a new urgency. Securities markets cannot operate without trust. Markets known for fraud, insider trading, and manipulation risk a downward spiral as investors depart in search of safer investments. Today, many investors are rethinking the wisdom of entrusting their financial futures to the stock market. Absent trust in the integrity of the securities markets, individuals will hoard their money under the proverbial mattress