The Muddled Duty to Disclose Under Rule 10b-5

Because the federal securities laws are, at heart, about disclosure, the question of whether and when there is a duty to disclose is often the central question in any given case. Certainly, the Securities & Exchange Commission (SEC) has broad powers to compel disclosures by issuers and certain others and has crafted a mandatory disclosure regime that creates many explicit duties. For a variety of reasons, however, this explicit regime falls short of a comprehensive answer to the duty question. For some sixty years now, the hardest duty questions have been addressed under the rubric of fraud, mainly under Rule 10b-5, the principal antifraud provision of the securities laws.\u27 Over those years, some questions have been settled. For example, a person who chooses to speak in a manner reasonably calculated to influence investors assumes the duty to speak truthfully. The difficult duty questions arise mainly when there is silence about some material fact, either because the person in question has said nothing at all or because what was said was not a clear misrepresentation of the truth. There is a considerable amount of confusion in the case law on the duty question, which motivates this Article. This confusion is surprising precisely because duty is so central and because the courts (and the SEC) have had so long to work on it. The story is one of twists and turns. Prior to 1980, the courts and commentators were struggling with the affirmative duty to disclose mainly by invoking flexible, open-ended obligations. This was so both in insider trading - the area that generated the largest number of duty questions - and in other settings, such as the issuer\u27s duty to disclose some facts immediately rather than wait for its next mandatory filing. This approach shifted abruptly in Chiarella v. United States, when the Supreme Court announced in dicta that [w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak and that such a duty arises only when one party has information that the other is entitled to know because of a fiduciary or similar relation of trust and confidence between them

Fraud by Hindsight

In securities-fraud cases, courts routinely admonish plaintiffs that they are not permitted to rely on allegations of fraud by hindsight. In effect, courts disfavor plaintiffs\u27 use of evidence of bad outcomes to support claims of securities fraud. Disfavoring hindsight evidence appears to tap into a well known, well-understood, and intuitively accessible problem of human judgment of 20/20 hindsight. Events come to seem predictable after unfolding, and hence, bad outcomes must have been predicted by people in a position to make forecasts. Psychologists call this phenomenon the hindsight bias. The popularity of this doctrine among judges deciding securities cases suggests that judges actively seek techniques that enable them to correct for psychological biases that might otherwise affect their decision-making. This paper assesses the hypothesis that judges have adopted the fraud-by-hindsight doctrine so as to avoid erroneous judgment infected with the hindsight bias. We find that although judges have identified a real problem in human judgment, they are not developing a doctrine to remedy the influence of hindsight on judgment. Rather, they are using this problem of human judgment as the justification for expanding their authority to manage the complex, high-stakes securities cases that come before them. The result provides judges with the greater case-management authority they seek, but leaves the securities litigation without a meaningful doctrine to ameliorate the influence of hindsight on judgment

Fraud by Hindsight

In securities-fraud cases, courts routinely admonish plaintiffs that they are not permitted to rely on allegations of fraud by hindsight. In effect, courts disfavor plaintiffs\u27 use of evidence of bad outcomes to support claims of securities fraud. Disfavoring hindsight evidence appears to tap into a well known, well-understood, and intuitively accessible problem of human judgment of 20/20 hindsight. Events come to seem predictable after unfolding, and hence, bad outcomes must have been predicted by people in a position to make forecasts. Psychologists call this phenomenon the hindsight bias. The popularity of this doctrine among judges deciding securities cases suggests that judges actively seek techniques that enable them to correct for psychological biases that might otherwise affect their decision-making. This paper assesses the hypothesis that judges have adopted the fraud-by-hindsight doctrine so as to avoid erroneous judgment infected with the hindsight bias. We find that although judges have identified a real problem in human judgment, they are not developing a doctrine to remedy the influence of hindsight on judgment. Rather, they are using this problem of human judgment as the justification for expanding their authority to manage the complex, high-stakes securities cases that come before them. The result provides judges with the greater case-management authority they seek, but leaves the securities litigation without a meaningful doctrine to ameliorate the influence of hindsight on judgment

Risk-shifting Through Issuer Liability and Corporate Monitoring

This article explores how issuer liability re-allocates fraud risk and how risk allocation may reduce the incidence of fraud. In the US, the apparent absence of individual liability of officeholders and insufficient monitoring by insurers under-mine the potential deterrent effect of securities litigation. The underlying reasons why both mechanisms remain ineffective are collective action problems under the prevailing dispersed ownership structure, which eliminates the incentives to moni-tor set by issuer liability. This article suggests that issuer liability could potentially have a stronger deterrent effect when it shifts risk to individuals or entities holding a larger financial stake. Thus, it would enlist large shareholders in monitoring in much of Europe. The same risk-shifting effect also has implications for the debate about the relationship between securities litigation and creditor interests. Credi-tors’ claims should not be given precedence over claims of defrauded investors (e.g., because of the capital maintenance principle), since bearing some of the fraud risk will more strongly incentivise large creditors, such as banks, to monitor the firm in jurisdictions where corporate debt is relatively concentrated

A study of compliance post-OFT infringement action

This article considers compliance with competition law among a particular sub-set of UK companies. The research was principally motivated by the reform of UK competition law in the late 1990's and the introduction of new investigatory and fining powers for the UK competition authorities, with potentially very serious consequences for companies in breach of competition law. There has been fairly extensive research into competition law compliance in Australia, and in particular, a Report based on a recent ACCC Enforcement and Compliance Survey noted that:- 'Those who have interacted with or been investigated by the ACCC generally report themselves to be more compliant.' Accordingly, in this research we sought to ascertain the extent to which an infringement finding by the OFT altered awareness of, attitudes to, and methods of compliance with competition law. This was undertaken by forwarding a questionnaire to all parties which were the subject of an infringement decision by the OFT under the Competition Act 1998. The research considers the extent to which competition law compliance, and the motivations for instituting an effective compliance programme, have been affected by enforcement action by the Office of Fair Trading under the Competition Act 1998

An overview on the inconsistencies of approach in regulating the capital position of banks: Will the United Kingdom step out of line with Europe?

After the collapse of a number of banking institutions and bailouts of banks by governments, regulators have taken a different attitude and now appear keen to take regulation seriously when it comes to ensuring that banks have adequate capital and sufficient liquidity. Not only that, but in the United Kingdom, the Independent Commission on Banking Reform has made proposals with regard to the capital position of banks. This article, which is an overview, will look at matters from a UK perspective and at the proposals for reform. This article, after its introduction and summary, will look at a number of areas: first, the reforms made by Basel III; second, the regulation of Systemically Important Financial Institutions (Sifis) and the proposals for dealing with these; third, some matters in relation to lending that relate to capital and liquidity generally; fourth, increased stress testing of banks; fifth, derivatives and risk taking and the new proposed structure of regulation in the United Kingdom; sixth, the war of spin between regulators and banks; seventh, Shadow Banking; and eighth, The Independent Commission on Banking Reform and its proposals for reform. It will also be a theme that the various proposals lack consistency and that this could lead to regulatory arbitrage. It is already clear that there are inconsistencies between the various regulatory organisations, with proposals in the United Kingdom indicating that banks will be required to keep much higher levels of capital than those proposed by Basel and the European Community. The views of those who have pointed out inconsistencies between the United Kingdom and Basel/Europe have been highlighted

Foot and ankle injuries during the Athens 2004 Olympic Games

<p>Abstract</p> <p>Background</p> <p>Major, rare and complex incidents can occur at any mass-gathering sporting event and team medical staff should be appropriately prepared for these. One such event, the Athens Olympic Games in 2004, presented a significant sporting and medical challenge. This study concerns an epidemiological analysis of foot and ankle injuries during the Games.</p> <p>Methods</p> <p>An observational, epidemiological survey was used to analyse injuries in all sport tournaments (men's and women's) over the period of the Games.</p> <p>Results</p> <p>A total of 624 injuries (525 soft tissue injuries and 99 bony injuries) were reported. The most frequent diagnoses were contusions, sprains, fractures, dislocations and lacerations. Significantly more injuries in male (58%) versus female athletes (42%) were recorded. The incidence, diagnosis and cause of injuries differed substantially between the team sports.</p> <p>Conclusion</p> <p>Our experience from the Athens Olympic Games will inform the development of public health surveillance systems for future Olympic Games, as well as other similar mass events.</p