Unfit for Duty: The Officer and Director Bar as a Remedy for Fraud

Many commentators have questioned the efficacy of the SEC’s enforcement program in the aftermath of the 2008 financial crisis. Some criticize the agency for allowing corporate defendants to settle charges without admitting or denying liability. Others dispute the impact of astronomical fines levied against too-big-to-fail financial institutions. Still others urge prosecutors to bring criminal charges against those who led the failed financial firms to ruin. This Article, written for a symposium on SEC enforcement, focuses attention on an underutilized weapon in the SEC’s arsenal: the power to bar officers and directors of public companies from future service in such roles. Despite longstanding power to seek and impose bars, the SEC seldom pursues the remedy against senior executives or directors of large firms. The bar has the potential to act as a corrective and deterrent device. If sought more widely, the bar could operate both to prevent future misconduct and to express societal assessments of individual responsibility for massive corporate failures. For these reasons, the SEC should look to the bar more frequently as a remedy for fraud. After laying out the case for the increased use of bar orders, the Article recommends changes to SEC enforcement strategies that could help improve the agency’s success rate when seeking bar orders in court

The Unicorn Governance Trap

The recent trend of large-scale start-up companies delaying an IPO creates a new kind of corporate governance problem. The prevalence of “unicorns” – privately held companies with market valuations of $1 billion or more – means the disciplinary mechanisms on which investors traditionally relied no longer function to prevent misconduct or mismanagement by unicorn founders. High profile frauds by unicorns like Zenefits and Theranos, and the recent travails of Uber highlight the need to rethink unicorn governance structure. These burgeoning controversies call for reconsideration of legal reforms that allow unicorns to remain for protracted periods in an ill-defined limbo between private and public company status. This uncharted status allows unicorn founders to maneuver away from oversight by venture capital investors who traditionally constrained their conduct, while indefinitely delaying the scrutiny of gatekeepers and regulators that accompanies formal entry onto the public securities markets

Dynamic Federalism: Competition, Cooperation and Securities Enforcement

The concept of competition between the federal government and the states was central to the framers’ vision of our constitutional structure. In the framers’ view, federal-state regulatory competition ensured an alternative regime to citizens dissatisfied with the dominant regulator’s performance. Recently, the dynamics of federalism have shifted power in the securities enforcement field from the SEC to certain state securities regulators. The states, rather than the SEC, have led enforcement efforts in the Wall Street analyst conflicts and the mutual fund trading investigations. This shift in authority has prompted renewed debate over whether a uniform national system of securities regulation is preferable to the current dual system. The rising profile of state officials, and calls from certain quarters to curtail states’ enforcement powers, presents a paradigm through which to assess how a dynamic federalist system helps to ensure optimal regulatory policies and practices. This Essay explores the complex dynamics of federal-state regulatory competition in securities enforcement and concludes that efforts to curtail the states’ enforcement power are misguided. Contrary to the claims of state regulators’ critics, the recent move by states to exert influence in securities enforcement demonstrates the vibrancy and health of our political and constitutional structure

Legitimacy and Corporate Law: The Case for Regulatory Redundancy

This Article provides a democratic assessment of the corporate lawmaking structure in the United States. It draws upon the basic democratic principle that those affected by legal rules should have a voice in determining the substance of those rules. Although other commentators have noted certain undemocratic aspects of corporate law, this Article aims to present a more comprehensive assessment of the corporate regulatory regime. It departs from prior accounts by looking past the states\u27 role to consider the ways that federal regulation shores up the legitimacy of the overarching structure. This focus on the federal role provides some comfort on a democratic account, but also counsels caution with respect to continuing efforts to limit the scope of the federal role within the corporate governance structure. At the federal level, Congress has chosen to regulate corporate matters by setting broad policy objectives and delegating administrative tasks to the Securities and Exchange Commission (SEC). The democratic legitimacy of the corporate regulatory regime thus requires proper respect for the discretion that Congress has vested in the agency. This Article therefore urges skepticism toward efforts to constrain the SEC\u27s regulatory role through judicial challenges to its rulemaking authority. It argues that the agency\u27s ability to respond deftly to market crises and scandals has been hampered unnecessarily by a tradition of aggressive judicial review of agency rulemaking. While rooted in concerns for preserving democratic accountability, this tradition has undermined the very values it seeks to protect. Because the procedures for SEC rulemaking comport well with democratic principles, the agency deserves more deference than courts have been willing to allow. The analysis has implications for current proposals to reform regulation of the national financial markets. Calls to reduce or weaken the SEC\u27s role in financial regulation should give pause to those concerned with the democratic integrity of our regulatory processes. It is the SEC\u27s political independence that bolsters its ability to navigate the rough terrain of regulating the powerful industries within its jurisdiction. Enhancing rather than diminishing the agency\u27s independence should be a central element of proposals to reform our financial regulatory system

The Role of Good Faith in Delaware: How Open-Ended Standards Help Delaware Preserve Its Edge

This Article traces the development of the good faith doctrine in Delaware and links shifts in the doctrine to events occurring in the national economy and in Washington. It shows that in 2003 Delaware judges seemed open to the possibility of imposing liability on directors in a case (Disney) where facts suggested that the directors were overly passive in approving the terms of an employment contract for a senior corporate executive. After the 2001-2002 corporate governance scandals faded, however, the courts abandoned this course. A trio of decisions in Disney, Stone v. Ritter, and Lyondell reiterated what had long been clear prior to 2003, that directors will not face personal liability for the breach of the duty of care. Instead, such liability is limited to situations where directors’ actions or omissions evidence intent to harm the corporation. The Article also assesses Delaware’s response to the 2008 financial crisis. Thus far, Delaware courts have avoided staking out territory with respect to financial oversight. However, on central governance issues such as shareholder voting the legislature and courts are making an effort to preserve state primacy. The legislature, led by Delaware’s bar, moved quickly in 2009 to try to blunt progress on federal proxy access. In spring 2009 the legislature amended Delaware’s corporate statute to affirm shareholders’ rights to gain access to a corporation’s proxy machinery through binding bylaw amendment. In addition, the Delaware Bar Association formally opposed the Securities and Exchange Commission’s more comprehensive proxy access proposal. In contrast, the judiciary’s renewed commitment to shield corporate directors from personal liability tied the courts’ hands in ways that made it difficult to respond doctrinally to the financial crisis. Thus, in Citigroup the court declined to break new ground on directors’ obligations to monitor corporate risk, but on the core issue of executive compensation the court reopened a path for recovery that had seemed until then to be firmly shut. The survival of the plaintiffs’ waste claim in Citigroup seems part of Delaware courts’ efforts appear engaged on compensation issues

Corporate Governance and Accountability

This book chapter on Corporate Governance and Accountability is a contribution to the book CORPORATE GOVERNANCE - SYNTHESIS OF THEORY, RESEARCH, AND PRACTICE (Wiley, forthcoming 2010), edited by Ronald Anderson and H. Kent Baker. This chapter describes the sources of corporate governance standards for American corporations and analyzes the accountability mechanisms designed to ensure that corporate officials act faithfully in their management of corporate affairs. The chapter focuses on the financial reporting system under the U.S. securities laws which forms the foundation of the accountability system, and discusses structures and rules designed to ensure the integrity of financial reporting. The role of the SEC, accounting and auditing regulators and the board of directors is examined. Special emphasis is given to the Sarbanes-Oxley Act of 2002, which aimed to correct many of the perceived failures of the system. The chapter concludes that while our corporate governance systems is sound in design, problems in enforcement prevent the regime from effectively constraining abuses and excesses of corporate leaders