Foreword: Revisiting Gilson and Kraakman’s Efficiency Story

Gilson and Kraakman\u27s ‘Mechanisms of Market Efficiency’ is part of the canon of modem corporate law scholarship, one of a handful of articles that has profoundly influenced the way we think about the field. It is also enigmatic, warranting a fresh look by those who think they know what it says from some long-ago reading or second-hand references by other authors

Panel Presentation: Securities Regulation and Corporate Responsibility

What I want to do is talk about the big picture, as John suggested, and consider the likely spillover effects of Sarbanes-Oxley. I want to do this in a discretely administrative law-oriented way, taking two themes that were very visible and driving forces behind the legislation. The first, as Mary suggested in her opening remarks, is a question about federalism. It has been common for the last twenty years, at least, to trot out - as John just did - a distinction between federal and state spheres of competency. The SEC is on the disclosure side, while the substance of corporate law (e.g., the mechanics of how decisions are made) is left to the states. I don\u27t think you can read either the text or the music of Sarbanes-Oxley and think that this is much of a viable distinction anymore. If Congress really believed in the importance of that distinction as a matter of policy, Sarbanes-Oxley would be a very, very different statute

Disclosure\u27s Purpose

The United States securities regulatory infrastructure requires disclosure of a wide array of information both by and about covered companies. The basic purpose of the disclosures is to level the playing field – for investors, for issuers, and for the public. Although investor protection is the disclosure goal often touted, this article develops the purposes of disclosure extending beyond investors to issuers and the public. Indeed, the disclosure system is designed to level the playing field for issuers— addressing confidentiality concerns, for example. In addition, the system helps to promote confidence in the markets, which, in turn, enables growth and innovation by creating access to capital – goals important to issuers. Yet, as importantly, the system also protects the public more broadly. After all, the harms of market crashes and other disruptions are not confined to investors and issuers – despite the fact that writing in this space focuses largely on them. Disclosure’s purpose, then, is to diminish asymmetries and the space for fraud, both for those within the entity and for the public affected by the entity. To achieve these purposes, the system depends on gatekeepers, like corporate directors who are assigned a role in effectively managing the purpose and consequences of disclosure. Doing so requires them take ownership of both the ensuing internal discourse between the entity, its insiders, and its owners, as well as the external discourse with the entity’s public stakeholders and the public more generally. When directors do so, the resulting discourse and candor helps to ensure the purposes of disclosure are met. This article examines the purpose and regulation of this discourse, emphasizing the role of the board of directors and its attention to public stakeholders and the public, with a particular focus on omissions. The article proceeds as follows. Part I explores the purposes of disclosure in corporate discourse and how disclosure requirements are designed to transmit information. As we will see, the securities disclosure regime aims to address a broad range of issues -- from fairness to market competitiveness. Part II develops the omissions theory in the context of the purposes of disclosure, as well as explicating their role in corporate discourse. Part III turns to the board and its responsibilities with respect to the purposes of securities disclosures and corporate discourse, with a particular emphasis on omissions and candor, and deployng some case studies to develop the theories further. Part IV analyzes the relationship between directors, disclosure (and its purpose) and omissions, and publicness, tying the information-forcing-substance theory to director gatekeeping and explicating how it can result in more thorough disclosure outcomes for investors, issuers, and the public – and thereby, fulfill disclosure’s purpose

On Leaving Corporate Executives Naked, Homeless and Without Wheels : Corporate Fraud, Equitable Remedies, and the Debate Over Entity Versus Individual Liability

There is a lively debate about the relative merits of entity versus individual liability in cases involving securities fraud. After reviewing this debate in the context of both private securities litigation and SEC enforcement, this paper considers whether the legal tools available against individual executives are adequate, and if not, what changes might be made. The main focus is on equitable remedies, especially rescission and restitution, under both state and federal law. As to the former, Vice Chancellor Strine’s opinion in In re Healthsouth offers an interesting template, although there are limits on the usefulness of derivative suits to police aggressively in this area. Federal law probably offers the more powerful tools, which could be used more effectively than they are at present

“Fine Distinctions” in the Contemporary Law of Insider Trading

William Cary’s opinion for the SEC in In re Cady, Roberts & Co. built the foundation on which the modern law of insider trading rests. This paper—a contribution to Columbia Law School’s recent celebration of Cary’s Cady Roberts opinion, explores some of these—particularly the emergence of a doctrine of “reckless” insider trading. Historically, the crucial question is this: how or why did the insider trading prohibition survive the retrenchment that happened to so many other elements of Rule 10b-5? It argues that the Supreme Court embraced the continuing existence of the “abstain or disclose” rule, and tolerated constructive fraud notwithstanding its new-found commitment to federalism—which I call the (fictional) “Cary-Powell compromise”—because it accepted the central premise on which the expressive function of insider trading regulation is based: manifestations of greed and lack of self-restraint among the privileged, especially fiduciaries or those closely related to fiduciaries, threaten to undermine the official identity of the public markets as open and fair. But enough time may have passed that we may have lost sight of the compromise associated with this fiction and started acting as if insider trading really is the worst kind of deceit. The result is pressure on doctrine to expand, using anything plausible in the 10b-5 toolkit. The aim is to tie this concern more clearly to the uneasy deceptiveness of insider trading, first using somewhat familiar examples such as the debate over whether possession or use is required for liability and the supposed overreach of Rule 10b5-2. Each of these settings brings us back to the centrality of intent, reminding us that the Cary-Powell compromise has in mind a form of purposefulness that is closely tied to greed and opportunism, making insider trading a sui generis form of securities fraud. That takes us to the most jarring recent development in insider trading law, the emergence (particularly in SEC v. Obus) of recklessness as an alternative basis for liability

Cultures of Compliance

There has been a cultural turn in discussion and debates about the promise of corporate compliance efforts. These efforts are occurring quickly, without great confidence in their efficacy. Thus the interest in culture. This article explores what a culture of compliance means and why it is so hard to achieve. The dark side that enables non-compliance in organizations is powerful and often hidden from view, working via scripts that rationalize or normalize, denigrations of regulation, and celebrations of beliefs and attitudes that bring with them compliance dangers. The article addresses how both culture and compliance should be judged by those wishing for better corporate behavior

When Lawyers and Law Firms Invest in Their Corporate Clients’ Stock

I will state my conclusion at the outset. I am not convinced that lawyers\u27 investments in clients in lieu of fees are problematic enough from a conflicts standpoint that the rules of professional responsibility should treat them as presumptively inconsistent with the lawyer\u27s fiduciary responsibility. Lawyers\u27 investments in their clients do raise interesting and unsettling issues, but these issues are not qualitatively different from issues raised by many other norms or practices within the legal profession that also threaten lawyerly objectivity. Indeed, in contrast to some other practices, these fee arrangements can, in some respects, enhance objectivity, or at least balance out some of the agency-cost problems that otherwise infect attorney-client relationships in the corporate setting. If so, broadly banning these fee arrangements in the name of fiduciary responsibility makes little sense. My aim here, in large part, is to speak to the good lawyer about what objectivity and prudence really mean in a world where serious wealth has become the metric for professional success, and how both law and ethics ought to respond to the residual problems caused by these fee arrangements

Reading Stoneridge Carefully: A Duty-based Approach to Reliance and Third Party Liability Under Rule 10b-5

The Supreme Court\u27s decision in the Stoneridge case has largely been interpreted as a imposing a strict, pro-defendant reliance requirement. This article offers an alternative reading that takes the Court\u27s analysis more seriously than its overheated dicta, one that makes remoteness a serious and meaningful inquiry that can produce balanced and fair responses to the concern that seemed to motivate the search for restraint: fear of disproportionate liability. It explores the nature of the dispropotion, and suggests ways--using the Court\u27s own explanatory tools--for deciding when third party involvement is close enough to the fraud so that fear of disproportion lessens. Among other things, this approach leads clearly to a rejection of the so-called attribution approach for liability. Recognizing that a statutory solution may be better than judicial patchwork, it also offers a coupling of expanded liability with a more rational and sensible proportionate liability regime than now exists

\u3cem\u3eCaremark\u3c/em\u3e and Compliance: A Twenty Year Lookback

The Delaware Chancery Court’s decision in In re Caremark was and is a landmark decision. This brief Commentary takes a look back at Caremark on three issues that pertain to its contemporary relevance inside the corporate boardroom: (1) framing the cost-benefit assessment on the question of how much to spend on compliance; (2) how and when to force certain compliance matters to real-time board-level attention; and (3) using selection, promotion, and compensation decisions to influence the culture and risk-taking “temperature” of the firm

Schoenbaum Revisited: Limiting the Scope of Antifraud Protection in an Internationalized Securities Marketplace

In 1968, the Second Circuit decided Schoenbaum vs Firstbrook, a doctrinally significant case for two reasons. The initial panel decision found, among other things, that the allegedly fraudulent mismanagement of a foreign company had sufficient effects in the US to trigger the assertion of US subject matter jurisdiction. It is argued that as a result of the forces creating an internationalized securities marketplace, the prevailing extraterritoriality doctrine has become both useless and problematic