Telling Differences: Observational Equivalence, Externalities, and Wrongful Convictions

We must begin with the mistake and transform it into what is true. That is, we must uncover the sources of error; otherwise hearing what is true won’t help us. It cannot penetrate when something is taking its place. To convince someone of what is true, it is not enough to state it; we must find the road from error to truth. Ludwig Wittgenstein, Remarks on Frazier\u27s Golden Bough 1e (Rush Rhees ed., A.C. Miles trans., 1979 (emphasis in original)

Fraudulent Corporate Signals: Conduct as Securities Fraud

Paying a dividend, repurchasing shares, underpricing an initial public offering, pledging collateral, and borrowing using short-term, instead of long-term debt, are all forms of corporate communications. They are “corporate signals” that tell investors certain things about a company’s operations and current financial position, and about the managers’ confidence in its future performance. This Article provides the first comprehensive analysis of the relationship between corporate signals and securities fraud. The incentive to communicate using corporate signals has increased in recent years, a phenomenon that, I argue, is due to the growing complexity of public corporations, and, importantly, to a number of changes in federal securities laws aimed at better deterring fraud and making companies more transparent. The Article makes three major contributions. First, it identifies this deep connection between the use of corporate signals (both truthful and deceptive) and recent changes in securities laws. Second, it identifies significant social costs associated with corporate signaling, which commentators and policymakers have over-looked: signals can encourage stock bubbles, create costly “signaling races,” and lead to the loss of information about companies and industries. Third, it provides a normative account of how a lawmaker could design antifraud provisions under the securities laws in order to reduce total fraud, instead of simply rechanneling deceptive practices from the realm of written and oral statements to that of deceptive corporate signals