The Legal Status of “Dump & Sue”: Should Plaintiffs and their Attorneys be Prohibited from Trading the Stock of Companies they Sue? – a Law and Economics Approach

There is some evidence that plaintiffs and their attorneys are profitably short-selling the stock of the companies they intend to sue. The status of such short sales is undecided in the law. Lawsuits against companies can cause large drops in market value, and hence such an action by the plaintiff should cause concern. Plaintiffs, however, are not traditional insiders, and they do not owe the shareholders any fiduciary duties. They can therefore consent to their attorneys also short-selling the stock of the defendant corporation. The attorneys need to receive such permission to avoid misappropriating the information concerning their client’s decision to sue. A plaintiff’s decision to sue after short-selling does not constitute market manipulation in the traditional sense, since the decision to sue is a true fact that causes the drop in the share price as opposed to those who commit fraud by spreading false negative stories about the company. Plaintiffs need, therefore, to be legally deemed temporary insiders until they publicly reveal their intention to sue or actually sue. The reasons for deeming them insiders, and hence prohibiting them from short-selling, are threefold. First, allowing such activities would raise the same concerns regarding market integrity raised by those opposed to insider trading. Second, allowing such short-selling is a form of fraud by silence against those who purchase the shares. Third, allowing short-selling would give the plaintiffs double recovery for their lawsuit, as they could gain a large share of their claim against the company from the profitable short sales in addition to any verdict or settlement. Furthermore, proposals to extend Regulation FD to plaintiff’s attorneys would be ineffective in combating the harm from such short-selling. The law, therefore, through either developments by the courts, regulatory promulgations by the SEC, an act of Congress, or a combination of any of the preceding three mechanisms should be used to treat plaintiffs as insiders until they sue or announce their intention to sue

Shareholders, Creditors, and Directors’ Fiduciary Duties: A Law and Finance Approach

The debate surrounding fiduciary duties owed to creditors by directors, especially in the vicinity of insolvency, has resurfaced in light of two court decisions in Canada and the United States. In this paper, we contribute to the discussion by looking at the issue from a corporate finance perspective, where we utilize well-established theorems and results. We show that creditors are able to protect themselves by the use of covenants. While this idea has been reported extensively in previous discussions about fiduciary duties, we focus on studies that show the extent to which creditors use covenants to protect themselves against opportunistic behavior by managers and shareholders. Additionally, we show that debt can actually increase the value of the firm and the shares, and therefore, the idea that shareholders use debt for opportunistic behavior is misplaced. If anything, debt is used to align managerial incentives to maximize the value of the firm. The Fisher Separation theorem is also introduced and used to show that all stakeholders in a firm will want the firm to pursue projects with the maximum net present value. Hence, we propose that fiduciary duties should always be owed to the corporation as a whole, where the main focus of the managers is investing in those projects that have the highest expected net present value

The Lates Cases and Statutes in Corporate Law in Canada and the United States

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Section 24(2) in the Trial Courts: An Empirical Analysis of the Legal and Non-legal Determinants of Excluding Unconstitutionally Obtained Evidence in Canada

This empirical study explores the legal and non-legal factors influencing trial judges’ decisions to admit or exclude illegally obtained evidence under section 24(2) of the Canadian Charter of Rights and Freedoms. Mining an original dataset of 1,472 reported decisions from 2013–2018, we found little evidence that they are affected by judges’ gender or partisan ideology. We did find, in contrast, that they are substantially influenced by judges’ previous professional backgrounds: Former criminal defence lawyers are more likely to exclude evidence than former non-criminal practitioners, who are in turn more likely to exclude evidence than former prosecutors. We also found significant regional disparities, with judges in Quebec, British Columbia, Newfoundland, and Nova Scotia more likely to exclude evidence than Alberta judges. The study also revealed that judges are more likely to admit evidence when trying more serious charges and less likely to do so when trying female defendants

International Water Law and Fresh Water Dispute Resolution: A Cosean Perspective

International Water Law has developed a set of rules for resolving interstate fresh water disputes that govern both the substance of these disputes and the conduct of the disputing states. Equitable and reasonable utilization is commonly considered as the leading substantive rule, no significant harm as subsidiary to it, and the duty to cooperate as the central procedural rule. The purpose of this Article is to analyze the merits of these substantive and procedural rules under the lens of the celebrated Coase theorem. The normative part of the Coase theorem observes that if transaction costs are high, then the legal rule governing the resolution of a dispute between two parties should minimize these costs. Such a legal rule will ensure an optimal and efficient allocation of resources. International fresh water disputes usually involve high transaction costs such as unequal and asymmetric access to information, enforcement uncertainty, and unclear political goals of the parties. We argue that a legal rule such as equitable and reasonable utilization only increases uncertainty and transaction costs, whereas a rule such as no significant harm is better-suited to achieving efficient dispute resolution. Moreover, when a so-called procedural rule such as the duty to cooperate is imposed on the parties and gives rise to its own set of obligations, this ensures a better negotiation environment, which in turn leads to more efficient dispute resolution

In Defense of the Free-Banking Stablecoins

Stablecoins, a form of crypto-currencies, have come under increasing regulatory scrutiny. The justification for this arises by analogizing the stablecoins to banknotes issued in the early nineteenth century during a period known as the free-banking era. During that era, banks in many states were free to issue their own notes with little supervision. The results, according to the critics, were an unstable banking system that resulted in the federal government printing its own money. In this Article, we examine the history of that era looking at judicial decisions from that time. We conclude that the judiciary had no qualms about free-banking, and if anything, they had concerns about governments printing money. Using the lessons from that era we recommend a slow and steady approach to regulating stablecoins and suggest that any regulation should come at the state level. We speculate that the motivation for the regulatory scrutiny may have more to do with government revenues instead of the public interest

Does a Judge\u27s Party of Appointment or Gender Matter to Case outcomes?: An Empirical Study of the Court of Appeal for Ontario

A recent study by Cass Sunstein identified ideological differences in the votes cast by judges on the United States Courts of Appeals in certain types of cases. He found that these patterns varied depending on the ideology of an appellate judge\u27s co-panelists. In this study, we undertake a similar examination of the busiest appellate court in Canada, the Court of Appeal for Ontario. This study collects data on the votes cast by individual judges in every reported decision between 1990 and 2003. Each case was cod6d by type, for example criminal law, constitutional law, or private law. In addition, the votes cast by individual judges in each category were tracked based on variables such as the type of litigant, the political party that appointed the judge, and the judge\u27s gender. This study reveals that at least in certain categories of cases, both party of appointment and gender are statistically significant in explaining case outcomes. Between these two variables, gender actually appears to be the stronger determinant of outcome in certain types of cases. While these findings are cause for concern, this study also points toward a simple solution. Diversity in the composition of appeal panels both from the standpoint of gender and party of appointment dampened the statistical influence of either variable. In other words, in the case of gender, a single judge on a panel who is of the opposite sex from the others, or in the case of political party, a single judge appointed by a different political party, is sufficient to eliminate the potential distorting influence of either variable. This finding suggests a need to reform how appeal panels are currently assembled in order to ensure political and gender diversity and minimize concerns about the potential for bias

Does a Judge\u27s Party of Appointment or Gender Matter to Case outcomes?: An Empirical Study of the Court of Appeal for Ontario

A recent study by Cass Sunstein identified ideological differences in the votes cast by judges on the United States Courts of Appeals in certain types of cases. He found that these patterns varied depending on the ideology of an appellate judge\u27s co-panelists. In this study, we undertake a similar examination of the busiest appellate court in Canada, the Court of Appeal for Ontario. This study collects data on the votes cast by individual judges in every reported decision between 1990 and 2003. Each case was cod6d by type, for example criminal law, constitutional law, or private law. In addition, the votes cast by individual judges in each category were tracked based on variables such as the type of litigant, the political party that appointed the judge, and the judge\u27s gender. This study reveals that at least in certain categories of cases, both party of appointment and gender are statistically significant in explaining case outcomes. Between these two variables, gender actually appears to be the stronger determinant of outcome in certain types of cases. While these findings are cause for concern, this study also points toward a simple solution. Diversity in the composition of appeal panels both from the standpoint of gender and party of appointment dampened the statistical influence of either variable. In other words, in the case of gender, a single judge on a panel who is of the opposite sex from the others, or in the case of political party, a single judge appointed by a different political party, is sufficient to eliminate the potential distorting influence of either variable. This finding suggests a need to reform how appeal panels are currently assembled in order to ensure political and gender diversity and minimize concerns about the potential for bias