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Abstract:
Exchanges have a powerful incentive to regulate insider trading and market manipulation because of the effect that those practices have on liquidity. Markets known for insider trading and manipulation risk a downward spiral as investors depart seeking out alternative, safer investments. Exchanges, through the design of transparent trading mechanisms, vigilant monitoring of trading, and the imposition of demanding listing standards, can help create the trust that leads to deep and liquid securities markets. This essay compares the institutional incentives of securities exchanges and government to regulate abuses in the securities markets. I conclude that exchanges are more likely to regulate in a way that optimizes the trade-off between investor protection and the cost of regulation. Concerns about problems with conflict of interest in exchange regulation have been substantially reduced by the changes that international competition has brought to the securities markets. I propose a model that allocates regulatory authority between the exchanges and the government in a way that ameliorates the limitations of both institutions as regulators. In this regulatory model, exchanges would play the paramount regulatory role, with government playing the role of auditor of exchange regulation. The government's role would be limited in areas allocated to exchange regulation to ensuring that exchanges actually enforce their rules as written and aiding in the enforcement of those rules.

Abstract:
This Essay examines the stock market's reaction to the Ninth Circuit's decision in re Silicon Graphics Securities Litigation. That decision adopted the most stringent interpretation of the Private Securities Litigation Reform Act's "strong inference" standard for pleading scienter in securities fraud cases. Studying the abnormal stock returns of a sample of high technology companies, the authors find a statistically significant positive return for shareholders of these companies to the Silicon Graphics decision. They also find that these positive stock price effects were strongest for those firms most likely to be sued in securities fraud class actions, but the results were less positive for those firms most likely to be sued for committing fraud. The authors conclude that the Silicon Graphics decision enhanced shareholder wealth on average. They argue that when the Supreme Court is called upon to interpret the Reform Act's pleading standard that it should adopt the Silicon Graphics standard.

Abstract:
Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives. Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence.

The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is a behaviorally-flawed regulator, the Securities and Exchange Commission (SEC). Several behavioral biases may plague SEC regulators including overconfidence, the confirmation bias, framing effects, and groupthink. While structural solutions are possible to reduce biases within the agency, we argue that such solutions are only partially effective in correcting these biases.

Instead of attempting to determine when the behavioral biases of regulators outweigh those within the market, we take a different tactic. Because behaviorally flawed (and possibly self-interested) regulators themselves will decide whether market-based biases outweigh regulatory biases, we propose a framework for assessing such regulatory intervention. Our framework varies along two dimensions. The more monopolistic the regulator (such as the SEC), the greater is the presumption against intervention to correct for biases in the market. Monopolistic regulatory agencies provide a fertile environment for behavioral biases to flourish. Second, the more regulations supplant market decisionmaking, the greater is the presumption against such regulations. Market supplanting regulations are particularly prone to entrenchment, making reversal difficult once such regulations have become part of the status quo.

behavioral economics, securities regulation

Abstract:
Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives. Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence.

The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is a behaviorally-flawed regulator, the Securities and Exchange Commission (SEC). Several behavioral biases may plague SEC regulators including overconfidence, the confirmation bias, framing effects, and groupthink. While structural solutions are possible to reduce biases within the agency, we argue that such solutions are only partially effective in correcting these biases.

Instead of attempting to determine when the behavioral biases of regulators outweigh those within the market, we take a different tactic. Because behaviorally flawed (and possibly self-interested) regulators themselves will decide whether market-based biases outweigh regulatory biases, we propose a framework for assessing such regulatory intervention. Our framework varies along two dimensions. The more monopolistic the regulator (such as the SEC), the greater is the presumption against intervention to correct for biases in the market. Monopolistic regulatory agencies provide a fertile environment for behavioral biases to flourish. Second, the more regulations supplant market decisionmaking, the greater is the presumption against such regulations. Market supplanting regulations are particularly prone to entrenchment, making reversal difficult once such regulations have become part of the status quo.

Abstract:
We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract additional directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We also do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual.

Abstract:
We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract additional directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We also do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual.

Abstract:
This article presents the findings of a study of the resolution of motions to dismiss securities fraud lawsuits since the passage of the Private Securities Litigation Reform Act in 1995. Our sample consists of decisions on motions to dismiss in securities class actions by district and appellate courts in the Second and Ninth Circuits for cases filed after the passage of the Reform Act to the end of 2001. These circuits are the leading circuits for the filing of securities class actions and are generally recognized as representing two ends of the securities class action spectrum. Post-PSLRA, the Second Circuit applies the least restrictive pleading standard to securities claims and the Ninth Circuit applies the most restrictive.

We find some evidence that the Ninth Circuit's post-PSLRA reputation as being a tougher venue in which to win securities fraud class actions is born out by a significantly higher dismissal rate. The differences between the two circuits are also reflected in factors that correlate with dismissal. For example, allegations of violations of accounting principles other than revenue recognition correlate negatively with dismissal in the Second Circuit. This coefficient, however, is insignificant in our regressions for the Ninth Circuit. Allegations of revenue recognition violations are insignificant in both circuits, whether or not the issuer has been forced to restate those revenues. The circuits part ways on other factors as well: the Second Circuit is significantly less likely to dismiss cases with allegations of false forward-looking statements, a surprising result given the stringent standards for such statements imposed by the PSLRA. The Ninth Circuit is significantly less likely to dismiss complaints with allegations of '33 Act violations and the Second Circuit is more likely to dismiss cases brought by the Milberg Weiss firm. When it comes to insider trading, however, the two circuits are both skeptical and the allegations correlate with dismissal in both circuits.

Securities litigation, accounting fraud, insider trading

Abstract:
Congress passed the Private Securities Litigation Reform Act of 1995 in an attempt to discourage meritless securities fraud class actions. This paper uses damages, accounting, insider trading and governance variables to explain the incidence of securities fraud litigation both before and after the passage of the PSLRA. Using a matched sample of sued and non-sued firms from the computer hardware and software industries, we find that our accounting and insider trading variables, which do not correlate with the incidence of litigation prior to the passage of the PSLRA, are significant after the passage of the PSLRA. This finding is confirmed by our analysis of allegations and outcomes. Our accounting variables do not explain the incidence of pre-PSLRA accounting allegations, but they become significant after the passage of the PSLRA. Similarly, insider trading variables do not explain insider trading allegations before the PSLRA, but net sales by insiders correlate with such allegations after its enactment. Finally, we find no correlation between lawsuit outcomes and our accounting variables before the PSLRA, but accounting variables are significant after its enactment. Abnormal insider sales correlate with outcomes before the PSLRA, but not after. Overall, we interpret our findings as evidence that the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits.

Securities litigation, litigation risk, accounting fraud, insider trading

Abstract:
We study the stock market's reaction to three events in the litigation process: (1) the revelation of potential fraud; (2) the filing a lawsuit; and (3) the judicial resolution of the lawsuit. We find a large and statistically significant negative reaction to the first event, and a smaller but still statistically significant reaction to the second. We find no significant reaction to the resolution of the motion to dismiss. We find little overlap between the variables that previous research has found to be correlate with the incidence of the litigation and the variables that correlate with the resolution of the motion to dismiss. We also find little overlap between the variable that correlate with the outcome of the motion to dismiss and the variables that explain the variance in stock market returns for these dates. We conclude that the outcome of litigation is not generally anticipated by stock market participants and that market returns are not influenced by the outcome of litigation.

Securities fraud, litigation, corporate fraud

Abstract:
The Private Securities Litigation Reform Act of 1995 was designed to curtail class action law-suits by the plaintiffs bar. In particular, the high-technology industry, accountants, and investment bankers thought that they had been unjustly victimized by class action lawsuits based on little more than declines in a company's stock price. Prior to 1995, the plaintiffs' bar had free rein to use the discovery process to troll for evidence to support its claims. Moreover, the high costs of litigation were a powerful weapon with which to coerce companies to settle claims. The plaintiffs' bar and its allies in Congress have called for a repeal or modification of the PSLRA. This paper evaluates the operation of class action lawsuits before and after the act. The hard evidence does not support repealing the PSLRA. In fact, securities class actions are being filed at a record pace. And although a higher percentage of these lawsuits is being dismissed now than before the act, the ones that survive lead to larger settlements. The PSLRA raised the standard required before plaintiffs' attorneys could drag a defendant company through the expense of discovery. The lawsuits that meet this higher standard are likely to be less frivolous and are consequently worth more in settlement negotiations. The combination of higher settlements and a smaller percentage of such cases getting to trial suggests that the class action lawsuits under the PSLRA are doing a more cost-effective job of deterring corporate fraud. This conclusion is bolstered by the fact that post-PSLRA complaints have more particularized allegations that are more highly correlated with factors related to fraud. In short, the PSLRA is working well, although not as well as intended, and there do not appear to be grounds to either repeal or significantly amend it. A better course for reform would be to change the damages remedy in securities fraud class actions to focus on deterrence.

Abstract:
The Delaware Supreme Court has recently cleared a path for controlling shareholders to freeze out minority shareholders through a combination of a tender offer and a short-form merger. This article defends that doctrinal development against recent attacks from a number of commentators. I conclude that the risks of coercion are slight in this context and that minority shareholders are unlikely to benefit from more intrusive judicial scrutiny.

Abstract:
Securities exchanges can police market abuses if government provides them the needed tools.

Securities markets cannot operate without trust. Investors can trust exchanges to regulate because of their powerful incentive to maximize trading volume. The many choices that investors have today remind exchanges that investor protection is a crucial part of their business. Investors will leave markets that fail to protect investors to find markets that will. Government regulation, by contrast, is unlikely to be as responsive to the needs of the securities markets and risks burdening investors with the cost of unnecessary regulation. If government provides exchanges with the necessary tools, financial markets can produce the regulation that encourages investor participation while retaining the powerful incentive provided by competition. As Adam Smith explained long ago, competition is the most powerful tool known for channeling man's baser instincts toward the social good. Securities regulation cannot afford to ignore that tool.

Securities exchange, markets, investors, government regulation, self regulation, financial markets, firm regulation, law, finance

Abstract:
Under Section 11 of the Securities Act of 1933, firms making public offerings of securities are strictly liable to investors for any material misstatements in the registration statements that accompany those offers. This strict liability regime is premised on the notion that issuers are best placed to avoid misstatements in the registration statement. Section 11 gives other potential defendants a "due diligence" defense to reflect their lesser ability to ensure the accuracy of the registration statement. The recent spate of "laddering" lawsuits alleging manipulation of the aftermarket for certain stocks issued in "hot" initial public offerings (IPOs) presents a role-reversal in that underwriters, rather than issuers, are alleged to be the principal wrongdoers. This paper compares a randomly selected sample of the defendant-issuers in the IPO laddering lawsuits with a matched sample of IPO firms not included in the laddering litigation. We find few differences between the sued firms and the match firms that would suggest that the issuers are culpable for laddering schemes. These findings call into question - at least under some circumstances - the deterrent value of the strict liability regime of Section 11 for corporate issuers. We propose a due diligence defense for issuers for statements in the registration statement relating to situations in which the primary wrongdoer is not the issuer.

Abstract:
When Congress enacted the Private Securities Litigation Reform Act in 1995, the Act's "lead plaintiff" provision was the centerpiece of its efforts to increase investor control over securities fraud class actions. The lead plaintiff provision alters the balance of power between investors and class counsel by creating a presumption that the investor with the largest financial stake in the case will serve as lead plaintiff. The lead plaintiff then chooses class counsel and, at least in theory, negotiates the terms of counsel's compensation. Congress' stated purpose in enacting the lead plaintiff provision was to encourage institutional investors - pension funds, mutual funds, hedge funds, etc. - to come forward to serve as lead plaintiff. The theory was that an institutional investor with a substantial damages claim would have the incentive to bargain hard with class counsel on behalf of the class, reducing the percentage of the recovery awarded to class counsel. Congress also expected institutions to play an oversight role, monitoring to make sure that class counsel was vigorously pursuing claims on behalf of the class and not settling claims on the cheap.

Our study offers evidence on the extent to which the lead plaintiff provision furthers these goals. We have collected two samples of securities class actions - one from 1991 to 1995 (pre-PSLRA), and one from 1996-2000 (post-PSLRA). We compare the class representatives from the two periods to determine if institutional investors are stepping forward in significantly greater numbers. We also sort the institutional investors - distinguishing public from private - to see what types of investors have stepped forward to serve as lead plaintiff. Consistent with other research, we find a significant difference only in the number of public institutions serving as lead plaintiff.

Our sample also allows us to analyze the impact of the lead plaintiff provision. Does the presence of an institutional investor increase the likelihood of a high value settlement? Despite the visible participation of institutions in several high-profile cases, we find no systematic evidence that private institutional lead plaintiffs are associated with larger class recoveries. Public pension funds, on the other hand, are correlated with higher class recoveries as a fraction of the potential damage award in the post-PSLRA period. Our results are, however, consistent with the possibility that public pensions "cherry pick" the actions in which they seek to become lead plaintiff, selecting only the cases with the largest potential damages and the strongest evidence of fraud. Further analysis is necessary to evaluate this possibility.

We also evaluate the effect of lead plaintiffs on the selection of attorneys and attorneys' fees. We find that, for the time period of our study, institutional investors tended to avoid the Milberg Weiss plaintiffs' attorney firm. On the more fundamental issue of whether the presence of an institutional investor as a lead plaintiff reduces the fees paid to the lawyers, after controlling for the size of the case, we find no systematic evidence that institutional involvement correlates with lower fee awards.

securities regulations, class actions, procedure, lead plaintiff, pslra

Abstract:
This Article proposes the replacement of securities fraud class actions for "fraud on the market" with an enforcement regime administered by the securities exchanges. It discusses the social costs of fraud in secondary trading markets and the respective roles of compensation and deterrence in controlling those costs. The expense and ineffectiveness of securities class actions in achieving deterrence are explained. An alternative regime enforced by the exchanges is outlined, and the incentives of exchanges to enforce anti-fraud prohibitions are analyzed.

Abstract:
This Article proposes the replacement of securities fraud class actions for "fraud on the market" with an enforcement regime administered by the securities exchanges. It discusses the social costs of fraud in secondary trading markets and the respective roles of compensation and deterrence in controlling those costs. The expense and ineffectiveness of securities class actions in achieving deterrence are explained. An alternative regime enforced by the exchanges is outlined, and the incentives of exchanges to enforce anti-fraud prohibitions are analyzed.

Abstract:
This essay argues that less liability for auditors in certain areas might encourage more accurate and useful financial statements, or at least equally accurate statements at a lower cost. Audit quality is promoted by three incentives: reputation, regulation, and litigation. When we take reputation and regulation into account, exposing auditors to potentially massive liability may undermine the effectiveness of reputation and regulation, thereby diminishing integrity of audited financial statements. The relation of litigation to the other incentives that promote audit quality has become more important in light of the sea change that occurred in the regulation of the auditing profession with the adoption of the Sarbanes-Oxley Act. Given these fundamental changes in the regulatory backdrop, I argue that the marginal benefit of litigation has been substantially diminished and in many cases that it is likely to be ineffective in promoting greater audit quality. I propose a knowledge standard for auditor liability in securities fraud cases.

Abstract:
This study investigates firms' voluntary disclosure of cautionary language under the safe harbor of the Private Securities Litigation Reform Act of 1995. We examine three disclosure attributes indicative of meaningful cautionary language under the statute. Consistent with predictions, we find that firms subject to greater litigation risk disclose more cautionary language, update the disclosure more from year-to-year, and use more readable language. The response to changes in litigation risk is asymmetric; firms increase their use of cautionary language when litigation risk increases but do not remove cautionary language when litigation risk decreases. Taken together, our evidence suggests that firms adopt disclosure policies to reduce the expected costs of litigation.

Voluntary disclosure, litigation risk, safe harbor, forward-looking information

Abstract:
This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.

securities litigation, litigation risk, accounting fraud, insider trading

Abstract:
We study the role of attorneys as arbitrators in securities arbitration, using a dataset of 422 randomly selected arbitrators and their 6724 arbitration awards from 1992 to 2006. We find that arbitrators who also represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor-claimants than other arbitrators. This relation between representing brokerage firms and arbitration awards remains significant even when we control for political outlook. We find no significant effect for attorney-arbitrators who represent investors or both investors and brokerage firms. We report that ideology also correlates significantly with arbitration awards - arbitrators who donate money to Democratic political candidates award greater compensation than arbitrators who donate to Republican candidates.

Because the arbitration award is the product of the panel, not a single arbitrator, we also study the dynamics of panel interaction. We find that the position of chair is an important factor in assessing the arbitrator's influence (although the financial conflicts of other arbitrators may also affect arbitration awards). Coalitions among the other arbitrators are also important. If the chair and another panelist possess a common attribute, the effect on the arbitration award increases.

Finally, we provide evidence that the 1998 NASD reforms to the arbitration process - which introduced party control over the composition of panels - ameliorated, but did not eliminate, the effect that attorneys who represent brokers have on outcomes. We find no significant effect from the NASD's 2004 reforms.

attorneys, procedure, litigation, arbitration, securities regulation, investors, brokers, brokerage firms

Abstract:
Prior research shows that the PSLRA increased the significance of merit-related factors, such as the presence of an accounting restatement or insider selling, in determining the incidence and outcomes of securities fraud class actions. (Johnson, Nelson, and Pritchard, 2007). This result, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of non-meritorious litigation. Second, the PSLRA may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. This paper tests these alternative hypotheses. We find that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. We also find, however, that pre-PSLRA non-nuisance claims would be less likely to be filed post-PSLRA period. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking obvious hard evidence indicia of fraud (an accounting restatement or an SEC investigation). This screening effect is stronger if the claims also lacked evidence of abnormal insider trading. By contrast, we find that pre-PSLRA claims with hard evidence or abnormal insider trading would be no less likely to be filed in the post-PSLRA period. We also examine the likelihood of settlement for pre-PSRLA claims if they had been filed in the post-PSLRA period, and find a similar screening effect for case outcomes. We conclude that Congress effectively changed the definition of merit in adopting the PSLRA, discouraging suits that would have produced a non-nuisance outcome prior to the law's enactment.

Stockholder litigation, accounting restatements, earnings forecasts, insider trading

Abstract:
Stoneridge is the latest in a series of recent Supreme Court decisions restricting securities class actions. It is also the latest in a series of Court decisions (Affiliated Ute, Basic, and Central Bank) using the reliance element of the Rule 10b-5 cause of action to expand or restrict the reach of securities fraud class actions. In this essay I argue that the Court took a wrong turn in Basic when it failed to come to terms with the relation between reliance and damages in securities fraud. Central Bank held that the express causes of action in the securities laws should serve as a guide to the elements of implied cause of action in Rule 10b-5. A close reading of the express causes of action in the securities law suggests that damages should be limited to the defendant's benefit if the plaintiff cannot plead actual reliance on the fraudulent misstatement. Compensation should only be available in cases alleging actual reliance. Changing the damages measure to disgorgement in Rule 10b-5 actions based on Basic's fraud on the market presumption would substantially diminish the pocket shifting aspect of securities fraud class actions while maintaining their deterrent value. I analyze the institutions that might effect this needed change in the damages measure - the Court, Congress, the SEC, or shareholders. The available evidence suggests that the three governmental actors in this list are largely paralyzed from overhauling securities class actions in a meaningful way. I argue that shareholders, the parties who bear the costs of the current regime, must take matters into their own hands by amending the corporation's articles. The amendment proposed here would effect a limited waiver of compensatory damages in lawsuits relying on the fraud on the market presumption.

Supreme Court, Stoneridge, class action reform

Abstract:
Taming the power of Wall Street was a principal campaign theme for Franklin Delano Roosevelt in the 1932 election. Roosevelt's election bore fruit in the Securities Act of 1933, which regulated the public offering of securities, the Securities Exchange Act of 1934, which regulated stock markets and the securities traded in those markets, and the Public Utility Holding Company Act of 1935 (PUHCA), which legislated a wholesale reorganization of the utility industry. The reform effort was spearheaded by the newly created Securities and Exchange Commission, part of the new wave of experts brought to Washington to rein in business. PUHCA also marked the federal government's first significant incursion into corporate governance, with a corresponding reduction in the traditional role of investment bankers. The SEC's ascendance over the investment bankers was reinforced during FDR's second term by the Chandler Act of 1938, which provided the agency with a broad role in the bankruptcy reorganization of troubled companies.

Enacting those statutes was only the beginning, as the scope and effectiveness of the SEC's regulatory efforts depended critically on navigating these new statutes past an initially hostile Supreme Court. After substantial delay in the lower courts, the securities statutes eventually got a friendly hearing in the Supreme Court, where a number of Justices came to the Court after serving as the "Founding Fathers" of the federal securities laws. Roosevelt's Supreme Court nominees were involved in drafting the new legislation, securing its passage in Congress and implementing a litigation strategy that successfully stalled final determination of the constitutionality of the securities laws until New Deal appointed justices were in place. Felix Frankfurter played an important role in shaping the Securities Act and PUHCA, and was a key advisor on litigation strategy to the Roosevelt administration. Hugo Black led the legislative battle to enact PUHCA against the utility companies. Stanley Reed and Robert Jackson were key courtroom advocates arguing PUHCA's constitutionality. William O. Douglas headed the study of Protective Committees that led to the Chandler Act and was Chairman of the SEC.

In this article, we explore the role of the New Deal justices in enacting the securities laws, litigating the challenges brought against them and then interpreting these laws in securities cases before the Supreme Court. We show the important role that these New Deal justices played in ensuring a broad scope for the federal securities laws through generous interpretation. Once constitutional questions had faded, securities cases proved to be a critical testing ground for newly emerging theories of administrative law. We demonstrate the split over the importance of judicial review versus deference to the rule of experts that emerged among these Roosevelt appointees. Finally, we explore the relative lack of influence of Douglas and Frankfurter in these cases, despite their familiarity and experience with the securities laws.

Supreme Court, Securities Act, New Deal justices, bankruptcy reorganization

Abstract:
This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with expectations, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and insider selling after the PSLRA. There is no evidence, however, of an association between litigation and abnormal insider selling either before or after the PSLRA, even though this measure conforms more closely with legal standards for assessing fraudulent intent. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements and abnormal insider selling. Thus, unlike lawsuit filings, the outcome of litigation does conform with judicial doctrine regarding insider trading. Consistent with Skinner (1997), there is no association between the likelihood of settlement and firms' forward-looking earnings disclosures.

stockholder litigation, restatements, earnings forecasts, insider trading

Abstract:
With the tightening of U.S. securities regulation as part of the Sarbanes-Oxley Act, the United Kingdom’s more liberal laws have resulted in London surpassing New York as the world’s financial capital. This paper examines how that came about, and asks whether it is a permanent condition, just as Delaware many decades ago surpassed New Jersey as the U.S. capital for corporate chartering after New Jersey adopted stricter chartering laws. The paper concludes that in the future, neither London nor New York will maintain its current high profile - instead, a more decentralized, liberalized financial world will likely emerge.

Delaware General Corporation Law, Model Business Corporation Act, Issuer Choice, Anti-takeover Provisions, Anti-takeover statutes, bedrock principle, Sarbanes-Oxley Act

Abstract:
Regulatory competition has long driven the path of corporate law in the federal system of the United States. Now, jurisdictional competition has spread to exchange listings. New York took an early lead in that competition in the 1990s, but has now been overtaken by London. Can London prevail in the competition for stock listings in the long term? This essay explores that question through the insights offered by Delaware's dominance in the market for corporate listings. Delaware has prevailed by offering corporate directors a predictable body of that credibly shields directors from the vagaries of political backlash in times of financial crisis. London's performance during the recent financial crisis suggests that it - like New York - lacks the capacity to shield players in the financial system from the populist forces that seek retribution in the wake of economic reversals. In the long run, neither London nor New York is likely to enjoy a comparative advantage in the market for stock exchange listings.

London Stock Exchange, corporate law, SEC disclosure

Abstract:
Critics have charged that state competition in corporate law, which Delaware clearly dominates, leads to a “race to the bottom” promoting management entrenchment at shareholders’ expense. We present evidence here that is inconsistent with this hypothesis. CEO turnover rates in Delaware are significantly higher than in other states. We also explore causal mechanisms for Delaware’s higher turnover rate: we show that Delaware attracts higher demand directors, firms without founder influence, and higher institutional ownership. We find that the last two of these characteristics explain the higher CEO turnover for Delaware companies..

Corporate governance, CEO turnover, Investor Protection

Abstract:
A number of Canadian provinces recently have adopted legislation providing shareholders with a claim for secondary market fraud. Although the legislation has some similarities to the “fraud on the market” class action found in the United States, the laws have some important differences. This article compares securities class actions in Canada and the United States, highlighting the differences between the two regimes that are likely to have important strategic consequences for class action attorneys and issuers. The article also collects and analyzes data on the securities class actions that have been filed to date against Canadian issuers in both Canada and the US, sometimes simultaneously. Finally, the article analyzes the effect of the new legislation on premia for directors’ and officers’ insurance. We find that the relative price of D&O insurance went up substantially for issuers listed only in Canada after the legislation went into effect.

Ontario Securities Act, Supreme Court of Canada, director and officer insurance

Abstract:
Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). This decision clarified the law with respect to one of the most hotly contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a very lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate in circuits previously applying a higher preponderance standard, including the Ninth Circuit, which previously had the most stringent standard for pleading scienter. Perhaps because of the greater difficulty in obtaining dismissal, Tellabs correlates with an increase in nuisance settlements in the Ninth Circuit.

Private Securities Litigation Reform Act of 1995 (PSLRA), Tellabs, Inc., Supreme Court

Abstract:
Auditors play an important role as gatekeepers to public capital markets. By attesting to the accuracy of a company’s financial statements, the auditor lends its credibility to that company and its financial health. Both market and legal mechanisms play a role in ensuring that auditors perform high quality audits. Reputation is critical in the market for auditors. In addition, potential legal liability to issuers and investors arising from contract, tort, and statutory securities laws creates incentives for auditors to conduct high quality audits. Potential discipline by professional self-regulatory bodies also plays a part. Striking the appropriate balance among market-based, legal, and self-regulatory mechanisms is a delicate task. Canada and the US have both established oversight bodies for the auditors of public companies in an effort to enhance the quality of audits for those companies: the Canadian Public Accountability Board (CPAB) and the Public Company Accounting Oversight Board (PCAOB) in the United States. The two countries deviate, however, in their allocation of regulatory responsibility in relation to the accounting profession, with Canada continuing to rely on a largely self-regulatory model and the US relying almost exclusively on government regulation. This study compares these two approaches to the regulation of public auditors in Canada and the US and offers concrete suggestions for improvement. In particular, this study analyzes and compares the CPAB and the PCAOB, looking at the structure, operation, and governance of the two boards, and analyzing their effectiveness and making recommendations for how they might be improved.

Auditors, Public Auditing in Canada, CPAB, PCAOB, accuracy of financial statements

Abstract:
Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd. This decision clarified the law with respect to one of the most contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate in circuits previously applying a higher preponderance standard in determining scienter, including the Ninth Circuit. We also find that the number of dismissal decisions before defendants obtain a final motion to dismiss increased after Tellabs in the Ninth Circuit. Perhaps because of the greater difficulty and time involved in obtaining dismissal, Tellabs correlates with an increase in nuisance settlements in the Ninth Circuit. In contrast, Tellabs also correlates with a decrease in nuisance settlements in circuits that previously applied the more lenient Seventh Circuit standard.

Abstract:
The confirmation of Lewis F. Powell, Jr., to the Supreme Court led to a dramatic shift in the court's approach to securities law. This article relies on Powell's internal court files to document Powell's influence in changing the court's direction in securities law. Powell's influence was the product of his extensive experience with the securities laws as a corporate lawyer, which gave him much greater familiarity with that body of law than his fellow justices had. That experience also made him skeptical of civil liability, particularly class and derivative actions. Powell's skepticism led him to interpret the securities law in a consistently narrow fashion to reduce liability exposure and increase predictability. Powell also rebuffed the sec's efforts to expand its reach, particularly in insider trading and takeover regulation. Powell's experience and interest produced a counter-revolution in the federal securities law.

Abstract:
This Article discusses the developments that led to the Securities Litigation Uniform Standards Act of 1998 and provides a summary and analysis of the Uniform Act. It also discusses recent developments in securities fraud class actions governed by the Private Securities Litigation Reform Act of 1995 and how the new national standard created by the Uniform Act is likely to affect federal securities class actions.

Abstract:
In recent years, the Supreme Court has increasingly looked to "tradition" as a source of constitutional values. Justice Scalia has articulated a majoritarian view of tradition that looks to the legislative practices of state legislatures. Justice Souter has articulated a model that looks to Supreme Court precedent as a source of tradition, so-called "common law constitutionalism." Both have also found recent academic adherents: Michael McConnell has defended Scalia?s model, and David Strauss has done the same for Souter. While Scalia, Souter, and their academic followers are correct in celebrating tradition as a source of constitutional values, they have celebrated the wrong traditions. In this paper, we develop a model of tradition and show how tradition, properly understood, can be a source of constitutional values. Tradition is compatible with constitutionalism in identifying widely-shared community values that should be subject to constitutional precommitment and can be an effective mechanism for constitutional change. "Constitutionally efficient" traditions are those that emerge from decentralized evolutionary processes over a long period of time, bubbling up from society. The sources of tradition articulated by Scalia and Souter lack these conditions for constitutional efficiency; hence, they should be rejected as sources of constitutional values. We offer an alternative model of constitutionally-efficient traditions. Our article is followed by a Comment by Professor John McGinnis of Cardozo Law School and a brief Reply to McGinnis.