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Abstract:
Sarbanes-Oxley (SOX) was adopted in a rush, political expediency necessitating that something be done before the 2002 election to minimize voter backlash from the collapse of Enron and WorldCom. Despite the rush, the Act contained a number of improvements on the current state of regulation, including a separation of accounting and consulting services, increase in the strength and independence of the audit committee, certification of financial statements by top officers, and assessment of internal controls by managers and auditors.

Nonetheless, SOX engendered an immediate cascade of criticism, much of the excoriation coming from the Academy, especially those adhering to the view that a corporation was a nexus of contracts. For them, the Act fixed non-existent problems, generated costs that exceeded benefits, and relied on approaches that took no notice of definitive economic data; quack corporate governance in a phrase.

While SOX suffered from uneven craftsmanship and was not fully vetted in the traditional manner, this did not entirely explain the immediacy and strength of the vituperative attacks. Instead, the Act amounted to an affront, indeed a rejection, of the view within the Academy that corporations were a nexus of contracts and that the evolution of corporate law was a race to the top. In fact, SOX appears to have generated improvements in the corporate governance process. As to whether the costs of some provisions outweigh the benefits, definitive empirical data on the subject remains to be developed.

Abstract:
This article explores the role of the Securities and Exchange Commission in the corporate governance process. Traditionally, most have viewed substance as a matter for the states and disclosure for the Commission. This "neat" dichotomy has been long accepted but little examined.

The Commission was always meant to play a role in the governance process. Congress assigned to the SEC the authority to regulate disclosure in part to prevent various abusive practices by management, including the payment of excessive compensation and self perpetuation. Disclosure largely eliminated secrecy but did end self interest. Instead, pressure built on states to loosen substantive standards. Disclosure, therefore, contributed to the continued decline in substantive standards under state law.

With the link between substantive standards and accurate disclosure increasingly apparent, the Commission began to intervene into the governance process more directly, employing disclosure as a mechanism designed to alter the behavior of officers and directors. The approach, however, didn't work particularly well. Disclosure couldn't entirely compensate for the declining substantive standards under state law.

These dynamics have changed significantly with the adoption of Sarbanes-Oxley. The Commission has now become more overtly involved in the governance process. The impact of these changes have yet to be fully realized but they contain the potential for a profound shift in the traditional approach to corporate governance.

Abstract:
In discussing independent directors, most of the focus has been on the definitions employed by the stock exchanges. It is the Delaware definition, however, that is the more important one. Delaware provides that, in non-controlling shareholder cases, conflict of interest transactions approved by a board consisting of a majority of "independent" directors will receive the presumption of the business judgment rule. The result is to eliminate any judicial consideration of fairness in reviewing the transaction.

A number of problems exist with the approach. First, the requirement of a majority means that the business judgment rule applies despite the presence of a minority of interested or non-independent directors in the decision making process. They may participate in the debate and vote on the matter without altering the standard of review. Second, the definition of independent is inconsistently applied and does not insure that boards will in fact consist of a majority of independent directors. Third, the Delaware courts have used all but impossible pleading standards to dismiss challenges to director independence at the motion to dismiss stage, terminating any ability to use discovery to resolve the issue.

The result is that conflict of interest transactions receive business judgment protection despite approval by a majority of directors who are in fact not independent. No real substantive limits exist, therefore, on conflict of interest transactions. The result is predictable, with executive compensation and other conflict of interest transactions subject to no significant legal limits.

Abstract:
Blogs are changing legal scholarship. Although not a substitute for the detailed, often intricately researched analysis contained in law reviews and other scholarly publications, they fill an important gap in the scholarly continuum. Blog posts can generate ideas and discussion that can be transformed into more a systematic and thorough paper or scholarly article. At the same time, blogs provide a forum for testing ideas once they are published in more traditional venues.

While over time, a blog presence will likely become de rigueur for top scholars and law reviews, top tier schools as a group have not yet targeted blogs as a necessary component of scholarly activity. In the short term, therefore, blogs provide unique opportunities for faculty and law schools outside the top tier to enhance their reputational rankings. Blogs can enhance reputation by allowing faculty to route around some of the biases in law review placements and SSRN rankings that favor those at the top tier schools. Blogs also represent a cost effective mechanism for advertising scholarly activity.

The paper discusses the evidence that blogs enhance reputation and surveys the way that scholars at law schools outside the top tier are already harnessing blogs to enhance their reputations. The paper also discusses what it takes to create a successful blog, from the search for content to the benefits of advertising. The paper finishes with a brief history of The Race to the Bottom, a corporate governance blog.

Abstract:
Corporate law scholarship is replete with those who favor an enabling approach to regulation, with companies having the right to opt in to particular requirements or regimes. Opting in (or out) permits private ordering and allows for efficient relationships that are a product of bargaining between owners and managers.

This paper tests the core claim of scholars in the nexus of contracts tradition - that private ordering as a process of bargaining creates optimal rules. We do this by analyzing empirical evidence in the context of waiver of liability provisions. The article examines the history of these provisions, emphasizing that they arose in Delaware not from an effort to overturn Van Gorkom but from a decision to intervene in the market for D&O insurance. In other words, their genesis was owed to a desire to interfere with market forces with respect to insurance.

The Delaware model allowed companies to opt in to a regime that eliminated monetary damages for breach of the duty of care through amendments to the articles of incorporation. The contractarian approach would suggest that shareholders and management would use this authority to negotiate agreements that are in their mutual best interests. If a process of bargaining is at work as they claim, the opt-in process ought to result in a variety of practices, with some companies adopting waiver of liability provisions, others not, while still others modify the provisions to only waive liability in particular circumstances. These provisions, therefore, represent a laboratory for determining whether, and the degree to which, bargaining to achieve more efficient private arrangements actually occurs.

Our analysis reveals that the diversity predicted by a private ordering model is not borne out by the evidence. Instead, the evidence shows that one categorical rule (liability for breach of the duty of care) was merely replaced by another (no liability for a breach of the duty of care), with no evidence that the change increased efficiency. The article demonstrates that bargaining does not take place as the contractarian thesis would predict and that the so called private ordering does not necessarily result in greater efficiency.

Abstract:
Corporate law scholarship is replete with those who favor an enabling approach to regulation, with companies having the right to opt in to particular requirements or regimes. Opting in (or out) permits private ordering and allows for efficient relationships that are a product of bargaining between owners and managers.

This paper tests the core claim of scholars in the nexus of contracts tradition - that private ordering as a process of bargaining creates optimal rules. We do this by analyzing empirical evidence in the context of waiver of liability provisions. The article examines the history of these provisions, emphasizing that they arose in Delaware not from an effort to overturn Van Gorkom but from a decision to intervene in the market for D&O insurance. In other words, their genesis was owed to a desire to interfere with market forces with respect to insurance.

The Delaware model allowed companies to opt in to a regime that eliminated monetary damages for breach of the duty of care through amendments to the articles of incorporation. The contractarian approach would suggest that shareholders and management would use this authority to negotiate agreements that are in their mutual best interests. If a process of bargaining is at work as they claim, the opt-in process ought to result in a variety of practices, with some companies adopting waiver of liability provisions, others not, while still others modify the provisions to only waive liability in particular circumstances. These provisions, therefore, represent a laboratory for determining whether, and the degree to which, bargaining to achieve more efficient private arrangements actually occurs.

Our analysis reveals that the diversity predicted by a private ordering model is not borne out by the evidence. Instead, the evidence shows that one categorical rule (liability for breach of the duty of care) was merely replaced by another (no liability for a breach of the duty of care), with no evidence that the change increased efficiency. The article demonstrates that bargaining does not take place as the contractarian thesis would predict and that the so called private ordering does not necessarily result in greater efficiency.

nexus of contracts, bargaining, shareholders, waiver of liability, directors

Abstract:
In the shareholder governance area, one of the most contentious issues concerns the right of shareholders to nominate directors and include the nominees in management's proxy statement.

This article examines the conflict in the context of the growing importance of independent directors. State law and the Securities and Exchange Commission (SEC) have increasingly relied upon independent directors to protect shareholders and ensure the integrity of the financial disclosure process. Yet because of weak definitions and problems of enforcement, these directors are often not truly independent.

One method of addressing these concerns is to allow shareholders to nominate and elect their own candidates. They have the power to nominate under state law but the authority has largely been emasculated by the need to solicit proxies, an expensive and time consuming process.

The SEC has from time to time sought, always unsuccessfully, to amend the rules to allow shareholders some access to the company's proxy statement for their nominees, with the first effort taking place in 1942. The article contains a comprehensive analysis of these efforts, including the most recent iteration in 2007 when the Commission reaffirmed its traditional position that shareholders should not have access to the company's proxy statement for nominees.

The article takes the position that in an era of activist shareholders, pressure on the SEC to reform its rules will continue to grow. Moreover, continued denial of access will make things worse, leading to efforts by activist shareholders that are more intrusive and more likely to result in contests for the board of directors. The denial of access also leaves in place a serious gap in the disclosure regime for proxy contests. Finally, as the SEC becomes increasingly involved in the corporate governance process, a role it has not historically had to consider, the denial of access raises questions about the agency's willingness to protect the interests of shareholders.

Abstract:
The current waive of turmoil in the financial markets has cast attention on the problem of executive compensation. Companies that have failed or disappeared in shot-gun mergers have nonetheless paid exorbitant sums to officers who arguably played a substantial role in their demise. In response, Congress for the first time established federal standards for determining compensation, including clawbacks and limits on golden parachutes.

The congressional efforts, although mild, represent a deep frustration with the system used by the Delaware courts in assessing executive compensation. With the CEO on the board, executive compensation has traditionally been examined under the duty of loyalty. Through legal legerdemain, the Delaware courts have accorded the decisions the all but insurmountable protection of the business judgment rule, requiring only that the board contain a majority of "independent directors." By largely reducing the test to a rote head count, the courts did little to ensure that compensation decisions were unaffected by the interested influence. At the same time, the courts did little to ensure that independent directors were in fact independent.

The paper provides some suggested reforms. The efficacy of the process must be improved. Most importantly, however, fairness needs to be returned to the analysis. Only with some obligation to show the fairness of the compensation decision with the interests of shareholder be adequately protected.

Abstract:
Weak state regulation of corporate governance process and the race to the bottom resulted in federal intervention in the 1930s and the adoption of the securities laws. The laws largely ousted the states from the corporate disclosure and proxy process. The duties of directors, however, remained subject to state regulation.

The race to the bottom, therefore, continued. One example was the adoption of waiver of liability provisions. It took less than two decades after Delaware adopted the first such provision in the aftermath of Van Gorkom for all 50 states to have something similar in place. Likewise, fiduciary obligations gradually weakened, with Delaware all but eliminating the duty of loyalty, replacing substantive fairness with ineffective procedural requirements. The predicable scandals and excesses followed.

Congress responded with the adoption of Sarbanes-Oxley and federalizing some portions of the duties of officers and directors. SOX, however, did not do so in a systematic way. As a result, neither the states nor the federal government adequately regulate the behavior of corporate managers. Said another way, the dynamics that resulted in the scandals of the millennium largely remain in place.

Abstract:
Glass-Steagall separated banking and securities activities from the Great Depression through much of the 1990s. By 1995, the Act was viewed as an anachronism, a dinosaur that in a deregulatory era ought to go.

In fact, Glass-Steagall had a significant impact on the vibrancy of the securities markets by preventing underwriting and other capital raising functions from becoming dominated by banks. Instead, the Act enabled the development of a strong securities industry that had as its primary purpose capital raising. This contributed to the strengths of the US capital markets. Evidence from Japan and Germany suggest that without some type of forced separation, securities markets tend to become bank dominated and the capital markets less vibrant. The same could happen to the United States with the repeal of Glass Steagall.

Abstract:
Law faculty blogs have been around for much of the new millennium. This article examines these blogs, including their role in the legal scholarship continuum and their growing influence of legal community.

The paper begins with an evolutionary study, noting that law blogging originally began in a state of nature, with few rules governing frequency or content of posts. Increased competition and the emergence of Empire and Captive law blogs, however, has resulted in a growing sense of order on the legal blogosphere.

Perhaps as a result, the influence of law blogs has increased. The paper relies on a list of approximately 130 law faculty blogs and studies the frequency of law review and case citations. The numbers have been undergoing significant growth. The growth is particularly noteworthy given the difficulty in searching for material posted on the Internet.

The paper also studies the impact of law blogging on rankings in the US News. In the short term, blogging can disproportionately benefit law schools and faculty outside the top tier. Blogs can enhance the reputation of the sponsoring faculty member, enable them to route around the biases inherent in the system of law review placements and SSRN downloads, permit a level of participation in the legal debate that might otherwise not be available, and facilitate the dissemination of information important to alumni and other constituencies. Most critically, however, they represent a cost effective mechanism for improving a law school's reputational rankings and, perforce, its overall rankings in the infamous US News and World Report.

Much of the data used in the paper is derived from a list of 130 law faculty blogs, something paired down to the top 50 law faculty blogs. The top 50 was determined based upon a number of ranking metrics. These lists are included as an Appendix to this article.

Abstract:
One of the most difficult problems of corporate governance concerns the relationship between a company and its indirect owners, those who mostly hold shares in street name accounts. Voting rights under state law rests with the record owner (usually a broker, bank or depository), not the beneficial owner. Yet the rules of the Securities and Exchange Commission and the stock exchanges provide a mechanism for ensuring that street name owners in fact can vote their shares. The system is, however, built mostly around the notion that brokers and banks must forward proxy and other materials to beneficial owners, a circuitous, time consuming, and wasteful process. While the Shareholder Communication Rules do allow for some direct contact between the company and its beneficial owners, at least where the beneficial owners do not object, the rules are ineffective and do not promote direct communication. This article, although written back in the late 1980s, discusses the system of communicating with beneficial owners and the problems with the existing system.

Abstract:
Corporate governance and corporate disclosure have become increasingly interrelated. One cannot adequately function without the other. Each, however, is within the primary purview of different regulators and each regulator takes a different philosophical approach in addressing the matter.

The Securities and Exchange Commission at one point tried to intervene more directly and improve governance by relying on listing standards, an approach largely ended by the DC Circuit’s decision in Business Roundtable. As a result, the SEC has been forced to resort to disclosure to affect the substance of governance.

Some of the governance requirements are contained in Form 8-K, particularly those relating to bylaw/article amendments and resignations of directors and certain officers. In addition, Item 407 of Regulation S-K contains disclosure about the board, ranging from the identification of independent directors to meeting attendance. Item 402 (executive compensation) and Item 404 (related party transactions) also touch on governance issues. These specific requirements are augmented by a growing body of enforcement actions. This article is a chapter from THE REGULATION OF CORPORATE DISCLOSURE and examines the SEC disclosure requirements, particularly those contained in Form 8-K and Regulation S-K.

Abstract:
Few corporate law doctrines matter more than the duty of loyalty. Designed to protect the shareholders from the consequences of improper self-dealing, the duty applies to transactions with the corporation that benefit officers, directors, or other fiduciaries.

Despite the central importance of fairness to the duty of loyalty, however, the trend has been to eliminate any analysis of fairness, replacing substantive review with procedural safeguards. This has been particularly true with respect to ratification by disinterested shareholders. If done properly, disinterested ratification results in the application of the business judgment rule. In those circumstances, courts will not examine the fairness of the transactions.

The wisdom of a policy allowing a majority of disinterested shareholders in a public company to consent to, and thereby immunize from challenge, self-dealing is questionable. Moreover, the procedural safeguards designed to ensure that shareholders are informed when they "ratify" the self interested transactions do not work. Informed shareholders must have all material information when consenting to the self-dealing. In practice, however, they often do not. Delaware courts repeatedly consider immaterial categories of information among the most important to shareholders in deciding how to vote.

This can be seen from a comparison between Delaware and federal cases interpreting the concept of materiality. Although both purport to use the same test (putting aside that Delaware still relies on the long rejected probability/magnitude test for the materiality of ongoing merger negotiations), it is clear that in application they do not. Delaware uses a far more restrictive concept of materiality, one that does not ensure that shareholders in fact have all material information needed to make informed decisions.

To the extent that substantive review gives way to procedural safeguards, the procedural safeguards must be meaningful. Meaningful safeguards require full disclosure. Yet at least in the area of disinterested shareholder approval, this has not occurred.

Abstract:
With the fall of the Soviet Union, a number of newly independent countries emerged, many of them attempting to put in place market based institutions and legal regimes. A number of corporate scholars from the United States participated in the development of these legal regimes.

In the area of corporate law, problems arose from poor draftsmanship, lack of adequate expertise and institutions, poorly functioning courts, the problem of hold over directors from the Soviet period, and corruption. As a result of these and other factors, traditional corporate statutes of the type used in most developed countries did not work effectively. To address this problem, two professors, Bernard Black and Reinier Kraakman, suggested that corporate laws be "self enforcing". The model entailed less reliance on judicial enforcement and more on increasing the authority of outside investors, including increased procedural safeguards and greater limitations on director behavior.

This article takes a different approach. It identifies the system of governance used during the Soviet period when limits existed on management's self serving behavior. The article posits that some aspects of the Soviet approach, albeit shaped by the contours of a market economy, would be a better way to protect shareholders and encourage investment than the "self enforcing" model.

This article is reprinted from [or was adapted from an article published in] the Journal of East European Law, Volume No.7 Issue Nos. 3 -4.

Abstract:
Law faculty blogs have been around for much of the new millennium. This article examines these blogs, including their role in the legal scholarship continuum and their growing influence of legal community.

The paper begins with an evolutionary study, noting that law blogging originally began in a state of nature, with few rules governing frequency or content of posts. Increased competition and the emergence of Empire and Captive law blogs, however, has resulted in a growing sense of order on the legal blogosphere.

Perhaps as a result, the influence of law blogs has increased. The paper relies on a list of approximately 130 law faculty blogs and studies the frequency of law review and case citations. The numbers have been undergoing significant growth. The growth is particularly noteworthy given the difficulty in searching for material posted on the Internet.

The paper also studies the impact of law blogging on rankings in the US News. In the short term, blogging can disproportionately benefit law schools and faculty outside the top tier. Blogs can enhance the reputation of the sponsoring faculty member, enable them to route around the biases inherent in the system of law review placements and SSRN downloads, permit a level of participation in the legal debate that might otherwise not be available, and facilitate the dissemination of information important to alumni and other constituencies. Most critically, however, they represent a cost effective mechanism for improving a law school's reputational rankings and, perforce, its overall rankings in the infamous US News and World Report.

Much of the data used in the paper is derived from a list of 130 law faculty blogs, something paired down to the top 50 law faculty blogs. The top 50 was determined based upon a number of ranking metrics. These lists are included as an Appendix to this article.

Abstract:
In the aftermath of the fall of the Soviet Union, Russia emerged as the largest of the newly independent states. As part of the transformation process, Russia sought to implement capitalist style securities markets.

Russian financial markets have been in constant turmoil since the demise of the command economy. Almost overnight, the country faced the challenge of developing a system for privately financing Russian enterprises. A plethora of banks, brokers, and stock exchanges sprang to life, most of which were undercapitalized, disorganized, and poorly policed. The absence of effective regulatory regimes resulted in marginal compliance at best.

The most critical question for the development of the markets, however, concerns the market intermediaries responsible for the capital-formation process.

In developed markets, the capital-raising process is dominated either by banks or by securities firms. The type of intermediary has important implications. Bank-dominated economies possess a number of inherent attributes that can impede the capital-raising process, including less dynamic capital markets, a reduced supply of funding for domestic companies, and a greater degree of government interference. Japan and Germany are examples. Those dominated by securities firms are more receptive to the capital needs of less established companies.

The development of robust securities markets remains critical to Russia's economic recovery. In order for adequate markets to emerge, Russia must develop an aggressive class of intermediaries with the ability to place shares of privatized companies. Comparative analysis suggests that, absent deliberate government policies to the contrary, bank-dominated systems will emerge. A bank-dominated system will stall economic development by creating inadequately vibrant capital markets. Consequently, insufficient funds will be available for capital, reducing the number of companies that can obtain long-term financing.

Abstract:
The Securities and Exchange Commission has proposed a rule that would allow certain shareholders to include their nominees for the board of directors in the company's proxy statement. Called shareholder access, the effort has drawn considerable opposition. Those disagreeing with the effort often point to the widespread adoption of majority vote provisions and the recent amendments to the Delaware Corporation Law expressly authorizing access bylaws as evidence that the initiative is unnecessary. This letter responds to those arguments, contending that neither majority vote provisions nor the amendments to the DGCL in fact negate the very strong need for shareholder access.

Abstract:
A critical issue in the area of corporate governance and law concerns the differences in legal regimes that arise as a result of culture. Kazakhstan in the 1990s achieved independence from the former Soviet Union and was forced in quick order to put in place a series of laws that allowed a capitalist economy to function. Yet these laws were adopted in a state that had no experience with most aspects of private property. The Kazakh people were nomadic, moving from place to place, with little experience with real property. Personal property was largely limited to what they could carry. Stalin ended their nomadic behavior at tragic cost in the 1930s, forcing the Kazakh's to become more stationary. But the Soviet system likewise put little emphasis on an economic system based upon private property. Thus, at the time of independence in 1991, the Kazakhs had little experience with a capitalist based economic system.

The article examines the process of privatization that took place in Kazakhstan during the 1990s and the impact on the Kazakh people. The article emphasizes the lack of consideration of Kazakh history and culture in implementing the privatization process.

Abstract:
Judges on panels at the US Court of Appeals are not intended to represent a mosaic of society. They bring an assortment of biases and predispositions to the decision making process. Judicial integrity is ostensibly protected, however, through the use of neutral assignment. Judges are assigned to panels randomly, without consideration of the particular cases to be decided.

In fact, this is not necessarily the case. In 1963, a judge on the US Court of Appeals for the 5th Circuit alleged that membership on panels had been deliberately skewed to ensure a pro-civil rights majority. An analysis of the historical circumstances surrounding the allegations indicates that the allegations were probably true.

Could it happen again? A review of the assignment process used by the federal appellate courts indicates that, in general, most do not have in place adequate procedures designed to guarantee neutral assignment of judges at the US Court of Appeals. As a result, it is possible that judges could be assigned to panels at the court of appeals on a non-neutral basis.

Abstract:
After more than a half century of judicial monopoly, Congress in 2002 adopted Section 1658(b), thereby creating a statute of limitations and repose for fraud actions brought under Section 10(b) and Rule 10b-5. The five year period of repose represents an outside cut-off that commences at the time of the violation. The two year limitations period begins upon “discovery of the facts constituting” the fraud. See 28 U.S.C. § 1658(b). Under the self-evident meaning of this language, the limitations period begins only when plaintiffs discover - that is, actually know - that they have been defrauded. The legislative history confirms this actual-knowledge standard. The limitations period was not meant to be used to investigate whether a fraud occurred, but to address the “obstacles” that exist “after the fraud is discovered,” including the need to unravel the complexities of the violation and address the logistical concerns in bringing a claim, particularly the need to marshal the facts sufficient to meet the heightened pleading standards set out in the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (PSLRA). See S. Rep. No. 146, 107th Cong., 2d Sess. 9 (May 6, 2002).

This Court in Lampf adopted an actual-knowledge, not an inquiry-notice, standard for determining the accrual date of the one year limitations period. This was apparent from this Court’s express reliance on Section 9(e) of the Exchange Act, 15 U.S.C. § 78i(e), with its actual knowledge standard, as the appropriate model, and the explicit rejection of Section 13 of the 1933 Act, with its inquiry notice standard. Lampf’s reliance on an actual knowledge standard was also apparent in this Court’s treatment of equitable tolling. Tolling had allowed courts to ensure fairness by using equity to delay the accrual date where plaintiffs were unaware of the fraud through no fault of their own. Lampf concluded, however, that equitable tolling would henceforth be “unnecessary,” an approach that could only be understood as a direct consequence of an accrual standard that depended upon plaintiffs’ actual knowledge of the fraud. With plaintiffs aware of having been defrauded, a tolling doctrine designed to provide additional time to uncover the violation had become superfluous or “unnecessary.”

The actual-knowledge standard does not interfere with the goals of finality and the elimination of stale claims. Those concerns are addressed through the adoption of a five year statute of repose. As for the assertion that the actual knowledge standard somehow allows plaintiffs to delay the onset of the limitations period through inactivity, this concern is misplaced. First, the modern realities of class action securities fraud suits against public companies provide considerable practical incentive to investigate the mere suspicion of a violation. Any delay in investigation could result in the expiration of the period of repose or the failure to meet the heightened pleading standards contained in the PSLRA.

The possibility of deliberate inactivity is also belied by the competitive reality of class action securities litigation. SOX sought to increase the role of institutional investors, those plaintiffs with the resources available to conduct investigations. In addition, law firms that delay investigating the possibility of fraud could find themselves at a competitive disadvantage. The first firm to become aware of the fraud and discern the applicable class will be in a position to identify possible lead plaintiffs, the investors with the largest financial interest in the relief sought, increasing the potential likelihood that it will be designated lead counsel. See 15 U.S.C. § 78u-4. Second, a legal standard that determines actual knowledge through reference to the entire class will essentially eliminate even the possibility of the strategic use of inactivity. In the context of class actions against public companies for securities fraud, actual knowledge is most appropriately considered through resort to the information known to the class as a whole. To the extent known to the class, plaintiffs will be unable to rely on their own unawareness to delay the onset of the limitations period. This also provides plaintiffs with an additional incentive to investigate even the possibility of fraud in order discover facts known to the market.

This use of the inquiry notice standard on the one hand permits the elimination of potentially meritorious claims and on the other hand encourages the filing of meritless claims. Meritless claims do more than waste resources. They open plaintiffs and their counsel to the possibility of sanctions under Rule 11. See 15 U.S.C. § 78u-4(c)(making mandatory consideration of sanctions under Rule 11 upon final adjudication of a securities fraud action).