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An Eliot Effect? Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7

Eric Zitzewitz

Dartmouth College; NBER

This paper examines the negotiated settlements of 20 market timing and late trading cases, comparing the restitution obtained for shareholders with an estimate of shareholder dilution. This restitution ratio varies from 0.04 to 5, or from 0.1 to 10 if penalties are included. While some of this variation is explained by differences in the defendants' conduct, controlling for this, settlement negotiations that involved New York as well as the Security and Exchange Commission (SEC) resulted in restitution ratios that were higher by a factor of 5-10. An analysis that uses the firms' headquarters location and customers' state of residence as an instrument for New York's involvement suggests that this difference is causal, and not the result of New York involving itself in cases likely to lead to large settlements. Given the much larger staff and institutional expertise of the SEC, it is likely that these differences in outcomes are due to differences in aggressiveness, not prosecutorial resources. Differences in aggressiveness are consistent with popular conceptions of the regulators' career concerns, as well as with theories of industry focus and regulatory capture.

Number of Pages in PDF File: 48

Keywords: settlement negotiations, regulatory capture, securities regulation, administrative law

JEL Classification: K32, L51, H77, G28, K42

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Date posted: April 21, 2008  

Suggested Citation

Zitzewitz, Eric, An Eliot Effect? Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7. Available at SSRN: https://ssrn.com/abstract=1091035 or http://dx.doi.org/10.2139/ssrn.1091035

Contact Information

Eric W. Zitzewitz (Contact Author)
Dartmouth College ( email )
Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)
HOME PAGE: http://www.dartmouth.edu/~ericz
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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