Lord Denning, a highly quotable British judge, once remarked:
“As a moth is drawn to the light, so is a litigant drawn to the United States.”
Some reasons for this strong attraction are obvious: (1) the U.S. (and only a few other nations) authorize opt-out class actions; (2) the U.S. permits (and generously awards) contingent fees; (3) the U.S. has no “loser pays” rule (and most other countries do); and (4) the U.S. uses juries in civil cases and permits punitive damages.
As I discuss in a recent paper posted on SSRN, available here, the strongest evidence of … Read more
I am very happy and honored to be back before this committee. I have been asked to comment on several proposed bills, all of which I basically support, but I will focus my limited time today primarily on Congressman Himes’ Discussion Draft of an “Insider Trading Prohibition Act.” I want to commend Congressman Himes for having supervised the drafting of a very careful, balanced and sophisticated bill that should serve as a model for a long overdue effort to codify the law of insider trading. To date, the law of insider trading has been solely the product of judicial law-making, … Read more
Stock market manipulation has been around since shortly after stock markets were invented. Everyone is familiar with the methodology in the standard “pump and dump” scheme: False rumors are circulated, the stock is bid up by the manipulators, supply might be constrained, and, once the public’s appetite is aroused, the stock is dumped by the manipulators.
But the internet has changed all that. No need exists today for the boiler shop or its battery of phones or even carefully assembled lists of suckers. All that one needs today is to put one’s message (written under a pseudonym) on a blog … Read more
In the bizarre world that Washington politics has become, few stories are more fascinating than Jeff Bezos’ accusation that the National Enquirer and its parent, American Media Inc., committed blackmail and extortion by threatening to reveal nude pictures of him and his girlfriend unless he would “publicly affirm that The Enquirer’s reporting on his affair was not motivated by political concerns.” Let’s assume that everything Bezos said is true. Most of us sympathize with him (after all, being the world’s richest man is a tough role that does make one awfully vulnerable). All kinds of political motives for threatening … Read more
Clemenceau was right. Reforming a profession cannot be left to the professionals. A cascade of auditing scandals — in the U.K., the U.S., Europe, and South Africa — has convinced many that reform is necessary. The political reaction has been the most intense in the U.K., where two governmental reports were released last month, each sharply critical of the auditing profession and its regulation. One has called for a new audit regulator that would be financially independent of the industry, and the other by the U.K.’s Competition and Markets Authority (“CMA”) has proposed a number of measures to … Read more
Securities litigation is growing at a prodigious rate. Is that good or bad? This column will answer that we have to unpack this phenomenon and realize that very different things (with very different implications) are happening simultaneously. Let’s begin with the basic data: Some 403 federal securities class actions were filed in 2018, down slightly from 412 in 2017 (which was the highest year since 2001), but more than 200% of the average number for 1996 to 2016 (which was 193). Viewed together, 2017 and 2018 show that the rate of securities class action filings is accelerating, and this … Read more
Forever is a long time — indeed, too long. That is the essence of my answer to my two friends and colleagues — professors Zohar Goshen and Joshua Mitts — who each argue against mandatory sunset provisions on super-voting stock (Professor Gordon provides an overview with which I largely concur). Even if one accepts the Goshen/Mitts premise that the other shareholders want the founder to have total control (in order to pursue his “idiosyncratic vision” for the company), the probability is high that, at some point, the majority of the shareholders will want to limit or end that total control. … Read more
In my last post, I focused on the Council of Institutional Investors’ (“CII”) recent proposal to the New York Stock Exchange and Nasdaq to impose a listing condition that any super-voting rights on dual class stock must expire within at least seven years of listing. Although I sympathized with the CII’s goal and believe dual class capitalizations to be undesirable in the case of a public corporation, I also recognized that we cannot expect the holder of a control block to stand by passively and watch his voting power dissipate. Thus, as I noted, the control holder might … Read more
The most important issue in corporate governance today is dual class capitalization, and the most important recent development is the petition submitted on October 24, 2018 by the Council of Institutional Investors (“CII”) to both the New York Stock Exchange and Nasdaq, asking them to place a “sunset” on differentials in voting rights. Under the CII’s proposal, both exchanges would agree not to list an initial public offering (“IPO”) that had dual classes of stock with different voting rights, unless the disparity in per share voting power ended no later than seven years after the IPO. The CII sees this … Read more
Elon Musk came close to doing something truly unique. No, not his electric car. Rather, he was about to roll the dice with his shareholders’ equity.
Securities analysts estimate that somewhere between 25 and 35 percent of the value of Tesla would be sacrificed if Musk were no longer its CEO. No one else in Tesla’s management can credibly run the company, and Musk alone appears to be the visionary that can maintain its technological superiority. Yet, he placed this value at risk by rejecting a relatively generous (even soft) settlement offered by the SEC to resolve his notorious tweet … Read more
A drama is playing out in Boston federal court before a respected judge that could prove to be a legal “Watergate,” one that could reshape class action practice. Combining elements that are both sordid and comic, this litigation has already shown that the leading experts on legal ethics disagree significantly over what must be disclosed to the court approving a class action settlement. More importantly, although this episode could prove to be an isolated aberration, the other possibility is that the behavior at issue in this case may occur regularly. As all New York City tenants know when they … Read more
Earlier this month, the CEO of Pepsi Co. suggested to President Trump that eliminating quarterly reporting (and shifting to biannual reporting) would reduce the pressure on managers to focus on the short-term. As impulsive as Elon Musk, the president bought this view hook, line, and sinker and tweeted his proposed shift to the world (and a probably startled SEC).
But what will be the actual impact? Those who have a law and economics orientation will predictably respond that widening reporting frames will present investors with greater uncertainty and risk, with the result that stock prices should decline (and the cost … Read more
This is a column for insider trading junkies—a special breed who love all the nuances in this very nuanced subject. Late last month, a Second Circuit panel did something fairly unusual: It withdrew a 2017 decision and substituted a new opinion with a new rationale (but still with the same 2-1 division on the panel). The new decision in United States v. Martoma has a less sweeping and more defensible rationale but still deviates from the law in other circuits. In addition, it has some nuances that future cases are certain to explore. Chief among these is the status … Read more
The following is an abbreviated version of Professor Coffee’s May 23 testimony before the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investments. The deleted portions of his testimony relate to the specific content of proposed bills to extend and supplement the JOBS Act.
Chairman Huizenga, Ranking Member Maloney, and Fellow Members of the Committee:
I thank you for inviting me. I have been asked to comment on 11 proposed bills, all of which seem to have a common source: a 2018 Report entitled, “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public,” … Read more
It is an old maxim that “Hard cases make bad law.” But it may have a corollary: “Bad facts make hard law.” When a defendant clearly overreaches, the court may not let small details stand in its way. The decision in In re Xerox Corp. Consol. Shareholder Litigation by Justice Barry Ostrager of the New York Supreme Court may be such a case. Decided at the end of last month, the decision enjoined a shareholder vote on a merger-like transaction between Xerox Corporation and Fujifilm Holdings Corporation (“Fuji”) and required Xerox to waive its advance notice bylaw so that … Read more
Once a legal unknown, Michael Cohen made it last week to the front pages of both the New York Times and the Wall Street Journal. Charges swirl around him as the personal fixer for President Trump and the alleged bagman for the payment of hush money by Trump to porn star Stormy Daniels. Daniels’ attorney, Michael Avenatti, has accused Cohen of violating the federal bank fraud statute, and the Department of Justice has identified Cohen as the subject of a criminal investigation.
This brief column will not attempt to evaluate Cohen’s criminal liability (if any), but it will offer … Read more
Securities class actions soared in 2017, jumping from 271 filings in 2016 to a near record 412 filings in 2017 — well above the average of 193 per year for the years 1997 to 2016. Only 2001 was comparable, although both 2001 and 2017 were inflated by special factors. Now add to this growth the $3 billion settlement in the Petrobras litigation earlier this year (plus the highly favorable ruling by the Second Circuit in Petrobras last year). The result may be the same as when the discovery of gold at Sutter’s Mill was announced to the … Read more
After over a year of work, which included the review of some 635,450 Form 8-Ks filed by 7,799 public companies from January 1, 2000, to September 30, 2016, we think we know at least one answer to the question in the above title: Informed trading soars! We have just posted our research, which we co-authored with former Columbia Law Professor and now SEC Commissioner Robert Jackson and Robert Bishop, a recent Columbia Law graduate, on SSRN, available here. Above all, it shows that following the appointment of a hedge fund-nominated director to the board, the target firm experiences … Read more
Press reports indicate that Spotify, the music streaming company, is planning an initial public offering in March or April of this year, and that it plans to use a novel “direct listing” approach that has not previously been used at the New York Stock Exchange. Already, it has made a confidential filing of its registration statement with the SEC. Eager to accommodate Spotify, the NYSE has filed amendments to its listing rules with the SEC (and twice amended this filing, most recently in December). If the news stories are accurate, the SEC has signaled its willingness to approve … Read more
Hedge fund activism has transformed the corporate governance landscape – possibly for better, possibly for worse. But as activist funds emerge as the newest and most potent players in corporate governance, there is one certainty: New agency costs also arise. The activist firm has the de facto ability today to buy a significant block of stock in a target firm (typically 5 percent to 8 percent), announce a new business strategy for the target (often involving increased leverage and asset sales), and then demand board representation (generally two directors, sometimes more) to implement its strategy. Increasingly, the activist gets what … Read more