High Frequency Trading Reform: The Short Term and the Longer Term

High frequency trading has more enemies than friends, but the key question is what are the costs of reform.  Attorney General Schneiderman’s pending suit against Barclays PLC for allegedly misrepresenting that its dark pool (known as “LX”) was “safe” from high frequency traders, when in fact it appears to have been a hotbed of “predatory” trading, shows two things:  First, it underlines that the market, itself, does not really understand the microstructure of equity trading, because trading at LX fell by 37% the week after the suit revealed unsuspected practices.[1]  But LX may not stand alone, and other dark pools … Read more

Death by One Thousand Cuts

Ask any plaintiff’s lawyer about Halliburton II, and you will hear a predictable response: “Whew! We Dodged the Bullet!”  But that is not entirely accurate.  The bullet hit, but inflicted a non-fatal wound.  Prior to Halliburton II, class certification was automatic in securities class actions, at least if the stock traded on the NYSE or the upper reaches of Nasdaq.  After Halliburton II, defendants will now have a chance to show a lack of “price distortion” (with the burden on them, to be sure).  That may be a fair and balanced result (as I wrote here earlier … Read more

Hedge Fund Activism: New Myths and Old Realities

Two recent developments have changed the playing field of corporate governance: (1) the Delaware Chancery Court’s ruling this month on the use of a two-tier poison pill in the Sotheby’s case (and Sotheby’s quick and conciliatory settlement two days later, which conceded three  seats on Sotheby’s expanded board to Third Point LLC, a particularly aggressive hedge fund),[1] and (2) the joint $50 billion bid of Pershing Square Capital Management and Valeant Pharmaceuticals International Inc. for Allergan Inc.[2]  In their wake, every pundit has announced that this is the heyday of hedge fund activism.  Fund managers now hold the whip hand, … Read more

The JOBS Act II Is Coming!

In 2012, the Republicans learned an important lesson: neither the White House nor many Congressional Democrats would resist major deregulation of the federal securities laws if that deregulation was packaged as a “JOBS Act.” 2014 is also an election year, and a similar election year package may be in progress. On Wednesday, April 9th, the Subcommittee on Capital Markets and Government Sponsored Entities of the House Committee on Financial Services held hearings on seven bills. They range from the modest to the extreme, and all are united only by their insistence on dismantling securities regulation. Some have unanticipated consequences that … Read more

The Herbalife Circus

You can’t make this stuff up.  Reality is more bizarre than fiction.  Good as “House of Cards” or “Game of Thrones” are, they cannot match the Herbalife battle for the sheer confrontation of economic power, the treachery among rivals, or the political machinations.  What the War of the Roses was to Shakespeare, the Herbalife battle could be for future playwrights, supplying them with similar opportunities to exploit well-known historical events for artistic purposes.  Can one imagine a future David Mamet writing:  “To short or not to short.  That is the question.”?[1]

This soap opera began in December, 2012 when shareholder … Read more

After The Fraud on the Market Doctrine: What Should Replace It?

Like children on Christmas Eve, securities defense attorneys and corporate executives are waiting in hopeful anticipation for the Supreme Court’s coming decision in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), which may overrule the “fraud on the market” doctrine (“FOTM”) that was announced over a quarter century ago in Basic v. Levinson.[1] Academics are divided, with probably the majority fearing the loss of general deterrence if the securities class action is substantially undercut. Conversely, a minority (including this author) believe it is remarkable that FOTM has survived as long as it has because it is extraordinarily ill-suited to the real world of securities fraud (as hereafter explained). A third more nervous group of spectators are the managing partners of litigation-oriented law firms, who know that FOTM’s potential abolition would likely imply a steep decline in securities litigation, which is the staple of their practice. Ironically, some of the securities defense attorneys eagerly awaiting FOTM’s demise may next year be learning how to litigate patent cases. Be careful then what you wish for, as you may get it. Read more

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Editor's Tweet: Professor John Coffee on Columbia Law: After The Fraud on the Market Doctrine: What Should Replace It?

SEC Enforcement: Talking the Talk, But Walking the Walk?

Almost everyone has an opinion about securities enforcement.  Many are disappointed (and even angry) that “few high level executives” have been prosecuted (criminally or even civilly) in connection with the 2008 financial crisis.[1]  Deep in their bunker, the SEC still has some diehards who maintain that fraud has been fully prosecuted, but, even there, attitudes are changing.  The shift is much clearer at the Department of Justice (“DOJ”), which has just settled with JPMorgan for $13 billion and may be in hot pursuit of still unnamed defendants.[2]  Even if the SEC is presenting itself as a more aggressive … Read more

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Editor's Tweet: John C. Coffee Jr. of Columbia Law School on SEC Enforcement: Talking the Talk, But Walking the Walk?

In the Wake of the Whale, What’s Changed?

The “London Whale” is far from the financial crime of the century, but it may well be the financial blunder of the decade. Crimes and blunders are, of course, different, but the slow and inconsistent response by JPMorgan Chase & Co. to its discovery that traders in its London office were hiding their losses has placed the behavior of several JPMorgan officers on the ambiguous seam between a negligent blunder and more culpable fraud.

This frames an obvious question: Does the U.S. Securities and Exchange Commission’s settlement with JPMorgan deal adequately with this misbehavior? After ignoring Lehman Brothers and other … Read more

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“Bad Actors” and Worse Policy

Is the SEC capable of blushing?  Increasingly, there are occasions in which the Securities and Exchange Commission takes positions so inconsistent with the protection of investors and its own history and so deferential to the industry that one has to ask:  What were they thinking?  How can a federal agency be that tone deaf?  This column will, first, examine the SEC’s new policy toward when “bad actors” can use the vastly expanded Rule 506 and, second, focus on how these rules will likely be gamed.

In Release No. 33-9414 (July 10, 2013),[1] the Commission has adopted rules to disqualify … Read more

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Editor's Tweet: Professor John Coffee of Columbia Law School on “Bad Actors” and Worse Policy

Disclosure Is Still the Best Policeman!

In a delightful essay, Ron Gilson and Jeff Gordon remind us that the times have changed and the Williams Act belongs in their view to the era of the Beatles. (Personally, I have trouble believing that Sgt. Pepper was really that long ago.  Next, they will try to tell me that John Lennon is dead).  Even if they are right, I must respond with a counter-truism.  Plus ca change, plus la meme chose.  And I will raise their bid, by invoking two other familiar maxims:  First, power corrupts, and absolute power is at least within view for institutional … Read more

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Editor's Tweet: John Coffee on why Disclosure Is Still the Best Policeman in the 13(d) Debate

The Institute for the Fiduciary Standard Awards Its First “Oscar”

The Institute for the Fiduciary Standard, a non-profit organization dedicated to the advancement of fiduciary principles, has awarded its first ever Tamar Frankel Fiduciary Prize to Robert A.G. Monks, the corporate governance activist and scholar. The Frankel Fiduciary Prize is intended to recognize contributions to “the preservation and advancement of fiduciary principles in public life” and is named after Professor Tamar Frankel of the Boston University Law School, a leading scholar in this field.

Professor John C. Coffee, Jr. of Columbia University Law School, the Chairman of the Nominating Committee that made this selection, explained the Committee’s decision, saying:

“Bob … Read more

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Editor's Tweet: The Institute for the Fiduciary Standard Awards Its First “Oscar” http://wp.me/p2Xx5U-1dp

‘Neither Admit Nor Deny’: Practical Implications of SEC’s New Policy

In a move that appears at once to be shrewd, savvy and largely symbolic, the SEC has modified its longstanding policy that it will not require a defendant to admit or deny liability, or facts that might establish its liability, in a settlement with the SEC. Now, such an admission may be required “when appropriate.”1 Whatever the outcome in the SEC’s mandamus appeal of Judge Jed S. Rakoff’s Citigroup decision,2 Rakoff has effectively won the war, even if he loses the Citigroup battle. Although denying that Rakoff influenced them, the SEC conceded (effectively, if not formally) that its policy was

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Editor's Tweet: Prof. John C. Coffee, Jr. of Columbia Law School discusses 'Neither Admit Nor Deny': Practical Implications of SEC's New Policy

The Wachtell Bylaw: A Balanced Perspective

In a free-swinging and provocative attack, Brandon Gold, a graduating Harvard Law School student, argues (1) that third party bonuses, paid by hedge funds or others soliciting proxies, to their director nominees are acceptable and even desirable, and (2) that a proposed bylaw, drafted by Wachtell, Lipton, that would disqualify nominees who were parties to any such agreement or understanding or who have received such compensation from third parties is invalid.  Only the second of these questions involves much nuance, but both are worth exploring.

Mr. Gold’s first assertion that such “pay for performance” compensation arrangements for directors are desirable … Read more

Securities Enforcement: 2013 Report Card

This is the season for report cards and grades.  The securities laws are enforced by the plaintiff’s bar and the SEC.  How well are they doing?  What grades do they deserve?

I.  Private Enforcement

In terms of private litigation, 2012 saw only 53 court-approved securities class action settlements, which was a 14-year low.[1]  This was not unexpected because settlements follow in the wake of class action filings in earlier years, and class action filings were well down in 2009 and 2010.[2]  This decline seems likely to continue, as securities class action filings were also down sharply in 2012, with only … Read more

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Editor's Tweet: Professor John C. Coffee, Jr. of Columbia Law School discusses Securities Enforcement: 2013 Report Card

Nominations Invited for First Annual Fiduciary Award Created to Honor Tamar Frankel

The Institute For The Fiduciary Standard, a non-profit organization based in Washington, D.C., has created a prize—to be known as the Tamar Frankel Fiduciary Prize—which will be awarded annually to a person who has made a “significant contribution to the preservation and advancement of fiduciary principles in public life.”  The award is named after Professor Tamar Frankel, an expert on fiduciary duties and investment management and a longtime Professor at Boston University Law School.

The chairman of the Nominating Committee is Professor John C. Coffee, Jr. of Columbia University Law School.  Nominations are invited from the public, but the deadline … Read more

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Editor's Tweet: Annual Fiduciary Award Created Honoring Tamar Frankel

Shareholder Activism and Ethics: Are Shareholder Bonuses Incentives or Bribes?

This is the heyday of institutional investor activism in proxy contests.  Insurgents are running more slates and targeting larger companies.  They are also enjoying a higher rate of success:  66% of proxy contexts this year have been at least partially successful.  The reason is probably the support that activists have received from the principal proxy advisors:  Institutional Shareholder Services (“ISS”) and Glass Lewis & Company.  According to a recent N.Y. Times Dealbook survey, ISS has backed the insurgent slate in 73% of the cases so far in 2013.

All this may be well and good.  Shareholders certainly have the right … Read more

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Editor's Tweet: Professor John C. Coffee Jr. of Columbia Law School discusses whether bonuses from shareholder activists are incentives or bribes?

The Challenge of the Semi-Public Company

Something new and significant is taking shape. For a variety of reasons—the impact of the JOBS Act, the growing popularity of equity private placements, the appearance of new trading markets for venture capital and other non-reporting companies—a new tier of companies is growing rapidly that is composed of issuers that are not “reporting” companies, but that do have a significant number of shareholders. In terms of the size of their shareholder class, these companies overlap with public companies, but they trade in the dark—and actively. More importantly, as their number grows, it is predictable that existing and new trading venues will begin to compete to attract and capture the trading interest in these stocks. This column will call these firms “semi-public companies” to reflect their intermediate status, midway between truly private firms (such as early stage venture capital startups and family-held firms) and public companies. Read more

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Editor's Tweet: Professor John C. Coffee, Jr. of Columbia Law School discusses the Challenge of the Semi-Public Company.

M&A Litigation: More and More Dysfunctional

Empirical scholars of corporate law are uncovering a rapidly changing and depressing pattern in M&A litigation. This new research dates from a series of articles in 2012 by Professors John Armour, Bernard Black and Brian Cheffins, which announced that Delaware was “losing” its cases, as plaintiff’s attorneys migrated to other jurisdictions where they could expect lower dismissal rates and/or higher fee awards.[1] This year, a newer study by Professors Matthew Cain and Steven Davidoff covers 1,117 merger transactions between 2005 and 2011 and reports more surprising and complex findings. [2]  But the key question has not been faced by these … Read more

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Editor's Tweet: Professor John Coffee of Columbia Law School discusses M&A Litigation and its increasing dysfunctional

Insider Trading Rules Need Rationalization

The current scope of the insider trading prohibition is arbitrary and unrationalized. Both sides in the debate should be able to agree on this, as the current scope is at the same time both underinclusive and overinclusive. On the one hand, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has neither breached a fiduciary duty nor “feigned fidelity” to the source and is presumably immune from insider trading liability under current law. On the other hand, if an employee of an acquiring firm seeks to test out information about a potential target with a friend at a major investor in the target and that investor later acquires more stock in the target based on that conversation, it is possible under SEC v. Obus that the employee will be deemed to have violated Rule 10b-5 on theory that he made a gift of the information, even though no payment or economic benefit is paid to the alleged tipper. This is considerably grayer behavior than that of the thief. Thus, drawing lines so that the thief escapes liability, while the inquiring employee does not, seems morally incoherent. Nor are such lines doctrinally necessary. Read more

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Editor's Tweet: Professor John C. Coffee, Jr. discusses the current scope of the insider trading prohibition and how it can be rationalized

Gone With the Wind: Small IPOs, the JOBS Act, and Reality

A dramatic reversal occurred in the capital markets, beginning around 2000, and its causes and implications appear to have been widely misunderstood. From 1980 to 2000, an average of 310 operating companies did initial public offerings (IPOs) each year, but from 2001 to 2011, this number fell by over two-thirds to only 99 operating companies per year.This decline cannot be explained by macro-economic conditions as Gross Domestic Product more than doubled over this period.

Moreover, this decline has been even more precipitous in the case of smaller IPOs (hereinafter defined to mean IPOs of companies with pre-issuance annual … Read more

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Editor's Tweet: Professor Coffee discusses small IPOs, the JOBS Act, and reality. He suggests some alternative explanations for the decline of the IPO.