Roy Shapira

A Reputational Theory of Corporate Law

How does corporate law matter? My recent paper suggests that the main impact of corporate law is not in imposing sanctions, but rather in producing information. The process of litigation or regulatory investigations produces information on the behavior of defendant companies and businessmen. This information reaches third parties, and affects the way that outside observers treat the parties to the dispute. In other words, corporate and securities litigation affects behavior indirectly, through shaping the reputations of companies and businessmen.

The paper explores how exactly information from the courtroom translates into the court of public opinion. By analyzing the content of … Read more

John Coffee, Headshot

Update on “Loser Pays” Fee Shifting

The Delaware State Senate passed legislation on May 12th that will preclude “loser pays” fee shifting by bylaw or charter provision—sometimes. The Delaware House is expected to act sometime in June. But the pending legislation only bars such fee-shifting “in connection with an internal corporate claim.” Internal corporate claims are narrowly defined in a new Section 115 of the DGCL to mean claims “(i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii), as to which this title confers jurisdiction upon the Court of … Read more

Fried Frank discusses Expansion of Aiding and Abetting Liability for “Gatekeepers” — Stewart v. Wilmington Trust

In Stewart v. Wilmington Trust (March 26, 2015), the Delaware Chancery Court characterized the outside auditor and the administrative management company for certain captive insurance companies as having a “gatekeeping role” for the companies. On that basis, the court refused to dismiss claims against them for aiding and abetting the alleged breaches of fiduciary duties of the companies’ directors. The decision expands the Chancery Court’s recent focus on the gatekeeper concept, underscoring the potential for aiding and abetting liability for advisors.

Focus on advisors who have a “gatekeeper” role. An advisor to a board may have aiding and … Read more


Patent Trolls and IPOs: A Perfect Moment to Strike

In a recent episode of HBO’s Silicon Valley,[1] the show’s fictional startup team encounters a setback when they’re sued just before their company is about to receive a major venture funding round. As the news of the suit spreads, once-interested VC firms back away, leaving the future of the company in doubt.

“A young startup with an IP lawsuit hanging over its head? I wouldn’t want to be part of that team,” says the company’s lawyer.

“Yeah… it just sounds really expensive,” the founder responds, reeling at the cost of fighting the suit.

“Welcome to the business, Richie.”… Read more

Robert Jackson and Gillian Metzger

Brief of 15 Professors of Law and Finance in MetLife v. FSOC

Last week, along with our co-authors Kate Andrias and Michael Barr of the University of Michigan Law School, we filed an amicus brief on behalf of fifteen professors of law and finance in MetLife v. Financial Stability Oversight Council. MetLife has challenged the FSOC’s determination that the company’s distress could threaten U.S. financial stability—and, thus, that MetLife should be subject to Federal Reserve supervision. The case, which is currently before the federal trial court in Washington D.C., represents the first major challenge to an FSOC designation. Our brief explains why the court should reject this challenge.

Our brief reflects … Read more

McDermott discusses SEC’s Large Payouts to Compliance-Officer Whistleblowers

On April 22, 2015, the U.S. Securities and Exchange Commission (SEC) announced that it had awarded $1.4 million–$1.6 million to a compliance officer-turned-whistleblower who aided the SEC in an enforcement action against the officer’s employer. This marks the second time an employee with an internal audit or compliance function—who does not typically qualify under whistleblower rules—received an award under the SEC’s whistleblower program dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under SEC rules, disclosures of misconduct by those whose principal duties are related to compliance or internal auditing do not qualify as “original information” eligible for … Read more

Bill Wang

Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping

After the Supreme Court’s unanimous decision in Carpenter v. United States,[1] the federal mail and wire fraud statutes became potent prosecutorial weapons against insider trading when the information-owner is the victim. This post examines how criminal liability under the federal mail and wire fraud statutes supplements traditional SEC authority to pursue insider trading. SEC Rules 14e-3 and 10b-5 cover a great deal of stock market insider trading and tipping, but certainly not all. For instance, Rule 14e-3 is confined to the tender offer context.

As illustrated by the recent case of United States v. Newman,[2] the Rule 10b-5 … Read more

Morrison Foerster discusses FINRA’s Revised Sanction Guidelines: Higher, Tougher, Fairer?

FINRA’s newly revised Sanction Guidelines, effective immediately, signal that the upward trend in sanctions against broker-dealers is likely to continue.

The Sanction Guidelines, which establish the range of sanctions that FINRA may impose in formal disciplinary proceedings, affect several specific types of violations, as well as the principles behind levying sanctions and the overall levels of monetary sanctions. The Guidelines are also meant to catch up to the sanctions that FINRA actually is levying; as FINRA stated, in revising the guidelines, it is seeking to “harmonize the Sanction Guidelines with the current state of the cases in this area.”… Read more

David Yermack

Donor Governance and Financial Management in Prominent Art Museums

Donations play a fundamental (and increasing) role in supporting art museums and other nonprofit corporations. However, donations are often not freely given and may come at the price of certain restrictions upon the donation’s use and expropriation. This practice, termed here as “donor governance,” represents a form of corporate governance for nonprofits—the “restrictive covenants” on the donation’s use limit nonprofit managers’ ability to freely use the funding.

Donor governance manifests itself particularly strongly in the art-museum context. Many art museums suffer from recurring encounters with financial distress and self-perpetuating boards of trustees, incentivizing donors to be wary of donating without … Read more

Roe Vatiero

Corporate Governance and its Political Economy

To fully understand the modern corporation’s ownership, shape, and distribution of authority, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. Interest groups often seek to obtain via politics both … Read more

Sarah Light

The New Insider Trading: Environmental Markets within the Firm

Global climate change is the most pressing environmental problem of our time. This fact has led legal scholars and policymakers to debate the relative environmental effectiveness, efficiency, and justice of different public policy instruments such as carbon taxes, cap-and-trade systems, and prescriptive regulation. Such scholarship tends to assume that the government is the key (or only) player setting and enforcing environmental standards against private firms, which are regulatory targets.

In a recent article, entitled, The New Insider Trading: Environmental Markets within the Firm,[1] (available here) I challenge these assumptions through a close examination of British Petroleum’s (BP’s) … Read more

Simpson Thacher discusses SEC and FINRA Report on Cybersecurity Sweep Examinations and SEC’s Cybersecurity Guidance Update

The SEC issued a National Exam Program risk alert summarizing OCIE’s cybersecurity examination sweep of advisers and broker-dealers on February 3, 2015 (SEC Risk Alert). On the same day, FINRA issued its report on cybersecurity practices of broker-dealers, based on its own sweep examination (FINRA Report). Neither the SEC Risk Alert nor the FINRA Report creates any new rules or legal obligations, but each provides insight into current industry practice.

Many commentators have interpreted the reported results as a sign that the industry is on top of cybersecurity issues, but OCIE specifically included cybersecurity controls among its examination priorities for … Read more

Moorhead and Vaughan

The Ethical Challenges of Legal Risk

General Motors’ tardy response to ignition switch problems; Standard Chartered Bank’s wire-stripping of Iranian funds; and the News of the World’s misleading ‘lone wolf’ defence of hacking are all illustrations of the increasingly controversial role that the management of legal risk by in-house legal functions can play.  Standard Chartered Bank’s in-house legal team advised on how they could ‘enforcement proof’ wire-stripping Iranian identifiers from transfers of funds into the US (and advised their organisation to clear these funds through a competitor bank) – they took a monumental risk with the commercial and reputational interests of the Bank.  They apparently did … Read more


Commissioner Aguilar discusses U.S. Equity Market Structure: Making Our Markets Work Better for Investors

The following public comments were released by Commissioner Luis A. Aguilar, U.S. Securities and Exchange Commission (SEC)[1] on May 11, 2015.  A copy of them appears on the SEC website, here.

I. Introduction

It is well known that the Commission needs to undertake a holistic review of our current equity market structure. In fact, the Commission has formed an advisory committee to assist that review.[2] In furtherance of that process, the following is intended to focus on certain issues that any serious review should consider—such as the various issues that have arisen from our markets’ increasingly fragmented … Read more

Adam Badawi

Lobbying in the Boardroom

Understanding why firms exist has long been a preoccupation of economists. The leading answers—the ones that have won people Nobel prizes or put them on the short list[1]—focus on the ability of firms to get things done by asserting authority rather than relying on contracts or formal dispute resolution. To put it simply, if the boss tells you to stay late to finish a project, you don’t start a lawsuit, you just do it.

In the modern corporation, the board of directors is the ultimate source of this authority.[2] That authority gives the board the power to … Read more

Joanna C. Schwartz

The Cost of Suing Business

To listen to the Chamber of Commerce, one would think that class actions are the most significant scourge on business ever conjured up by man. In brief after brief to the Supreme Court, the Chamber of Commerce and other business amici tell the same story: Meritless class actions, filed by rapacious plaintiffs’ attorneys, are so devastatingly expensive to defend against, and threaten such financial ruin if plaintiffs prevail, that corporate defendants cannot help but accept “blackmail settlements” that harm both businesses’ bottom lines and society at large.

The Supreme Court appears to have premised several recent civil procedure decisions—including Twombly, Read more

Fried Frank discusses U.S. DOL Re-Proposes ERISA Fiduciary Rule

Roughly four and a half years after its first attempt, the U.S. Department of Labor today again proposed to redefine the term “fiduciary” as it applies in the investment advice context. The DOL withdrew the 2010 Proposed Rule following blistering criticism from the regulated community and Congress. Since the withdrawal, however, heated debate among stakeholders has continued. Earlier this year, President Obama publicly expressed his support for the 2015 Proposed Rule. Further complicating matters, SEC Chairman Mary Jo White recently committed the SEC to proposing a fiduciary standard for brokers who recommend financial products to clients—regardless of whether the clients … Read more

John Morley

Why Law Firms Collapse

Law firms don’t just go bankrupt – they collapse. Dewey & LeBoeuf; Heller Ehrman; Howrey; Thelen. All of these firms and many others have disappeared with extraordinary swiftness and finality. Large law firms often go from apparent health to liquidation in just a few months – sometimes even weeks or days. And none has ever managed to reorganize its debts in Chapter 11 bankruptcy and survive. This pattern of swift and complete collapse is puzzling, because it is strangely out of proportion to law firms’ actual financial distress. Most collapsed firms have remained profitable up through the days they dissolved.… Read more

PwC discusses Cyber-security: Think Risk Not IT

Despite millions of dollars spent on enhancements, cybersecurity remains the area of risk management with the largest gap between threat and preparedness. As the frequency and sophistication of cyber attacks have increased significantly in recent years, counter measures have failed to keep pace.

This gap is especially important for financial institutions, which by our estimate are over 30% more likely to be targeted by cyber crime. While the biggest banks have been dealing with cyber threats for years, they and their smaller peers are largely responding to threats reactively. More specifically, banks continue to address past issues rather than responding … Read more

Key Speakers At Seminars At The IMF & World Bank Annual Meetings

Chair Yellen discusses Finance and Society

Let me begin by thanking the organizers for inviting me to participate in this important dialogue on the role of finance in society. The financial sector is vital to the economy.  A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.

Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and … Read more