Sense and Nonsense About Securities Litigation

In a forthcoming article, I contend that Professor James Spindler has it wrong in his recent critique[1] of scholarly opposition to securities fraud class actions (SFCAs).  Spindler argues that the opposition is based on two mistaken ideas: (1) that compensation for securities fraud is impossible because recovery against the issuer means that defrauded buyers effectively pay themselves (the circularity critique) and (2) that most investors are diversified and thus suffer no real harm from securities fraud since buy-side losses wash out from sell-side gains on average and over time (the diversification critique).

Spindler purports to refute both of these … Read more

The Irrepressible Myth That SEC Overregulation Has Chilled IPOs

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. Introduction

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

Making a Market for Corporate Disclosure

Public-company information has great social value. However, it is widely thought that left to their own devices, firms will under-disclose information about their condition and prospects. This thinking is embodied in the mandatory-disclosure regime that sits at the foundation of modern securities law. But government-compelled disclosure in this area—including piecemeal additions to the disclosure regime based on the latest Washington fad—leaves much to be desired.

In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate … Read more

Arnold & Porter Discusses Ninth Circuit Ruling on Section 14(e) of Exchange Act

On April 20, 2018, the Court of Appeals for the Ninth Circuit held in Varjabedian v. Emulex Corp. that a violation of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (Exchange Act), which governs tender offers, requires a showing of negligence, not scienter.[1]  In so holding, the Ninth Circuit departs from five other Circuit Courts—the Second, Third, Fifth, Sixth, and Eleventh Circuits—that have held that Section 14(e) claims require proof of scienter (the intent to defraud).


In February 2015, Emulex Corp. (Emulex) and Avago Technologies Wireless Manufacturing, Inc. (Avago) announced that they had … Read more

Gibson Dunn Discusses SIFMA Report on Helping More Companies Go and Stay Public

On April 27, 2018, the Securities Industry and Financial Markets Association (“SIFMA”), the leading industry group representing broker-dealers, banks and asset managers, along with other securities industry related groups, released a report called “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public” (the “Report”).[1]  In response to the decline in the number of IPOs and the number of public companies generally in the United States over the last twenty years, the Report provides recommendations aimed at reducing perceived impediments to becoming and remaining a public company.

As the Report notes, the United States is now home … Read more

Paul Weiss Discusses Roadmap of Non-GAAP Financial Measures for Audit Committees

On March 16, 2018, the Center for Audit Quality (the “CAQ”) published Non-GAAP Financial Measures: A Roadmap for Audit Committees[1] (the “Roadmap”) to provide guidance to audit committees on advancing their oversight and involvement with non-GAAP financial measures. The Roadmap summarizes the common themes on the presentation and use of non-GAAP financial measures that emerged from a series of roundtable discussions held by the CAQ in 2017 and attended by a variety of stakeholders, including audit committee members, management, investors, securities lawyers and public company auditors.  The CAQ hopes that the Roadmap will prove useful for audit committees and … Read more

An Unasserted Lesson of the SEC’s Yahoo Cyberbreach Enforcement Action

Much has been written about the Securities and Exchange Commission’s enforcement action involving Yahoo’s failure to adequately disclose a cyberbreach.[1]  I am writing about something that the SEC’s announcement and order did not address and therefore has not been written about.

On April 24, 2018, the SEC announced a settlement with Altaba Inc., formerly Yahoo! Inc., under which Altaba agreed to pay $35 million and take certain remedial actions to resolve claims that Yahoo violated federal securities law by waiting until September 2016 to make disclosures about a 2014 data breach of its user database.[2]  The SEC’s announcement … Read more

Enforcement Co-Chief Offers Tips on Meeting with the SEC

I’m delighted to be here today among so many friends and colleagues, and I extend my thanks to the New York City Bar for hosting this important event. Because New York plays such a pivotal role in our financial system, members of the New York City Bar have long taken a leading role in many of the most significant securities and white collar matters. And the City Bar has been a key forum for education and dialogue about these important issues. I am honored to join today’s distinguished group of speakers, panelists, and attendees.

This afternoon, I would like to … Read more

Accusers as Adjudicators in Agency Enforcement Proceedings

Largely because of the U.S. Supreme Court’s 1975 decision in Withrow v. Larkin, the accepted view for decades has been that a federal administrative agency does not violate the Due Process Clause by combining the functions of investigating, charging, and then resolving allegations that a person violated the law.  Many federal agencies have this structure, such as the Securities and Exchange Commission and the Federal Trade Commission.

In 2016, the Supreme Court decided Williams v. Pennsylvania, a judicial disqualification case that, without addressing administrative agencies, nonetheless raises a substantial question about one aspect of the combination of functions … Read more

The Influence of Cross-Border Cooperation on Equity Market Liquidity

In a recent post on this blog, I described how IOSCO’s Multilateral Memorandum of Understanding (MMoU)—an arrangement intended to facilitate cooperation among regulators—improved cross-border enforcement of securities laws. In this post, I summarize a follow-up study showing that this enhanced enforcement significantly increased capital market liquidity by roughly 7 to 13 percent for domestic shares unaffiliated with foreign markets. The study also shows an even greater improvement for shares listed on markets outside an issuer’s home country. Cross-border enforcement is most important in these situations that involve multiple markets, regulators, and jurisdictions, and so it is not surprising that such … Read more

Legal Insider Trading in Europe Makes the Case for Enforcement

Evidence about the relative importance of private and public enforcement of securities laws for financial markets is inconclusive. The recently introduced Market Abuse Directive (MAD) (2003/6/EC) sets a European Union (EU) standard for regulation of insider dealing and market manipulation. Under Article 18 of the MAD, EU member states had to implement by October 12, 2004, local regulations that require the disclosure of corporate insider trading. The regulation represents a unique natural experiment that was introduced not in response to a specific case but as a mandate (exogenously) to EU countries (and Switzerland) simultaneously. This experiment allows us to examine … Read more

SEC Chair Clayton Talks Retail Investment Services and Forward-Looking Regulation

It is wonderful to be in Philadelphia.

It is wonderful to be at Temple University. It is very kind of Temple to host this event. I will speak for about 30 minutes and then take questions.[1]

Before I move to today’s topic — the relationship between Main Street investors and investment professionals — I ask for your indulgence because I want to elaborate on Pennsylvania, Philadelphia and Temple University.

Pennsylvania is my home state.[2] My brothers and I were fortunate to experience much of the best of Pennsylvania growing up.   Through the sixth grade, we lived in what … Read more

SEC Investment-Management Director Talks Conduct Standards and Liquidity Risk

I am going to touch on two areas of work that reflect our efforts to be a responsive regulator that seeks engagement from all as we develop regulatory policies: the standards of conduct for investment professionals and liquidity risk management.

Before I dive in, let me pause for the disclaimer. I am speaking today only for myself and not for the Commission, the Commissioners or the staff.[2]

Standards of Conduct for Investment Professionals

The Commission recently proposed for public comment a significant rulemaking package on the standards of conduct for investment professionals.[3] The proposals are intended to serve … Read more

Insider Trading’s Legality Problem

Last year, when the Supreme Court revisited the topic of insider trading in Salman v. United States, scholars rehearsed a familiar debate: Should Congress enact a statute that explicitly defines insider trading? Or should it stick with the status quo, wherein the Court periodically clarifies previous holdings in cases such as Dirks, Chiarella, and O’Hagan? Defenders of the status quo argue that a statutory definition would simply encourage traders to find—and leap through—legal loopholes. Critics respond just as robustly that statutory language provides notice and restrains prosecutorial overreach.

In Insider Trading’s Legality Problem, I explore an additional … Read more

Davis Polk Discusses SEC’s $35 Million Fine for Late Cyberbreach Disclosure

On April 24, the Securities and Exchange Commission charged Altaba Inc., formerly Yahoo! Inc., with misleading shareholders by waiting almost two years to disclose its 2014 data breach. Consenting to a cease-and-desist order, Altaba agreed to pay a $35 million penalty in the first SEC enforcement action against a public company relating to cyberbreach notification. The SEC’s action follows a trend by state attorneys general and other regulators in exacting significant penalties from companies that fail to provide timely breach notification. Yahoo! previously reached an $80 million settlement to resolve a class-action securities case for failure to disclose the … Read more

The Hidden Cost of Meritless Class Action Lawsuits

Close to 40 percent of all companies listed on major U.S. stock exchanges have been targeted by a securities class action lawsuit at least once between 1996 and 2017, according to the Stanford Securities Class Action Clearinghouse. These lawsuits are not only common but increasingly popular, with a record number of cases filed in the past two years. Given their prevalence, understanding the economic implications of the current securities litigation system is important.

Securities class action lawsuits can be socially beneficial if they deter wrongdoing, curb managerial rent extraction, and compensate injured shareholders. However, class actions have a widely discussed … Read more

Arnold & Porter Discusses Regulators’ Clamp-Down on ICOs, Virtual Currencies, and Blockchain Firms

If there was ever a regulatory grace period for virtual currencies and blockchain technology, it is officially over.  Five federal regulators—The Financial Crimes Enforcement Network of the US Treasury Department (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS) and the Office of Foreign Assets Control (OFAC)— all recently issued statements or took actions in which they clarified their positions on the scope of their jurisdiction over multiple aspects of virtual currency and certain types of blockchain enterprises.  State, foreign and multilateral regulators have also taken actions to rein in virtual … Read more

Regulating Offshore Finance

The Cayman Islands, Bermuda, and the British Virgin Islands are famous as “tax havens” that facilitate the evasion or avoidance of domestic tax. They and a growing number of other offshore jurisdictions in the Caribbean and elsewhere are emerging hubs of modern financial transactions. While offshore jurisdictions tend to attract foreign capital with low tax rates, they may be doing much more than shortchanging the Internal Revenue Service.

In my article, “Regulating Offshore Finance,” I explore how offshore incorporation can enable commercial entities to evade federal regulatory statutes. The applicability of federal statutes and where a commercial entity chooses to … Read more

How to Regulate Bitcoin Futures

Bitcoin is a currency, technology, and, most recently, futures product.  Several clearinghouses have allowed bitcoin futures trading.  For example, CBOE launched trading in bitcoin futures on December 10, 2017, while CME Group did so a week later.[1]  NASDAQ and Cantor Fitzgerald’s exchange are also considering offering bitcoin futures.

Futures generally contribute to systemic risk,[2] but distinctive features of bitcoin futures heighten concerns.  Thus, the Futures Industry Association (FIA), a trade organization representing major banks and brokers, has protested the introduction of bitcoin futures to the market without more scrutiny, given their enormous potential to disrupt the economy.  This … Read more

The Middle-Market IPO Tax

It’s a real honor to be here with you today at the Greater Cleveland Middle Market Forum.* In addition to leading some of the nation’s most promising young companies, you all have done exceptional work making sure that the middle market gets the attention it deserves in Washington. And as a lifelong baseball fan, I couldn’t miss the chance to see the Indians show the Cubs who’s boss tonight in Cleveland.[1]

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the … Read more