The Problem with Insider Giving

For a brief moment last month, Kodak Corporation’s stock soared from $2 a share to more than $33 a share on news that it might obtain substantial government financing. At that peak, Kodak director George Karfunkel unloaded shares then worth $116 million. If he had sold them, he might have been at grave legal risk.  As a director, Karfunkel likely had nonpublic information about Kodak’s prospects, and, if so, his fiduciary duties would have forbidden him from trading. But Karfunkel didn’t sell his shares – he gave them to a charity he runs.

Karfunkel is not alone.[1] NYU finance … Read more

Changing the Guard: Improving Corporate Governance with D&O Insurer Rotations

Insurance companies try to detect and reduce risk. Health insurers encourage preventative care, fire insurers insist on functioning sprinklers, police insurers investigate alleged misconduct and drop departments that tolerate excessive force, and Hollywood insurers flag risky scenes as requiring stunt doubles. These efforts make sense – it is the insurer’s money on the line if the client makes a claim – and they tend to benefit society.

Unfortunately, something is different about D&O insurance, which protects directors and officers from suits by shareholders alleging self-dealing or mismanagement. As Professors Tom Baker and Sean Griffith concluded from extensive interviews, “D&O insurers … Read more

Senator Richard Burr and Mixed Motives for Insider Trading

In response to accusations Friday of trading on non-public information about the coronavirus, Senator Richard Burr of North Carolina asserted independent and lawful grounds for unloading between $628,000 and $1.72 million worth of stock. “I relied solely on public news reports to guide my decision regarding the sale of stocks on February 13,” he said. “Specifically, I closely followed CNBC’s daily health and science reporting out of its Asia bureaus at that time.”[1]

While some people doubted the veracity of Burr’s purportedly lawful trading motives, others denied their significance. Journalist Kurt Eichenwald, for example tweeted:

If you sold after … Read more

Insider Trading: Are Insolvent Firms Different?

Are insolvent firms different from solvent firms with respect to insider trading law and policy? Formally, the law does not change. But economic realities and non-securities law duties do. As a result, the insider trading landscape changes considerably. The law is more permissive in some ways, and more constraining in others, as troubled instruments trade.

One difference is the level of regulation of trading in the residual claims of the firm. In solvent firms, the residual claims are equity securities, and equity securities are subject to the full ambit of trading restrictions.

In insolvent firms, non-equity claims such as trade … Read more

Insider Tainting: Strategic Tipping of Material Non-Public Information

In an article forthcoming in the Northwestern University Law Review, I analyze the strategic use of insider trading law to disable the trading activity of an information recipient. I call this phenomenon “insider tainting.” While most tips of information open doors, insider tainting closes them. Rather than empowering and enriching the tippee, the tipper conveys information to constrain her. Tainted with inside information, the tippee faces legal risks to her preexisting or potential trading plans.

Consider an instance of arguable insider tainting involving Dallas Mavericks owner Mark Cuban. He sold his stake in soon after the company’s chief executive … Read more

The Corporate Governance of National Security

A central goal of corporate law is to make managers accountable to shareholders. So it may come as a surprise that America’s federal government frequently compels companies to “effectively exclude the Shareholder from . . . influence over the Corporation’s business or management [.]”[1] Indeed, there is a federal agency whose principal is to ask companies to entrench the board of directors, waive the duty of loyalty, and hire individuals with little business experience to run the company.

That agency is located in the Pentagon. The managers hired and entrenched are former spies, military officers, and law enforcement officials. … Read more

Enterprise Without Entities

Scholars and practitioners of the law generally agree that any large enterprise must be run through a legal entity such as a corporation. Entities reduce transaction costs to coordinate an enterprise’s many patrons, limit liability for shareholders, and protect a business from untimely dissolution. The widespread consensus is it would be “effectively impossible” to obtain these benefits without entities, and therefore that legal entities are essential to economic life as we know it.

So it may be surprising to learn about a domain of mass-commerce in which legal entities are substantially absent.  In this domain, millions of people exchange trillions … Read more

The Law and Economics of Benchmark Manipulation

The following post comes to us from Andrew Verstein, Assistant Professor of Law at Wake Forest University School of Law. It is based on his recent article, “The Law and Economics of Benchmark Manipulation,” which is forthcoming in the Boston College Law Review and is available here.

This is a period of unremitting market manipulation. Allegations have rocked the markets in interest rates, foreign currency, gold, palladium, milk, oil, biofuels, natural gas, and aluminum, to say nothing of the inexorably rising tide of stock price manipulation. By all accounts, manipulation … Read more

Deterring Libor Manipulation and Improving Benchmarks

It’s tempting to think that we might be seeing the end of potential manipulation of financial benchmarks and rates, such as Libor.

The story would go like this: the Libor rate was an anomaly – humorous in retrospect – that was structured in a way prone to manipulation because it relied on the subjective (and objectively unverifiable) judgments of bank personnel who were subject to conflicts of interest.  Having weathered that scandal, we have now grown wiser. The FSA’s recent reforms of the rate-setting process have constrained the opportunities for ex ante human discretion in Libor: they treat Libor panel … Read more

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Editor's Tweet: Andrew Verstein of Yale Law School discusses deterring Libor manipulation and improving benchmarks