The SEC’s September Enforcement Spike

The Securities and Exchange Commission (SEC) periodically reports on its performance to the public and Congress, emphasizing metrics such as the number of enforcement actions (“cases”) filed (see, e.g., SEC, 2018, 2020). Former co-directors of the Division of Enforcement acknowledge the potential dangers of focusing on quantitative measurements: “the raw number of cases filed or the total amounts of fines and penalties assessed during an arbitrary time period such as a single fiscal year—cannot adequately measure the effectiveness of an enforcement program…[and] can result in a misalignment of incentives and objectives” (SEC 2018). We examine this concern by testing whether … Read more

Litigation Risk and the Independent Director Labor Market

A recent decision by the Delaware Supreme Court, In re Investors Bancorp, Inc. Stockholder Litigation (“Investors Bancorp”), increased the risk of litigation against directors, bucking a dec Edit visibilityades-long trend. The decision reversed a Chancery Court ruling and substantially changed the standard that Delaware courts use to review shareholder derivative litigation dealing with director equity grants (Skadden 2017). We use the decision to examine two related issues: (1) is litigation risk a material issue in the independent director employment market and (2) is there an optimal level of litigation risk as a corporate governance mechanism that … Read more

The Cost of Disclosure Regulation: Evidence from D&O Insurance and Non-Meritorious Securities Litigation

There is an extensive literature on the benefits of mandatory disclosure by firms, but measuring the costs of such disclosure has been more challenging (Leuz and Wysocki 2016). In particular, while some believe that mandatory disclosure could increase litigation against firms (e.g. Coates and Srinivasan 2014), few papers find such evidence. We use proprietary directors’ and officers’ (D&O) insurance data and a natural experiment based on inter-state variation in disclosure regulation to examine this question. Specifically, state law requires that firms incorporated in New York disclose D&O insurance premiums. We examine whether D&O insurance premiums for New York and non-New … Read more

Scienter Pleading and Rule 10b-5: Empirical Analysis and Behavioral Implications

Although the volume of private securities class action filings has dropped recently, these lawsuits remain both a significant worry for issuers, investment banks, auditing firms and other potential defendants, and an arguably useful supplement to governmental enforcement of securities antifraud laws.  Because we both teach a course in accounting ethics and accountants’ liability and have found ourselves at a loss to clearly explain to our students the law of scienter pleading in Rule 10b-5 cases against auditors, we undertook research that culminated in an article entitled Scienter Pleading and Rule 10b-5: Empirical Analysis and Behavioral Implications, just published in … Read more

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Editor's Tweet: Professors Robert Prentice and Dain Donelson of University of Texas at Austin law discuss scienter pleading and Rule 10b-5