John C. Coffee, Jr.

The Senator Traded While His Constituents Died: A Legal Analysis of Insider Trading by Public Officials

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The coronavirus’ impact across the United States will make an epic, even Tolstoyan, saga, sweeping across all levels of American society and featuring brave heroes and tragic victims. But so far, this story has lacked one figure that every drama needs: a clear villain – someone the public can despise. No, President Trump cannot play this role. Reckless, ignorant, and delusional as he may be, he can only play the fool of the story, but not the villain, because he has not been profiting off the tragedies of others.

A true villain would be useful. In the 1930s, much of … Read more

The Blaszczak Bombshell: A Return to the “Parity of Information” Theory of Insider Trading?

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The law of insider trading generally moves with the speed of molasses in February. For every two steps forward, there is one (or more) steps backward. But this winter has seen a rapid succession of developments. First, the Himes Bill passed the House of Representatives by an overwhelming margin,[1] but only after its sponsors retreated on its most important provision: the elimination of the “personal benefit rule” from insider trading law.[2] Second, the Bharara Task Force on Insider Trading reported, with a strong and unanimous recommendation that the personal benefit rule be abolished and a new statute passed.… Read more

Petition for Rulemaking on Short and Distort

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Short selling serves a critical function in the capital markets by encouraging price discovery and preventing the formation of asset bubbles.  But recent years have seen a rise in “negative activism,” a novel phenomenon that has flourished in the era of social media and algorithmic trading.[1]  The typical negative activist opens a large short position; disseminates sometimes aggressive negative opinion about a public company (often stopping just short of factual falsehoods) on Twitter and elsewhere, which induces a panic and run on the stock price; and rapidly closes that position for a profit, prior to the stock price partially … Read more

The Future of the Large Law Firm: Growth, Mergers, and Inequality

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By last count, there are now 29 U.S. law firms with at least 1,000 lawyers.[1]  In a few weeks, this number should rise to 32, primarily as the result of mergers.[2] My prediction is that this number will climb to well over 50 by the end of this decade. Still, two inconsistent trends are peaking at the same time: (1) large firms are growing in size, but (2) growth in the number of equity partners at these firms has stalled (and may even have declined). According to the annual survey by the National Law Journal, the number of … Read more

Toxic Unicorns: What Has Been Missed About WeWork’s Fiasco

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Most everyone has had their say about the collapse of WeWork’s failed initial public offering (“IPO”).[1] Clearly, this failure was overdetermined, as many competing causes can explain it, including: (1) the extraordinary level of self-dealing that its CEO, Adam Neumann, regularly engaged in; (2) the corporate governance structure that locked up all voting power and control in him; (3) a system of non-GAAP metrics that more than raised eyebrows; (4) an extraordinarily high valuation for a company that, despite its claims of being a high-tech start-up, was closer to a simple real estate firm; and (5) the unstable personality … Read more

Introduction: Bill Allen As We Knew Him

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The Blue Sky Blog has never before run eulogies, but Chancellor William Allen is a special case. Whether one evaluates him in terms of his historical significance, his unique craftsmanship as a judge, or his personal character and the courage he has shown in the face of adversity, he has few equals. He bridged an important transition during which Delaware’s jurisprudence went from being viewed skeptically as predictably pro-management to the current era in which Delaware decisions receive the same close and respectful attention as might be given to a U.S. Supreme Court decision. Chancellor Allen was not alone in … Read more

The Rise of the Mega-Law Firm: Some Reckless Reflections and Prickly Predictions

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This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and the Director of its Center on Corporate Governance. These slides accompanied a lunch address that he gave at a Conference, entitled “Law Firms in the 21st Century,” which was held at Columbia on September 14, 2019.

 … Read more

Can Morrison Be Outflanked?: How Foreign Purchasers Are Suing in U.S. and Foreign Courts

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Lord Denning, a highly quotable British judge, once remarked:

“As a moth is drawn to the light, so is a litigant drawn to the United States.”[1]

Some reasons for this strong attraction are obvious: (1) the U.S. (and only a few other nations) authorize opt-out class actions; (2) the U.S. permits (and generously awards) contingent fees; (3) the U.S. has no “loser pays” rule (and most other countries do); and (4) the U.S. uses juries in civil cases and permits punitive damages.

As I discuss in a recent paper posted on SSRN, available here, the strongest evidence of … Read more

Prof. Coffee Testifies on Insider Trading Legislation Before the House Financial Services Subcommittee on Investor Protection

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I am very happy and honored to be back before this committee. I have been asked to comment on several proposed bills, all of which I basically support, but I will focus my limited time today primarily on Congressman Himes’ Discussion Draft of an “Insider Trading Prohibition Act.” I want to commend Congressman Himes for having supervised the drafting of a very careful, balanced and sophisticated bill that should serve as a model for a long overdue effort to codify the law of insider trading. To date, the law of insider trading has been solely the product of judicial law-making, … Read more

Short Selling and the New Market Manipulation

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Stock market manipulation has been around since shortly after stock markets were invented. Everyone is familiar with the methodology in the standard “pump and dump” scheme: False rumors are circulated, the stock is bid up by the manipulators, supply might be constrained, and, once the public’s appetite is aroused, the stock is dumped by the manipulators.

But the internet has changed all that. No need exists today for the boiler shop or its battery of phones or even carefully assembled lists of suckers. All that one needs today is to put one’s message (written under a pseudonym) on a blog … Read more

Was Bezos Blackmailed?

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In the bizarre world that Washington politics has become, few stories are more fascinating than Jeff Bezos’ accusation that the National Enquirer and its parent, American Media Inc., committed blackmail and extortion by threatening to reveal nude pictures of him and his girlfriend unless he would “publicly affirm that The Enquirer’s reporting on his affair was not motivated by political concerns.”[1] Let’s assume that everything Bezos said is true. Most of us sympathize with him (after all, being the world’s richest man is a tough role that does make one awfully vulnerable). All kinds of political motives for threatening … Read more

Auditing Is Too Important to Be Left to the Auditors!

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Clemenceau was right.[1]  Reforming a profession cannot be left to the professionals. A cascade of auditing scandals — in the U.K., the U.S., Europe, and South Africa — has convinced many that reform is necessary. The political reaction has been the most intense in the U.K., where two governmental reports were released last month, each sharply critical of the auditing profession and its regulation. One has called for a new audit regulator that would be financially independent of the industry,[2] and the other by the U.K.’s Competition and Markets Authority (“CMA”) has proposed a number of measures to … Read more

The Changing Character of Securities Litigation in 2019: Why It’s Time to Draw Some Distinctions

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Securities litigation is growing at a prodigious rate. Is that good or bad? This column will answer that we have to unpack this phenomenon and realize that very different things (with very different implications) are happening simultaneously. Let’s begin with the basic data: Some 403 federal securities class actions were filed in 2018, down slightly from 412 in 2017 (which was the highest year since 2001), but more than 200% of the average number for 1996 to 2016 (which was 193).[1] Viewed together, 2017 and 2018 show that the rate of securities class action filings is accelerating, and this … Read more

A Brief Response

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Forever is a long time — indeed, too long. That is the essence of my answer to my two friends and colleagues — professors Zohar Goshen and Joshua Mitts — who each argue against mandatory sunset provisions on super-voting stock (Professor Gordon provides an overview with which I largely concur). Even if one accepts the Goshen/Mitts premise that the other shareholders want the founder to have total control (in order to pursue his “idiosyncratic vision” for the company), the probability is high that, at some point, the majority of the shareholders will want to limit or end that total control. … Read more

Dual Class Stock: What Is a Fair Compromise?

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In my last post[1], I focused on the Council of Institutional Investors’ (“CII”) recent proposal to the New York Stock Exchange and Nasdaq to impose a listing condition that any super-voting rights on dual class stock must expire within at least seven years of listing. Although I sympathized with the CII’s goal and believe dual class capitalizations to be undesirable in the case of a public corporation, I also recognized that we cannot expect the holder of a control block to stand by passively and watch his voting power dissipate. Thus, as I noted, the control holder might … Read more

Dual Class Stock: The Shades of Sunset

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The most important issue in corporate governance today is dual class capitalization, and the most important recent development is the petition submitted on October 24, 2018 by the Council of Institutional Investors (“CII”) to both the New York Stock Exchange and Nasdaq, asking them to place a “sunset” on differentials in voting rights. Under the CII’s proposal, both exchanges would agree not to list an initial public offering (“IPO”) that had dual classes of stock with different voting rights, unless the disparity in per share voting power ended no later than seven years after the IPO. The CII sees this … Read more

Bonfire of the Vanities–2018 Style: The Case of Elon Musk

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Elon Musk came close to doing something truly unique. No, not his electric car. Rather, he was about to roll the dice with his shareholders’ equity.

Securities analysts estimate that somewhere between 25 and 35 percent of the value of Tesla would be sacrificed if Musk were no longer its CEO. No one else in Tesla’s management can credibly run the company, and Musk alone appears to be the visionary that can maintain its technological superiority. Yet, he placed this value at risk by rejecting a relatively generous (even soft) settlement offered by the SEC to resolve his notorious tweet … Read more

The Market for Lead Plaintiffs

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A drama is playing out in Boston federal court before a respected judge that could prove to be a legal “Watergate,” one that could reshape class action practice.[1] Combining elements that are both sordid and comic, this litigation has already shown that the leading experts on legal ethics disagree significantly over what must be disclosed to the court approving a class action settlement. More importantly, although this episode could prove to be an isolated aberration, the other possibility is that the behavior at issue in this case may occur regularly. As all New York City tenants know when they … Read more

What Really Drives “Short-Termism”?

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Earlier this month, the CEO of Pepsi Co. suggested to President Trump that eliminating quarterly reporting (and shifting to biannual reporting) would reduce the pressure on managers to focus on the short-term. As impulsive as Elon Musk, the president bought this view hook, line, and sinker and tweeted his proposed shift to the world (and a probably startled SEC).

But what will be the actual impact? Those who have a law and economics orientation will predictably respond that widening reporting frames will present investors with greater uncertainty and risk, with the result that stock prices should decline (and the cost … Read more

Tippees and Tippers:­­ The Impact of Martoma II

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This is a column for insider trading junkies—a special breed who love all the nuances in this very nuanced subject. Late last month, a Second Circuit panel did something fairly unusual: It withdrew a 2017 decision and substituted a new opinion with a new rationale (but still with the same 2-1 division on the panel). The new decision in United States v. Martoma[1] has a less sweeping and more defensible rationale but still deviates from the law in other circuits. In addition, it has some nuances that future cases are certain to explore. Chief among these is the status … Read more