John C. Coffee, Jr.

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

The Irrepressible Myth That SEC Overregulation Has Chilled IPOs

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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

The Lessons of Xerox: Is New York Law Now Tougher Than Delaware’s?

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It is an old maxim that “Hard cases make bad law.” But it may have a corollary: “Bad facts make hard law.” When a defendant clearly overreaches, the court may not let small details stand in its way. The decision in In re Xerox Corp. Consol. Shareholder Litigation[1]  by Justice Barry Ostrager of the New York Supreme Court may be such a case. Decided at the end of last month, the decision enjoined a shareholder vote on a merger-like transaction between Xerox Corporation and Fujifilm Holdings Corporation (“Fuji”) and required Xerox to waive its advance notice bylaw so that … Read more

Bagman, Fixer, Lobbyist, and Lawyer: Can Michael Cohen Combine All These Roles?

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Once a legal unknown, Michael Cohen made it last week to the front pages of both the New York Times and the Wall Street Journal. Charges swirl around him as the personal fixer for President Trump and the alleged bagman for the payment of hush money by Trump to porn star Stormy Daniels. Daniels’ attorney, Michael Avenatti, has accused Cohen of violating the federal bank fraud statute, and the Department of Justice has identified Cohen as the subject of a criminal investigation.

This brief column will not attempt to evaluate Cohen’s criminal liability (if any), but it will offer … Read more

Securities Litigation in 2017: “It Was the Best of Times, It Was the Worst of Times”

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Securities class actions soared in 2017, jumping from 271 filings in 2016 to a near record 412 filings in 2017 — well above the average of 193 per year for the years 1997 to 2016.[1] Only 2001 was comparable, although both 2001 and 2017 were inflated by special factors.[2] Now add to this growth the $3 billion settlement in the Petrobras litigation earlier this year (plus the highly favorable ruling by the Second Circuit in Petrobras last year).[3] The result may be the same as when the discovery of gold at Sutter’s Mill was announced to the … Read more

What Happens When an Activist Goes on the Board?

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After over a year of work, which included the review of some 635,450 Form 8-Ks filed by 7,799 public companies from January 1, 2000, to September 30, 2016, we think we know at least one answer to the question in the above title: Informed trading soars! We have just posted our research, which we co-authored with former Columbia Law Professor and now SEC Commissioner Robert Jackson and Robert Bishop, a recent Columbia Law graduate, on SSRN,[1] available here. Above all, it shows that following the appointment of a hedge fund-nominated director to the board, the target firm experiences … Read more

The Spotify Listing: Can an “Underwriter-less” IPO Attract Other Unicorns?

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Press reports indicate that Spotify, the music streaming company, is planning an initial public offering in March or April of this year, and that it plans to use a novel “direct listing” approach that has not previously been used at the New York Stock Exchange.[1] Already, it has made a confidential filing of its registration statement with the SEC.  Eager to accommodate Spotify, the NYSE has filed amendments to its listing rules with the SEC (and twice amended this filing, most recently in December).[2] If the news stories are accurate, the SEC has signaled its willingness to approve … Read more

Activism and Informed Trading

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Hedge fund activism has transformed the corporate governance landscape – possibly for better, possibly for worse. But as activist funds emerge as the newest and most potent players in corporate governance, there is one certainty: New agency costs also arise. The activist firm has the de facto ability today to buy a significant block of stock in a target firm (typically 5 percent to 8 percent), announce a new business strategy for the target (often involving increased leverage and asset sales), and then demand board representation (generally two directors, sometimes more) to implement its strategy. Increasingly, the activist gets what … Read more

Confidential Distortion: Dealing with Confidential Witnesses in Securities Litigation

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In a recent article prepared for the ABA’s National Institute on Class Actions, which is now posted on SSRN (available here), I and Professor Alexandra Lahav survey recent class action developments, and I focus particularly on the special case of securities litigation. Here, a unique and problematic feature of securities litigation is the frequent reliance placed by plaintiff’s counsel on confidential witnesses. Nowhere else does one regularly encounter detailed complaints that cite as many as 20 or more confidential witnesses (listed in order as CW-1, CW-2, CW-3, etc.), most describing damaging admissions allegedly made to these unnamed witnesses … Read more

Brexit: The Lessons from Trade Wars

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Brexit has set the stage for a retaliatory trade war that neither the U.K. nor the E.U. wants and that will injure consumers (and others) on both sides. Moreover, it could threaten the U.S. as well, if it leads the U.K. to relax its financial regulatory requirements and return to its former “regulatory-lite” policies in order to compete more effectively (and thereby lead a regulatory race to the bottom).

In a paper just posted on SSRN (available here) that I deliver at the University of Paris/Sorbonne in two weeks, I analyze how trade wars begin and play out, applying … Read more

Cheating the Algorithm: The New “Pump and Dump” Fraud

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Old frauds never die. Nor do they fade away. Rather, they mutate and morph into new configurations in response to new opportunities (which new technologies usually create). Thus, the traditional boiler room “pump and dump” scheme was a product of the widespread adoption of the telephone, which allowed high pressure salesmen to reach hundreds of gullible customers in a day. Today, an analogous new technological development is inviting new forms of fraud. The new development is algorithmic trading (which by some estimates now accounts for 30 percent of stock trading[1]). Computers are programmed to trade in a micro-second … Read more

The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement

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Professor John C. Coffee, Jr. of Columbia Law School is scheduled to speak on June 22 before the Securities and Exchange Commission’s Investor Advisory Committee, which asked him to address the CHOICE Act’s impact on the SEC’s enforcement powers. These are his remarks:

The Financial CHOICE Act of 2017 has now passed the House of Representatives on a strict party-line vote (winning not a single Democratic vote), but its prospects in the Senate seem dim. Nonetheless, a fair chance exists that individual provisions of this bill will make it through the Senate in one or more watered-down compromises. But which … Read more

The Financial CHOICE Act of 2017: Will Collective Amnesia Triumph?

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Notwithstanding decidedly hostile testimony last month from this humble columnist,[1] the U.S. House of Representatives will soon pass legislation (probably on a strict party-line basis) entitled, “The Financial CHOICE Act of 2017” (H.R. 10) (which acronym stands for “Creating Hope and Optimism for Investors, Corporations, and Entrepreneurs”).  Despite this cutesy and innocuous title, the CHOICE Act proposes dangerous and radical surgery that would gut those provisions of the Dodd-Frank Act that seek to prevent the failure of a single major bank from setting off a chain reaction that could bring down all interconnected banks.  Indeed, the Act reads as … Read more

The Race to the Bottom: Is the Last Stop New York?

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The practice of nominal shareholder plaintiffs challenging virtually every sizable corporate merger with a lawsuit alleging a fiduciary breach has been a scandal for some time.  At least when brought by the “bottom fishers” of the plaintiff’s bar, these suits result invariably in a nonmonetary, “disclosure only” settlement that benefits no shareholder, but does justify an award of fees to the plaintiff’s attorney (the only party with an economic interest in the suit).

The near inevitability of M&A litigation is a relatively recent phenomenon, as the rate soared after 2000.  One study finds that only 12 percent of M&A transactions … Read more

How Not to Write a Class Action “Reform” Bill

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It was predictable. Given a solidly Republican Congress and a Republican president, sooner or later, an effort would be made in the Trump administration to curb class actions. Not surprisingly, it has come sooner, with the “Fairness in Class Action Litigation Act of 2017” (H.R. 985). A motley assortment of procedural “reforms”—some good, many bad, and most overbroad—H.R. 985 has been introduced by Representative Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee. Much of this bill is a reincarnation of a similar class action “reform” bill that passed the House in 2015, but died in the Senate (possibly because … Read more

Trumping the Constitution

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Buried deep in Article I of the U.S. Constitution is an obscure provision known as the “Emoluments Clause.”  In relevant part, it provides that:

“[N]o person holding any Office of Profit or Trust under them, shall, without the consent of the Congress, accept of any present, Emolument, Office or Title, of any kind whatever, from any King, Prince, or foreign State.”[1]

Arguably, it was the first conflicts of interest prohibition in U.S. history, and its origins lie in a gift of a snuff box by the King of France to Benjamin Franklin, then our Ambassador to France, which gift … Read more

Shareholder Activism in the Era of Trump: What Strategy Works?

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In the approaching Era of Trump, we are likely to see much deregulation, reduced public enforcement, and possibly some curbs on private enforcement.  Corporate compliance efforts may also be downsized, and compliance officials may learn again to defer to the judgment of the entrepreneurs in the corporation’s profit centers.  If a bubble develops in financial stocks (as seems more than possible), some corporate debacles and scandals become predictable.  What defenses do shareholders have in this brave new world?

Here, Wells Fargo & Co’s decision to claw back a record $60 million from two senior executives ($41 million from CEO John … Read more

The Globalization of Securities Litigation

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Europe (and much of the rest of the world) have long been skeptical of American-style opt-out class actions in which the plaintiff’s attorney defines the scope of the class.  Similarly, they have prohibited the contingent fee, discouraged punitive damages, insisted on “loser pays” fee shifting, and required opt-in classes to be led by a public agency or an approved not-for-profit body.  All this should seemingly preclude the spread of “entrepreneurial litigation” to Europe or elsewhere.[1]  But it hasn’t!

Major securities class actions for record or near record amounts have recently settled in the Netherlands and Japan, and an even … Read more

Adventures in Corporate Governance: Guarding the Internet

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Academics who profess expertise in corporate governance sometimes find themselves on very strange turf.  That has been my status for the last two years, serving as an adviser to the U.S. Commerce Department in connection with the Obama Administration’s efforts to “privatize” the Internet Corporation for Assigned Names and Numbers (“ICANN”).  ICANN is the non-profit entity that essentially manages the Internet’s domain name functions and oversees much of its internal plumbing.[1]  This privatization effort has now been challenged in Congress by Senator Ted Cruz and others, and political fireworks are likely.  But let’s start at the beginning.  In March … Read more

Volkswagen and the Culture of Silence

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Since the Volkswagen story first broke in September 2015, most observers have just scratched their heads and muttered to themselves in amazement: “What were they thinking?  How could you place ‘defeat devices’ in 11 million cars worldwide and expect that you were going to escape detection for long?”  There is, however, an answer to this question—one that says much about what is wrong with current priorities and practices for the enforcement of white collar crime.  This column begins with an assessment of the Volkswagen case and then turns to an analysis of white collar crime strategies.  Finally, it proposes remedies … Read more