Tag: Securities Law

Pleading Around the Private Securities Litigation Reform Act: Reevaluating the Pleading Requirements for Market Manipulation Claims – Note by Damian Moos

From Volume 78, Number 3 (March 2005)
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In 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”) to address the serious flaws in the private securities litigation system. Courts, Congress, and many commentators agreed that the chief evil plaguing the system was strike suits, suits “based on no valid claim, brought either for nuisance value or as leverage to obtain a favorable or inflated settlement.” Strike suits prevailed in private securities claims because, irrespective of the merits of the claim, it was usually less costly for defendants to settle than fight the allegations. Plaintiffs’ attorneys realized that defendants would settle and took advantage of the situation, sometimes filing claims based on bad news rather than evidence of wrongdoing. Congress stepped in to put an end to these abusive strike suits by enacting the PSLRA, which, among other things, raised the pleading standards for private securities claims, stopped plaintiffs from abusing the discovery process to force settlements, and made the threat of sanctions under Federal Rule of Civil Procedure 11 (“Rule 11”) more imposing.

In an attempt to avoid the PSLRA, plaintiffs began filing their securities claims in state courts. The shift to state courts undermined the PSLRA’s goal of deterring strike suits, because the safeguards of the PSLRA only applied to federal claims. In response, Congress passed the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) to stop the movement to state courts. The SLUSA preempted state law causes of action for securities fraud and market manipulation and made securities class actions brought in state courts removable to federal courts. Thus, Congress slammed shut the state court back door.

 

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Law’s Signal: A Cueing Theory of Law in Market Transition – Article by Robert B. Ahdieh

From Volume 77, Number 2 (January 2004)
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Securities markets are commonly assumed to spring forth at the intersection of an adequate supply of, and a healthy demand for, investment capital. In recent years, however, seemingly failed market transitions—the failure of new markets to emerge and of existing markets to evolve—have called this assumption into question. From the developed economies of Germany and Japan to the developing countries of central and eastern Europe, securities markets have exhibited some inability to take root. The failure of U.S. securities markets, and particularly the New York Stock Exchange, to make greater use of computerized trading, communications, and processing technologies, meanwhile, seems to suggest some market resistance to technological modernization. In light of this pattern, one must wonder: How are strong markets created and maintained, and what might be law’s role in this process?

This Article attempts to articulate a model for understanding the needs of efficient market transition and the resulting role of law in that process. Specifically, it suggests a “cueing” function for law in market transition. Grounded in largely ignored lessons of game theory and in the microeconomic analysis of so-called network effects, cueing theory identifies the coordination of market participants’ expectations as law’s central role in market transition. Building on recent legal literature on private regulation, social norms, and the expressive function of law, this theory suggests that in securities market transition—whether it be market creation in central and eastern Europe or market restructuring in the United States—law primarily serves to convene, encourage, inform, and facilitate.

A cueing role for law constitutes an important extension of traditional conceptions of what law does, particularly in securities regulation, but in other areas as well. Regulatory cues are neither coercive nor outcome determinative and involve a close intertwining of public and private regulation. The exceptional character of law in this context, and the recent growth in areas where regulatory cues might have fruitful application, may explain why such a role has not previously been analyzed. Yet in securities markets and other industries exhibiting network economies—from electricity transmission and interstate transportation to telecommunications and the Internet—a cueing function for law may be central to efficient transition. It may explain much of why “law matters” in the modern economy.

 

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Gatekeeper Liability – Article by Assaf Hamdani

From Volume 77, Number 1 (November 2003)
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The recent crisis in the wake of the Enron debacle has demonstrated the importance of enlisting gatekeepers – such as accountants, underwriters, and lawyers – to prevent corporate fraud. But while a consensus may exist over the basic need to expand liability to gatekeepers, little is known about the appropriate scope of such liability. Going beyond the capital-market context, this Article develops a framework to determine the scope of gatekeeper liability for client misconduct. Specifically, the Article analyzes the fundamental tradeoff between the potentially adverse impact of gatekeeper liability on relevant markets and the incentives such liability provides for gatekeepers to foil wrongdoing. Expanding the scope of their liability will make gatekeepers increase the price of their services to reflect their liability exposure. Although initially appealing as a means to screen out wrongdoers, this price increase may turn out to have adverse consequences when clients vary with respect to their wrongful intentions: Rather than screen out wrongdoers, gatekeeper liability may drive out only law-abiding clients. Enhanced liability, however, will also induce gatekeepers to monitor clients and prevent them from committing misconduct. The Article explores the policy implications of this analysis for determining which third parties should face gatekeeper liability, identifying the adequate scope of gatekeeper liability, and recognizing the shortcomings of gatekeeper liability as an instrument of social policy. The Article concludes by putting forward a tentative outline of the proper regime of gatekeeper liability for securities fraud.

 

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Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets – Article by Robert B. Ahdieh

From Volume 76, Number 2 (January 2003)
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As Russia and other formerly socialist states construct market economies, the appearance of strong securities markets remains an unfulfilled expectation. Notwithstanding broad privatization of state-owned enterprises and the elimination of industrial subsidies – essential precursors to demand for capital-raising securities markets – stock markets in Central and Eastern Europe remain illiquid, inefficient, and unreliable.

Strong securities markets do not, it seems, neatly follow from the welfare-maximizing behavior of individuals and institutions. Nor can the appearance of securities markets be effectively dictated by government decree. Post-communist securities market transition therefore presents a puzzle: Do markets emerge, or must they be created?

Joining the debate over whether “law matters” in the creation of securities markets, this Article draws on recent finance and microeconomic analysis of network effects to propose an alternative theory of why law might matter in the creation of securities markets, and to challenge traditionally limited views of how it matters. After articulating the proposed network model of securities markets, this Article outlines the model’s implications for securities market transition. Specifically, it highlights two categories of network inefficiencies that may help explain the persistent weaknesses of securities markets in Russia and other transitional states. The model suggests such inefficiencies may also arise in the modernization of established securities markets, however, implying lessons for the United States and other developed economies as well.

Where network effects undermine the spontaneous emergence of strong markets, this Article proposes a limited coordination of market expectations – as distinct from law’s demarcation of property rights and enforcement of contracts, as conventionally acknowledged, and its protection of minority investors, as recently emphasized by “law matters” corporate and securities law scholars – as a central role for law in the very creation and design of strong securities markets.

 

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