Since Delaware decisions like Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) and ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), there have been renewed calls for corporations to amend their charters and/or bylaws to require that shareholder lawsuits – including securities lawsuits – be subject to individualized arbitration.

This is actually a big interest of mine – I’m currently working on a paper concerning the enforceability of arbitration clauses in corporate governance documents.  Critically, I do not believe these decisions support the notion that arbitration provisions can control securities claims – at best, they suggest that arbitration provisions in corporate governance documents can control governance claims (i.e., Delaware litigation – concerning directors’ powers and fiduciary duties).

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Adam Levitin at Credit Slips has an interesting breakdown of MBS litigation settlements.  He points out that of the $94.6 billion in settlement funds, only 2% has gone to private investors alleging securities-fraud-type claims.

He concludes:

First, it shows that legislative reforms and court rulings have seriously impeded the effectiveness of securities class action litigation. If ever there were an area ripe for private securities litigation, private-label RMBS is it, yet almost all of the recoveries are from six settlements.  This should be no surprise, but it’s rare to see numbers put on the effect.  This is what securities issuers and underwriters have long wanted, and the opposition has mainly been the plaintiffs’ bar, but perhaps investors will take note of the effect too. 

Second, the distribution shows how badly non-GSE investors got shafted. Remember, that private-label securitization was over 60% of the market in 2006. Yet investors have recovered only 38% of that which the GSEs/FHFA have recovered, and most of that is from the trustee settlements or proposed settlements (I’m not sure that any have actually closed). Private securities litigation has recovered a mere 4% of what the GSEs/FHFA have recovered. 

The real question is whether investors have learned that they cannot rely on either trustees or the securities laws to protect them from fraud, and if they have, what they plan to do about it. One sensible thing would be simply to invest in other asset classes. The other would be to try and reform the trustee system and/or the securities laws.

I’m sure there are many reasons for the disparity, but I think one major contributor is a series of rulings narrowing the definition of standing in the class action context. 

(okay, that was my attempt to jazz up a procedural post)

Anyway, these standing issues are now pending – sort of – before the Supreme Court, as I previously posted.  What’s interesting is that these standing rulings have had a dramatic effect on private investors’ ability to bring claims, but they aren’t usually mentioned in the same breath as other, more obvious, limitations on securities class actions. 

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The SEC is in the process of crafting rules to facilitate crowdfunding of unregistered securities offerings.  There’s been a lot of back and forth about the merits of this idea – Michael Dorff, for example, has argued that it’s a sucker’s game, because the only businesses that will require crowdfunding are those too toxic for angel investors to touch.  Meanwhile, Steve Bradford just posted about a study suggesting that the “crowd” is better at identifying winning business ideas than individual investors – even the professionals.

One idea that’s been floated, however, is that crowdfunding will open doors for disadvantaged groups – like women.

Indiegogo, a crowdfunding website, recently boasted that women founders reach their target funding in much greater numbers than do women who seek startup capital through traditional means.  Women have had similar results on Kickstarter.

There’s been a lot written recently about how women fare poorly in the tech world when they seek startup funding.  Women report navigating a lot of pretty toxic sexism from the mostly-male angel investors with whom they must negotiate.

I have my doubts about the viability of crowdfunding, but I’ll be interested to see whether it can also level

This year, I’m going to be teaching a seminar on the financial crisis with a friend of mine from law school, Tanya Marsh of Wake Forest.  The seminar will be offered at Wake Forest in the Fall and then again at Duke in the Spring.  Among other things, we plan to assign the students to watch several movies about the crisis (some will be watched by the entire class; for others, different groups of students will watch different films, and then discuss them with the class).

In preparation, I watched (or, as the case may be, rewatched) the movies we’re likely to assign.  So here are my comments on the movies – which I assume many of you have already seen, but probably not everyone has seen everything – with the caveat that, I’m commenting at least as much as an audience member/amateur film critic as I am as a professor.

(Tanya tells me the students are unlikely to stumble across this post, but in case you do – these are my opinions only, we’ll want to hear yours!  And for what it’s worth, Tanya and I disagree on at least one of the films.)

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The exact measure of damages in a fraud on the market 10(b) action has long been a bit of a muddle, because it raises many difficult evidentiary and legal issues.  However, because most securities class actions are dismissed or settle, there actually are not many court decisions discussing the problem.   The Supreme Court’s decision in Comcast Corp. v. Behrend (2013), an antitrust case, may have begun to change that – as the BP litigation demonstrates.

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Market efficiency is a concept used by economists to describe markets with certain theoretical characteristics.  For example, a “weak-form” efficient market is one where historical prices are not predictive of future prices, and therefore excess profits cannot be earned by using strategies based on historical pricing.  A “semi-strong” efficient market is one where public information is reflected in stock price to the point where it is impossible to earn excess returns by trading public information.

Market efficiency is also a legal concept, which, it must be said, only roughly tracks the economic definition.  In particular, in Section 10(b) litigation, an “efficient” market is one that absorbs information with sufficient speed and thoroughness to justify allowing plaintiffs to bring claims using the fraud on the market theory to satisfy the element of reliance.

The exact degree of speed/thoroughness that’s required for Section 10(b) litigation is something of a theoretical muddle (as Donald Langevoort has written extensively about) – although the Supreme Court’s recent Halliburton decision may provide more guidance on that (see discussion here and here).

For now, though, most courts try to assess “efficiency” by reference to what are known as the Cammer factors, taken from the case of Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989).  These factors include weekly trading volume (with higher volume taken as an indicator of efficiency), the number of analysts reporting on the security, the number of market makers, and the cause-and-effect relationship between the disclosure of new information, and changes in the security’s price.  Some courts also consider additional factors such as the size of the bid-ask spread and the number of institutional owners.

These factors have frequently been criticized as duplicative or uninformative.  See e.g.,  Geoffrey Christopher Rapp, Proving Markets Inefficient: The Variability of Federal Court Decisions on Market Efficiency on Cammer v. Bloom and its Progeny.  Some commenters have speculated that a few of the factors are counterproductive, and in certain markets might indicate less efficiency.  See, e.g.,  William O. Fisher, Does the Efficient Market Theory Help Us Do Justice in a Time of Madness? (2005).

There’s a new paper that tests this claim, and concludes that the commenters are right, and at least some of these factors really are counterproductive.

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One of the classic arguments against private securities liability – and in particular, Section 10(b) fraud-on-the-market liability, with its high potential damages – is that it overdeters issuers, thus stifling voluntary disclosures rather than encouraging them.  This was in fact the theory behind the PSLRA’s safe harbor: the statute makes it particularly difficult for private plaintiffs to bring claims based on projections of future performance, in part because of Congress’s fear that expansive liability would dissuade issuers from making projections at all.

Two new empirical studies challenge this common wisdom.

The first, Private Litigation Costs and Voluntary Disclosure: Evidence from Foreign Cross-Listed Firms, by James P. Naughton et al., uses the Supreme Court’s decision in National Australia Bank v. Morrison as a natural experiment.  That decision abruptly removed the specter of private Section 10(b) liability based on securities sold on a foreign exchange.  The authors compare voluntary earnings guidance offered by firms whose securities are cross-listed in the US and abroad before and after Morrison to determine how the diminished threat of liability affects issuer behavior. 

As it turns out, the authors found that earnings guidance decreased for those firms whose securities are cross-listed, as compared to counterparts whose securities…