Securities Litigation in the Roberts Court: An Early Assessment

This Article provides an early assessment–both quantitative and qualitative–of the Roberts Court’s securities-law decisions. While the Roberts Court has continued to take an average of one to two securities-law cases per year, such cases represent an increased share of the Supreme Court’s docket, compared to prior Courts, because its overall docket has shrunk. The Roberts Court has maintained the same overall split in “expansive” or “restrictive” outcomes as the post-Powell Rehnquist Court, but has reduced polarization: more than half were unanimous and only three included five-vote majorities. An attitudinal model does no better than a coin flip in predicting outcomes. This Article shows a newly heightened role for procedure and a resistance to bright-line rules, with procedural decisions more restrictive and rejections of bright-line rules more expansive, factors that predict outcomes for cases argued in the October 2014 term, and the types of cases likely to attract the attention of the Court in the future. The turn to procedure matches the background and interests of the Chief Justice, a former appellate litigator, leading a broader “procedural revolution” on the Court that stretches beyond the limited reach of securities law.

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Judgment Day for Fraud-on-the-Market: Reflections on Amgen and the Second Coming of Halliburton

Through two recent decisions, the Supreme Court has both reaffirmed and revised the so-called fraud-on-the-market presumption of reliance–the mechanism that allows securities-fraud class actions to go forward. Members of the Court split on the mechanics of the presumption in the first of these cases (Amgen), leading to a call to reconsider the entire presumption as outmoded and mistaken. The second case (Halliburton) said that the presumption was still good law, though it did potentially increase the difficulty of getting the class certified. This Article compares and contrasts the two cases, explores the role of market efficiency post-Halliburton, and digs into what it means for the issue of price distortion to be an appropriate subject for consideration at the class certification stage.

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The Problem of Reliance in Securities Fraud Class Actions

This Essay analyzes the Supreme Court’s decision in Halliburton II. I argue that, although the opinion appears to do little other than establish a minor change in the class certification procedure, the probable impacts are subtler and more significant. Among other consequences, the opinion may spark congressional efforts to repeal or cut back the fraud-on-the-market presumption; reduce plaintiffs’ bargaining leverage and prospects for success; open new avenues for certification of state law cases; influence the rate of filing and the types of cases that are filed; increase the frequency of settlement classes; and increase litigation costs.

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Searching for Market Efficiency

In their Articles, Professors Langevoort and Miller each address the problem of defining market efficiency for fraud-on-the-market purposes in the wake of Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”). As their analyses highlight, the fundamental difficulty of the fraud-on-the-market doctrine is its fuzziness around the edges–there are few guideposts for how broadly or narrowly it should apply. Until now, courts have dealt with this fuzziness by adopting an extremely narrow definition of market efficiency. Halliburton II, however, appears to alter the balance by broadening the concept of market efficiency, while simultaneously permitting district courts to police the application of the fraud-on-the-market doctrine on a case-by-case basis. It remains to be seen how much Halliburton II will change the legal landscape, but what is certainly true is that district courts will continue to search for ways to cabin the doctrine’s potential scope.

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The Efficiency Criterion for Securities Regulation: Investor Welfare or Total Surplus?

Recent regulatory debates among legislators and legal scholars have centered on whether independent agencies should be subjected to a more rigorous cost–benefit analysis requirement than their current mandates, or alternatively, whether they should be required to conduct cost–benefit analyses that conform to the Office of Management and Budget’s guidance under Circular A-4, as many executive agencies already do. This Article closely examines the way in which one particular agency–the Securities and Exchange Commission–conducts its economic analysis in rulemaking. The SEC’s economic analysis, conducted pursuant to a statutory mandate to consider the effects on “efficiency, competition, and capital formation,” is essentially an investor welfare analysis: it considers how the rule would benefit investors and then considers the out-of-pocket compliance costs that regulated entities would incur. Circular A-4, by contrast, recommends a total surplus approach: a rule’s benefits and costs are considered from the perspective of all stakeholders in the affected sectors, without directly incorporating distributional effects. The current debates therefore raise an urgent policy question for the SEC with regard to the proper criterion of efficiency for its rules: whether it should continue to consider the costs and benefits of its rules from the perspective of investors only, or whether it should instead consider them from the perspective of total surplus. This Article raises four points in considering this question. First, because the two approaches provide conflicting standards as to the efficiency determination, arguments to impose additional burdens on the economic analysis for SEC rules are unlikely to be constructive unless parties can first agree upon the relevant efficiency criterion for securities regulation. The efficiency-criterion question must therefore be considered prior to the procedural question. Second, because Circular A-4 considers a broader spectrum of costs and benefits, those concerned exclusively with investors’ economic welfare should have reasons to object to, rather than support, its application to SEC rules. Third, despite such reasons, there is nevertheless a case for preferring Circular A-4’s approach because, if used properly, it offers several important benefits from a broader policy perspective. Finally, because the SEC has broad rulemaking authority and is not in fact constrained by an obligation to justify all of its rules on efficiency grounds, if the SEC seeks to protect investors’ economic interests at the expense of other stakeholders, it should be both more transparent and aggressive in adopting such rules for non-efficiency purposes that would qualify as “compelling public needs.”

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The Costs of Mandatory Cost–Benefit Analysis in SEC Rulemaking

Cost–benefit analysis can be a valuable tool when deployed at the Securities and Exchange Commission’s discretion to improve its rulemaking process and the overall quality of SEC rules. However, when a cost–benefit analysis obligation is imposed externally–whether from an explicit statutory command or from a de facto requirement enforced through judicial review–the costs of that mandatory cost–benefit analysis can be quite substantial. This Article identifies and explores the qualitative costs that that have already been incurred, and are bound to continue, if the adequacy of the SEC’s cost–benefit analysis remains subject to extensive judicial scrutiny. These costs will only intensify if Congress amends the federal securities laws to add a host of new and onerous cost–benefit analysis requirements.

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The End of Class Actions?

In this Article, I give a status report on the life expectancy of class action litigation following the Supreme Court’s decisions in Concepcion and American Express. These decisions permitted corporations to opt out of class action liability through the use of arbitration clauses, and many commentators, myself included, predicted that they would eventually lead us down a road where class actions against businesses would be all but eliminated. Enough time has now passed to make an assessment of whether these predictions are coming to fruition. I find that, although there is not yet solid evidence that businesses have flocked to class action waivers–and that one big category of class action plaintiffs (shareholders) remain insulated from Concepcion and American Express altogether–I still see every reason to believe that businesses will eventually be able to eliminate virtually all class actions that are brought against them, including those brought by shareholders.

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Shareholder Litigation Without Class Actions

In this Article, I imagine a post-class-action landscape for shareholder litigation. Projecting an environment in which both securities-fraud and transactional class actions are hobbled by procedural or substantive reforms–most likely through the adoption of mandatory-arbitration provisions or fee-shifting provisions–I assess what shareholder litigation would disappear, what (if any) would remain, and what a post-class-action landscape would look like. I argue that loss of the class action would remove a layer of legal insulation that prevents institutional investors from having to pursue positive-value claims against companies. Currently, the class action effectively ratifies fund fiduciary passivity in the face of fraud, for example, as long as the institution files a claim form to collect its share of a class action settlement that has been judicially certified. But without the class action, monitoring and litigation costs for such institutions may increase because fund fiduciaries must monitor their portfolios for, and litigate, positive-value claims. Failure to do so could expose them to liability to fund beneficiaries. I offer some suggestive, but incomplete, evidence about how many funds will have positive-value claims. Whether institutions in fact pursue such claims will decisively determine whether shareholder litigation has a post-class-action future. I also argue that bizarre gaps in liability coverage for public-pension-fund fiduciaries–who serve the funds that have traditionally been the most active litigants–may have unpredictable effects on trustee behavior outside the class action, may tilt in favor of bringing claims, and may also lead to herding behavior in arbitration. I also assess how loss of the class action would affect plaintiff law firms. I argue that the end of the class action means, at a minimum, abandonment of the idea that investors should be compensated for losses due to fraud or other corporate malfeasance. And I demonstrate that loss of the class action leaves investors in smaller firms with no legal remedy for wrongdoing, even if some form of litigation survives.

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Forum-Selection Bylaws Refracted Through an Agency Lens

Both praise and controversy surround director-adopted bylaws that affect shareholders’ litigation rights. Recent bylaws specify an exclusive forum for litigation of corporate governance claims, limit shareholder claims to resolution through arbitration, and (most controversially) impose a one-way regime of fee shifting on shareholder litigants. To one degree or another, courts have legitimated each development, while commentators differ in their assessments. This Article brings into clear focus issues so far blurred in debates surrounding these types of bylaws. Focusing on forum-selection bylaws, and on Delaware precedents, I argue that beginning from the standpoint of common law agency reveals the attenuated and incoherent concept of consent underlying forum-selection bylaws when they are unilaterally adopted by directors once shareholders have invested in a firm.
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Why Expanding Director Power Over Corporate Bylaws Could Undermine Core Stockholder Rights: Comments on Three Scary Predictions of the Future

When we dare to predict the future–knowing that our predictions will not be published for another year–we necessarily assume the risk that events in the real world will give our readers the hindsight to know whether or not we got it right at the time of our predictions. At the time of the 2014 ILEP conference, the principal focus–for the authors whose articles I reviewed and for the audience that was truly engaged and concerned–remained on corporate directors’ unilateral adoption of bylaws that required shareholders to litigate claims in arbitration. Many participants expressed concern about the notion that directors, who will be defendants in the lawsuits they send to arbitration, can decide the scope of discovery and make other procedural determinations that impair the viability of the arbitration. A central concern of the academics and audience, however, was the risk that directors could also undermine the ability of stockholders to even initiate suit, regardless of merit, by precluding any award of attorneys’ fees to the successful shareholder plaintiff. That was exactly the case in Katz v. CommonWealth REIT, a case I recently litigated. Many of the conference participants expressed concern that bylaws mandating arbitration could lead slowly to a world without class actions.

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