Law Enforcement Security Research Articles

Accommodating Power: the `Common Sense' of Regulators

This article examines the perspectives, strategies and practical `common sense' of those charged with regulating and enforcing securities laws in the post-Enron era. It argues that crackdown periods following stock market disasters disrupt dominant patterns of governance and empower regulators to proactively enforce laws against powerful financial actors. The article shows how officials negotiate their regulatory terrain and accommodate the economic and social capital of the `stakeholders' they are charged with regulating outside crisis periods and how they re-interpret and redefine their mission in response to political, economic and ideological change. Empirically the article is based on 21 interviews with regulators and enforcement staff in securities commissions and law enforcement, and on the discourses and directives found in key regulatory documents.

Public and private enforcement of securities laws: Resource-based evidence

Ascertaining which enforcement mechanisms work to protect investors has been both a focus of recent work in academic finance and an issue for policy-making at international development agencies. According to recent academic work, private enforcement of investor protection via both disclosure and private liability rules goes hand in hand with financial market development, but public enforcement fails to correlate with financial development and, hence, is unlikely to facilitate it. Our results confirm the disclosure result but reverse the results on both liability standards and public enforcement. We use securities regulators’ resources to proxy for regulatory intensity of the securities regulator. When we do, financial depth regularly, significantly, and robustly correlates with stronger public enforcement. In horse races between these resource-based measures of public enforcement intensity and the most common measures of private enforcement, public enforcement is overall as important as disclosure in explaining financial market outcomes around the world and more important than private liability rules. Hence, policymakers who reject public enforcement as useful for financial market development are ignoring the best currently available evidence.

Proposal for a Single Securities Commission in Canada: Comment and Discussion

This report analyzes and comments on the principal arguments put forward by the Crawford Panel to support the establishment of a single securities commission in Canada. One argument advanced is that the current rules-based regulatory structure should be replaced with a principles-based approach similar to that of the United Kingdom's Alternative Investment Market (AIM. We concur fully with the opinion expressed by one of the experts enlisted by the Panel, namely, that adopting a system similar to the AIM model in Canada is neither feasible nor desirable. The Panel expressed concern about the conditions for the financing of junior issuers. We show that, in general, the direct costs of such financings are lower in Canada than in the United States. The Canadian markets seem to have developed strategies that are well suited to the characteristics of an economy heavily dependent on small-cap companies and on the resource sector. An analysis of all financings, including traditional and non-traditional stock exchange listings as well as subsequent financings clearly shows that financings are very small and are carried out locally and, in 77% of cases, by issuers from outside Ontario. The Panel also expressed concern about the level of competitiveness of the Canadian market. We show that the principal challenge faced by the Canadian market is the gradual shift of transactions involving cross-listed securities to the U.S. market. The Panel has argued that establishing a single commission is necessary for improving enforcement of securities laws in Canada. In this regard, Canada is often compared to the United States. An analysis of data on sanctions shows, firstly, that the SEC is far from being the source of the majority of sanctions imposed on financial market participants. It initiates less than 10% of proceedings involving financial matters and imposes less than one quarter of all monetary sanctions. Secondly, there has been an increase in sanctions imposed in Canada in this area. Thirdly, there are major differences between Canada and other countries. This explains the differences observed and perceived as regards enforcement. The experts enlisted by the Panel have, in fact, recommended a series of eight actions and have suggested, in the eighth item, pan-Canadian enforcement of the law. Consequently, these experts have not concluded that centralization of the securities commissions is an indispensable condition for enhancing the enforcement of securities laws. Three elements appear from our analysis. First and foremost, the principal arguments put forward by the Panel to justify the urgency of centralizing securities commissions in Canada do not stand up to analysis. Secondly, the major challenge faced by the Canadian market - the shift of enterprises and transactions to the U.S. - does not seem to have been perceived as such or even discussed. Finally, we believe it is essential to recognize and preserve the distinctive characteristics of the existing market. It is a market that welcomes growth companies and small-cap companies, is highly decentralized and is apparently very favourable to issuers.

A Rapid Response to Questionable Trading - Moving Towards Better Enforcement of Australia's Securities Laws

The global financial crisis has acutely exposed the global nature of the markets for securities and their impact on the world economy. Yet despite some cross-fertilization, the regulation of those markets differs significantly. In the longer term it is likely that governments will now move towards the setting of more uniform securities laws and a more coordinated response to their enforcement. However in the short term can more be done to ensure that the Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX) improve their enforcement of Australia's securities laws, in particular the prohibitions against insider trading and market manipulation? ASIC has recently undertaken a review of its structure in an effort to become more market focused. The ASX has established a separate company to undertake supervision of its markets. However both ASIC and the ASX operate under existing laws and procedures that divide the supervision of regulating the markets between them. This article will consider whether changes are needed to both their enforcement tools and this division of regulation to prompt a quicker enforcement response and to respond to the challenges of a likely move towards worldwide harmonization of securities regulation.

The SEC and the Financial Industry: Evidence from Enforcement against Broker-Dealers

The Securities and Exchange Commission plays a central part in the U.S. regulatory framework for the supervision of the financial industry. How has the SEC carried out this mission? Despite recurrent crises, systematic studies of SEC performance data are suprisingly scarce. As the SEC reforms itself to address the shortcomings revealed in 2007-2008, a systematic examination of the agency's past record can help identify priorities and evaluate the agency's renewed efforts. This study takes a first step in studying empirically SEC enforcement against investment banks and brokerage houses, examining the agency's record in the period right before the 2007-2008 crisis. This data suggests that defendants associated with big firms fared better in SEC enforcement actions as compared to defendants associated with smaller firms in three important dimensions. First, SEC actions against big firms were more likely to involve corporate liability exclusively, with no individuals subject to any regulatory action. Second, big-firm defendants were more likely to end up in administrative rather than court proceedings, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees were likely to receive lower sanctions, notably temporary or permanent bars from the industry. These patterns have important implications for major debates concerning corporate liability, regulatory capture and the public and private enforcement of securities laws.

Preventing and Detecting Accounting Irregularities: The Role of Corporate Governance

This study examines the extent to which corporate governance acts as an efficient means of protecting investors against accounting irregularities, thus contributing to the literatures on governance, on fraudulent financial statements and on the public enforcement of securities laws by market authorities. It does so by empirically testing the prediction that the seriousness or level of non compliance of irregularities detected by market authorities is negatively associated with the quality of governance. For that purpose, a sample of 107 firms identified as reporting issuers in default by the Canadian Securities Administrators and the Ontario Securities Commission is matched with 107 other control firms based on industry, size, stock exchange membership and date of default.

Detection of Steganography-Producing Software Artifacts on Crime-Related Seized Computers

Steganography is the art and science of hiding information within information so that an observer does not know that communication is taking place. Bad actors passing information using steganography are of concern to the national security establishment and law enforcement. An attempt was made to determine if steganography was being used by criminals to communicate information. Web crawling technology was used and images were downloaded from Web sites that were considered as likely candidates for containing information hidden using steganographic techniques. A detection tool was used to analyze these images. The research failed to demonstrate that steganography was prevalent on the public Internet. The probable reasons included the growth and availability of large number of steganography-producing tools and the limited capacity of the detection tools to cope with them. Thus, a redirection was introduced in the methodology and the detection focus was shifted from the analysis of the ‘product’ of the steganography-producing software; viz. the images, to the 'artifacts’ left by the steganography-producing software while it is being used to generate steganographic images. This approach was based on the concept of ‘Stego-Usage Timeline’. As a proof of concept, a sample set of criminal computers was scanned for the remnants of steganography-producing software. The results demonstrated that the problem of ‘the detection of the usage of steganography’ could be addressed by the approach adopted after the research redirection and that certain steganographic software was popular among the criminals. Thus, the contribution of the research was in demonstrating that the limitations of the tools based on the signature detection of steganographically altered images can be overcome by focusing the detection effort on detecting the artifacts of the steganography-producing tools. Keywords: steganography, signature detection, file artifact detection.

Public and Private Enforcement of Securities Laws: Resource-Based Evidence

Ascertaining which enforcement mechanisms work to protect investors has been both a focus of recent work in academic finance and an issue for policy-making at international development agencies. According to recent academic work, private enforcement of investor protection via both disclosure and private liability rules goes hand in hand with financial market development, but public enforcement fails to correlate with financial development and, hence, is unlikely to facilitate it. Our results confirm the disclosure result but reverse the results on both liability standards and public enforcement. We use securities regulators' resources to proxy for regulatory intensity of the securities regulator. When we do, financial depth regularly, significantly, and robustly correlates with stronger public enforcement. In horse races between these resource-based measures of public enforcement intensity and the most common measures of private enforcement, public enforcement is overall as important as disclosure in explaining financial market outcomes around the world and more important than private liability rules. Hence, policymakers who reject public enforcement as useful for financial market development are ignoring the best currently-available evidence.

Enforcement and its Impact on Cost of Equity and Liquidity of the Market

Theory suggests that enforcement of securities laws is important. If securities laws are not enforced, outside investors will doubt whether they will get their money back with a fair return. So outside investors will not give their money to firms (this leads to low liquidity in capital markets) or, if they give money to firms, they will demand a higher return (this leads to a higher cost of equity). There is little literature documenting the importance of enforcing securities laws. On December 8, 2005, I was asked by the Task Force to Modernize Securities Legislation in Canada to survey the little literature that exists, and prepare a report titled Enforcement and Its Impact on Cost of Equity and Liquidity of the Market. This paper is that report.

Putin's Silovarchs

Since the late 1990s, most of Boris Yeltsin's oligarchs have left the political stage. In their place, a new business elite has sprung up, most from the network of security service and law enforcement veterans known as the siloviki (roughly, “power agents”) who form the backbone of President Putin's administration. Indeed, the security forces’ takeover of corporate boardrooms is coming to define Putin's regime. Silovarchs can deploy intelligence networks, state prosecutors, and armed force to intimidate or expropriate business rivals. Their temptation to use secret service tools and techniques predisposes the regime toward authoritarian politics. Western policy towards Russia will have to recognize these realities. The most promising path toward authentic democracy in Russia involves the cooptation of leading siloviki into the international business world.

Law and Finance in India - an Overview

The central role of legal reforms in sustaining economic growth and financial development is widely recognized in India. Exactly what elements of the legal system affect the financial system and how, are less clear. We review the recent literature on law and finance and assess the state of India's legal and judicial system as well as that of its financial system, particularly relative to the rest of the world. It appears that on paper Indian laws provide good to excellent protection to investor rights. Implementation of these laws, however, has been less than satisfactory. Public enforcement of securities laws has been weak and courts in India have been extremely slow and overloaded with cases. Even a decade and a half after the beginning of the reforms process, India still suffers from an excess of red-tape and bureaucracy (not to speak of corruption) poses hurdles to every major aspect of business. Indian financial markets have had limited though increasing depth and survey evidence reveals the preponderance of internal financing among India's small and medium sector firms as well as marked reliance of Indian small businesses on informal networks and institutions like reputation and trust rather than the formal legal system to enforce contracts and settle disputes.

Investor protection through administrative enforcement of disclosure requirements in prospectuses: Bangladeshi laws compared with their equivalents in India and Malaysia

Compares the approach to disclosure‐based regulation of securities markets in Bangladesh with that of India and Malaysia. Describes the present administration of the disclosure regime in Bangladesh, which is split between the Registrar of Joint Stock Companies (RJSC) and the Securities and Exchange Commission (SEC); this mirrors the two sets of laws involved, company law and securities law respectively. Outlines the basic regulatory functions of securities law enforcement: the ability of investors to seek remedies against the infringements of disclosure requirements and the efficiency of the SEC in dispensing justice, and finds that both are weak in Bangladesh. Suggests that more effective regulation in Bangladesh is necessary and that the SEC should be free from government and other interference. Argues that preventive measures should for this reason be the preferred policy; these include investor education and regulatory verification before prospectus issue.

Who actually steals? A study of covertly observed shoplifters*

Shoplifting is one of the most common and costly crimes, yet little data exist to determine reliably characteristics of the typical shoplifter or the modus operandi of the crime. It is a crime that has most often been studied using official, secondary data provided by either retail security personnel or law enforcement officers. Reliability issues plague these official data. Continuing the “dark figure of crime” tradition, this study examines shoplifting by covert observation with a camera system installed in a typical suburban retail drug store. A standardized data template was used to record the demographic and behavioral characteristics of shoppers. Significant numbers of shoppers (8.5%) were observed shoplifting. Logistic regression analysis reveals that, while members of some demographic groups shoplifted more often than others, behavioral indicators carried far more predictive power. The methodology and findings are considered within the larger context of the law enforcement and “profiling” literatures.

The Formation and Transformation of Securities Law in Japan: From the Bubble to the Big Bang

It has been a tumultuous decade for Japanese securities markets. The collapse of the Bubble and advent of the Big Bang have reshaped the markets and spurred significant foreign investment. The newspapers are filled with accounts of mergers, acquisitions, and bankruptcies. Less widely reported, but equally important, has been the dramatic shift in Japanese securities law. Prior to the 1990s, private enforcement of Japanese securities law was "virtually non-existent." The collapse of the Bubble, a regulatory vacuum and unsatisfactory alternative dispute resolution changed this. There has been a litigation explosion resulting in new judicial norms. A proactive judiciary has imposed duties on securities companies and created private causes of action for investors without basis or counterpart in the Japanese Securities Exchange Law. These judicial norms, more than administrative or private norms, have come to regulate the retail securities markets.As with previous periods of judicial activism, the central government has stepped in with new legislation. However, in contrast to earlier retrenchments that removed disputes from the purview of the judiciary, the Diet has codified the new private causes of action and reinforced the role of the judiciary.The changes in Japanese securities law are illustrative of a remarkable shift in Japanese law and present an opportunity to better understand the changing roles of administrative agencies and the judiciary in Japan. These changes also present opportunities, as well as hidden pitfalls, for foreign financial institutions operating in Japan. This paper explores an important area and period of Japanese law that has thus far received little attention.

Timing Corporate Disclosures to Maximize Performance-Based Remuneration: A Case of Misaligned Incentives?

Timing of stock option grants has become a significant corporate governance issue, in the light of the SEC's on-going inquiry into back-dating of stock options. In this article, we examine the general problem of misalignment of interests arising from managerial discretion as to the timing and content of corporate disclosures in the context of performance-based compensation. We consider, and assess from a legal perspective, several empirical studies, which strongly suggest that CEOs are manipulating disclosure in such a way as to increase their own compensation. We argue that all but the most egregious forms of disclosure manipulation by management are either legally permissible or effectively insulated from legal redress. The article then examines the underlying rationales for the existence of broad managerial discretion over timing of disclosure under securities laws, and the extent to which possible misalignment of interests in the area of disclosure timing and performance-based pay can be reduced by governance mechanisms, such as improved board monitoring, structural changes to performance-based pay or enhanced enforcement of securities laws. We conclude that although each governance mechanism has a role to play, no single mechanism is likely to be a governance panacea.

Adam Smith’s Higher Vision of Capitalism

Adam Smith had a vision of capitalism that was much more elevated than that of most neoclassical economists. His ideal society would satisfy the ends of human nature as he identified them, and it is from this standard that Smith criticized defective societies, praised good ones, and propounded a detailed agenda of reform. His views on human flourishing were also much richer than is often thought to be the case. Smith said that there are five explicit ends of nature (self-preservation, procreation of the species, order, happiness, and perfection of the species) [Smith 1976a, 77, 166, 16811 and an implicit goal of freedom. According to Smith, the satisfaction of the ends of nature could only occur in a particular type of prosperous, modem, free-trade commercial society. But I will argue that Smith's six ends together constitute a thick2 notion of the human good, one that is not bourgeois. What role does government play in the achievement of the ends of nature? In the Wealth of Nations (WN), Smith said that according to the system of natural liberty, the sovereign has only three duties to attend to, namely, external security, internal security (law and law enforcement), and public works and certain public institutions [Smith 1976b, 687-8]. Apart from these three duties, there is also a littlenoticed fourth duty:

State Law, Shareholder Protection, and the Theory of the Corporation

THIS spring the Supreme Court rejected a claim that the anti-fraud provisions of the Securities Exchange Act' impose a general fiduciary duty on those who control a corporation to act fairly toward minority interests.2 This decision, rejecting attempts to expand federal authority over internal corporate affairs through interpretation and thereby limiting the federal role to preventing fraud in securities transactions, may well increase the demands for major federal regulatory legislation governing the shareholdercorporation relationship. It is almost universally the opinion of academic commentators that state corporation codes do not impose sufficiently stringent controls on corporate management and are lax in protecting shareholders. Only federal intervention, it is said, can correct this sorry situation. This article will test the intellectual underpinnings of the conventional wisdom and of the rather venerable proposals calling for the federal regulation of the governance of corporations3 against an economic theory of corporate function and control. It will conclude both that state corporate legal systems are

The Private Enforcement of Law

The Private Enforcement of Law

Law Enforcement, Malfeasance, and Compensation of Enforcers

THE new economic approach to political behavior seeks to develop a positive theory of legislation, in contrast to the normative approach of welfare economics. The new approach asks why certain industries and not others become regulated or have tariffs imposed on imports or why income transfers take the form and direction they do, in contrast to asking which industries should be regulated or have tariffs imposed, or what transfers should be made.