Violations Of Securities Laws Research Articles

Article: Public Compensation for Private Harm: Fair Funds for Consumer Competition Law Redress

This paper discusses the use of the concept of Fair Funds for consumer competition law enforcement from an EU perspective. With such Fair Funds, the US Securities and Exchange Commission distributes collected fines and disgorged profits to compensate victims of securities law violations. The paper explains the use of Fair Funds in US law, highlights similarities, and adapts the concept for use in European competition law enforcement. It places an emphasis on the usefulness of such a concept against the role of consumers, but the conclusions can equally be drawn for small and medium enterprises’ private enforcement or private enforcement of competition law in general. It shows the advantages and disadvantages of including a system of Fair Funds. The paper argues that Fair Funds can serve as an alternative form of compensation, particularly for large groups of individual victims harmed in a small amount, such as consumers, with that overcome the lack of a harmonized collective redress system on EU level, and improve the coordination between public and private enforcement. private enforcement, consumers, collective redress, damages, compensation, fines, disgorgement, US, EU, financial law

The Effect of the Security and Exchange Commission’s Investigations into Corporate Social Responsibility Performance

We examine the effect of the Security and Exchange Commission’s (SEC) investigations into firms’ corporate social responsibility (CSR) performance. Adopting a staggered event study setting and analyzing all public and private SEC investigations into possible violations of federal securities laws, we find that firms reduce their investment in ESG-related activities and experience significantly lower CSR performance while being investigated by the SEC. This baseline finding is more pronounced among firms that appoint a large auditor or force their CEO to resign. To address concerns about potential endogeneity, we also conduct a multiperiod dynamic analysis and estimate our baseline regressions using the propensity-score-matched sample. Our results further reveal that the negative effect of SEC investigations on CSR performance manifests in CSR activities related to corporate governance and firms’ products. Overall, we highlight some unintended consequences of SEC investigations.

A Tale of Two Enforcement Venues: Determinants and Consequences of the SEC's Choice of Enforcement Venue After the Dodd-Frank Act

ABSTRACTThe Dodd-Frank Act allows the SEC to choose either an administrative proceeding or a federal court as an enforcement venue for resolving violations of federal securities laws. I examine determinants and consequences of the SEC's choice of enforcement venue after the Dodd-Frank Act. Results show that material cases are 28–35 percent more likely to be assigned to federal courts, and politically connected defendants are about 14 percent more likely to be routed to administrative proceedings. While monetary penalties by venue are statistically indifferent, politically connected defendants in administrative proceedings are associated with lower penalties. Additionally, I find that administrative proceedings process cases 27 times faster than federal courts. Results suggest the SEC's private incentives affect enforcement venue selection and possibly enforcement outcomes. The SEC is more likely to use administrative proceedings when political and economic costs are greater, and use federal courts when political and economic benefits are greater.JEL Classifications: G18; G28; G38; M41; M48; D72.

The Jury is Out: The Controversy About Jury Trials Under the Alberta Securities Act

After reviewing the place of securities law enforcement within the Canadian court system, the author traces the Peers and Aitkens decisions from the Provincial Court to the Supreme Court and outlines how these cases dealt with the question of what penalties trigger the right to a jury trial under section 11(f) of the Charter. The author explains how section 11(f) impacts the division of powers by creating a constitutional cap on the prison sentences that are available for violations of provincial law. In light of stiff maximum penalties for violations of securities laws, the Peers and Aitkens decisions raise the question of whether there are constitutional reasons to continue to try regulatory offences by judge alone in provincially appointed courts.

A Tale of Two Enforcement Venues: Determinants and Consequences of the SEC’s Choice of Enforcement Venue After the Dodd-Frank Act

The Dodd-Frank Act allows the SEC to choose either an internal administrative proceeding or a federal district court as an enforcement venue for resolving violations of federal securities laws. I first document that the SEC increased the use of administrative proceedings after Dodd-Frank. I next examine the determinants and consequences of the SEC’s choice of enforcement venue after the Dodd-Frank Act. Results show that more material cases are 28% to 35% more likely to be assigned to federal courts, and politically connected defendants are about 14% more likely to be routed to administrative proceedings. While monetary penalties by venue are statistically indifferent, politically connected defendants in administrative proceedings are associated with lower penalties. Additionally, I find that administrative proceedings process cases 27 times faster than federal courts. This study suggests that the SEC’s private incentives affect its enforcement venue selection and possibly enforcement outcomes. When the political and economic costs (benefits) are greater, the SEC is more likely to use administrative proceedings (federal courts).

Understanding Securities Class Action Lawsuits

Understanding Securities Class Action Lawsuits Mallory Waggoner, Reinhold Lamb Abstract When a company violates securities laws and fraudulently reports financial information, a recourse for investors is to file a securities class action lawsuit. In 2017 alone, there were 412 alleged securities law violations that produced class action lawsuits. This paper analyzes the state of securities class action lawsuits in the United States from economic, geographic and calendar perspectives. Instructionsare provided to investorswith a potentialclaim of damages as a result of fraud, with procedural advice if they are part of a group pursuing a class action lawsuit. Further, a look at recent class action filings is provided. Full Text: PDF DOI: 10.15640/jble.v8n2a2

The Contract Dispute Act's Statute of Limitations

The Contract Dispute Act's Statute of Limitations

Damage Control: Changes in Disclosure Tone after Financial Misconduct

This paper examines whether managers attempt to mitigate the negative outcomes of financial misconduct by altering the tone of required disclosures. Using a series of difference-in-differences analyses, we show that following fraudulent activity, managers use more negative and litigious words in disclosures, as compared to a matched sample of control firms. We find managers that have a larger set of negative outcomes, such as those with foreknowledge of the fraud committed, are more aggressive in altering disclosure when compared to peer firms. Our results also suggest that negative outcomes due to financial misconduct, such as monetary fines and reputation loss, are mitigated by altering the tone in financial disclosures. Altogether, we conclude that managers alter disclosures to reduce the set of negative outcomes they face following securities law violations.

Do the SEC Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting?

The stated goal of the 2011 SEC Whistleblower (WB) Program introduced as part of the Dodd-Frank Act was to strengthen investor protection through greater deterrence of securities law violations and more effective regulatory enforcement. While the SEC has articulated the success of the program for detecting and prosecuting violations, there is no evidence on the effect of the program in deterring violations. In this paper, we consider the deterrent effect by examining the impact of the Program on aggressive financial reporting by U.S. firms. Despite ongoing challenges, including the high number of tips received, efforts by some managers to circumvent the new rules by muzzling whistleblowers, and potential unintended consequences of the incentives provided, we document a significant reduction in abnormal accruals following the introduction of the regulation. We observe reductions for both positive and negative abnormal accruals as well as for extreme abnormal accruals. We also predict that firms with weaker internal compliance and reporting program quality are more likely to change their reporting behavior as employees of these firms are more likely to report irregularities directly to the SEC rather than internally. Using two different proxies for the quality of a firm’s internal compliance and reporting program – ratings of a firm’s program as described in its Code of Ethics, and estimated program quality based on disclosures of ineffective whistleblower program controls under Sarbanes Oxley – we find that reductions in aggressive reporting are greater for firms with weaker internal programs. Collectively, these findings provide important large-sample evidence of significant benefits of the SEC WB Program of Dodd-Frank Act for deterring financial reporting fraud, and of the efficacy of bounty-type whistleblower programs, more generally.

The Public Company Whistleblowing Environment: Perceptions of a Wrongful Act and Monetary Attitude

ABSTRACTThe passage of the Sarbanes-Oxley (SOX) and Dodd-Frank Acts created a unique environment for whistleblowing at public companies. SOX requires public companies to establish anonymous reporting channels, and Dodd-Frank outlines substantial monetary incentives for reporting securities law violations directly to the SEC. In response to these provisions, this study examines whether the type of securities law violation (fraudulent financial reporting versus insider trading), individuals' psychological assessments of the wrongdoing, and individuals' monetary attitude influence intentions to report to an internal hotline and to the SEC. We find internal reporting is driven by increased perceptions of responsibility to report a wrongful act, whereas external reporting to the SEC is driven by increased perceptions of seriousness regarding the wrongful act. Finally, we find that individuals' attitude toward money explains reporting intentions; however, we do not find any evidence that monetary attitude leads to increased reporting to the SEC.Data Availability: Data used in this study are available from the authors upon request.

Has the lack of use of the qualified audit opinion turned it into the “Rotten Kid” threat?

Abstract Although the PCAOB describes the auditor’s report as utilizing a “pass/fail model,” auditing standards provide auditors with a reporting option that is not strictly “pass” or “fail” – a qualified audit opinion. Qualified opinions provide assurance that the financial statements are fairly presented in conformity with Generally Accepted Accounting Principles (GAAP), except for a particular matter (e.g., a non-pervasive material misstatement). Despite having the option to issue qualified opinions, auditors rarely use this option. This is not surprising when one considers that the Securities and Exchange Commission (SEC) considers financial statements filed with anything other than an unqualified opinion to be in violation of securities laws, resulting in possible suspension or delisting of the registrant’s securities. A proponent of strong penalties would argue that the SEC’s stance toward qualified opinions improves financial reporting quality by encouraging GAAP compliance. In this paper, we argue that the opposite may be true. Relying on the auditor-client negotiation literature and economic game theory, we argue that the severe consequences associated with qualified opinions in the US have caused them to become a non-credible threat in the eyes of audit clients, similar to the outcome of the Rotten Kid Game. As a result, auditors are less able to negotiate GAAP compliance by threatening to qualify the audit opinion, resulting in reduced financial reporting quality. We discuss the implications of such an outcome and provide suggestions regarding alternative methods used in foreign securities markets for responding to financial statements filed with a qualified opinion.

The Role of the International Organization of Securities Commissions in Cross-Border Enforcement of Securities Laws

The International Organization of Securities Commissions (IOSCO) is a recognized international standard setter for securities markets. Development and implementation of an effective global regulatory and enforcement mechanism is one of the organization's major purposes. In 2002, IOSCO introduced the Multilateral Memorandum of Understanding Concerning Consultation and the Exchange of Information. The Memorandum promotes cross-border enforcement of securities laws through strengthening information exchange among securities regulators. This paper examines the reasons that led securities regulators to seek development and implementation of a mechanism for cross-border exchange of information and how IOSCO addressed the main issues of cross-border exchange of information in the Memorandum. In addition, this paper examines the problems of development and implementation of mutual assistance in freezing and repatriation of assets derived from violations of securities laws.

SEC enforcement actions getting up close and personal

Purpose To alert public company management and directors to several recent SEC enforcement actions involving executives and other senior personnel arising out of securities law violations. Design/methodology/approach Reviews a series of enforcement actions against four chief executive officers, four chief financial officers, an audit committee chair, and one outside auditor (BDO USA LLC) and five of its partners arising out of securities law violations by four different corporations (MusclePharm Corporation, Bankrate, Inc., KIT Digital, Inc. and General Employment Enterprises, Inc.). Each of the actions involved financial reporting and disclosure violations. Also highlights the need for directors and senior management to maintain a sharp focus on their company’s controls and disclosure practices. Findings The SEC’S actions may portend renewed determination by the agency to hold executives and directors, as well as outside professionals, accountable for securities fraud and disclosure violations committed by corporations. Originality/value Practical guidance from experienced securities lawyers.

The SEC's Shift to Administrative Proceedings: An Empirical Assessment

Congress has repeatedly expanded the authority of the SEC to pursue violations of the securities laws in proceedings decided by its own administrative law judges, most recently in the Dodd Frank Act. We report the results from an empirical study of SEC enforcement actions against non-financial public companies to assess the impact of the Dodd Frank Act on the balance between SEC civil court and administrative enforcement actions. We show a general decline in the number of court actions against public companies post Dodd Frank. At the same time, we show an increase in average civil penalties post-Dodd Frank for both court actions and administrative proceedings involving non-financial companies as well as a greater willingness of such companies to cooperate with the SEC, consistent with an increase in the SEC’s leverage in administrative proceedings. We also provide evidence that the mix of cases the SEC brings in administrative proceedings has changed post-Dodd Frank. We show an increase in two proxies for the complexity of the alleged underlying securities law violation, the disgorgement amount and the number of years during which the violation allegedly took place. Despite the increase in the complexity of the securities law violations, we report evidence that the significance of enforcement actions decreased for administrative proceedings after the enactment of Dodd-Frank. Although we cannot measure the deterrent impact of the additional cases that the shift to administrative proceedings has allowed the SEC to bring, it does appear that the SEC is using administrative proceedings to expand its enforcement efforts against public companies. Post-Dodd Frank, the SEC has shifted toward costlier-to-prosecute actions that may reflect weaker and/or less salient cases relative to pre-Dodd Frank administrative proceedings.

SEC Muni enforcement chief offers her views on Municipalities Continuing Disclosure Cooperation initiative (MCDC)

Purpose – To explain the current status of the SEC’s year-old Municipalities Continuing Disclosure Cooperation (MCDC) initiative, which encourages municipal securities issuers, borrowers, and underwriters to self-report possible securities law violations related to inaccurate representations in offering documents concerning an issuer’s prior continuing disclosure compliance. Design/methodology/approach – Discusses the purpose of the MCDC, recent remarks by the chief of the SEC’s Municipal Securities and Public Pensions Unit, the SEC’s first cease-and-desist order, and the independent consultant compliance review required by MCDC settlement terms. Recommends how an MCDC self-reporter should respond to a call from the SEC. Findings – Thus far, the SEC has provided little detail regarding the MCDC enforcement process. Members of the SEC enforcement staff have said that underwriter MCDC cease-and-desist orders will be announced in the “coming months” and that issuers will not be named in these enforcement actions. Originality/value – Practical guidance from experienced financial services lawyers.

From Delaware to Israel: Evaluating Israel's Quasi Experiment of a Specialized Corporate Court

The Delaware Court of Chancery’s success has made the court a role model for both specialized economic courts in the United States and worldwide. Specialized economic courts are perceived by international organizations such as the World Bank and the OECD as an important element in the creation of a capable and effective judiciary, typically a perquisite for economic growth. In December 2010, Israel's legislature established a specialized division in Tel Aviv District Court to adjudicate corporate and securities law violations. This study is the first to examine the reform’s results and to provide an empirical account of securities civil litigation in Israel since the specialized division’s implementation. We employed a quasi-experimental research design to evaluate whether this structural change in the court affected civil enforcement through class and derivative actions in terms of litigation rates, forum selection, and court performance. In addition, a network analysis method was used to evaluate the new tribunal’s contribution to the formulation of a new body of law in the financial field.By manually curating 242 class and derivative actions adjudicated by both the specialized division and general district courts from 2006 to 2014, we found that although the new tribunal did not lead to the initiation of a greater number of procedures, it did cause a major shift in forum selection and thus became the center of securities litigation in Israel. Moreover, specialization has led to greater efficiency in the Tel Aviv District Court and therefore has made this court equivalent to other district courts even though this court handles the more complex cases that are typical of the economic capital of Israel. More importantly, the new tribunal set numerous precedents that help clarify the legal constraints on actors in the financial market and promote deterrence. Finally, the specialized judges rely on each other’s decisions and, as such, operate as a united bench to develop coherent and consistent case law.We conclude that in the Israeli context, specialization has proven an effective means to empower the judiciary and to promote investor protection. As such, with one foot in the civil procedure realm and the other in the corporate governance realm, this study reveals the connections between specialization, civil enforcement, and the creation of new norms by the judiciary in the financial field.

SEC charges broker-dealer for failure to protect against insider trading by employees

Purpose – To alert broker-dealers to Securities and Exchange Commission charges brought against a broker-dealer for ineffective controls over employee use of confidential information and to provide guidance regarding development and implementation of controls to protect against improper use of material non-public information by employees. Design/methodology/approach – Reviews Securities and Exchange Commission settlement order with broker-dealer for violations of securities laws for failure to adequately prevent insider trading by employees and provides guidance for implementing control to prevent insider trading. Findings – The Securities and Exchange Commission’s charges are the first to be brought against a broker-dealer for failure to adequately protect against insider trading. A broker used a customer’s confidential information regarding an impending acquisition by a private equity firm to purchase stock in the target company. The broker-dealer settled charges of violations of the federal securities laws for failing to adequately establish, maintain, and enforce policies and procedures to protect against insider trading by employees with access to confidential client information. Originality/value – Practical guidance regarding internal controls at broker-dealers from experienced securities litigation and regulation lawyers.

The Vanishing Supervisor

This Article begins with two stories that are emblematic of related trends in broker-dealers: the importance of compliance officers and the significance of technology in the oversight of brokers and their activities. The stories also point to the lessening role of the supervisor who is “on the ground” in the branches of the firms. This diminished mid-level supervisor is surprising, even shocking, in the federal regulation of broker-dealers. The history of this regulation reveals that Congress, the Securities and Exchange Commission (“SEC”) and self-regulatory organizations (“SROs”) like the Financial Industry Regulatory Authority (“FINRA”) sought to prevent broker abuses of customers by enhancing the role and competence of mid-level broker-dealer supervisors, best exemplified by the branch manager. Indeed, the Securities Exchange Act of 1934 did something that was not in the common law of agency or in the regulation of businesses under corporate or other business organization law: it imposed a direct liability upon broker-dealer supervisors for their failure to supervise those under their control who commit securities law violations. This focus on the intermediate supervisor was both a business and regulatory reaction to the growth of broker-dealers as large organizations with numerous employees and multiple offices spread across the entire country to serve the growing number of new investors in the post-World War II years. The SEC and the SROs took advantage of the new managerial position to ensure that brokers would follow the law and, through their regulation and enforcement, sought to “professionalize,” and raise the standards of, this position. Recognizing, however, that the supervisory tasks were too much for typical mid-level supervisors, the SEC, the SROs and the broker-dealers themselves provided them with the assistance of compliance officers and technology. Yet these aids are now threatening to push the intermediate supervisor aside, for business and regulatory reasons: the “flattening” of the managerial hierarchy in broker-dealers, partly made possible by technology, and the fact that the SEC and the SROs have established, and have more confidence in, compliance officers to assist in the performance of supervisory tasks in broker-dealers. As a result, broker-dealers are pressuring regulators to allow technologically-enhanced compliance officers, generally operating remotely in the main office under the direction of senior supervisors, to conduct the work of the intermediate supervisor. The Article contends that to replace, or even to downplay the importance of, this kind of supervisor would remove a key player in effective compliance for broker-dealers. There is considerable value for compliance in maintaining the broker-dealer supervisor who has securities experience, who is close to and even participates in the securities activities of brokers and who thus understands the pressures that they face. The Article argues that the SEC and FINRA must resist this dangerous trend of the elimination of the mid-level supervisor, a process to which they are themselves contributing with their emphasis upon compliance officers, and it offers several steps that they can take to bring these supervisors into the compliance conversation.

Corporate General Counsel and Financial Reporting Quality

We examine the role of general counsel (GC) in firms' financial reporting quality. GCs have a broad oversight role within the firm, including keeping the firm in compliance with laws and regulations and dealing with potential violations with respect to financial reporting. Several high-profile U.S. Securities and Exchange Commission (SEC) investigations have resulted in lawsuits or indictments against GCs for perpetrating financial fraud and caused many to ask: where were the gatekeepers? As such, we examine the conditions under which GCs may stray from their primary role as gatekeepers. Mainly, we empirically investigate claims that compensation can impair the independence or compromise the professional judgment of a GC. We measure the level of compensation using the GC’s presence or absence in the top five officers of the firm by compensation. Results are consistent with GCs straying from their role as gatekeepers, to some extent, when highly compensated in a manner similar to the CEO and CFO. In particular, firms with highly compensated GCs have lower financial reporting quality and more aggressive accounting practices, including management of the litigation reserve. However, the results also show that highly compensated GCs play an important gatekeeping role in keeping the firm in compliance with generally accepted accounting principles. Thus, highly compensated GCs appear to tolerate moderately aggressive behavior but constrain it such that it would not result in violation of securities laws and jeopardize their standing within the firm.This paper was accepted by Mary Barth, accounting.

Procedural Versus Substantive Coordination in International Financial Market Oversight

SEC staff really first became internationally engaged with global international in the 1980s. Global connections in the world's capital markets were expanding fast, and borders were becoming an enforcement concern for securities regulators. The early networks the SEC helped construct had this enforcement focus in mind, and, reflecting this, the SEC's Office of International Affairs was originally an arm of the Division of Enforcement. In many jurisdictions in the late 1980s and early 1990s, activities like insider trading were not illegal; even where they were, many securities regulators had limited domestic enforcement powers, let alone the power to share enforcement information with their foreign counterparts. Formal legal assistance treaties existed, but were typically tools by which only criminal authorities collected evidence on each others' behalf--and, of course, the SEC is not a criminal authority. So soft-law networks and legally nonbinding information-sharing arrangements--what we call MOUs or Memoranda of Understanding--arose as a tool to get around these constraints and strengthen domestic enforcement powers in other markets so that regulators could help each other. These informal, nonbinding arrangements have worked very well. The SEC currently has enforcement information-sharing arrangements with more than 80 other regulators. However, when we consider their successes, we also need to keep in mind exactly what these MOUs do. Enforcement information-sharing arrangements are fundamentally about regulators supporting each other in fulfilling their own domestic mandates. In other words, help me detect and deter violations of my securities laws, and I'll help you detect and deter violations of your securities laws. The underlying laws do not have to be the same. IOSCO AND PROCEDURAL COORDINATION This is not to say that efforts to forge these arrangements have not had a certain component. The International Organization of Securities Commissions (IOSCO), for example, has a subcommittee that reviews the laws and enforcement powers of regulators who wish to sign IOSCO's Multilateral MOU on enforcement-sharing. Through this subcommittee, IOSCO has successfully encouraged dozens of countries to adopt laws that give their regulators both more investigatory powers and the ability to use these powers to collect enforcement information on another regulator's behalf. But I believe this convergence component to these enforcement networks is probably best viewed as rather than substantive. As just one example, IOSCO has long pursued the elimination of dual illegality and dual criminality provisions in domestic law, i.e., prohibitions on assisting a foreign authority unless the violation alleged in abroad would also be a violation at home. (1) I suggest this is procedural rather than substantive because such legal and regulatory convergence does not really touch on the substance of how a jurisdiction oversees its own market--it just tries to eliminate barriers that hinder regulators from helping each other in applying their own substantive rules domestically. THE FINANCIAL CRISIS AND SUBSTANTIVE COORDINATION Particularly since the start of the recent financial crisis, however, there has been a significant change in emphasis among these soft law networks, beyond coordination and convergence, and toward more substantive regulatory coordination and convergence. The impetus for this change is essentially two-fold: 1. The concerns of market participants that operate globally; and, 2. Especially following the financial crisis, the concerns of regulators over regulatory arbitrage and regulatory competition. Regulatory Competition This first concern--the concern of market participants--is quite understandable. Facing multiple overlapping regulations, regulated entities will prefer a system where every jurisdiction's regulations are the same or where adhering to the regulations of one jurisdiction is recognized by other regulators as sufficient for operating in their own market. …