Volume 16
Volume 16.1
Deconstructing Scienter
Richard A. Booth
This article traces the evolution of scienter as applied under Rule 10b-5 primarily by analysis of SCOTUS decisions addressing the concept. It contributes to the law and literature by demonstrating the relevance of agency law doctrine, which has been almost entirely ignored by other scholarship on the subject of scienter.
Pay-for-Delay, Here to Stay? Surviving Summary Judgement Post-Actavis
Patrick M. Kennedy
This paper considers the continuing viability of “pay-for-delay” antitrust claims in the wake of the Supreme Court's landmark decision in FTC v. Actavis.1 Although the Court in Actavis suggested that settlements to impermissibly extend the life of a patent could state a claim under antitrust law, Justice Breyer's opinion for the majority leaves a number of important doctrinal components up in the air. In particular, who bears the burden of proving a settlement is too “large” and “unjustified” remains the subject of fierce litigation in the lower courts. This paper wades into these debates, concluding that the plaintiff bears the burden of proving a payment is large, but that the defendant is properly tasked with showing a payment has an innocent explanation, not the plaintiff. Further, I reject the claim that proving fair market value is an intrinsic component of the plaintiff's burden to show reverse settlements are “large and unexplained.” Alternatively, I argue that the best solution for companies facing significant uncertainty about the future doctrinal direction for reverse payment cases should instead create a patent invalidity insurance market.
Federalism, Free Competition, and Sherman Act Preemption of State Restraints
Alan J. Meese
This article demonstrates that federalism and state sovereignty do not rebut the strong case for Sherman Act preemption of state-created restraints. Such preemption would be a garden-variety exercise of Congress's commerce power. Moreover, Sherman Act preemption would not interfere with any constitutionally recognized attribute of state sovereignty.
Turning to canons of construction, the article concludes that such preemption is so plainly constitutional that the avoidance canon is inapposite. The federal-state balance and anti-preemption canons do protect traditional state regulatory spheres from inadvertent national intrusion. Neither supports Parker itself, which sustained a regime that directly burdened interstate commerce and injured out-of-state consumers. Application of these canons instead reveals that the Court's invocation of federalism is selective at best. Indeed, the Court's rejection of the federal-state balance canon and resulting application of the Act to local private restraints that produce no interstate harm created the very conflict between the Sherman Act and local regulation that the state action doctrine purports to resolve.
How Robinhood Has Revolutionized Online Trading and Dramatically Upended the Traditional Model for Payment for Order Flow (PFOF)
Paul J. Ingrassia
The once unglamorous practice of Payment for Order Flow (“PFOF”) received a new lease on life in the aftermath of the Robinhood-GameStop short squeeze of January 2021. In a special study from 2000, the SEC defined PFOF for options trading as “a method of transferring some of the trading profits from market making to the brokers that route customer orders to specialists for execution.” Boiled down to its essence, PFOF is the commission the broker-dealer earns for routing certain information about a trade made by its client to a routing agency or “market maker” (also called a “middleman”), which then finalizes the terms of the deal with the stock exchange. While the SEC definition applies to stock options specifically, order flow is a controversial practice for both options and non-derivative securities, such as stocks. Both types are relevant to Robinhood. To avoid confusion, I want to make clear from the outset that the SEC definition for options roughly approximates the definition of PFOF for stocks, bonds, and other securities. The reader should likewise note that when I refer to PFOF throughout this note I refer to its use across all sorts of asset classes, not simply options trades.
Technically speaking, when a retail trader buys a security on a platform provided by a broker-dealer (i.e., Robinhood Financial LLC), that security is often (although not always) owned by the market maker (i.e., Citadel LLC), which lends a defined inventory of securities to the brokerage firm. The brokerage firm then distributes customer pricing information about individual trades on the firms' books and records. Market makers are needed--at least for the time being--because most financial institutions lack the operational capabilities to manage a significant volume of securities contracts all on their own. While some of the larger and more sophisticated brokerages manage their own stock inventory, the financial markets have adopted a model that for the most part segregates the duties of broker-dealer and market maker.
Market makers also play a critical role in maintaining liquidity in financial markets. Periodically, middlemen will even alter the broker-dealer's inventory requirements to mitigate a perceived danger in the markets, such as what occurred with Citadel in January. I will also discuss in greater depth the market maker's role in Section V. But for now, it is important to note that when I speak of “order flow,” I am referring specifically to the trade flow information routed from a broker-dealer to a market maker.
The method of compensation known as PFOF has been around for decades. However, recent controversies surrounding PFOF's controversial practices, particularly by Robinhood, have underscored the changing ecosystem of private retail trading more generally. Further, new technological innovations have in significant ways democratized and revolutionized the online trading space by making investing more accessible than ever before, especially for less educated and younger traders now using online platforms like Robinhood. All these factors bring new possibilities--as well as potentially unforeseen risks--into the financial industry.
Volume 16.2
A Web of Paradoxes: Empirical Evidence on Online Platform Users and Implications for Competition and Regulation in Digital Markets
Pinar Akman
This article presents and analyses the results of a large-scale empirical study, in which over 11,000 consumers from ten countries in five continents were surveyed about their use, perceptions, and understanding of online platform services. To the author's knowledge, this is the first cross-continental, multi-platform empirical study of users of online platform services of its kind. Amongst others, the study probed platform users about their multi-homing and switching behavior; engagement with defaults; perceptions of quality, choice, and well-being; attitudes towards targeted advertising; understanding of basic platform operations and business models; and valuations of “free” platform services. The empirical evidence from the consumer demand side of some of the most popular multi-sided platforms reveals a web of paradoxes that needs to be navigated by policymakers and legislatures to reach evidence-led solutions for better-functioning and more competitive digital markets. This article contributes to literature and policy by, first, providing a multitude of novel empirical findings and, second, analyzing those findings and their policy implications, particularly regarding competition and regulation in digital markets. These contributions can inform policies, regulation, and enforcement choices in digital markets that involve services used daily by billions of consumers and are subjected to intense scrutiny, globally.
Losing the Forest for the Trees: On the Loss of Economic Efficiency and Equity in Federal Price-fixing Class Actions
Martin A. Asher, Gregory K. Arenson, and Russell L. Lamb
This article focuses on the misuse of econometrics in asserting that certain potential individual class members or groups of class members were not “impacted” (that is, adversely affected in any degree) as a result of alleged horizontal price fixing and the effect such arguments have had on class-certification law in the context of federal horizontal price-fixing cases. Econometric methods have proven to be powerful tools relevant to both proof of injury-in-fact and the quantification of damages (typically overcharges) in horizontal price-fixing disputes. However, defendants have sought to alter the law by some false claims emanating from econometrics. If defendants' claims were accepted, the result would be to erode both economic efficiency and equity--permitting price fixers to escape liability and retain their ill-gotten gains. Defendants' argument often reduces to a claim that it would be unfair to the defendants to include purportedly uninjured claimants in a certified class, even if the alternative is that the defendants would avoid liability for undisputed damages suffered by plaintiffs. This argument is even more perverse because the econometric methods employed yield the correct measure of aggregate damages (overcharges), while defendants' arguments, even taken at face value, go only to the distribution of those overcharges among plaintiffs. Hence, the fact that some claimants would receive less than they deserve and some more--though being correct in total--is apparently less fair than to allow the defendant price fixers to retain their cartel profits through denial of class certification and the effective termination of the suit. The courts have not followed, and should not follow, this path through the trees and lose sight of the forest.
Material Adverse Effect (Mae) Clauses in Canada: What U.S. Counsel Needs to Know
Paul Blyschak
The recent decision in Fairstone v. Duo Bank is an important addition to Canadian “material adverse effect” jurisprudence and, in addition to Canadian caselaw, relies heavily on Delaware precedent. On the face of the decision, Fairstone appears to be either adhering to or adopting such precedent. However, while this is the case in numerous respects, in several other ways Fairstone departs significantly from its Canadian and Delaware counterparts. It also makes these departures without either signaling it is doing so or explaining why it is doing so. The result is several interrelated, unresolved, and problematic issues of which U.S. and Canadian counsel should be aware and take caution. Stated differently, the result is an unusual and uncertain path between Canadian and Delaware MAE caselaw of consequence for all M&A transactions governed by Canadian law. Finally, given that the U.S. is by far the largest source of foreign investment into Canada, this confusion will be of particular interest to U.S. counsel with a cross-border practice.
SPACs and the Present Regulatory Conundrum
Samantha K. Keleher
Much commentary surrounding the SPAC boom focuses on the perceived risks of SPACs and capitalizes on the fear that generates. This commentary, however, largely ignores the great benefits inherent in SPACs. Conversely, of those discussions that espouse the virtues of SPACs, most also ignore the hazards involved in the current regulatory chasm of SPAC oversight. Misaligned incentives, a dearth of disclosure, and a lack of preparedness requirements make SPACs as they stand today potentially precarious for the average, unapprised retail investor. But the structure of SPACs also makes them potentially very valuable for retail and institutional investors alike - they bring accessibility to the markets, they have inherent safeguards in place, and they have the potential to be very lucrative. The risks identified by critics of SPACs can all be rectified with sensible but measured regulation. However, regulators must be mindful of the dual regulatory regime this will create: the SEC requires intensive, thorough disclosure and procedural requirements for the traditional IPO process because this is what it considers necessary for investor protection; however, SPACs require none of that. And importantly, as SPAC usage has exploded in recent years, traditional IPOs have steadily declined. Many attribute this shift to increasingly cumbersome and deterrent regulatory obstacles in place in the traditional IPO process. So, as long as these two methods of going public exist alongside each other, the SBC's regulatory reasoning will remain in conflict with itself. Regulators, therefore, must be aware of this as they consider how to best treat SPACs. They should acknowledge and welcome the benefits SPACs provide to the markets and investors, while bridging the divide they create with the traditional IPO process. This article seeks to address all of those concerns and offers a proposal for how to satisfactorily handle these instruments and their regulation.
Simplified Veil-Piercing
Eva Lilienfeld
Corporate veil-piercing is complicated. Streamlining the doctrine would provide clarity to an area of law complicated by the constitutional boundaries of personal jurisdiction and the fact-intensive nature of substantive veil-piercing This Note proceeds by reviewing two possible outcomes under current veil-piercing doctrine: a broader jurisdictional test or a broader substantive test. It then explains how each situation causes problems for plaintiffs and defendants alike. First, it forces parties to waste judicial resources in applying different veil-piercing tests to answer the same question. Second, it prevents litigants from understanding their legal liabilities and obligations by unnecessarily complicating a case. Finally, the interaction of personal jurisdiction and substantive corporate law triggers issue preclusion and unfairly prevents plaintiffs from re-litigating their claims elsewhere.
This Note argues that courts should instead apply the same test for both jurisdictional and substantive veil-piercing purposes. By using the substantive veil-piercing test for the entire case, corporate defendants can better anticipate their legal liabilities, and plaintiffs can more adequately assess the merits of their claims. Implementing this solution would, without running afoul of procedural due process concerns, increase efficiency, predictability, and just outcomes for plaintiff's in a muddle area of corporate law.
Volume 16.3
Toward Enhanced Corporate Sustainability Disclosure: Making ESG Reporting Serve Investor Needs
Dan Esty and Todd Cort
Interest in metrics that track corporate sustainability performance has risen dramatically in recent years. Driven in part by sustainability-minded investors who want to better align their portfolios with their values and in part by corporations that seek to show how they have folded a focus on sustainability into their business models, the growth of corporate Environmental, Social, and Governance (ESG) reporting has become a topic of focus and concern in the finance world. Notably, in the absence of widely applicable and consistent ESG reporting requirements, those aspiring to make sustainable investments face a dizzying array of corporate ESG disclosures as well as sustainability metrics produced by third-party data firms. And they have come to recognize that the available ESG data are both incomplete and inconsistent--and sometimes even outright misleading. With the demand for firmer foundations for sustainable investing in mind, this article maps the ESG terrain--laying out the critical issues, highlighting the shortcomings of existing ESG reporting, and identifying what investors want in the way of sustainability data. Building on this analysis and a survey undertaken by the Yale Initiative on Sustainable Finance, the Article concludes with a set of recommendations for improved corporate ESG metrics and methodologies.
Code Section 304: A Roadmap, an Updated Analysis, and Policy Considerations
Doron Narotzki and Melanie McCoskey
Code Section 304 requires the reclassification of stock sales between affiliated corporations as dividends. However, for many years, Code Section 304 has not fulfilled the original “anti-avoidance” tax policy that was behind its legislation. This article aims to provide an updated analysis and explanation of the mechanics of Code Section 304 and to provide some insight into the tax planning strategies that utilize Code Section 304 in order to minimize U.S. federal income tax. The article will also demonstrate how these tax avoidance results are still effective post-TCJA. The article will then suggest a potential tax law change to return this code section to its intended anti-abuse status. Finally, the article suggests reconsideration of the tax policy related to dividend distributions.
Rethinking the Financial Stability Oversight Council
Paolo Saguato
New major existential challenges are threatening the U.S. financial system. Climate change, cyber risk, the evolving role of digital assets, and vulnerabilities in nonbank financial intermediation call for prompt collective responses by financial regulators. However, the existing U.S. financial macroprudential regulatory architecture seems not to be up to the task because of “architectural vulnerabilities” that undermine its proper functioning.
The financial Stability Oversight Council (FSOC) is a multiagency authority created by the Dodd-Frank Act to mitigate systemic risk by coordinating the actions of U.S. financial regulators. It was envisioned as a macroprudential authority to stabilize the financial system. FSOC was given the power to designate systemic ally important entities and activities and to trigger a novel back-up regulatory and supervisory authority of the Federal Reserve (Fed), what I call the Regulator of Fast Resort (ROLR) function.
This Article shows that FSOC, in its current structure, is not up to the challenges facing the U.S. financial system. Offering a novel political economy account to its operations and structure, the Article shows that architectural vulnerabilities in the FSOC design exposes it to political cyclicality--which undermines its operations, deprives the markets of a critical watchdog, and compromises the operation of the Fed as ROLR. This Article proposes incrementalistic and marginal policy solutions to this problem. Congress should fix the architectural vulnerabilities of the FSOC by adopting a different leadership structure. Building on the comparative experience of the U.K. and the E.U., the Articles proposes two alternative options: upgrading the current leadership of the Council to a Co-Chair role of the Fed Chair and the Treasury Secretary; or alternatively, creating a new Systemic Risk Council within the Fed as a novel macroprudential authority.
The Impact of Geo-Economic Rivalry on U.S. Economic Governance: Will the United States Incorporate Aspects of China's State-Centric Governance?
Joel Slawotsky
China's corporate governance model emphasizes an extensive governmental role in the construction of economic markets. The paradigm consists of an economic-political syndicate of collaborative actors creating profit but whose critical core mission is to advance state objectives as defined by the ruling authority, the CCP. Economic interests thus serve political interests pursuant to a template of state direction and partnership with the private sector encompassing share ownership; industrial policies; governmental representatives embedded in the private sector; and discipline imposed for failing to comply with syndicate rules. The model has empowered China to narrow the once substantial leads enjoyed by the U.S. with respect to economic, technological, and military power. Although the United States has alleged that China's model is unfair and has endeavored to have China de-emphasize its model and move towards the U.S. model of market-capitalism, these efforts have been unsuccessful. Significantly, competitive pressures and national security interests may force the U.S. to embrace one or more aspects of China's economic model. The impetus for doing so is not merely driven by U.S. governmental concerns over China; indeed, some U.S. business leaders have called for a similar role for the U.S. government in order to successfully compete with the Chinese private-sector, let alone State-linked entities. Whether out of competitive pressures or the allure of success, incorporating aspects of China's model is an increasing possibility with significant potential impacts on U.S. corporate governance. This article discusses the drivers militating toward U.S. incorporation of aspects of China's governance model as well as the potential ramifications on U.S. governance.
Reaching for the Moon: An Analysis of Real-Time Securities Clearing and Settlement in Light of Emerging Blockchain Technologies
Luke Colle
The January 2021 “WallStreetBets” trading fiasco shocked the financial industry. At the congressional hearing that followed, policymakers, hedge fund managers, and market makers agreed that a two-day settlement cycle exposes investors, broker-dealers, and clearinghouses to significant risks that a hypothetical real-time settlement system would not. Commentators noted that blockchain technologies might make such a revolutionary settlement time possible.
This Note responds to the financial system's urgent need and offers an analysis of real-time settlement in light of novel blockchain technologies. In Part I, this Note analyzes the advantages and disadvantages of realtime settlement. In Part II, this Note explains--in layman's terms--how emerging blockchain technologies can mitigate the drawbacks of such incredibly speedy settlement. In Part III, this Note describes how exchanges and clearinghouses have applied blockchain technologies thus far.