Scienter

Abstract: This Essay examines the stock market's reaction to the Ninth Circuit's decision in re Silicon Graphics Securities Litigation. That decision adopted the most stringent interpretation of the Private Securities Litigation Reform Act's "strong inference" standard for pleading scienter in securities fraud cases. Studying the abnormal stock returns of a sample of high technology companies, the authors find a statistically significant positive return for shareholders of these companies to the Silicon Graphics decision. They also find that these positive stock price effects were strongest for those firms most likely to be sued in securities fraud class actions, but the results were less positive for those firms most likely to be sued for committing fraud. The authors conclude that the Silicon Graphics decision enhanced shareholder wealth on average. They argue that when the Supreme Court is called upon to interpret the Reform Act's pleading standard that it should adopt the Silicon Graphics standard.

Abstract: How does Supreme Court precedent affect lower court decisions when there is asymmetric probability of appellate review? Using securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd. Tellabs clarified the law with respect to one of the most contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a lenient Seventh Circuit reasonableness standard for pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Would the Supreme Court’s directive cause the dismissal rates in the lower courts to converge? Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate on scienter grounds in circuits previously applying a higher preponderance standard for scienter, particularly the Ninth Circuit. By contrast, we find no significant shift in the courts previously applying the lower reasonableness standard in our basic model. Looking at judicial characteristics that might explain the higher dismissal rates in the preponderance circuits, we find that judges who have substantial business caseloads or who were nominated by Republican presidents became substantially less likely to dismiss on scienter grounds after Tellabs. Consistent with the greater difficulty involved in obtaining dismissal, Tellabs correlates with an increase in low value settlements in the Ninth Circuit. Conversely, Tellabs also correlates with a decrease in low value settlements in circuits that previously applied the more lenient Seventh Circuit standard. Overall, we conclude that Tellabs led to increased uniformity in how lower courts apply pleading standards, but its effect is muted by the asymmetry of the right to appeal.

Abstract: In the post-Enron era, there has been considerable discussion about what went wrong at Enron and elsewhere and how to fix it. Congress passed the Sarbanes-Oxley Act, the New York Stock Exchange adopted new corporate governance regulations designed to create better checks and balances, and other self-regulatory organizations followed suit. In addition, the Securities and Exchange Commission, both before and after the Sarbanes-Oxley Act, promulgated many new regulations. One voice, however, has been fairly quiet. The State of Delaware, the mother of all corporate law, has been largely absent from the debate. The Delaware judiciary, however, has issued several opinions that indicate movement may be afoot. In this Article, I raise some questions about Delaware's (declining) role in corporate law, and discuss the emerging duty of good faith and its potential for curbing abuses like those seen in the past few years. To do so, I examine several key cases from Smith v. Van Gorkom, to Caremark, to the Disney cases. In these, and other cases, I argue, the judiciary has put forth a set of guiding principles for fiduciary good faith. I argue that this duty is appropriately a separate duty, not an obligation on the other two key fiduciary duties of due care and loyalty. I compare the Delaware cases and the standards within them to the standard for pleading and proving scienter under the federal securities laws. Using the federal standard as a jumping off point, I argue that the duty of good faith can be analogized to the types of situations involving scienter and, thereby, limited in a meaningful manner. As a result, good faith can help to fill the gap in fiduciary duties without becoming excessively capacious.

Abstract: In the post-Enron era, there has been considerable discussion about what went wrong at Enron and elsewhere and how to fix it. Congress passed the Sarbanes-Oxley Act, the New York Stock Exchange adopted new corporate governance regulations designed to create better checks and balances, and other self-regulatory organizations followed suit. In addition, the Securities and Exchange Commission, both before and after the Sarbanes-Oxley Act, promulgated many new regulations. One voice, however, has been fairly quiet. The State of Delaware, the mother of all corporate law, has been largely absent from the debate. The Delaware judiciary, however, has issued several opinions that indicate movement may be afoot. In this Article, I raise some questions about Delaware's (declining) role in corporate law, and discuss the emerging duty of good faith and its potential for curbing abuses like those seen in the past few years. To do so, I examine several key cases from Smith v. Van Gorkom, to Caremark, to the Disney cases. In these, and other cases, I argue, the judiciary has put forth a set of guiding principles for fiduciary good faith. I argue that this duty is appropriately a separate duty, not an obligation on the other two key fiduciary duties of due care and loyalty. I compare the Delaware cases and the standards within them to the standard for pleading and proving scienter under the federal securities laws. Using the federal standard as a jumping off point, I argue that the duty of good faith can be analogized to the types of situations involving scienter and, thereby, limited in a meaningful manner. As a result, good faith can help to fill the gap in fiduciary duties without becoming excessively capacious.