261 Demystifying Causation in Fraud-on-the-Market Actions (Fox, Merritt B.)
January 4, 2005
This Article concerns what an investor who purchases shares on the open market of an issuer that has made a positive, materially false misstatement in violation of Rule 10b-5 must show to establish causation in a "fraud-on-the-market" action for damages. Confusion has arisen in the courts concerning this question because they have analyzed the matter in terms of the twin concepts of "transaction causation" and "loss causation." They initially developed these concepts as a way of deciding causation in actions based on a showing of traditional reliance. Fraud-on-the-market actions involve a fundamentally different kind of causal connection, between the defendant's misstatement and the plaintiff's injury, as recognized by the Supreme Court in Basic v. Levinson. Because of this fundamental difference is causal connection, the twin concepts of transaction causation and loss causation simply do not make sense in fraud-on-the-market actions.
The focus in fraud-on-the-market cases should instead be on developing standards for what the plaintiff must plead and prove, and the acceptable forms of evidence, in order to establish that the defendant's misstatement inflated the price at the time of purchase. Analyzing the problem from the ex ante perspective of the economics based approach to securities law reveals that these are the real issues underlying the causation cases coming before the courts.
262 Governing Stock Markets in Transition Economies: Lessons from China (Pistor, Katharina and Chenggang Xu)
2005, Published in American Review of Law and Economics, 7 (1): 184-210
Jumpstarting stock markets in transition economies has proved difficult. These countries lack effective legal governance structures and face severe information problems. Yet, not all financial markets failed because of adverse conditions. Using China's initial stock market development as a case study, this paper suggests that administrative governance can substitute for formal legal governance. At the core of this governance structure was the quota system. It created incentives for regional competition and decentralized information collection at the IPO stage. It was also used to punish regions and responsible officials when companies from their regions failed as evidenced in this paper.
263 Contextual Analysis of Tax Ownership (Raskolnikov, Alex)
Ownership is one of the most fundamental concepts in tax law, yet it is remarkably confused. The uncertainty inhibits tax planning, leads to inconsistent responses from the government, and produces unexpected outcomes in the courts. There has been no shortage of scholarly attention to the issue, but most of the commentary has been either exceedingly narrow or focused on far-reaching reforms. As a result, the law of tax ownership lacks conceptual foundation. This Article attempts to remedy the deficiency. It proposes a comprehensive approach to tax ownership and demonstrates that the doctrine may (and should) be significantly clarified without a dramatic overhaul of the existing substantive law. The approach rests on dividing all ownership questions into four categories depending on the context in which the questions arose. Using this analytical framework, the Article allocates various tax ownership authorities to appropriate categories and develops the underlying principles guiding the analysis for each group. Because these principles differ among the categories, the Article suggests that the existence of numerous seemingly inconsistent tax ownership decisions should be understood not as a sign of a confused doctrine, but as an appropriate result reflecting the underlying conceptual differences. By rationalizing and organizing the law of tax ownership, the Article provides a framework for resolving future tax ownership controversies.
264 Causation By Presumption? Why the Supreme Court Should reject Phantom Losses and Reverse Broudo (Coffee, John C. Jr.)
January 2005
The Supreme Court is about to hear Dura Pharmaceuticals Inc. v. Broudo, a case in which the Ninth Circuit significantly liberalized the "loss causation" standards applicable to federal securities litigation. In response to a companion article by Professor Merritt Fox, which favors such a liberalization and even the abandonment of loss causation as a necessary element, Professor Coffee argues that any change in causation standards that permits a plaintiff to escape showing a decline in the security's stock market price attributable to the material misstatement or omission gives rise to perverse incentives, which would likely result in the award of phantom losses that may have been caused instead by other factors, such as a market bubble. More generally, he argues that the securities class action against the corporate defendant in cases of secondary market stock drops appears to serve little legitimate function, advancing neither compensatory nor deterrent ends. Instead, such actions against the corporation (as opposed to actions against gatekeepers, controlling persons or the corporation in the primary market setting) principally effect inefficient wealth transfers among largely diversified shareholders. Given the legal and other transaction costs involved, shareholders appear likely to be net losers from such actions. As a result, he concludes that further minimization of the causation requirement should await policy clarification of the role of the "fraud on the market" action against a non-trading issuer defendant.
265 Serial Entrepreneurs and Small Business Bankruptcies (Baird, Douglas G. and Edward R. Morrison)
Januray 4, 2005
This empirical study suggests that, far from ensuring assets are put to their best use, Chapter 11 encourages entrepreneurs to remain too long with failed businesses before trying to start new ones. Small entrepreneurs open and close a number of businesses over the course of their careers as they search for the business (or employer) that offers the best match with their skills. Chapter 11 delays this matching process and, over this dimension, differs little from rent control and other government policies that encourage socially wasteful lock-in of scarce resources. These costs may not be large, as bankruptcy judges are aware of and guard against them. At the same time, however, few benefits offset these costs. The typical Chapter 11 is a small business that has few, if any, specialized assets. It is organized around the owner-operator's human capital and can be (and usually is) reassembled by the owner at low cost. Other than delay, the outcome of a Chapter 11 case—reorganization or liquidation—has little bearing on a small entrepreneur's career.
266 Featuring the Three Tenors in La Triviata, (Goldberg, Victor P. )
January 2005, Forthcoming in Review of Law & Economics, Vol. 1, No. 1
In the "Three Tenors" case the FTC found an agreement a violation of the antitrust law despite the fact that there was no way it could be anticompetitive.The Commission failed to heed the lessons of Coase's classic paper on the nature of the firm, making a sharp distinction between activities within a firm (legal) and across firm boundaries (not legal).Analytically, there should be no distinction.The decision to integrate activities by contract rather than ownership is a matter of relative transactions costs.Since the boundaries of the firm are, ultimately, an economic decision reflecting the costs and benefits of the alternative arrangements, there is no economic justification for making the legality of any act contingent upon whether it was on the proper side of that boundary.Nor is there any particular virtue in using antitrust rules to alter the relative costs so as to shift that boundary to favor bringing activities within the firm.The paper proposes a "quick look" approach.The first thing to look for is some indication of market power.If antitrust harm is not credible because there is no market power, stop looking.
267 Citizens to Preserve Overton Park v. Volpe (Strauss, Peter L)
Fall 2004
This essay is one of a series destined to appear in a Foundation Press book, Administrative Law Stories, now set for publication in the fall of 2005. The decision in Citizens to Preserve Overton Park v. Volpe represents a transition from political to judicial controls over decisions broadly affecting a wide range of community interests. Unmistakable and dramatic as it is, that transition is not universally applauded. But the transition was striking and quick. The late sixties and early seventies saw an explosion of new national legislation on social and environmental issues, that often provided explicitly or implicitly for citizen remedies. In many respects, Overton Park marked the turn. It was an example, as well, of the success of highly motivated recent law school graduates in contributing to major developments in national law. If for that reason alone, it is a fitting subject for a collection of essays intended to give students a more concrete sense of their subject.
Stories are uniquely the product of a narrator's vision. For a case, like this one, that has appeared to different participants in remarkably different ways, what seems appropriate is to attempt to see how the course of events leading to decision in Overton Park might have appeared through a number of eyes. Of course, the reader has only one narrator; but he has attempted to people the pages of the essay and evoke their varying perspectives as faithfully as his research and capacity for empathetic understanding permit. Much of what follows draws on an earlier essay, Revisiting Overton Park, which appeared in the pages of the UCLA Law Review in 1992 and on the sensitive story-setting "reply" contributed by Prof. Lucie White. The release of the papers of Justices Blackmun, Brennan and Marshall for public view, and the availability of transcripts of oral argument in the United States Supreme Court library and litigation files in the possession of CPOP Attorney John Vardaman, have permitted supplementing the 1992 account.
268 Statutes that are not Static - The Case of the APA (Strauss, Peter L.)
February 2005
Judges interpreting statutes evidence a certain ambivalence whether they are interpreting the texts before them as artifacts whose meaning was fixed as of their date of enactment, or as present-day texts whose meaning may be shaped by subsequent events - whether intervening judicial decisions, or the adoption of new statutes (as distinct from amendments, an easy case) whose instructions bear on the issues they present. Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council stridently referred the meaning of the Administrative Procedure Act's rulemaking provision back to the political compromise struck at its enactment in 1946; the opinion insisted that judges are not free to vary its terms by common-law improvisations based on their reasoning about the procedural needs of contemporary rulemaking. Motor Vehicle Mfrs' Assn v. State Farm Mutual Auto Ins. Co. almost as impatiently dismissed the argument that judicial standards for reviewing agency rulemakings are those that prevailed when the APA was enacted (equating review of rulemaking with highly permissive review of economic legislation), rather than the "hard look" understandings that had grown up in the 1970s, primarily in the D.C. Circuit. The particular tension has long been a puzzle for administrative law scholars; yet it seems to reflect a general unease about how judges ought best interpret Congress's words as they age.
This essay explores that tension, first in the context of thoughts about the judicial-legislative interface appearing in the literature, both today's and yesterday's, and then using the concrete APA example. It argues that in its very occasional forays into the construction of particular statutes, the Supreme Court should accord substantial weight to contemporary consensus the profession and lower courts have been able to develop in interpreting law. The dominant characteristic of particular statutory issues in the Court today is that they are very infrequently, and usually tardily, presented. The Court's certiorari choices, like the contemporary Congress's legislative choices, are driven by the disputes that are live and important at any given moment. If the uncontroversial does not command the Court's attention, it nonetheless becomes a part of the living law known to lawyers advising clients, to Congress choosing its legislative opportunities, to agencies deciding how to make procedural choices, and to lower courts that cannot so easily evade the responsibilities of decision. Were the Court honestly to face the implications of its reservation of authority to choose which statutory issues to consider, it might conclude that its refusal to credit intervening statutory and lower court case-law developments, more than its insistence on a static view of original meaning, profoundly mistakes its proper contemporary role.
269 Unintended Consequences of Medical Malpractice Damages Caps (Sharkey, Catherine M.)
NYU Law Review, Vol. 80, May 2005
Previous empirical studies have examined various aspects of medical malpractice damages caps, focusing primarily upon their overall effect in reducing insurance premium rates and plaintiffs' recoveries, and other effects such as physicians' geographic choice of where to practice. Experimental studies have focused attention upon the possible "anchoring" effect of caps, which might inadvertently increase award amounts. This Article is the first to explore an unintended crossover effect that may be dampening the intended effects of caps.
This Article posits that, where noneconomic damages are limited by caps, plaintiffs' attorneys will more vigorously pursue, and juries will award, larger economic damages, which are often unbounded. Implicit in such a crossover effect is the malleability of various components of medical malpractice damages, which often are considered categorically distinct, particularly in the tort reform context. This Article challenges this conventional wisdom.
My original empirical analysis, using a comprehensive data set of jury verdicts from 1992, 1996, and 2001, in counties located in 22 states, collected by the National Center for State Courts, concludes that the imposition of caps on noneconomic damages has no statistically significant effect on overall compensatory damages in medical malpractice jury trial verdicts or final judgments. This result is consistent with the crossover theory. Given the promulgation of noneconomic damages caps, the crossover effect may also partially explain the recently documented trend of rising economic (as opposed to noneconomic) damages in medical malpractice cases.
270 Stability, Not Crisis: Medical Malpractice Claim Outcomes in Texas, 1988-2002 (Black, Bernard, Charles Silver, David A. Hyman and William M. Sage)
February 2005
Using a comprehensive database of closed claims maintained by the Texas Department of Insurance since 1988, this study provides evidence on a range of issues involving medical malpractice litigation, including claim frequency, payout frequency, payment amounts, defense costs, and jury verdicts. The data present a picture of stability in most respects and moderate change in others. We do not find evidence in claim outcomes of the medical malpractice insurance crisis that produced headlines over the last several years and led to legal reform in Texas and other states. At least in Texas, the rapid rise in insurance premiums that sparked the crisis may reflect, in significant part, insurance market dynamics rather than changes in claim outcomes.
Controlling for population growth, the number of large paid claims (over $25,000 in real 1988 dollars) was roughly constant from 1990-2002. The number of smaller paid claims declined. Controlling for inflation, payout per large paid claim increased over 1988-2002 by an estimated 0.1% (insignificant) - 0.5% (marginally significant) per year, depending on the dataset we use to define "medical malpractice" claims. Jury awards increased by an estimated 2.5% (insignificant) - 3.6% (barely significant) per year, depending on the dataset, but actual post-verdict payouts in tried cases showed little or no time trend. Real defense costs per large paid claim rose by 4.2 - 4.5% per year. Real total cost per large paid claim, including defense costs, rose by 0.8 - 1.2% per year.
