Law and the market: The impact of enforcement

University of Pennsylvania Law Review

Volumn 156, Issue 2, 2007, Pages 229-311

  Coffee Jr , John C ^a,b  

^a Law School ^*

^b Center on Corporate Governance

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EID: 39149125421     PISSN: 00419907     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (395)

1. For the suggestion that there has been a decline in their competitiveness, see COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION 2-6 (2006), http://www.capmktsreg.org/pdfs/ 11.30Committee_Interim_ReportREV2.pdf [hereinafter PAULSON REPORT].
2. The author is listed as a "Task Force Member" on this report. Id. at ii. The Paulson Report was swiftly followed by a study by New York City Mayor Michael Bloomberg and Senator Charles Schumer that reached similar conclusions.
3. See MICHAEL R. BLOOMBERG & CHARLES E. SCHUMER, SUSTAINING NEW YORK'S AND THE U.S.' GLOBAL FINANCIAL SERVICES LEADERSHIP 10-14 (2007) (arguing that global macroeconomic trends are threatening the United States' historical preeminence in capital markets). The author also served as a consultant to this report. As will be evident, this author is not in full agreement with either report, but does believe that the issue of capital market competitiveness is serious and justifies continuing attention.
4. Data about the magnitude of this cross-listing premium are presented infra at notes 11,16, and 157-184, and in the accompanying text. The source of this premium is less certain, but at least three complementary explanations are all plausible: (1) The act of cross-listing may be a signal that the corporation's future cash flows will be greater than the market previously perceived (possibly because the managers are so convinced of their superior investment prospects that they will take the costly and risky step of listing in the United States markets) ; (2) The act of cross-listing may also be a form of bonding that assures investors that agency costs will be reduced (or at least will be lower than they previously perceived), because the firm's managers have subjected themselves to SEC scrutiny and private and public enforcement systems that are unique to the United States; and (3) The act of cross-listing may decrease the discount rate on the market's expectation of future cash flows; this reduction in the discount rate (and hence increase in share price for any given expected level of future cash flows) is the product of reduced informational asymmetry (in part because of the increased enforcement risk), which in turn leads to a narrower bid/asked spread. This Article will argue that increased enforcement risk associated with entry into the U.S. market affects all three of these explanations.
5. Although a number of commentators have opined that the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C. (2000 & Supp. III 2004)), and high enforcement intensity, including private enforcement through securities class actions, have damaged the competitiveness of the U.S. economy, the latest empirical survey finds that the market share of foreign listings held by U.S. exchanges (e.g., the New York Stock Exchange (NYSE), NASDAQ, and American Stock and Options Exchange (AMEX)) has "increased from 1998 to 2005 relative to the market share of the [London Stock Exchange]'s Main Market." Craig Doidge et al., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time 4 (Charles A. Dice Ctr. for Research in Fin. Econ., Working Paper No. 2007-9, 2007), available at http://ssrn.com/ abstract=982193.
6. Although the evidence is clear that the London Stock Exchange has lost ground in its ability to attract foreign issuers, its subsidiary, the Alternative Investment Market (AIM), which is a market that specially caters to small and start-up firms that are not eligible to list on the major U.S. exchanges, has had considerable success in attracting IPO listings. Id.
7. If, however, one focuses on firms with characteristics that qualify them to list on a U.S. exchange, there is little evidence that such firms are less likely to so cross-list today. Id. at 4-5;
8. see also Stavros Peristiani, Evaluating the Relative Strength of the U.S. Capital Markets, CURRENT ISSUES ECON. & FIN. (Fed. Reserve Bank of N.Y., New York, N.Y.), July 2007, at 1, 3, available at http://www.newyorkfed.org/research/current_issues/ cil3-6.pdf (finding evidence of the decline of U.S. equity markets to be mixed and generally agreeing with Doidge et al.).
9. Recent surveys find that some foreign firms report themselves as having been deterred from listing in the United States by Sarbanes-Oxley, but that a distinct subset of foreign firms is bucking this trend and continuing to cross-list in the United States. See, e.g., Joseph D. Piotroski & Suraj Srinivasan, The Sarbanes-Oxley Act and the Flow of International Listings 31 (Apr. 2007) (unpublished manuscript), available at http://ssrn.com/abstract=956987.
10. Most non-U.S. firms that are eligible to cross-list in the United States have a controlling shareholder, and typically the law in the jurisdiction of incorporation for that foreign firm permits a controlling shareholder to extract some level of private benefits from the controlled corporation at the expense of minority shareholders. Doidge et al., supra note 3, at 3. By entering the U.S. market, the foreign firm likely reduces the ability of a controlling shareholder to maximize these private benefits of control.
11. See Craig Doidge, U.S. Cross-Listings and the Private Benefits of Control: Evidence from Dual-Class Firms, 72 J. FIN. ECON. 519, 550 (2004) (providing empirical evidence of this impact). For a controlling shareholder intent on maximizing its own interests, entry into the U.S. market by its controlled firm makes sense only if it anticipates either that (1) the gain in the share value of its own block of shares will exceed the value of the foregone private benefits, or (2) the prospective ability to raise capital in the United States at lower cost is of greater value to it (typically because of a specific business plan or strategy) than the foregone private benefits.
12. For the range of theories - some stressing geography, some stressing colonial endowments, some stressing openness to trade - see infra notes 53-55 and the accompanying text. That financial development drives economic growth is itself an idea whose clear formulation traces back only to the early 1990s.
13. See, e.g., Robert G. King & Ross Levine, Finance and Growth: Schumpeter Might Be Right, 108 Q.J. ECON. 717, 734-35 (1993). Still, in 1997, four young financial economists-Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, whose work is discussed in detail in Part I - revolutionized the field by introducing a provocative new thesis that legal origins were a prime factor in shaping financial development.
14. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131, 1149 (1997) (concluding that legal rules and enforcement impact the size and extent of a country's financial market). Their work has generated much controversy.
15. See, e.g., Paul G. Mahoney, The Common Law and Economic Growth: Hayek Might Be Right, 30 J. LEGAL STUD. 503, 504 (2001) (disagreeing with the claim of La Porta et al. and claiming that "legal origin does not affect economic growth... through its effect on financial markets");
16. Raghuram G. Rajan & Luigi Zingales, The Great Reversals: The Politics of Financial Development in the Twentieth Century, 69 J. FIN. ECON. 5, 14-15 (2003) (finding nations with civil law origins to have initially led in the race for financial development, but later to have abandoned the pursuit);
17. Thorsten Beck et al., Law, Politics, and Finance 32 (World Bank Policy Research, Working Paper No. 2585, 2001), available at http:// go.worldbank.org/XOXL5CEGB0 (finding a "strong link between financial institution development and legal origin").
18. This author has long doubted that law, or at least specific legal rights or provisions, can provide a coherent theory of financial development and has previously argued that, in the early development of securities markets, the role of substantive law was less important than the existence of an open, decentralized, and stable political economy. Investors were protected less by courts than by self-help arrangements involving underwriters and stock exchanges. See John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control, 111 YALE L.J. 1, 8-9 (2001) (arguing that the level of state control over the economy, rather than the nature of a country's legal system, most influences its financial development). Strong centrist governments appear to have inhibited the growth of securities markets, probably because securities markets are less easily controlled than large banks.
19. PAULSON REPORT, supra note 1, at ix.
20. BLOOMBERG & SCHUMER, supra note 1.
21. Particular emphasis is placed on "where new equity capital is being raised-that is, in which market initial public offerings (IPOs) are being done." PAULSON REPORT, supra note 1, at ix-x.
22. The Paulson Report found as follows: "As measured by value of IPOs, the U.S. share declined from 50 percent in 2000 to 5 percent in 2005. Measured by number of IPOs, the decline is from 37 percent in 2000 to 10 percent in 2005." Id. at x;
23. see also BLOOMBERG & SCHUMER, supra note 1, at 10-14. Other studies have reached similar conclusions.
24. See, e.g., Xi Li, The Sarbanes-Oxley Act and Cross-Listed Foreign Private Issuers 28 (Jan. 18, 2007) (unpublished manuscript), available at http://ssrn.com/abstract=952433 (finding that foreign private issuers experienced abnormal declines in stock price of 10%, on average, in response to Sarbanes-Oxley);
25. Piotroski & Srinivasan, supra note 4, at 33 ("[T] he Sarbanes-Oxley Act has altered the flow of foreign listings across international exchanges."). At the same time, it should also be noted that these less intensively regulated markets are experiencing scandals and a lower rate of growth. AIM, the London Stock Exchange's lightly regulated market for smaller companies and IPOs, was slightly down in 2006, and half of its largest IPOs in 2006 are trading below their initial offering price.
26. Carrick Mollenkamp et al., Uncertain AIM: A Hot Market in London Has Its Risks, Too, WALL ST. J., Dec. 20, 2006, at A1.
27. The Paulson Report finds that "[i]n 2005, foreign companies raised 10 times as much equity in the private U.S. markets as in the public markets ($53.2 billion vsz. $4.7 billion)." PAULSON REPORT, supra note 1, at x. It adds that, "of the global IPOs that raised money in non-U.S. markets, 57 percent of these companies (94 percent of the capital raised) chose to raise additional capital in the U.S. private markets.
28. " Id. Such funds are raised from large institutional investors pursuant to the exemption from registration provided by Rule 144A.
29. See 17 C.F.R. § 230.144A (2007) (permitting resale of privately placed securities to "qualified institutional buyers").
30. A wave of going-private transactions is, however, also currently causing a number of delistings from the London Stock Exchange. See Peter Smith & Norma Cohen, Delisting Wave Hits London, FIN. TIMES (London), Jan. 2, 2007, at 1 (reporting that the value of companies taken private broke a record in 2006, with the overall U.K. equities market shrinking 3% as a result). Thus, it is uncertain whether this new preference for going private is the product of overregulation in the United States or the low cost of capital available to the private equity firms that orchestrate such deals.
31. Craig Doidge et al., Why Are Foreign Firms Listed in the U.S. Worth More?, 71 J. FIN. ECON. 205, 206 (2004). Doidge et al. found that foreign companies with shares cross-listed in the U.S. had Tobin's q ratios that were 16.5% higher (as of the end of 1997) than the Tobin's q ratios of non-cross-listed firms from the same country.
32. Id. This figure rises to 37% when the foreign firm cross-listed on a major U.S. exchange (i.e., the NYSE, AMEX, or NASDAQ).
33. Id. In short, the valuation premium is twice as high over non-cross-listing firms when the foreign firm lists on a major U.S. exchange. In a later study, the same authors found the historical average valuation premium over 1990 to 2001 for foreign firms cross-listing onto U.S. exchanges to have been 17.5% over non-cross-listed firms, and for the period 2002 to 2005 to have been 14.3%.
34. See Doidge et al., supra note 3, at 33, 62-63 tbl.9. This longer-term study shows both a consistent premium from 1990 to 2005 for listings on U.S. exchanges and the absence of any premium for listing on the London Stock Exchange (and indeed a discount for many years).
35. Id. at 32-33.
36. See Luzi Hail & Chritian Leuz, Cost of Capital Effects and Changes in Growth Expectations Around U.S. Cross-Listings 36 (European Corporate Governance Inst., Working Paper No. 46/2004, 2006), available at http://ssrn.com/abstract=938230 (finding that, when non-U.S. companies cross-list on U.S. exchanges, their cost of capital reduces by 70 to 120 basis points);
37. see also Luzi Hail & Christian Leuz, International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?, 44 J. ACCT. RES. 485, 524 tbl.1 (2006) (finding that countries with "more extensive disclosure requirements and stronger securities regulation" exhibit a lower cost of capital).
38. The term "bonding hypothesis" was coined by this author (although others may have had similar ideas contemporaneously). See John C. Coffee, Jr., The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications, 93 NW. U. L. REV. 641, 691-92 (1999) [hereinafter Coffee, The Future as History] ("The simplest explanation for the migration of foreign issuers to U.S. exchanges and NASDAQ is that such a listing is a form of bonding . . . .");
39. see also John C. Coffee, Jr., Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757, 1830 (2002) [hereinafter Coffee, Racing Towards the Top] ("Cross-listing may in part be ... a bonding mechanism to assure public investors that they will not be exploited ....").
40. For other studies, see William A. Reese Jr. & Michael S. Weisbach, Protection of Minority Shareholder Interests, Cross-Listings in the United States, and Subsequent Equity Offerings, 66 J. FIN. ECON. 65, 101-02 (2002) (finding that post-listing behavior of cross-listing firms corroborated the bonding hypothesis),
41. and René M. Stulz, Globalization, Corporate Finance, and the Cost of Capital, J. APPLIED CORP. FIN., Fall 1999, at 8, 13 (arguing that globalization stimulates better governance, which lowers the cost of capital). Bonding can occur in a variety of ways and is not only the product of increased exposure to liability. By entering the U.S. market, foreign issuers also may expose themselves to the greater scrutiny of securities analysts and institutional investors and may employ underwriters who perform greater due diligence. The relative significance of these various means has not yet been seriously explored. However, the most recent review of the evidence finds that, although the Sarbanes-Oxley Act "increases the expected reporting, regulatory and legal costs of a listing on a U.S. exchange," the Act "should strengthen the credibility of U.S. listings as a bonding mechanism, thus increasing the expected benefits from a U.S. listing."
42. Piotroski & Srinivasan, supra note 4, at 4. Indeed, Piotroski and Srinivasan find that a distinct subset of foreign issuers does cross-list on a U.S. exchange, rather than on the London Stock Exchange, apparently for these reasons.
43. Id. at 5-7.
44. See sources cited infra note 15 (reviewing studies showing a valuation premium associated with U.S. cross-listing). For a chart showing the magnitude of this valuation premium for firms cross-listing in the U.S. market for the years 1997 to 2005,
45. see infra Figure 12.
46. Doidge et al. have reviewed data covering listings on the major U.S. exchanges and the London Stock Exchange from 1990 to 2005. At no time over this period do they find cross-listings on the London Stock Exchange to have been associated with a listing premium (and often there was a discount), but at all times over this period, cross-listings on the U.S. exchanges were associated with a listing premium, whose magnitude varied from time to time. Doidge et al., supra note 3, at 5, 32. Earlier studies have found that companies cross-listing on the London Stock Exchange did not outperform a control of non-cross-listing firms from the same jurisdictions (whereas firms cross-listing in the United States did outperform the control group).
47. See Marco Pagano et al., The Geography of Equity Listing: Why Do Companies List Abroad?, 57 J. FIN. 2651, 2684 (2002).
48. The average premium for foreign firms cross-listing to the three major U.S. exchanges was 37% in 1997. Doidge et al., supra note 11, at 206.
49. From 2002 to 2005, the average premium fell to 14%. Doidge et al., supra note 3, at 33.
50. This author originally advanced the interpretation, in 2002, that securities markets would compete through specialization by tailoring their markets to different clienteles. See Coffee, Racing Towards the Top, supra note 13, at 1798-99. Hence, convergence should not be the norm, at least with respect to securities exchanges and their listing requirements; rather, competition produces specialization, not convergence. No suggestion is here intended that the only explanation for why many foreign corporations prefer to list in London is that controlling shareholders wish to continue to receive private benefits of control. It is presented as a partial explanation, but not the exclusive one.
51. Undoubtedly, some foreign corporations list on the London Stock Exchange in order to avoid what they perceive as inefficient and costly regulation that the United States imposes on cross-listed firms. Nothing in this Article implies that U.S. enforcement policies are invariably wise or just, and some rational persons may consider them often arbitrary and capricious. The market generally may have perceived the impending enactment of Sarbanes-Oxley in this way. See Piotroski & Srinivasan, supra note 4, at 2-3 (describing surveys indicating that companies anticipated negative implications from Sarbanes-Oxley). More particularly, Kate Litvak has found that the stock prices of non-U.S. companies listed on the major U.S. exchanges declined in comparison to the stock prices of matching, non-cross-listed companies from the same industry and country and similar in size. In addition, the decline was more severe for non-U.S. companies listed on exchanges than for non-U.S. companies that had only made a more limited entry into the United States via private placements or Rule 144A.
52. Kate Litvak, The Effect of the Sarbanes-Oxley Act on Non-U.S. Companies Cross-Listed in the U.S., 13 J. CORP. FIN.' 195, 226 (2007) [hereinafter Litvak, The Effect of Sarbanes-Oxley];
53. see also Li, supra note 9, at 1-2 (finding negative 10% abnormal stock returns for cross-listed foreign companies as a result of the passage of Sarbanes-Oxley);
54. Kate Litvak, Sarbanes-Oxley and the Cross-Listing Premium, 105 MICH. L. REV. 1857, 1898 (2007) [hereinafter Litvak, The Cross-Listing Premium] (concluding that, in the period prior to the enactment of Sarbanes-Oxley, the cross-listing premium of foreign companies subject to Sarbanes-Oxley significantly declined relative to comparable companies not subject to the same regulation). This research suggests at least that Sarbanes-Oxley and U.S. regulation were perceived as harmful to investors in foreign firms (and hence lighter regulation in London was perceived as beneficial).
55. For a further analysis, see infra text accompanying notes 202-203.
56. Economists have argued not only that improved disclosure reduces uncertainty and informational asymmetries, but that it can also reduce nondiversifiable risk. For a brief review of this literature, see Hail & Leuz, supra note 12, at 487. Studies have found that foreign firms cross-listing on U.S. exchanges do provide superior financial disclosures relative to otherwise similar non-cross-listing firms.
57. See, e.g., Tarun Khanna et al., Disclosure Practices of Foreign Companies Interacting with U.S. Markets, 42 J. ACCT. RES. 475, 503 (2004). Others have developed indices to measure differences in the quality of the corporate governance between cross-listing and non-cross-listing firms, and have reported that firms cross-listing in the United States (but only in the United States) rank significantly higher on these indices.
58. See, e.g., GORDON L. CLARK & DARIUSZ WÓJCIK, THE GEOGRAPHY OF FINANCE: CORPORATE GOVERNANCE IN THE GLOBAL MARKETPLACE 152-54 (2007). This author has no dispute with either assertion, but believes that the enforcement variable may be the underlying force that most drives issuers to improve their disclosure.
59. The relevant comparison here is not between the general listing standards of the NYSE and those of the United Kingdom Listing Authority, which is a subsidiary of the Financial Services Authority (FSA) that adopts the listing standards applicable to the London Stock Exchange, but rather between the special rules of both bodies that are applicable to foreign issuers. In the United States, a foreign issuer need not file periodic disclosure reports with the SEC on a quarterly basis, but need only file an Annual Report on Form 20-F (plus copies of its press releases). See Requirements of Annual Reports, 17 C.F.R. § 240.13a-1 (2007); Quarterly Reports on Form 10-Q and Form 10-QSB, 17 C.F.R. § 240.13a-13 (2007); SEC Form 20-F, available at http:// www.sec.gov/about/forms/form20-f.pdf. This is the only major concession that the SEC makes to foreign issuers. For example, section 301 of Sarbanes-Oxley requires even the foreign issuer to have an independent audit committee. 15 U.S.C. § 78j-1 (m) (3) (2000 & Supp. III 2004).
60. By contrast, in the United Kingdom, the listing rules applicable to foreign issuers are considerably more relaxed than those applicable to domestic issuers. With respect to domestic issuers, the FSA goes well beyond the minimum standards required by the major European Commission directives and requires "super-equivalency" for U.K. domestic issuers; that is, U.K. domestic companies are required to meet "gold-plated" standards to provide investor protection. But these same standards do not apply to most foreign issuers. For example, the FSA's Listing Rules subject domestic companies to special rules with regard to related party transactions, and to the United Kingdom's "comply or explain" disclosure standards for corporate governance. See FSA, FSA Handbook: Listing Rules R. 9.25, 9.26, 11.1 (Nov. 2007), http://fsahandbook.info/FSA//handbook/LR.pdf [hereinafter U.K. Listing Rules], However, the Listing Rules require far less of a foreign company that applies for a secondary listing of its equity securities-and most foreign issuers apply for such a secondary listing (based on having a primary listing in their home country).
61. See generally id. at R. 9.1.1 (confining the application of the disclosure rules to companies with primary listings);
62. id. at R. 11.1.1 (confining the related party rules to companies with primary listings). Rule 14 of the U.K.
63. Listing Rules covers these companies, id. at R. 14.1, and thus the U.K. Listing Rules governing preemptive rights, Rules 9.3.11 and 9.3.12, are inapplicable to such "overseas listed companies."
64. See id. at R. 9.3.11, 9.3.12. In general, the provisions of the U.K. Listing Rules seeking to protect minority shareholders do not apply to "over-seas listed companies" with a secondary listing.
65. See Iain MacNeil & Alex Lau, International Corporate Regulation: Listing Rules and Overseas Companies, 50 INT'L & COMP. L.Q. 787, 803-05 (2001) (noting that preemption rights do not apply to overseas companies listed on the London Stock Exchange). Such overseas-listed companies with a secondary listing on the London Stock Exchange are required only to
66. maintain a listing in a recognized market, U.K. Listing Rules, supra, at R. 14.3.1,
67. ensure that a minimum proportion of shares remain in public hands, id. at R. 14.2.2, 14.3.2,
68. seek listings for further tranches of securities of the same class as listed, id. at R. 14.3.4,
69. and (4) provide certain documents and notifications to the FSA, id. at R. 3.3.2-3.3.7. In addition, overseas-listed companies are not subject to the City Code on Takeovers and Mergers promulgated by The Panel on Takeovers and Mergers.
70. See THE PANEL ON TAKEOVERS AND MERGERS, THE TAKEOVER CODE, at A3-A5 (8th ed. 2006), available at http://www.thetakeoverpanel.org.uk/new/codesars/ DATA%5Ccode.pdf. This differential in regulation has produced some recent concern in the United Kingdom that foreign firms are regulated too lightly.
71. Seejill Treanor, Fears Over Light-Touch Regulation of Foreign Firms, GUARDIAN (U.K.), Feb. 23, 2007, at 33 (describing fears associated with having "less stringent" regulation of foreign firms).
72. Otherwise, both the SEC and the FSA observe disclosure standards that comply with the standards of the International Organization of Securities Commission (IOSCO), which were first adopted in 1990. The SEC does go marginally beyond the IOSCO standards, and its accounting rules are also different. See Roberta S. Karmel, Will Convergence of Financial Disclosure Standards Change SEC Regulation of Foreign Issuers?, 26 BROOK. J. INT'L L. 485, 492-94 (2000). But which country's accounting rules are currently more rigorous is open to debate.
73. See supra notes 11, 15, 16, and accompanying text (surveying studies that show a higher Tobin's q ratio for firms cross-listed in the United States).
74. Insider trading does appear to be relatively pervasive on the London Stock Exchange and to have increased significantly between 2000 and 2004. Nuno Monteiro et al., Updated Measurement of Market Cleanliness 20 tbl.8 (FSA, Occasional Paper Series, Paper No. 25, 2007), available at http://www.fsa.gov.uk/pubs/occpapers/op25.pdf.
75. The report further found that "no major enforcement action had taken place in the period under examination." Id. at 4. Other research has found that the prevalence of insider trading does measurably affect the cost of equity capital, widening bid/asked spreads and reducing liquidity. Moreover, enforcement of insider trading laws appears to reduce the cost of equity capital.
76. See Utpal Bhattacharya Sc Hazem Daouk, The World Price of Insider Trading, 57 J. FIN. 75, 78 (2002) (arguing that the enforcement of insider trading laws, rather than their mere existence, leads to "a significant decrease in the cost of equity").
77. Between 1990 and 2005, some 129 U.K. issuers (i.e., domestic U.K. companies) cross-listed onto a U.S. exchange, whereas only 17 U.S. issuers cross-listed onto the London Stock Exchange's Main Market. Doidge et al., supra note 3, at 52-53 tbl.3. The foregoing authors have also provided this author with a country-by-country comparison of the cross-listing premiums for the year 2005. In 2005, they compared 479 U.K. firms that were not cross-listed with 74 U.K. firms that were cross-listed. The former had a Tobin's q of 1.65, and the latter a Tobin's q of 1.95, which went up to 2.05 for exchange-listed U.K. firms. Doidge et al., Chart of Tobin's q Values (2005) (on file with author).
78. Section 404 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7262 (2000 & Supp. III 2004), requires the corporation's management to assess in the corporation's annual report "the effectiveness of the internal control structure and procedures of the issuer for financial reporting" and its auditor to "attest to, and report on, the assessment made by the management of the issuer." In Auditing Standard No. 2, the Public Company Accounting Oversight Board (PCAOB) issued detailed rules that required the auditor to undertake a full-scale audit in making this "assessment" and to find that the corporation had a "material weakness" if there was more than a "remote" prospect of a financial restatement. AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT OF FINANCIAI. STATEMENTS, Auditing Standard No. 2, ∥∥ 4, 9 (PCAOB 2007). Auditing Standard No. 2 proved to be very costly and was significantly revised in 2006. For an overview, see Management's Report on Internal Control over Financial Reporting, Securities Act Release No. 8762, Exchange Act Release No. 54, 976, 71 Fed. Reg. 77,635 (Dec. 27, 2006).
79. As the Paulson Report noted, critics have estimated that section 404 gave rise to compliance costs that totaled between $15 and $20 billion in 2004. See PAULSON RE-PORT, supra note 1, at 115. This was based in turn on studies by Financial Executives International and Charles River Associates that placed the average cost per company in 2004 at $4.36 million or between $1.24 million and $8.51 million, depending on the size of the company. Id. at 126.
80. See infra notes 183-186 and accompanying text. The decline began in 2000, continued in 2001, and hit bottom in 2002, the year that the Sarbanes-Oxley Act was passed.
81. LLS&V stands for Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. Their most cited article is probably Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998). Their first paper to state their common law origins thesis was La Porta et al.,
82. supra note 6 .
83. LLS&V developed an "antidirector rights" index of shareholder protection rules, based on data from forty-nine countries, to serve as a measure of legal protection for minority shareholder rights. See La Porta et al., supra note 27, at 1127-29. Only six factors were included in this index: "[p]roxy by mail allowed," "[s] hares not blocked before meeting," " [cumulative voting or proportional representation," "[o]ppressed minorities mechanism," "[p]reemptive rights," and "[percentage of share capital to call an extraordinary shareholders' meeting."
84. Id. at 1122-23 tbl.1. Corporate lawyers would generally view several of these protections as having only modest value; for example, preemptive rights and cumulative voting are generally dispensed with in the United States. Some critics have also charged that LLS&V obtained their results by inconsistent coding of these variables.
85. See, e.g., Holger Spamann, On the Insignificance and/or Endogeneity of La Porta et al.'s "Anti-Director Rights Index" Under Consistent Coding 68 (John M. Olin Ctr. for Law, Econ. & Bus. Fellows' Discussion Paper Series, Discussion Paper No. 7, 2006), available at http://www.law.harvard.edu/programs/ olin_center/fellows_papers/pdf/Spamann_7. pdf (finding that after recoding LLS&V's data, "there is . .. very little reason to think that the [antidirector rights index] validly measures legal shareholder protection").
86. For a concise summary, see Edward L. Glaeser & Andrei Shleifer, Legal Origins, 117 Q.J.ECON. 1193, 1194 (2002) ("On just about any measure, common law countries are more financially developed than civil law countries."
87. (citing La Porta et al., supra note 6, at 1149;
88. La Porta et al., supra note 27, at 1151)).
89. At least one economic study has departed from this focus on the "law on the books" and indeed found that it is the enforcement, not the enactment, of statutes that yields measurable results. See Bhattacharya & Daouk, supra note 22, at 104 (finding that actual prosecutions for insider trading did reduce the cost of capital in a jurisdiction, but that the passage of an insider trading law did not).
90. See, e.g., Rafael La Porta et al., What Works in Securities Laws?, 61 J. FIN. 1, 27 (2006) ("[Securities laws matter because they facilitate private contracting rather than provide for public regulatory enforcement.").
91. As discussed infra in notes 44-48 and the accompanying text, this is the approach taken in La Porta et al.,
92. supra note 31, at 11-13, which evaluates enforcement in terms of the power and independence of the securities regulator, but contains no data on budgets or prosecutions.
93. Canada and Australia come the closest because they have authorized class action-like proceedings. Securities class actions covering the secondary market in Canada date only from December 31, 2005. Philip Anisman & Garry Watson, Some Comparisons Between Class Actions in Canada and the U.S.: Securities Class Actions, Certification, and Costs, 3 CAN. CLASS ACTION REV. 467, 499 (2006);
94. see also id. at 468 (noting Canada's recent authorization of class action-like proceedings). Class actions have been authorized for a longer period in Australia, but initially there was only a "low level[] of interest," which gradually increased over the last decade.
95. See Bernard Murphy & Camille Cameron, Access to Justice and the Evolution of Class Action Litigation in Australia, 30 MELB. U. L. REV. 399, 400 (2006).
96. See infra notes 129-131 and accompanying text.
97. This is said more with regard to foreign exchanges that are seeking to attract foreign listings through low-intensity enforcement. However, U.S. exchanges may also be seeking to outflank the stricter legal controls imposed on them by U.S. law by acquiring foreign exchanges that are beyond the reach of U.S. regulators. The NYSE has merged with Euronext, N.V., the largest European exchange, but a condition of this merger was that Euronext would remain subject to European regulation, Meanwhile, NASDAQ is pursuing a merger candidate, having failed to acquire the London Stock Exchange. Some commentators believe that a motive underlying these acquisition efforts is to induce the SEC to modify its rules so as to harmonize them with those in Europe. See, e.g., Flying in Formation, ECONOMIST, Feb. 3, 2007, at 76, 77 (noting that recent merger activity "has encouraged American and British regulators to co-operate more closely").
98. PAULSON REPORT, supra note 1, at 47-48.
99. See infra note 184 and accompanying text (evaluating the average Tobin's q of non-cross-listed firms along with the cross-listing premium on U.S. exchanges). Doidge et al. dispute that the U.S. listing premium declined after the passage of Sarbanes-Oxley.
100. Doidge et al., supra note 3, at 39. Others, including Kate Litvak and Luigi Zingales, disagree.
101. See Litvak, The Cross-Listing Premium, supra note 18, at 1898 (noting a significant decline in the U.S. listing premium in 2002, particularly for high-profit firms);
102. Litvak, The Effect of Sarbanes-Oxley, supra note 18, at 226 (finding that events leading to the enactment of Sarbanes-Oxley triggered drops in the stock prices of cross-listed companies);
103. Luigi Zingales, Is the U.S. Capital Market Losing Its Competitive Edge? 13-14 (Univ. of Chi. Graduate Sch. of Bus. Initiative on Global Mkts., Working Paper No. 1, 2006), available at http://research.chicagogsb.edu/ igm/research/papers/ ILZingalescompetitiveness.pdf (concluding that after Sarbanes-Oxley was passed, the U.S. listing premium dropped especially significantly for companies from countries with good corporate governance). No position is taken here on this empirical issue.
104. See, e.g., King & Levine, supra note 6, at 719;
105. Ross Levine & Sara Zervos, Stock Markets, Banks, and Economic Growth, 88 AM. ECON. REV. 537, 538 (1998).
106. La Porta et al., supra note 27, at 1151. This methodology has attracted considerable criticism. The most amusing of these critiques has been offered by Professor Mark West.
107. See Mark D. West, Legal Determinants of World Cup Success (John M. Olin Ctr. for Law & Econ., Paper No. 02-009, 2002), available at http://ssrn.com/abstract=318940. He argues that "if factors such as 'rule of law' and legal origin matter, they might also matter in other areas of human endeavor," such as success in soccer.
108. Id. at 2. Using primary independent variables identical to the ones used by LLS&V in their 1997 regressions (among which are legal origin and rule of law) and basing his study on the same forty-nine countries, Professor West controls for the number of professional soccer players per capita, whereas LLS&V controlled for GDP growth and the logarithm of real GNP.
109. Id. at 3. He discusses the possibility that teams from countries based on the French civil law system are likely to play better football, because, where "vestiges of the Napoleonic Code" survive, discretion is typically removed from "coaches and managers in the same manner that that civil law system curtails judicial activism.
110. " Id. at 5. However, he concedes that "maybe-just maybe-other forces are at work."
111. Id. at 5.
112. La Porta et al., supra note 6, at 1138 tbl.II.
113. Rafael La Porta et al., Investor Protection and Corporate Governance, 58 J. FIN, ECON. 3, 20 (2000).
114. For this criticism, see Marco Pagano & Paolo F. Volpin, The Political Economy of Corporate Governance, 95 AM. ECON. REV. 1005, 1006 (2005) (noting that the possibility of "reforms of corporate law" contradicts the premise of the legal origin theory). For the same critique (and others),
115. see KENNETH W. DAM, THE LAW- GROWRH NEXUS: THE RULE OF LAW AND ECONOMIC DEVELOPMENT 32-33 (2006).
116. La Porta et al., supra note 27, at 1142 tbl.1, 1140.
117. La Porta et al., supra note 31, at 11-13.
118. In analyzing public enforcement, the three authors "focus on five broad aspects of public enforcement." Id. at 12. First, they evaluate the "attributes" of the securities regulator: Who appoints its members? Can they be removed by a higher authority? Does it focus on securities markets alone? Does it have the "power to regulate primary offerings and/or listing rules on stock exchanges"?
119. Id. Second, they determine whether the power to regulate is "delegated to the [regulator], rather than remain [ing] with the legislature or the Ministry of Finance.
120. " Id. Third, they rate the "investigative powers" of the securities regulator: can it subpoena documents and witnesses?
121. Id. Fourth, they evaluate the civil sanctions that the regulator can levy.
122. Id. Finally, they examine the criminal penalties that are authorized and rank the regulator in terms of the severity of these penalties.
123. Id. at 12-13. Although they find that securities regulators in common law countries have both more extensive investigative powers and harsher criminal and noncriminal sanctions,
124. id. at 15-16 tbl.II, which seems correct, they never assess or attempt to measure if these powers are actually used.
125. Id. at 13.
126. Id. at 19-20.
127. Id. at 20.
128. For a summary of evidence on this point, see DAM, supra note 42, at 38-39.
129. The Napoleonic influence over Latin America was short-lived, while the U.S. influence may have had a far longer duration. See id. at 42-45.
130. See, e.g., Spamann, supra note 28, at 1 (reviewing criticisms of LLS&V's coding method);
131. id. at 19-20 ("For example,... both Norway and the U.S. have cumulative voting only as an optional rule, but... La Porta et al. coded Norway as 0 and the U.S. as 1 for that variable .. .."
132. (citing La Porta et al., supra note 27) ).
133. For instance, South Korea, Japan, China, and Costa Rica have civil law origins (largely Germanic), while some of the poorest countries in sub-Saharan Africa (e.g., Kenya, Liberia, Nigeria) have common law origins.
134. See generally JARED DIAMOND, GUNS, GERMS, AND STEEL: THE FATES OF HUMAN SOCIETIES (1997). A dominant theme of this analysis is that tropical countries faced severe health problems that limited economic development and limited the effort made to direct capital to them.
135. Id. at 28-32.
136. See Rajan & Zingales, supra note 6, at 21-23 (arguing that free trade discourages dominant industries from seeking to block development of securities markets).
137. See, e.g., Daron Acemoglu et al., The Colonial Origins of Comparative Development: An Empirical Investigation, 91 AM. ECON. REV. 1369, 1372-73 (2001) (emphasizing the impact of colonial conditions, rather than legal origins, on economic performance).
138. See Coffee, supra note 6, at 61-62 (explaining that the emergence of stock exchanges in Amsterdam and London was "neither accidental nor unrelated to the earlier appearance of a pluralistic society").
139. See id. at 61-62 (arguing, in part, that self-regulation was more easily accepted in common law countries). For a similar and very detailed assessment of English culture and its shared characteristics with Dutch culture of the same era, see ALAN MACFARLANE, THE RIDDLE OF THE MODERN WORLD: OF LIBERTY, WEALTH AND EQUALITY 280-85 (2000).
140. By the early 1600s, English popular culture had originated and celebrated the "rags to riches" story of the poor boy who, through diligence and perspicacity, rose from poverty to great wealth and power. The classic such story was the children's tale of Dick Whittington and his cat, in which the feline famously advised the boy apprentice to return to London and not give up. The 400th anniversary of this folktale was duly celebrated in 2005. See Symposium, The Power of Stories: Intersections of Law, Literature, and Culture, 12 TEX. WESLEYAN L. REV. 1 (2005). This folktale was based on an actual historical figure, Sir Richard Whittington, who rose from the status of a poor apprentice to become a wealthy cloth merchant and eventually Lord Mayor of London.
141. See Susanna Frederick Fischer, Dick Whittington and Creativity: From Trade to Folklore, From Folklore to Trade, 12 TEX. WESLEYAN L. REV. 5, 9-13 (2005). Folktales do not prove that such careers were common, but they do reveal that the popular imagination wanted to believe in, and was captured by, such stories. Three centuries later, the U.S. equivalent of the Dick Whittington story was the Horatio Alger story; again, at least on occasion, men such as Andrew Carnegie did achieve great wealth and power based on their individual entrepreneurial skill. Similar stories from the same era are much harder to identify on the Continent.
142. For more on these themes, see MACFARLANE, supra note 57, at 280-90, and Coffee, supra note 6, at 61-63.
143. In the United Kingdom, the Directors Liability Act of 1890 liberalized the law of deceit (and was later copied by the Securities Act of 1933). See Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a) (2000) (making "fraud or deceit" unlawful "in the offer or sale of any securities") ; 1 LOUIS LOSS ET AL., SECURITIES REGULATION 7 (4th ed. 2006) (noting that the Directors Liability Act imposed "civil liability for untrue statements in the prospectus without proof of scienter" (citing Directors Liability Act, 53 & 54 Vict., c. 64)). In the United States, "blue sky" statutes were enacted in most states to govern securities transactions, beginning with a comprehensive Kansas statute in 1911.
144. Id. at 53. By 1933, blue sky statutes had been enacted in 47 states and Hawaii.
145. Id. at 58. For a fuller discussion of how U.S. securities markets developed prior to the existence of any comprehensive law governing securities transactions,
146. see Coffee, supra note 6, at 25-39.
147. For a representative account of Weber's view of the relationship between law and economic growth, see David M. Trubek, Max Weber on Law and the Rise of Capitalism, 1972 Wis. L. REV. 720, 739-48.
148. Weber, however, regarded the common law itself as backward and resistant to systematization, 2 MAX WEBER, ECONOMY AND SOCIETY 657 (Guenther Roth & Claus Wittich eds., 1978).
149. See, e.g., Glaeser & Shleifer, supra note 29, at 1194, 1224 (suggesting that the "heavy government intervention" that can occur in a civil law system can explain the difference between common law and civil law countries) ;
150. Mahoney, supra note 6, at 504, 511-13 (discussing the structural differences between common law and civil law countries).
151. For good descriptions (and criticisms) of the role of self-regulation in the U.S. capital markets, see generally Marcel Kahan, Some Problems with Stock Exchange-Based Securities Regulation, 83 VA. L. REV. 1509 (1997);
152. Paul G. Mahoney, The Exchange as Regulator, 83 VA. L. REV. 1453 (1997);
153. Sam Scott Miller, Self-Regulation of the Securities Markets: A Critical Examination, 42 WASH. & LEE L. REV, 853 (1985).
154. Howell E. Jackson & Stavros Gkantinis, Markets as Regulators: A Survey 21-22 (John M. Olin Ctr. for Law, Econ. & Bus., Faculty Discussion Paper No. 579, 2007), available at http://www.law.harvard.edu/ programs/olin_center/papers/pdf/Jackson_ Gkantinis_579.pdf.
155. Thus, France, Germany, and Japan are the paradigms of the Government-Led Model, while no common law jurisdiction falls into this category. See id. at 25.
156. Id. at 22, 23.
157. Id. at 26.
158. Id. at 26-27.
159. Id. at 27.
160. Id.
161. Id. at 26.
162. Id. at 27.
163. Id.
164. Id. at 33.
165. Howell E. Jackson, Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications (John M. Olin Ctr. for Law, Econ. & Bus., Faculty Discussion Paper No. 521, 2005), available at http://www.law.harvard.edu/programs/olin_center/papers/pdf/Jackson_521.pdf.
166. Id. at 3.
167. This is true, for example, in the United Kingdom, where the FSA supervises all three sectors; in Germany, where the BaFin (an abbreviation for "Bundesanstalt für Finanzdienstleistungsaufsicht," or "Federal Financial Supervisory Authority") does the same; and in Japan, where the Japan Financial Services Agency directly supervises the banking and insurance industries and monitors the securities markets in cooperation with the Securities and Exchange Surveillance Committee. Jackson & Gkantinis, supra note 64, at 46, 45, 42.
168. Jackson, supra note 75, at 17.
169. Id. at 19 fig.3.
170. Id. at 19-20.
171. Id. at 20.
172. Id. at 19 fig.3 (relying on data from FSA, ANNUAL REPORT: 2003/04 app. 5, at 100-01 (2004), available at http://www.fsa.gov.uk/pubs/annual/ar03_04/ar03_04.pdf).
173. Id. at 20.
174. Id. at 23 fig.7 (relying on data from FSA, supra note 82, app. 5, at 100-01). The United States is at the far right of this chart.
175. Id. at 24 figs.8 & 9.
176. Id. at 28 fig. 10.
177. Id. at 29 fig. 11.
178. This is at least a plausible premise because banks and insurance companies are much larger in size than securities brokers and tend to have larger in-house compliance staffs as a result. Also, in their dealings with retail customers, banks may engage in transactions that are less risky than the activities of securities brokers.
179. For an overview, see generally Bhattacharya & Daouk, supra note 22, at 77 (finding that of the 103 countries with stock markets, 87 had insider trading laws).
180. Testifying before the Senate Committee on the Judiciary on September 26, 2006, Mr. Christopher Thomas, the founder of Measuredmarkets, an economic consulting firm, presented data suggesting that more than 40% of the mergers with a value of $1 billion or more that were announced in the United States over the twelve-month period ending in early July 2006 were preceded by suspicious trading that appeared to be, in his words, "deviant trading behavior." Illegal Insider Trading: How Widespread Is the Problem and Is There Adequate Criminal Enforcement?: Hearing Before the S. Comm. on the Judiciary, 109th Cong. 12 (2006) [hereinafter Illegal Insider Trading] (statement of Christopher K. Thomas, President, Measuredmarkets, Inc.).
181. He also cited a recent study done in the United Kingdom that found almost 30% of the takeover announcements in 2004 to have been preceded by "suspicious share price movements." Id. These two studies do not indicate the relative frequency of insider trading between the two countries because they do not use a common methodology, but they do show the problem to be common in both countries.
182. Illegal Insider Trading, supra note 90, at 4 (statement of Linda Thomsen, Director, Division of Enforcement, SEC). Ms. Thomsen's testimony indicated the following numbers of enforcement actions involving insider trading over the period from 2001 to late 2006: 44 actions filed against 77 defendants in fiscal 2006 (through September 22, 2006); 49 actions against 93 defendants in fiscal 2005; 42 actions against 95 defendants in fiscal 2004; 50 actions against 104 defendants in fiscal 2003; 59 actions against 144 defendants in fiscal 2002; and 57 actions against 115 defendants in fiscal 2001.
183. Id. at 137-38 n.2.
184. Id. at 137. This figure indicates that insider trading does not receive a disproportionate priority from the SEC.
185. Illegal Insider Trading, supra note 90, at 124 tbl.1 (statement of Ronald J. Tenpas, Associate Deputy Att'y Gen., Department of Justice). In addition, some insider trading cases are initiated by the U.S. Postal Inspection Service, which claimed credit for some 23 indictments and 8 convictions between 2001 and 2006 (4 of which convictions were obtained jointly with the FBI).
186. Id. at 124-25 & tbl.2.
187. Grant Ringshaw, Hot on the Trail of the Insider Dealers, SUNDAY TIMES (London), May 13, 2007, Business 8. BaFin conducted many more insider trading investigations than the FSA, and these regularly resulted in some criminal prosecutions and convictions.
188. See infra notes 146-148 and accompanying text.
189. Monteiro et al., supra note 22, at 4 (discussing Ben Dubow & Nuno Monteiro, Measuring Market Cleanliness (FSA, Occasional Paper Series, Paper No. 23, 2006), available at http://www.fsa.gov.uk/pubs/ occpapers/op23.pdf). Both the 2006 study and a later 2007 study were conducted by members of the "Economics of Financial Regulation Department."
190. Dubow & Monteiro, supra, at 2;
191. Monteiro et al., supra note 22, at 2. The revised 2007 study concludes that the U.K. market may "have become cleaner" since the FSA's creation.
192. Monteiro et al., supra note 22, at 5.
193. In 2004, the Financial Times reported that the FSA fined a securities analyst £18,000 and a finance director £15,000.
194. Kate Burgess, FSA Hands Out £33,000 Fines for Insider Trading, FIN. TIMES (London), Dec. 17, 2004, at 22.
195. The FSA announced that these penalties showed that misuse of confidential information "will not be tolerated by the FSA." Id.
196. See Ringshaw, supra note 94, at 8.
197. Carrie Johnson, Former Qwest Chief Gets 6-Year Prison Term, WASH. POST, July 28, 2007, at D1.
198. The FSA has spent over £15 million, "its largest-ever technology investment," on "a state-of-the-art surveillance system." Ringshaw, supra note 94, at 8. But criminal prosecutions for insider trading remain unknown in the United Kingdom.
199. Europe is beginning to consider the adoption of the class action, but has not yet done so, For a survey, see Christopher Hodges, Europeanisation of Civil Justice: Trends and Issues, 26 CIV.JUST. Q. 96, 120-23 (2007).
200. Contingent fees are now permitted to a very limited degree in Great Britain in personal injury cases. Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty?, 71 CHI.-KENT L. REV. 625, 627 & n.10 (1995).
201. In the United States, 95% of personal injury litigation appears to be conducted on a contingent-fee basis. Id. at 626 n.3. For the fullest critique of contingent fees in the class action context,
202. see Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without the Prince of Denmark?, 37 UCLA L. REV. 29 (1989).
203. For a more balanced description, see Patricia Munch Danzon, Contingent Fees for Personal Injury Litigation, 14 BELLJ. ECON. 213 (1983).
204. Jackson, supra note 75, at 27 tbl.3. NASD is the National Association of Securities Dealers, the predecessor to FINRA.
205. Howell E. Jackson & Mark J. Roe, Public Enforcement of Securities Laws: Preliminary Evidence 23 (Aug. 8, 2007) (unpublished manuscript), available at http://ssrn.com/abstract=1000086.
206. Id. at 24-25.
207. In fact, they found that "not only does the common law dummy [variable] lose significance, but the sign of its coefficient changes to negative." Id.
208. The period of reference for SEC data is its fiscal year from October 1 to September 30. By contrast, FSA data are based on its fiscal year, which extends from April 1 to March 31. In each set of columns, therefore, FSA data are six months more recent than corresponding SEC data. For the last column (Year 2006), only SEC data are available. The next-to-last set of columns, however (Year 2005), includes FSA cases up to and including March 31, 2006.
209. The data on the decline of SEC enforcement actions are summarized in Sarah Johnson, SEC Enforcement Declines 8.9 Percent, CFO.COM, Nov. 3, 2006, http://www.cfo.com/article.cfm/8127167. The data are also available in the SECs Performance and Accountability Reports, all available on the agency's website. The SEC figures total all of the civil and administrative proceedings (excluding mere investigations) initiated during the calendar year indicated along the x-axis. In 2006, 218 civil actions and 356 administrative proceedings were brought; in 2005, the two components amounted to, respectively, 335 and 294; in 2004, the numbers were 375 and 264, respectively; in 2003, 271 and 365, respectively; in 2002, 270 and 280, respectively.
210. See SEC, 2006 PERFORMANCE AND ACCOUNTABILITY REPORT 8 (2006) [hereinafter SEC, 2006 REPORT], available at http://sec.gov/about/secpar/secpar2006.pdf;
211. SEC, 2005 PERFORMANCE AND ACCOUNTABILITY REPORT 7 (2005) [hereinafter SEC, 2005 REPORT] , available at http://sec.gov/about/secpar/secpar2005.pdf;
212. SEC, 2004 PERFORMANCE AND ACCOUNTABILITY REPORT 25 (2005), available at http://sec.gov/about/secpar/ secpar04.pdf;
213. SEC, ANNUAL REPORT 2003, at 17 tbl. (2003), available at http:// sec.gov/pdf/annrep03/ar03full.pdf;
214. SEC, ANNUAL REPORT 2002, at 2 tbl. (2002), available at http://sec.gov/pdf/annrep02/ar02full.pdf.
215. The sources for the FSA data are the FSA's annual reports, all available on its website. See FSA, ANNUAL REPORT: 2005/06 app. 9, at 141 tbl. [hereinafter FSA, 2005-2006 ANNUAL REPORT], available at http://www.fsa.gov.uk/pubs/annual/ar05_06/ar05_06.pdf;
216. FSA, ANNUAL REPORT: 2004/05 app. 9, at 140 tbl., available at http://www.fsa.gov.uk/pubs/annual/ar04_05/ar04_05.pdf;
217. FSA, supra note 82, app. 9, at 140 tbl.; FSA, ANNUAL REPORT: 2002/03 app. 9, at 213 tbl., available at http://www.fsa.gov.uk/pubs/annual/ar02_03/ar02_03.pdf. FSA numbers refer to all cases opened during the period April 1-March 31 of the respective year (as opposed to cases already open or closed during that time). Categories of cases include pensions and endowments, investment management, unauthorized activities, systems and controls, noncompliance with ombudsman, market protection, listing rule breaches, money laundering controls and financial fraud, and fitness and propriety issues or threshold conditions (by far the most numerous category in the last three years).
218. Finally, for the purpose of this chart, the terms "initiated" and "opened," when describing proceedings, are assumed to have equivalent meanings.
219. As a note of historical interest, we should point out that in previous years, FSA numbers were substantially higher (666 cases in 1999-2000; 763 in 2000-2001). See FSA, ANNUAL REPORT: 2000/01, at 39, available at http://www.fsa.gov.uk/pubs/ annual/ar00_01.pdf;
220. FSA, ANNUAL REPORT: 1999/2000, at 37, available at http://www.fsa.gov.uk/pubs/annual/ar1999_00.pdf. The sharp decline appears to be explained, at least in part, by the fact that in 2001, the FSA introduced several changes in its enforcement practices in response to consultation. In particular, in order to cut costly tribunal hearings, the FSA implemented a pilot mediation program, which helped reduce litigation numbers in the following years. The aim was to free resources in view of the coming into force of the Financial Services and Markets Act of 2000, a statute that is usually viewed as prescribing more rigorous and selective discipline of the enforcement process.
221. See Financial Services and Markets Act, 2000, c.8 (Eng.);
222. FSA, DECISION MAKING MANUAL app. (2001), available at http://www.fsa.gov.uk/pubs/policy/psreg_annexj .pdf.
223. The FSA data are from the 2005-2006 FSA annual report. See FSA, 2005-2006 ANNUAL REPORT,
224. supra note 105, app. 9, at 142 fig. Penalties imposed in the various areas of FSA activities,
225. see supra note 105, were added up to obtain yearly totals. These numbers were then converted from pounds to dollars at the rate in force on March 31, 2006 (£1 = $1.73980), the date on which the report closed. Historical currency exchange rates are available at OANDA.com,
226. FXHistory-Historical Currency Exchange Rates, http://www.oanda.com/ convert/fxhistory (last visited Dec. 1, 2007). The SEC data are from the SECs 2006 annual report.
227. See SEC, 2006 REPORT, supra note 105, at 54 exhibit 2.20.
228. In the case of the SEC, the amounts reflect the penalties actually collected, except in the case of 2003-2004 where the figure represents the amount ordered. Even greater amounts were ordered in the other years, but have not yet been collected. Collection has been increasingly, but never completely, successful over the years: the rate was 40% in 2003, 86% in 2004 and 96% in 2005. The reported percentage of collection for 2006 declined to 82%. Id.
229. In the case of the FSA, the amounts were "concentrated" in a relatively low number of individual penalties (22 in 2003-2004, 31 in 2004-2005, and 17 in 2005-2006).
230. For an explanation of the different definitions of "year" in the respective annual reports, see supra note 105.
231. See SEC, 2006 REPORT, supra note 105, at 8. This $3.3 billion was "ordered" in 2006, but may never be fully recovered.
232. Market capitalization data are available from the World Federation of Exchanges. See World Fed'n of Exchs., Domestic Market Capitalization, http://www.world-exchanges.org/publications/Ts2%20Market%20cap..pdf (last visited Dec. 1, 2007). The London Stock Exchange capitalization (in billions) amounted to $2460 in 2003, $2865 in 2004, and $3058 in 2005. Id.
233. For the purposes of this chart we considered U.S. market capitalization to be the sum of AMEX, NASDAQ, and NYSE capitalizations for each year. Thus calculated, U.S. market capitalization (in billions) amounted to $14,266 in 2003; $16,324 in 2004; and $17,438 in 2005. Id. Data for 2006 were not available at the time of this writing.
234. It should be noted that there is not a perfect correspondence between the duration of the year in which the penalties were imposed (e.g., April 1, 2003 to March 31, 2004) and the duration of the year during which market capitalization was assessed (e.g., January 1, 2003 to December 31, 2003), It seems unlikely that this has any significant effect.
235. In fact, from 2000 to 2002, the aggregate penalties imposed by the states exceeded the SECs penalties according to Jackson's study. See supra Table 2.
236. Howell E. Jackson, Regulatory Intensity in the Regulation of Capital Markets: A Preliminary Comparison of Canadian and U.S. Approaches, in THE TASK FORCE TO MODERNIZE SECURITIES LEGISLATION IN CANADA, CANADA STEPS UP: RESEARCH STUDIES: STRENGTHENING MARKET CREDIBILITY AND INTEGRITY 75, 98 (2006), available at http://www.tfmsl.ca/docs/ V6(2)%20Jackson.pdf. Before making these adjustments, Jackson found U.S. budgets to be "in the range of 9 times larger than Canadian budgets, whereas staffing levels are in the range of 5 to 6 times larger." Id. at 94.
237. Id. at 116.
238. This chart is taken from BLOOMBERG & SCHUMER, supra note 1, at 75 exhibit 19.
239. Todd Foster et al., NERA Econ. Consulting, Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar 1, 5 (2007), http://www.nera.com/image/BRO_Recent_Trends_SEC1288_FINAL_0307.pdf.
240. SEC penalties in 2005 were $1.8 billion and class action settlements were either $3.5 billion or $9.7 billion (depending on the treatment of the WorldCom settlement). See supra Figures 6 and 8.
241. This summary is taken from Jonathan M. Karpoff et al., The Legal Penalties for Financial Misrepresentation 1 (May 1, 2007) (unpublished manuscript), available at http://ssrn.com/abstract=933333.
242. Id.
243. Id.
244. The exact settlement amount was $6,133,000,000 plus interest. See In re World-Com, Inc. Sec. Litig., 388 F. Supp. 2d 319, 322-35 (S.D.N.Y. 2005).
245. Karpoff et al. point to such recent examples as Qwest Communications ($250 million), Bristol-Myers Squibb ($100 million), and Royal Dutch/Shell ($100 million). Karpoff et al., supra note 116, at 2.
246. Id.at 1.
247. Id. at 4.
248. Id. at 8.
249. Id. at 8-9.
250. Id.
251. Id. at 9.
252. Id. at 10.
253. Id.
254. Id. at 9. The figure for acquittals is current as of December 31, 2005. At that time, some 232 individuals were awaiting trial.
255. Id.
256. Id.
257. Press Release, U.S. Dep't of Justice, Fact Sheet: Corporate Fraud Task Force (Aug. 9, 2006), available at http://www.usdoj.gov/opa/pr/2006/ August/06_odag_521.html.
258. For recent evidence and analysis of the sharply higher sentences being imposed on white collar offenders, see Preet Bharara, Corporations Cry Uncle and Their Employees Cry Foul: Rethinking Prosecutorial Pressure on Corporate Defendants, 44 AM. CRIM. L. REV. 53, 55 (2007);
259. J. Scott Dutcher, Comment, From the Boardroom to the Cellblock: The Justifications for Harsher Punishment of White-Collar and Corporate Crime, 37 ARIZ. ST. L.J. 1295, 1302-03 (2005);
260. Jamie L. Gustafson, Note, Cracking Down on White-Collar Crime: An Analysis of the Recent Trend of Severe Sentences for Corporate Officers, 40 SUFFOLK U. L. REV. 685, 700 (2007).
261. See John Tiner, Chief Executive, FSA, Keynote Address at the Enforcement Law Conference (June 16, 2006) (transcript available at http://www.fsa.gov.uk/ pages/ Library/Communication/Speeches/2006/0616_jt.shtml). The FSA has recently come under some criticism in the United Kingdom for its failure to combat financial crime effectively. See, e.g., Alistair MacDonald, Judging a U.K. Watchdog, WALL ST. J.,July 23, 2007, at Cl (reporting on recent skepticism in the United Kingdom as to whether the FSA truly protects investors). Thus, public statements that disparage or deemphasize enforcement, such as Mr. Tiner's, may become less common.
262. See, e.g., Jonathan R. Macey & David D. Haddock, Shirking at the SEC: The Failure of the National Market System, 1985 U. ILL. L. REV. 315, 319 (1985) ("The notion that the SEC behaves as if one of its principal duties is to police a cartel of exchanges and brokers is consistent with the modern economic theory of regulation.").
263. Jackson & Gkantinis, supra note 64, at 47.
264. See, e.g, Business Roundtable v. SEC, 905 F.2d 406, 416-17 (D.C. Cir. 1990) (invalidating an SEC rule seeking to regulate shareholder voting through listing standards).
265. In July 2007, possibly in response to public criticism, the FSA issued a Market Watch newsletter, which expressed its concerns about the high rate of suspicious trading on takeovers, and stated, characteristically, that the FSA was "committed to working in partnership with the industry to reduce the incidence of market abuse." Market Division: Newsletter on Market Conduct and Transaction Reporting Issues, MARKET WATCH (FSA, London, U.K.), July 2007, at 1, available at http://www.fsa.gov.uk/ pubs/ newsletters/mw_newsletter21.pdf. Much of the newsletter focused on advice to companies on how to control properly the dissemination of material, nonpublic information. Will this have any meaningful effect? This author doubts that it will.
266. The data are found in FSA, Business Plan 2007/08, at 39 tbl.4.3 (2007) [hereinafter FSA, 2007-2008 Business Plan], available at http://www.fsa.gov.uk/pubs/plan/ pb2007_08.pdf,
267. and FSA, Business Plan 2006/07, at 42 tbl.4.2 (2006), available at http://www.fsa.gov.uk/pubs/plan/pb2006_07.pdf. While the figures for early years are actual, the amount for 2006-2007 is an estimate and the amount for 2007-2008 is a budgetary allocation. The amounts, originally stated in British pounds sterling, were converted at the going rate as of February 26, 2007 (£1 = $1.96390).
268. See OANDA.com, supra note 105.
269. The cost-of-enforcement data are taken from the SECs 2005 and 2006 annual reports. See SEC, 2006 REPORT, supra note 105, at 61 tbl;
270. SEC, 2005 REPORT, supra note 105, at 53 tbl. The figures are as of September 30 of each year.
271. NAT'L AUDIT OFFICE, THE FINANCIAL SERVICES AUTHORITY: A REVIEW UNDER SECTION 12 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000, at 47 (2007), available at http://www.nao.org.uk/publications/nao_reports/06-07/0607500.pdf.
272. Id. at 7.
273. "BaFin" is the shorthand acronym for German words that translate into "Federal Financial Supervisory Authority."
274. See supra note 77.
275. See Bundesanstalt für Finanzdienstleistungsaufsicht, Haushaltsplan: 2007, at 17 (2006), available at http://www.bafin.de/ haushalt/2007_hh.pdf (showing budgets for 2005, 2006, and 2007);
276. Bundesanstalt für Finanzdienstleistungsaufsicht, Haushaltsplan: 2007 (Enforcement) 8 (2006), available at http://www.bafin.de/haushalt/ 2007_hh_ enforce.pdf (showing expenditures on enforcement for 2005 and 2006, and estimated expenditures for 2007).
277. See supra Figure 9.
278. See BUNDESANSTALT FÜR FINANZDIENSTLEISTUNGSAUFSICHT, 2005 ANNUAL REPORT 159 [hereinafter BAFLN, 2005 ANNUAL REPORT], available at http://www.bafin.de/jahresbericht/2005/kapitel_VI_en.pdf.
279. Id. at 160.
280. BUNDESANSTALT FUR FINANZDIENSTLEISTUNGSAUFSICHT JAHRESBERICHT 2006, at 166 tbls.22 & 23 (2006), available at http://www.bafin.de/jahresbericht/2006/ kapitel_VII.pdf.
281. See supra notes 94-97 and accompanying text.
282. See BAFIN, 2005 ANNUAL REPORT, supra note 146, at 182.
283. The data on ASIC's enforcement expenditures relative to its total budget, as illustrated in Table 4, were provided to the author by Professor Ian Ramsay
284. ASIC, ASIC ANNUAL REPORT 2004-05, at 12 tbl. [hereinafter ASIC, 2004-2005 REPORT], available at http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC_AR_05.pdf/ $file/ASIC_AR_05.pdf;
285. ASIC, ASIC ANNUAL REPORT 2003-04, at 10 tbl. [hereinafter ASIC, 2003-2004 REPORT], available at http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC_AR_04_complete.pdf/ $file/ASIC_AR_04- _complete.pdf. In terms of dedicated staff, ASIC had 373 enforcement personnel out of a total staff of 1394 (or 26.8%) in 2005-2006, 420 enforcement personnel out of a total staff of 1497 (or 28.1%) in 2004-2005, and 385 out of a total staff of 1466 (or 26.3%) in 2003-2004.
286. ASIC, 2005-2006 REPORT, supra, at 17, 15;
287. ASIC, 2004-2005 REPORT, supra, at 14-15;
288. ASIC, 2003-2004 REPORT, supra, at 12-13. In addition, some 100 additional personnel are employed in a consumer protection office to handle complaints from the public made against Australian public corporations.
289. ASIC, 2005-2006 REPORT, supra, at 17 tbl. Hence, the percentage may be even higher.
290. ASIC 2005-2006 REPORT, supra note 151, at 18. In the same period, ASIC resolved by settlement or verdict some 189 criminal, civil, and administrative proceedings and reported that 94% of its total litigation was successful, with 72% of its criminal cases and 98% of its civil cases being "successfully" resolved.
291. Id.
292. The adjustments for relative market size were based on market capitalization figures taken from the website of the World Federation of Exchanges. World Fed'n of Exchs., Domestic Market Capitalization (2005), http://www.world-exchanges.org/publications/EQUITY105.pdf.
293. For more information on the method used to calculate market capitalization, see note 109, supra. The data on the number of enforcement cases brought by the SEC and FSA were taken from the agencies' annual reports.
294. See SEC, 2006 REPORT, supra note 105, at 8;
295. FSA, 2005-2006 ANNUAL REPORT, supra note 105, app. 9, at 141 tbl. Although the United States comes in last on this market-adjusted chart, it must be remembered both that (1) the SEC's jurisdiction is limited to securities regulation, while the other two share a broader jurisdiction, and (2) this chart excludes the cases brought by self-regulatory organizations and the states in the United States, which efforts may equal or exceed that at the SEC.
296. See Helen Bird et al., Strategic Regulation and ASIC Enforcement Patterns: Results of an Empirical Study, 5 J. CORP. L. STUD. 191, 246 (2005) (finding that the ASIC made " predominant" use of criminal penalties between 1997 and 1999). More recently, Australia has made increasing use of civil penalties to punish selective disclosure and insider trading offenses.
297. See Michelle Welsh, Eleven Years On - An Examination of ASIC's Use of an Expanding Civil Penalty Regime, 17 AUSTL. J. CORP. L. 175, 176 (2004).
298. See FSA, 2007-2008 Business Plan, supra note 138, at 39 ("The unpredictable size, timing and complexity of enforcement cases means that it is not economical to retain permanent staff to handle all cases.").
299. Arguably, a permanent and substantial enforcement staff could create an incentive to bring enforcement actions so as to keep the staff fully employed. Although this author does not believe that the SEC's enforcement staff has ever been underoccupied in the modern era so as to give rise to this temptation, the claim is at least plausible, and some may feel it helps explain the difference in regulatory styles.
300. For reviews of these traditional theories, see Doidge et al., supra note 11, at 207-210,
301. and G. Andrew Karolyi, The World of Cross-Listings and Cross-Listings of the World: Challenging Conventional Wisdom, 10 REV. FIN. 99, 101-05 (2006).
302. Two 1999 studies were especially noteworthy: Stephen R. Foerster & G. Andrew Karolyi, The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States, 54 J. FIN. 981, 983 (1999),
303. which observed that cross-listed shares experienced unusually significant positive price changes, and Darius Miller, The Market Reaction to International Cross-Listings: Evidence from Depositary Receipts, 51 J. FIN. ECON. 103, 103 (1999), which found the market reaction to cross-listing to be significantly more positive than had been previously observed.
304. Miller, supra note 158, at 114 tbl.4.
305. Id.
306. See Pagano et al., supra note 15, at 2661, 2664 (noting that the number of American companies cross-listed in Europe fell from 284 to 184 between 1986 and 1997 as European exchanges became less attractive).
307. Coffee, The Future as History, supra note 13, at 691-92.
308. Reese & Weisbach, supra note 13, at 91;
309. see also Evangelos Benos & Michael S. Weisbach, Private Benefits and Cross-Listings in the United States, 5 EMERGING MARKETS REV. 217, 237-38 (2004) (finding that positive stock price reactions following cross-listing announcements were indicative of bonding).
310. See studies discussed supra notes 11, 15. Tobin's q is calculated as the market value of a company divided by the replacement value of its assets. A ratio above 1 shows that management has caused the firm's market value to exceed its asset value. Thus, a high ratio suggests a strong management that is maximizing shareholder value.
311. For this conclusion, see CLARK & WÒJCIK, supra note 19, at 139.
312. See supra note 15 and accompanying text.
313. Doidge et al., supra note 11, at 206.
314. See Khanna et al., supra note 19, at 499-50 (concluding that cross-listing firms have better disclosure practices because of either listing regulations or self-selection by firms that elect to cross-list).
315. CLARK & WÒJCIK, supra note 19, at 151-52.
316. Craig Doidge et al., Private Benefits of Control, Ownership, and the Cross-Listing Decision 18 (Charles A. Dice Ctr. for Research in Fin. Econ., Working Paper No. 2005-2, 2005), available at http://www.cob.ohio-state. edu/fin/dice/papers/2005/2005-2.pdf.
317. See Private Resales of Securities to Institutions, 17 C.F.R. § 230.144A (2007). Rule 144A was principally designed to give foreign issuers access to U.S. institutional investors without listing on an exchange or registering under the Securities Exchange Act, as issuers already having their common stock listed on a U.S. exchange may not use Rule 144A for a common stock offering. Id. § 144A(d) (3) (i).
318. Rule 144A offerings are not considered to be public offerings of securities, and are thus exempted from registration by section 4(2) of the Securities Act of 1933. See 15 U.S.C. § 77d(2) (2000) (exempting "transactions by an issuer not involving any public offering"). So long as fewer than 300 holders resident in the United States acquire the class of stock sold by the foreign issuer pursuant to Rule 144A, the foreign issuer will not be required to register under the Securities Exchange Act of 1934. See Exemptions for American Depositary Receipts and Certain Foreign Securities, 17 C.F.R. § 240.12g3-2(a) (2007).
319. It has long been known that the stock price reaction was insignificant to a foreign firm's entry into the U.S. markets by means of a private placement under Rule 144A (as opposed to a listing on a U.S. exchange). See Coffee, Racing Towards the Top, supra note 13, at 1784-85;
320. Miller, supra note 158, at 114-15.
321. More recent work by Doidge et al. has found that the Tobin's q valuation ratio is significantly higher for foreign firms cross-listing onto a U.S. exchange in comparison to foreign firms listing over the counter or making a Rule 144A offering. See Doidge et al., supra note 3, at 18-19.
322. Nonlisted foreign firms that enter the United States by these other means "have low sales growth, low Tobin's q ratios, and higher insider ownership compared to U.S. exchange-listed firms or even compared to other listed firms." Id. at 19. Another recent study finds that cross-listings in the over-the-counter market are associated only with "less pronounced" reductions in the firms' cost of capital and that Rule 144A private placements even have adverse effects.
323. See Hail & Leuz, supra note 12, at 28, 15.
324. See Ariel Yehezkel, Foreign Corporations Listing in the United States: Does Law Matter? Testing the Israeli Phenomenon, 2 N.Y.U. J.L. & Bus. 351, 393 (2006) (arguing that there is no significant difference between Israeli and U.S. securities laws because Israeli securities laws adopt the "supervisory structure and the regulatory philosophy" underpinning the U.S. laws).
325. Id. at 397.
326. Id. at 392.
327. See Jordan Siegel, Can Foreign Firms Bond Themselves Effectively by Renting U.S. Securities Laws?, 75 J. FIN. ECON. 319, 335, 342-43, 346-49 (2005) (asserting that the SEC rarely took enforcement actions against cross-listed foreign firms between 1934 and 2002).
328. See Foster et al., supra note 114, at 5 tbl. Two of these three cases involved Nortel Networks, a Canadian issuer, which settled separate securities class actions covering different time periods for $1.143 billion and $1.074 billion, respectively. The other foreign defendant was Royal Ahold, NV, a Dutch company, which settled for $1.1 billion. These settlements rank fifth, seventh, and sixth, respectively, on the list of the ten largest class action settlements.
329. Id. Another major securities class action was recently brought against Royal Dutch Shell, a British-Dutch corporation with ADRs listed on NYSE, and survived at least an initial challenge to class certification.
330. See In re Royal Dutch/Shell Transp. Sec. Litig., 380 F. Supp. 2d 509, 548, 551 (D.N.J. 2005) (affirming jurisdiction over nonresident foreign defendants and the claims of foreign class members) , amended by 404 F. Supp. 2d 605 (D.N.J. 2005).
331. See In re TV Azteca, S.A., Exchange Act Release No. 54,445, 2006 SEC LEXIS 2041 (SEC Sept. 14, 2006) (admin, proceeding) (finding that TV Azteca failed to comply with section 13(a) of the Exchange Act by failing to file an annual report). Pursuant to this settlement, TV Azteca's registration under the Securities Exchange Act was revoked, id., and certain of its senior officers were barred from serving as officers or directors of a public company. SEC v. TV Azteca, S.A. de C.V., et al., Defendants Agree To Settle SEC Charges, Litigation Release No. 19,833 (Sept. 14, 2006), available at http://www.sec.gov/litigation/litreleases/2006/lr19833.htm.
332. See Judith Burns, Spiegel Ex-Officers Settle SEC Charges in Accounting Case, WALL ST. J., Nov. 3, 2006, at B4 (reporting that the former officers and directors of Spiegel, which had been acquired by a European corporation that allegedly caused it to conceal its deteriorating financial performance, had consented to penalties ranging from $100,000 to $170,000 each).
333. See Ron Scherer, Enron Effect: The Changed Corner Office, CHRISTIAN SCI. MONITOR, Jan. 18, 2005, at 1.
334. See Kate Murphy, 3 Britons in Enron Case Are Told To Remain in U.S., N.Y. TIMES, July 22, 2006, at C3 (describing extradition of three British investment bankers who were indicted on fraud charges in the Enron prosecution).
335. PAULSON REPORT, supra note 1, at 47-48.
336. Doidge et al., supra note 3, at 49 fig.2. This figure shows the average Tobin's q of non-cross-listed firms each year, as well as the premium (in the darker tone) for firms cross-listing on U.S. exchanges. For another examination of the cross-listing premium over an overlapping period,
337. see Litvak, The Cross-Listing Premium, supra note 18. Litvak finds the cross-listing premium to have declined from year-end 2001 to year-end 2002 and interprets this as, in part, an indication that investors perceived the costs of Sarbanes-Oxley to outweigh its benefits.
338. Id. at 1898, 1896, 1871. Professor Litvak does not discuss the period after 2002.
339. For a concise discussion of the wave of financial restatements that began to accelerate in 1997 and has continued through 2005, see PAULSON REPORT, supra note 1, at 119-21. As it notes, the U.S. GAO has found that the annual frequency of restatements rose seven-fold over this period, from 0.9% in 1997 to 6.8% in 2005.
340. Id. at 120 fig.V.1.
341. See Reese & Weisbach, supra note 13, at 86 tbl.3.
342. See Hail & Leuz, supra note 12, at 7-8 (discussing studies that have reached this conclusion).
343. E.g., Doidge et al., supra note 170, at 18, 23.
344. See Reese & Weisbach, supra note 13, at 101-02.
345. CLARK & WÓJCIK, supra note 19, at 148-49.
346. See, e.g, MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE GOVERNANCE: POLITICAL CONTEXT, CORPORATE IMPACT 35-37 (2003) [hereinafter ROE, POLITICAI. DETERMINANTS];
347. Mark J. Roe, Legal Origins, Politics, and Modern Stock Markets, 120 HARV. L. REV. 460, 496-98 (2006) [hereinafter Roe, Legal Origins];
348. Mark J. Roe, Political Preconditions to Separating Ownership from Corporate Control, 53 STAN. L. REV. 539, 602-03 (2000);
349. Mark J. Roe, The Shareholder Wealth Maximization Norm and Industrial Organization, 149 U. PA. L. REV. 2063, 2065, 2068-70 (2001). Professor Roe's essential thesis is that in labor-friendly political regimes (a description that characterized Europe during much of the twentieth century), dispersed shareholders could not effectively resist labor's claims on the corporation, but controlling shareholders could (at least to a greater degree). Concentrated shareholders could strike an implicit bargain with labor under which the controlling shareholders' right to private benefits of control was recognized in return for their guarantee of high employment and wages to labor. Such a bargain was easy for labor to accept because its cost largely fell on minority shareholders, not labor.
350. This follows from the very different characteristic structure of shareholder ownership in the two types of jurisdictions. For the argument that the structure of ownership determines the prevalent type of fraud, see John C. Coffee, Jr., A Theory of Corporate Scandals: Why the U.S.A. and Europe Differ, 21 OXFORD REV. ECON. POL'Y 198, 198 (2005).
351. See Litvak, The Effect of Sarbanes-Oxley, supra note 18, at 213-15.
352. For an overview, see Bernard S. Black & John C. Coffee, Jr., Hail Britannia?: Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997, 2002-05 (1994).
353. See ROE, POLITICAL DETERMINANTS, supra note 191, at 14;
354. Roe, Legal Origins, supra note 191, at 497.
355. See Coffee, supra note 6, at 65-66, 80-81 (asserting that strong markets create a demand for stronger legal rules).
356. See Julian Franks et al., Ownership: Evolution and Regulation 37-38 (European Corporate Governance Inst., Fin. Working Paper No. 009/2003, 2006), available at http://ssrn.com/abstract-354381 ("[Dispersed ownership developed on the basis of informal relations of trust rather than formal systems of regulation.").
357. See id. at 15, 58 tbl.A3 (noting that the Companies Act first granted U.K. investors preemption rights in 1980).
358. For such an assessment, see Zhong Zhang, Legal Deterrence: The Foundation of Corporate Deterrence - Evidence from China 56-57 (June 14, 2007) (background paper, Initiative for Policy Dialogue conference) available at http://www0.gsb.columbia.edu/ipd/pub/Zhong_Zhang_Legal_Deterrence.pdf.
359. See sources cited supra note 191.
360. The political preference of U.S. voters for strong enforcement and exemplary punishment is shown not just by the Sarbanes-Oxley Act, which vastly elevated penalty levels, but by earlier legislation as well. In 1988, Congress elevated the penalties for insider trading in response to popular demand in the Insider Trading and Securities Fraud Enforcement Act of 1988, which also added section 20A to the Securities Exchange Act of 1934 to authorize private litigation against insider trading. Pub. L. No. 100-704, sees. 3-5, 102 Stat. 4677 (codified as amended at 15 U.S.C. §§ 78u-1, 78ff(a), 78t-1 (2000)). Congress also moved to a sentencing guideline system in 1991, in part to increase actual penalty levels for white-collar crime. The United States Sentencing Commission repeatedly enhanced the then-mandatory sentencing guidelines through the 1990s. See Cindy R. Alexander et al., Regulating Corporate Criminal Sanctions: Federal Guidelines and the Sentencing of Public Firms, 42 J.L. & ECON. 393, 418 (1999) (finding that fines and penalties imposed on public corporations had increased since the implementation of the guidelines). In short, the popularity of "get tough" measures on white-collar crime (and particularly securities fraud) shows the impact of a retail shareholder culture on the political process.
361. Litvak, The Effect of Sarbanes-Oxley, supra note 18, at 195.
362. See Doidge et al., supra note 3, at 49 fig.2.
363. At the time, the implications of section 404 of Sarbanes-Oxley were not understood because its statutory language is not demanding. It was not until the PCAOB's adoption of Auditing Standard No. 2 a year later that its high costs came into view. See supra notes 24, 25, and accompanying text.
364. According to Thomson Financial, U.S. IPOs declined after 2000, reaching bottom in 2003. They have more recently risen, but not back to their pre-2000 level: Table presented. Back of the Envelope, N.Y. TIMES, Dec. 22, 2006, at C5. The data for 2006 were as of December 2006; the data for 2007 were projections.
365. See La Porta et al., supra note 31, at 20 ("Public enforcement plays a modest role at best in the development of stock markets.").
366. Jackson & Roe supra note 103, at 37.
367. See, e.g., In re Royal Ahold N.V. Sec. & ERISA Litig., 437 F. Supp. 2d 467, 469 (D. Md. 2006) (approving a class action settlement where the vast majority of the class members were non-U.S. residents);
368. In re Royal Dutch/Shell Transp. Sec. Litig., 380 F. Supp. 2d 509, 548 (D.N.J. 2005) (denying the defendants' motion to dismiss the claims of foreign investors), amended by 404 F. Supp. 2d 605 (D.N.J. 2005).
369. The Royal Ahold litigation, which is the largest securities settlement to date involving a European corporation,
370. see supra note 178, is the subject of multiple reported decisions. For the decision preliminarily certifying the settlement,
371. see In re Royal Ahold N.V. Sec. & ERISA Litig., No. 03-MD-01539, 2006 WL 132080, at *4 (D. Md. Jan. 9, 2006); for the decision approving the settlement,
372. see 437 F. Supp. 2d at 469. The defendants estimated that 80% of the class consisted of foreign investors. Memorandum of Law in Support of Lead Plaintiffs' Motion for Final Approval of Certification of Settlement Class and Final Approval of Settlement and Plan of Allocation of Settlement Proceeds at 12,
373. In re Royal Ahold N.V. Sec. & ERISA Litig., 437 F. Supp. 2d 467 (D. Md. 2006) (No. 03-MD-01539).
374. This "conduct test" was initially formulated by Second Circuit Judge Henry Friendly. See Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 986-87 (2d Cir. 1975) (holding that for the Securities Exchange Act to apply to transnational frauds, conduct occurring in the United States needs to be more than "merely preparatory" to the fraud); Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir, 1972) (noting that the Securities Exchange Act does not apply "[w]hen no fraud has been practiced in this country and the purchase or sale has not been made here"). Its premise is that Congress would not have "intended to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when [they] are peddled only to foreigners." IIT v. Vencap, Ltd., 519 F.2d 1001, 1017 (2d Cir. 1975). Absent significant conduct by the defendant in the United States that extends beyond "merely preparatory" efforts, the class action is likely to be dismissed. See, e.g., In re Nat'l Austl. Bank Sec. Litig., No. 03-6537, 2006 WL 3844465, at *5-7 (S.D.N.Y. Oct. 25, 2006) (dismissing such a proposed class action where "a significant, if not predominant, amount of the material conduct ... occurred a half-world away"), amended by 2006 WL 3844463 (S.D.N.Y. Nov. 8, 2006).
375. For a fuller statement of this critique (and supporting evidence), see John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534, 1556-61 (2006).
376. For specific proposals, see id. at 1572-84.
377. Because of a variety of factors, corporate officers almost never contribute funds from their own pockets to settle securities class actions. Id. at 1550-51.
378. See 377 U.S. 426, 432 (1964) ("Private enforcement of the proxy rules provides a necessary supplement to Commission action.").
379. Most importantly, it would be necessary to overturn Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994), which exempts those who "aid and abet" a securities law violation from civil liability under Rule 10b-5.
380. The number of enforcement actions fell from 629 in 2005 to 574 in 2006, and the total penalties collected fell from roughly $1.8 billion to $991 million. See supra Figures 5 and 6.
381. Press Release, SEC, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), available at http://www.sec.gov/news/press/2006-4.htm.
382. See Brooke Masters & Jeremy Grant, SEC Near to a Formula for Options Fines, FIN. TIMES (London), Feb. 7, 2007, at 24 (reporting the SEC's movement toward creating a formula for punishing companies that takes into account the financial benefit the company received from backdating).
383. For a fuller version of this argument, see Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. ILL. L. REV. 691, 727-30.
384. Id. at 726, 731.
385. See Securities Exchange Act of 1934 §20(e), 15 U.S.C. § 78t(e) (2000) (authorizing the SEC, but not private plaintiffs, to sue any person who "knowingly provides substantial assistance to another person" in connection with a securities law violation).
386. Floyd Norris, Should U.S. Markets Be Wide Open?, N.Y. TIMES, Feb. 9, 2007, at C1.
387. See Ethiopis Tafara & Robert J. Peterson, A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, 48 HARV. INT'L L.J. 31, 32 (2007) (proposing a framework that permits exemption from SEC registration based on compliance with foreign securities regulations and laws substantively similar to the SEC's).
388. See Edward F. Greene, Beyond Borders: Time To Tear Down the Barriers to Global Investing, 48 HARV. INT'L L.J. 85, 95-96 (2007).
389. Others preceded Greene in making this suggestion. See, e.g., Franklin R. Edwards, Listing of Foreign Securities on U.S. Exchanges, J. APPLIED CORP. FIN., Winter 1993, at 28, 32-36 (suggesting that a loosening of SEC reporting requirements for foreign issuers would carry little danger);
390. Merritt B. Fox, The Political Economy of Statutory Reach: U.S. Disclosure Rules in a Globalizing Market for Securities, 97 MICH. L. REV. 696, 731 (1998) (explaining the superiority of a disclosure regime that is determined by the nationality of the issuer rather than investor residency or transaction location).
391. That the market may be efficient and that share prices may be accurate does not protect retail investors from the misappropriation of private benefits of control by controlling shareholders. Market efficiency might mean that the market has accurately priced the expected level of benefits that the average controlling shareholder will divert to itself and discounted the stock's price for this mean value. But this mean value will be surrounded by considerable variance, as all controlling shareholders are not alike. If all investors were fully diversified, this variance would not hurt them, because excessive misappropriation in one case would be balanced by subnormal misappropriation in another. But not all retail investors are diversified, and many will be predictably injured by such variance. Thus, the stock price can be accurate, but retail investors can still suffer injury.
392. One alternative might be to require that the foreign broker subject itself to private litigation in the United States by consenting to service of process and posting a bond. Private enforcement here might be a more effective "substitute" for U.S. public enforcement than foreign public enforcement is.
393. Political scientists have, for example, noticed sharp contrasts in the "regulatory style" of environmental regulation between the United States and Japan. See ROBERT A. KAGAN, ADVERSARIAL LEGALISM: THE AMERICAN WAY OF LAW 194-95 (2001) (characterizing U.S. enforcement as harsher and more adversarial, and describing the pitfalls of this style).
394. The SEC certainly uses ex ante controls, such as no-action letters, advance review and approval of registration statements, and prior clearance of certain transactions, in effect to regulate entry into its capital markets. But these controls are not employed by the Division of Enforcement, which is committed to ex post enforcement.
395. See Coffee, supra note 211, at 1556-61.