A free pass for foreign firms? An assessment of sec and private enforcement against foreign issuers

Yale Law Journal

Volumn 119, Issue 7, 2010, Pages 1638-1701

  Shnitser, Natalya ^a  

^a STANFORD UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77953117102     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (172)

1. In the last four years, at least four policy reports have been issued, each responding to some variation of the alleged "steady decline in [the U.S.] share of global capital markets activity" and the loss of U.S. public market competitiveness compared to global public markets. COMM'N ON THE REGULATION OF U.S. CAPITAL MKTS. IN THE 21ST CENTURY, REPORT AND RECOMMENDATIONS 1 (2007). Claiming that "[f]oreign companies commonly cite the U.S. enforcement system as the most important reason why they do not want to list in the U.S. market," the reports have called for a reduction in the intensity of the rules and enforcement processes that currently apply to foreign issuers. COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT 71 (2006); see MICHAEL R. BLOOMBERG & CHARLES E. SCHUMER, SUSTAINING NEW YORK'S AND THE US' GLOBAL FINANCIAL SERVICES LEADERSHIP (2007); THE FIN. SERVS. ROUNDTABLE, THE BLUEPRINT FOR U.S. FINANCIAL COMPETITIVENESS (2007).
2. See, e.g., Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359, 2362-63 (1998) (arguing for the adoption of a "market approach" to securities regulation that would eliminate a significant deterrent to listings).
3. The term "bonding" was first coined by Jensen and Meckling, who defined it as the costs or liabilities that an agent or entrepreneur will incur to assure investors that it will perform as promised, thereby enabling it to market its securities at a higher price. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976).
4. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997). The focus on legal rules became particularly intense after the publication of the seminal law and finance paper in 1998. Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113, 1115 (1998) [hereinafter La Porta et al., Law and Finance] (examining "empirically how laws protecting investors differ across 49 countries, how the quality of enforcement of these laws varies, and whether these variations matter for corporate ownership patterns around the world"). After Law and Finance was published, hundreds of scholars "joined in [a] search to find the hidden legal rules that facilitate financial development," a process that at times "resembled the medieval quest for the philosopher's stone that could turn lead into gold." John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 U. PA. L. REV. 229, 243 (2007).
5. Larry E. Ribstein, Crosslisting and Regulatory Competition, 1 REV. L. & ECON. 97, 98 (2005).
6. Donald C. Langevoort, Structuring Securities Regulation in the European Union: Lessons from the U.S. Experience, in INVESTOR PROTECTION IN EUROPE: CORPORATE LAW MAKING, THE MIFID AND BEYOND 485, 488 (Guido Ferrarini & Eddy Wymeersch eds., 2006).
7. See, e.g., Coffee, supra note 4, at 244.
8. In a very recent working paper, discussed in more detail below, Kate Litvak compares the crosslisting premiums for foreign issuers with varying levels of exposure to SEC enforcement and U.S. securities litigation. She finds that crosslisting premia "are not strongly attached to the level of US regulation." Kate Litvak, The Relationship Among U.S. Securities Laws, Crosslisting Premia, and Trading Volumes 5 (CELS 2009 4th Annual Conference on Empirical Legal Studies, Working Paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443590.
9. See, e.g., Coffee, supra note 4, at 309 (observing that "the United States pursues securities law violations through both public and private enforcement with an intensity unmatched elsewhere in the world" and attributing lower cost of capital to this overall intensity).
10. See, e.g., COMM. ON CAPITAL MKTS. REGULATION, supra note 1, at 71.
11. Stephen Labaton, Accounting Plan Would Allow Use of Foreign Rules, N.Y. TIMES, July 5, 2008, at A1.
12. See, e.g., Gretchen Morgenson, Following Clues the S.E.C. Didn't, N.Y. TIMES, Feb. 1, 2009, at BU1 (noting "our nation's broken-down regulatory apparatus"). Following the financial crisis, there has been increased academic attention devoted to assessing the future and viability of the SEC, including a Virginia Law Review symposium dedicated to such questions. In his introduction to the symposium, Joel Seligman notes that "it is indeed uncertain whether the Commission will survive to celebrate its 100th anniversary-at least in a form familiar to us today." Joel Seligman, The SEC in a Time of Discontinuity, 95 VA. L. REV. 667, 670 (2009).
13. See, e.g., Howell E. Jackson & Mark J. Roe, Public and Private Enforcement of Securities Laws: Resource-Based Evidence, 93 J. FIN. ECON. 207 (2009).
14. Jordan Siegel, Can Foreign Firms Bond Themselves Effectively by Renting U.S. Securities Laws?, 75 J. FIN. ECON. 319, 324 (2005).
15. See, e.g., Coffee, supra note 4, at 261-62 (suggesting that enforcement can be measured "in terms of the number of actions brought" and presenting comparisons of the annual number of enforcement actions in the United States and the United Kingdom). There is no discussion, however, of how each respective agency tracks or reports its enforcement actions. Nor does Coffee discuss whether a U.S. enforcement action is comparable to a U.K. enforcement action or whether the two can be compared for the purpose of evaluating enforcement intensity.
16. Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494 (1977).
17. Press Release, NYSE Euronext, NYSE Group, Inc. 2006 Highlights (Dec. 29, 2006), available at http://www.nyse.com/press/1167392589502.html.
18. Press Release, NYSE Euronext, NYSE Salutes the Baltic States of Estonia, Latvia, and Lithuania (Sept. 24, 2006), available at http://www.nyse.com/press/1190629848623.html.
19. SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES: MARKET SUMMARY 2006, available at http://www.sec.gov/divisions/corpfin/internatl/foreignmarketsumm2006.pdf.
20. According to the SEC, there were 229 companies on the Global Market and 33 on the Capital Market, both of which are NASDAQ markets. See SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES: MARKET SUMMARY 2007, available at http://www.sec.gov/divisions/ corpfin/internatl/foreignmarketsumm2007.pdf. For more information about the organization of NASDAQ, see NASDAQ, Listing Standards and Fees (2009), http://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf.
21. John C. Coffee, Jr., The Impact of Crosslistings and Stock Market Competition on International Corporate Governance, in GLOBAL MARKETS, DOMESTIC INSTITUTIONS 437, 442 (Curtis J. Milhaupt ed., 2003).
22. In May 2008, the SEC's Chief Accountant reported that approximately two-thirds of European companies had deregistered. SEC Official Says Fewer Companies Coming to U.S. Markets in Registered Forum, 40 Sec. Reg. & L. Rep. (BNA) 777, 778 (May 12, 2008).
23. This chart is based solely on SEC lists of International Registered and Reporting Companies. See SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES, http://www.sec.gov/divisions/corpfin/internatl/companies.shtml (last visited Feb. 2, 2010).
24. A valuation premium is typically computed using the valuation ratio known as Tobin's q, which is the ratio of market value to book value of assets.
25. See Craig Doidge, G. Andrew Karolyi & René M. Stulz, Why Are Foreign Firms Listed in the U.S. Worth More?, 71 J. FIN. ECON. 205, 206 (2004).
26. Craig Doidge, G. Andrew Karolyi & René M. Stulz, Has New York Become Less Competitive Than London in Global Markets? Evaluating Foreign Listing Choices over Time, 91 J. FIN. ECON. 253, 272 (2009).
27. Luzi Hail & Christian Leuz, Cost of Capital and Cash Flow Effects of U.S. Crosslistings 18 (Weiss Ctr. for Int'l Fin. Research, Working Paper No. 05-2, 2005), available at http://finance.wharton.upenn.edu/weiss/wpapers/05-2.pdf.
28. While the bonding hypothesis has received the most academic attention, numerous alternative explanations for crosslisting have been proposed and are once again gaining traction in the scholarly literature. Initially, some scholars favored a simpler access-to-capital explanation. See Coffee, supra note 21, at 440. Others have emphasized the strategic business motivations behind crosslisting. For example, listing on a foreign exchange may improve product identification among investors and consumers in the host country. It may increase market demand for the firm's products as well as its securities. Amir N. Licht, Crosslisting and Corporate Governance: Bonding or Avoiding?, 4 CHI. J. INT'L L. 141, 145 (2003). Finally, a few scholars have proposed alternative theories of crosslisting related neither to corporate governance nor to capital markets. Amir Licht, for example, suggests that the evidence instead supports a so-called avoiding hypothesis. Id. at 142. According to Licht, because the regulatory regime that is out for rent by foreign issuers differs markedly from the regime that applies to domestic issuers, foreign issuers choose to crosslist in the United States to avoid the "disinfecting sunlight" of their home countries' securities laws. Id. at 162. Cally Jordan, meanwhile, focuses on crosslisting as a mechanism to overcome the "home bias" of U.S. investors. See Cally Jordan, The Chameleon Effect: Beyond the Bonding Hypothesis for Crosslisted Securities, 3 N.Y.U. J. L. & BUS. 37, 43 (2006). Most recently, in a new analysis of crosslisting premia, Kate Litvak has found support for the "early crosslisting literature," which involves overcoming market segmentation. Litvak, supra note 8, at 15.
29. See Doidge et. al, supra note 28, at 254 (noting that "much of the recent literature on crosslistings has emphasized the governance benefit of crosslisting on a major U.S. exchange"); see also Ribstein, supra note 5, at 104 (noting that "bonding seems to be the dominant explanation for crosslisting").
30. Coffee, supra note 21, at 448 (emphasis added); see also Joseph D. Piotroski & Suraj Srinivasan, Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings, 46 J. ACCT. RES. 383, 385 (2008) (noting that "[w]hen effective, this bonding process creates a commitment to adopt stronger corporate governance practices and credibly separates the listing firm from other firms in their home market, resulting in higher market valuations and lower costs of capital").
31. Coffee, supra note 4, at 233.
32. Under both the Securities Act of 1933 and the Securities Exchange Act of 1934, the term "foreign private issuer" refers to any corporation or other organization incorporated or organized under the laws of any foreign country. Nevertheless, there is an exception for an organization whose shares are more than 50% owned by residents of the United States if: the majority of its executive officers or directors are U.S. citizens or residents, more than 50% of its assets are located in the United States, or its principle place of business is the United States. The SEC treats companies that fall within the exception as domestic issuers. SEC Rule 3b-4, 17 C.F.R. § 240.3b-4 (2008).
33. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
34. See Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (2006).
35. Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (2006).
36. SEC Rule 12g3-2(b)(2), 17 C.F.R. § 240.12g3-2 (2008).
37. SEC Rule 12g-1, 17 C.F.R. § 240.12g-1.
38. Regulation S encompasses Rules 901 through 905 of the Securities Act of 1933. See 17 C.F.R. § 230.901-05.
39. 17 C.F.R. § 230.903.
40. 17 C.F.R. § 230.501-08.
41. 17 C.F.R. § 230.144A.
42. Luigi Zingales, The Future of Securities Regulation 16 (Univ. of Chi. Booth Sch. of Bus., Working Paper No. 08-27, 2009), available at http://ssrn.com/abstract=1319648.
43. 17 C.F.R. § 240.12g3-2(b), (d).
44. See Licht, supra note 30, at 142-43.
45. Brief of the Sec. Indus. and Fin. Mkts. Ass'n, the Chamber of Commerce of the U.S.A., the U.S. Council for Int'l Bus., and the Association Française des Entreprises Privées, as Amici Curiae Supporting Defendants-Appellees at 10, Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167 (2d Cir. 2008) (No. 07-0583), available at http://www.uschamber.com/nclc/caselist/ issues/securities.htm.
46. Licht, supra note 30, at 151-53; see also Donald C. Langevoort, The SEC, Retail Investors, and the Institutionalization of the Securities Markets, 95 VA. L. REV. 1025, 1077 (noting that "there are two very distinct tiers of investor protection in the United States: a more rigorous standard for domestic companies and a less rigorous one for foreign companies").
47. Licht, supra note 30, at 152.
48. SEC Rule 13a-16, 17 C.F.R. § 240.13a-16 (2008); Form 6-K, 17 C.F.R. § 249.306.
49. See Press Release, SEC, SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily, Aug. 27, 2008, available at http://www.sec.gov/news/press/2008/2008-184.htm (noting that "more than 100 countries around the world, including all of Europe, currently require or permit IFRS reporting"); Press Release, SEC, SEC Takes Action to Improve Consistency of Disclosure to U.S. Investors in Foreign Companies, Nov. 15, 2007, available at http://www.sec.gov/news/press/ 2007/2007-235.htm.
50. See Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521 (2005).
51. Harvey L. Pitt, Chairman, SEC, A Single Capital Market in Europe: Challenges for Global Companies, Remarks at the Conference of the Institute of Chartered Accountants of England and Wales (Oct. 10, 2002), available at http://www.sec.gov/news/speech/spch589.htm.
52. Foreign private issuers did not need to provide an auditor's attestation on internal controls over financial reporting until they filed their annual reports for fiscal years ending on or after July 15, 2007.
53. The final deadline for compliance with the section 404 management report requirements was also delayed until 2007. See Press Release, SEC, SEC Offers Further Relief from section 404 Compliance for Smaller Public Companies and Many Foreign Private Issuers (Aug. 9, 2006), available at http://www.sec.gov/news/press/2006/2006-136.htm.
54. See Piotroski & Srinivasan, supra note 32, at 393-94 ("96 foreign firms deregistered with the SEC in 2002-2005 while only 22 firms deregistered in all the years from 1990 to 2001.").
55. On the one hand, Kate Litvak has shown that foreign firms listed in the United States experienced a significant negative price reaction to news that SOX would apply to them. Kate Litvak, The Long-Term Effect of the Sarbanes-Oxley Act on Crosslisting Premia, 14 EUR. FIN. MGMT. 875 (2008). On the other hand, Doidge and co-authors contend that the post-SOX decline in United States listings relative to U.K. listings has not been due to SOX. Instead, the increase in U.K. listings consists of smaller, riskier firms listing on London's Alternative Investment Market, firms that would not be able to list on the NYSE. Doidge, Karolyi & Stulz, supra note 28. Still others like Piotroski and Srinivasan have found that the probability of small firms listing in the U.S. declined post-SOX, while large firms' choices remained the same. Piotroski & Srinivasan, supra note 32, at 410-12. Notably, Doidge, Karolyi and Stulz examine only large firms, whereas Piotroski and Srinivasan examine the listing patters of both large and small foreign firms.
56. See La Porta et al., Law and Finance, supra note 4.
57. Craig Doidge, U.S. Crosslistings and the Private Benefits of Control: Evidence from Dual-Class Firms, 72 J. FIN. ECON. 519, 524 (2004).
58. Luzi Hail & Christian Leuz, International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?, 44 J. ACCT. RES. 485, 486 (2006).
59. Licht, supra note 30, at 141.
60. Coffee, supra note 4, at 250.
61. Howell E. Jackson, Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications, 24 YALE J. ON REG. 253, 283 (2007).
62. Coffee, supra note 4, at 272.
63. Id. at 262, 269-72.
64. John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 VA. L. REV. 707, 729 (2009) ("Thus, comparing the SEC to its most closely comparable regulator, the FSA, the ratio in recoveries seems to be nearly 300 to 1 in 2007 and probably around 100 to 1 for most recent years.").
65. As discussed below, the SEC often reports multiple "actions" related to the settlement of a case against one individual or firm. Similarly, wrongdoing at just one company may generate many separate enforcement actions against various employees and related parties, which, depending on the nature of the investigation and settlement processes, may be reported as individual actions or grouped into one reported enforcement action.
66. See supra Section I.B.
67. Litvak analyzes the crosslisting premium and presents results that "tend to weaken bonding theories of the source of crosslisting premia." Litvak, supra note 8, at 16.
68. Jonathan M. Karpoff, D. Scott Lee & Gerald S. Martin, The Cost to Firms of Cooking the Books, 43 J. FIN. & QUANTITATIVE ANALYSIS 581 (2008).
69. Id. at 585. The CRSP includes common stock issues, certificates, and ADRSs listed on the NYSE, Alternext (formerly AMEX), NASDAQ, and ARCA exchanges.
70. Id. at 586.
71. James D. Cox & Randall S. Thomas, SEC Enforcement Heuristics: An Empirical Inquiry, 53 DUKE L.J. 737 (2003).
72. Securities Law Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931; Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494. Prior to the passage of these acts, and particularly before 1978, the SEC's ability to prosecute fraudulent reporting cases was limited to injunctive actions in federal court or administrative actions requiring the registrant to correct its filings.
73. Cox & Thomas, supra note 73, at 757.
74. Siegel, supra note 14, at 335-43.
75. Id. at 342.
76. See, e.g., PRICEWATERHOUSECOOPERS, 2008 SECURITIES LITIGATION STUDY 36 (2009) [hereinafter PWC, 2008 STUDY], available at http://10b5.pwc.com/PDF/NY-09-0894%20SECURITIES%20LIT%20 STUDY%20FINAL.PDF; Coffee & Sale, supra note 66; Part I: SEC Enforcement Trends, 2009: Calls for Reform and Their Background, SEC Actions, Mar. 2, 2009, http://www.secactions.com/?p=871; see also The Perils of Pledging, TheCorporateCounsel.net, Oct. 28, 2008, http://www.thecorporatecounsel.net/blog/archive/001943.html (noting the "impressive numbers" released by the SEC).
77. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
78. According to Doidge and his colleagues, in 1998 the major New York exchanges "collectively attracted 30% of all the foreign listings in the world; the London Stock Exchange's (LSE) Main Market and Alternative Investment Market (AIM) had 16%. It is now almost conventional wisdom. that London has become more competitive in attracting foreign listings than New York." Doidge et al., supra note 28, at 253-54.
79. Id. at 255 ("The typical foreign firm has a controlling shareholder and comes from a country where controlling shareholders have more of an opportunity to make themselves better off at the expense of minority shareholders compared with the US." (citation omitted)).
80. Craig Doidge et al., Private Benefits of Control, Ownership, and the Crosslisting Decision, 64 J. FIN. 425, 432 (2009).
81. Coffee, supra note 21, at 444.
82. Human Capital: Major Human Capital Challenges at SEC and Key Trade Agencies: Hearing Before the S. Subcomm. on Oversight of Gov't Mgmt., Restructuring & the Dist. of Columbia, Comm. on Governmental Affairs, 107th Cong. 6 (2002) [hereinafter Human Capital Hearing] (statement of Richard J. Hillman, Director of Financial Markets and Community Investment, U.S. Gen. Accounting Office and Loren Yager, Director of International Affairs and Trade, U.S. Gen. Accounting Office).
83. Langevoort, supra note 6, at 487.
84. Id. at 499.
85. Id. at 487.
86. A recent paper presents evidence of strategic calculus by SEC regulators. Notably, in his empirical investigation of SEC enforcement actions against broker-dealers, Stavros Gadinis finds that SEC officials may adjust enforcement measures on the basis of the target's desirability as a potential employer. Stavros Gadinis, The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers (Harvard John M. Olin Ctr. for Law, Econ. & Bus., Discussion Paper No. 27, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1333717.
87. For example, like many other consulting and auditing firms, PricewaterhouseCoopers (PwC) publishes annual reports about the state of securities litigation in the United States. While mainly focused on trends in class action litigation, these reports frequently address new laws and trends that affect PwC's foreign clients, many of whom crosslist on U.S. markets. In four reports (2004-2007), PwC has included a tally of the number of foreign issuers targeted by SEC enforcement actions. However, PwC does not explain its methodology for identifying such actions and includes actions against foreign companies that are not technically foreign private issuers as defined by the SEC. Moreover, it excludes certain administrative actions (such as actions for delinquent filings) that are not very costly to foreign companies but that are important for the purposes of this analysis. See, e.g., PRICEWATERHOUSECOOPERS, 2007 SECURITIES LITIGATION STUDY 59 (2008)[hereinafter PWC, 2007 STUDY], available at http://10b5.pwc.com/PDF/2007%20SECURITY%20LIT%20STUDY%20W-LT.PDF.
88. Siegel describes his approach as follows: To determine the SEC's record, I first search all SEC litigation releases between January 1, 1995 and June 30, 2002 for actions taken against crosslisted firms. I then interview 116 plaintiffs' attorneys in 2002 to crosscheck and identify any remaining SEC enforcement actions. The attorneys interviewed represented the most active in the area of securities law and represented all major offices of all prominent law firms in this area. Several of the attorneys had 30 years of experience and had personal involvement in the earliest cases. As a further check, I search both Lexis and the entire SEC web site (including administrative proceedings) by the names of all companies ever targeted by private plaintiffs. Siegel, supra note 14, at 342.
89. SEC, International Registered and Reporting Companies, http://www.sec.gov/ divisions/corpfin/internatl/companies.shtml (last visited Feb. 2, 2010).
90. I contacted the SEC to ask for earlier lists but was told that electronic copies are not available. I was not able to find the earlier lists on Lexis or Westlaw.
91. Telephone Interview with Paul Dudek, Chief of Office of Int'l Corp. Fin., SEC (Dec. 9, 2009).
92. See supra note 34.
93. Standard foreign private issuer disclosure documents include 20Fs (annual and transition report of foreign private issuers) and 6Ks (current report of foreign issuer). In contrast, domestic issuers typically file 10-Ks (annual reports) and 10-Qs (quarterly reports). See SEC, Index to Forms, http://www.sec.gov/info/edgar/forms/edgform.pdf (last visited Feb. 2, 2010).
94. In short, there are two exceptions to the general rule that the International Registered and Reporting issuer lists include only foreign private issuers that file FPI disclosure materials. First, the lists include certain Canadian issuers that may or may not be foreign private issuers and that file domestic issuer forms with the SEC. Second, certain foreign private issuers from the Cayman Islands, the Marshall Islands and the British Virgin Islands also file domestic forms. In order to understand how many issuers on the list of International Registered and Reporting Companies file domestic forms, I used the Edgar database to check the disclosure materials filed by each of the 1259 issuers from Canada, the Cayman Islands, the Marshall Islands and the British Virgin Islands on the aggregate 2000-2008 list. Although Edgar did not have sufficient information for all of the companies on the list, of the 1229 such issuers for which information was available, I identified 166 (or 13.5%) that had filed domestic forms. See SEC, Searching Company Filings, http://sec.gov/search/ search.htm (last visited Feb. 2, 2010).
95. SEC, Search SEC documents (Advanced Search), http://search.sec.gov/secgov/index.jsp (last visited Feb. 2, 2010).
96. The database search generated results for companies listed in litigation documents because they were, for example, involved in certain transactions with other U.S. defendants.
97. In evaluating whether or not to include actions against subsidiaries of FPIs, I had to evaluate the involvement of the FPI in the case. I did not include enforcement actions in which the FPI was merely identified as a corporate parent of the defendant. In particular, I did not include a number of such cases in the Broker Dealer and Investment Advisor enforcement categories, see infra note 105, since they generally involved misconduct by U.S. incorporated financial institutions and did not reference any wrongdoing or liability by the foreign parent.
98. The list generated by this methodology contains an entry for each time a foreign issuer (including its employees and subsidiaries) was named as a defendant in an SEC enforcement action. Thus, if an employee of a foreign issuer was named in two separate actions, there would be a separate entry for each unique enforcement action. Similarly, in rare instances where multiple foreign issuers were named as defendants in a single action, I included an entry for each foreign issuer affected by the enforcement action.
99. The SEC classifies enforcement actions by fiscal year, and hence, I follow this practice as well. The fiscal year begins on October 1st and ends on September 30th. See, e.g., SEC, SELECT SEC AND MARKET DATA, FISCAL 2008 (2009), available at http://sec.gov/about/ secstats2008.pdf
100. The SEC generally classifies enforcement actions into one of the following categories: Issuer Reporting and Disclosure, Broker Dealer, Investment Advisors, Securities Offering Cases, Delinquent Filings, Insider Trading Cases, Market Manipulation, Civil Contempt, Municipal Offering, Transfer Agent, Investment Companies, or Miscellaneous Cases. See id. 3 tbl.2.
101. Hence, not all actions on my list included foreign issuers as named defendants. Including actions against the employees and subsidiaries of foreign issuers reflects the attempt to define enforcement against foreign issuers broadly, as proponents of the bonding hypothesis would likely argue that a narrower measure would underestimate the scope and effectiveness of U.S. public enforcement.
102. Since the IRR lists did include a small subset of issuers that did not file typical foreign issuer disclosure documents, the goal of this check was to identify companies that filed as domestic issuers (and hence provided more disclosure to the SEC).
103. See supra note 92 and accompanying text; Siegel, supra note 14. Several of the companies on the PwC lists were not on the SEC IRR lists. Foreign companies that are not foreign private issuers must meet the same registration and disclosure requirements as U.S. firms, and one would not expect that they would be treated differently by the SEC (or at least one would expect that the difference in treatment would be much smaller). Meanwhile other companies such as Parmalat S.p.A., also on the PwC list, sold securities only to U.S. institutional investors and hence did not have to register with the SEC. In this case, one would expect the SEC to treat such companies differently, in large part due to the lack of information. Thus, my analysis focuses mainly only on the foreign private issuers that are registered with the SEC and that submit disclosure information in the form of Form 20Fs and 6Ks.
104. SHEARMAN & STERLING LLP, FCPA DIGEST OF CASES AND REVIEW RELEASES RELATING TO BRIBES TO FOREIGN OFFICIALS UNDER THE FOREIGN CORRUPT PRACTICES ACT OF 1977 (2009), available at http://www.shearman.com/files/upload/LT-030509-FCPA-Digest -Cases-And-Review-Relating-to%20Bribes-to-Foreign-Officials-under-the-Foreign -Corrupt-Practices-Act.pdf [hereinafter SHEARMAN & STERLING, 2009 REPORT].
105. See id. at ii-iv.
106. For a small number of actions, there was no issuer wrongdoing. That is, the action did not pertain to violations of securities laws by a registered issuer. Such cases were excluded from the sample.
107. For 2000 through 2004, this data comes from the SEC annual reports, which are available on the SEC's website at http://sec.gov/about/annrep.shtml. For 2005-2008, the data comes from Select SEC and Market Data Reports, which are published at the end of each fiscal year and are available on the Commission's website at http://sec.gov/about.shtml.
108. The SEC does not publish the total number of issuers registered and reporting with the agency. Compustat is a database that covers approximately ninety-eight percent of the world's market capitalization with data on over 90,000 global securities. September 2009 Compustat North American data was used to identify all companies in any given year. See Compustat, http://www.compustat.com/ (last visited Feb. 2, 2010).
109. The ballpark number was 12,000, with a possible range between 10,000 to 15,000 issuers. Telephone Interview with Paul Dudek, supra note 96.
110. SEC, FINAL REPORT OF THE ADVISORY COMMITTEE ON SMALLER PUBLIC COMPANIES, at E3, E11 (2006), available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
111. Of the eighty-six entries on the list, five involve three different Canadian issuers that were on the IRR lists but filed domestic disclosure materials.
112. Licht, supra note 30.
113. The scope of the enforcement actions may be measured, in part, by the number of unique enforcement actions related to wrongdoing by a particular issuer. For example, the SEC brought at least ten separate actions related to the wrongdoing by the Dutch company Royal Ahold and its subsidiaries.
114. E.g., Cox & Thomas, supra note 73.
115. Human Capital Hearing, supra note 86 (statement of Richard J. Hillman, Director of Financial Markets and Community Investment, U.S. General Accounting Office and Loren Yager, Director of International Affairs and Trade, U.S. General Accounting Office).
116. Enforcement rates for these enforcement categories are not presented due to methodological challenges. While the Issuer Reporting and Delinquent Issuer cases are typically brought against companies and/or their employees for wrongdoing related to those companies, cases in these other categories frequently target individuals apart from any issuers. Because individuals are targeted apart from companies, it is much harder to determine the universe of possible enforcement targets and hence nearly impossible to determine enforcement rates.
117. As I point out in note 102, supra, the SEC did bring a number of actions against U.S.-incorporated broker-dealers and investment advisors that were owned by foreign companies. However, to the extent that the action did not involve the foreign parent or suggest any wrongdoing by the foreign issuer, I did not include such actions on my list.
118. Order Making Findings and Revoking Registrations by Default, Exchange Act of 1934 Release No. 57,168, at 3 (Jan. 18, 2008), available at http://www.sec.gov/litigation/admin/ 2008/34-57168.pdf.
119. These numbers were taken from the SEC International Registered and Reporting Companies lists, supra note 94.
120. These numbers were generated using the Compustat database, supra note 113. While the total number of domestic issuers does not appear to be published (or even known by) the SEC, to assess the validity of the Compustat numbers, I referred to the Final Report of the Advisory Committee on Smaller Companies, supra note 115, at E-11, which cited "9,769 companies per year from 2000 to the end of the fiscal year 2004. exclud[ing] ADRs." As noted above, Paul Dudek also gave a ballpark number of "12,000" total issuers on U.S. markets each year. See supra note 114.
121. Although this Section focuses only on issuer reporting and disclosure, the general search for enforcement actions discussed above revealed only two enforcement actions against a registered and reporting company between fiscal years 2000 and 2002.
122. For purposes of this analysis, "domestic issuers" includes all issuers other than those that are both listed on the IRR lists and that file FPI disclosure materials. All other issuers are included in the domestic category.
123. To compute these rates, I divide the number of actions (either against FPIs or domestic issuers) identified in Tables 8 and 9 by the total number of domestic and foreign registered and reporting companies listed in Table 7. If the ballpark estimate of 12,000 total issuers provided by Paul Dudek is used, then the Percent of Domestic Issuers Targeted (Including Enforcement Against Aiders and Auditors) would be 0.54%, 0.51%, 0.91%, 0.96%, 0.87%, 0.90%, 0.73%, 0.93%, 0.77%. Similarly, if, instead of using the number of registered and reporting companies, the IRR number is adjusted downward by 13% to account for the subset of issuers discussed in note 99 above, then the Percent of FPIs Targeted (Including Enforcement Against Aiders and Auditors) would be 0.00%, 0.00%, 0.09%, 0.19%, 0.37%, 0.37%, 0.40%, 0.22%, 0.79%.
124. To calculate these percentages, I use the number of foreign registered and reporting companies in Table 7, supra.
125. To calculate these percentages, I use the number of domestic companies in Table 7, supra. 131. Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494.
126. RAYMUND WONG & PATRICK CONROY, FCPA SETTLEMENTS: IT'S A SMALL WORLD AFTER ALL 2 (2009), available at http://www.nera.com/image/Pub_FCPA_Settlements_0109_Final2.pdf [hereinafter NERA ECONOMIC CONSULTING] (quoting Linda Chatman Thomsen, Director of Enforcement, SEC).
127. Data in this chart are drawn from SHEARMAN & STERLING, 2009 REPORT, supra note 109, at ii.
128. U.S. Department of Justice, Fact Sheet: The Department of Justice Public Corruption Efforts, Mar. 27, 2008, available at http://www.usdoj.gov/opa/pr/2008/March/08_ag_246.html (last visited Apr. 25, 2009).
129. SHEARMAN & STERLING, LLP, FCOA DIGEST OF CASES AND REVIEW RELEASES RELATING TO BRIBES TO FOREIGN OFFICIALS UNDER THE FOREIGN CORRUPT PRACTICES ACT OF 1977, at iii (2008) [hereinafter SHEARMAN & STERLING, 2008 REPORT].
130. NERA ECONOMIC CONSULTING, supra note 132, at 2.
131. "Siemens paid kickbacks to win contracts for transportation in Venezuela, mobile-telephone networks in Bangladesh, power plants in Israel and traffic-control systems in Russia, according to prosecutors. The company allegedly paid billion in bribes to government officials worldwide and concealed them using off-book accounts." Sheenagh Matthews, Siemens Rises as Size of Bribery Fine Brings Relief, BLOOMBERG.COM, Dec. 15, 2008, http://www.bloomberg.com/apps/news?pid=20601100&sid=aHEQY.E66b9w&refer=germany.
132. See, e.g., Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359, 2362-63 (1998) (arguing for the adoption of a "market approach" to securities regulation that would eliminate a significant deterrent to listings).
133. The term "bonding" was first coined by Jensen and Meckling, who defined it as the costs or liabilities that an agent or entrepreneur will incur to assure investors that it will perform as promised, thereby enabling it to market its securities at a higher price. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976).
134. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997). The focus on legal rules became particularly intense after the publication of the seminal law and finance paper in 1998. Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113, 1115 (1998) [hereinafter La Porta et al., Law and Finance] (examining "empirically how laws protecting investors differ across 49 countries, how the quality of enforcement of these laws varies, and whether these variations matter for corporate ownership patterns around the world"). After Law and Finance was published, hundreds of scholars "joined in [a] search to find the hidden legal rules that facilitate financial development," a process that at times "resembled the medieval quest for the philosopher's stone that could turn lead into gold." John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 U. PA. L. REV. 229, 243 (2007).
135. Larry E. Ribstein, Crosslisting and Regulatory Competition, 1 REV. L. & ECON. 97, 98 (2005).
136. Donald C. Langevoort, Structuring Securities Regulation in the European Union: Lessons from the U.S. Experience, in INVESTOR PROTECTION IN EUROPE: CORPORATE LAW MAKING, THE MIFID AND BEYOND 485, 488 (Guido Ferrarini & Eddy Wymeersch eds., 2006).
137. See, e.g., Coffee, supra note 4, at 244.
138. In a very recent working paper, discussed in more detail below, Kate Litvak compares the crosslisting premiums for foreign issuers with varying levels of exposure to SEC enforcement and U.S. securities litigation. She finds that crosslisting premia "are not strongly attached to the level of US regulation." Kate Litvak, The Relationship Among U.S. Securities Laws, Crosslisting Premia, and Trading Volumes 5 (CELS 2009 4th Annual Conference on Empirical Legal Studies, Working Paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443590.
139. See, e.g., Coffee, supra note 4, at 309 (observing that "the United States pursues securities law violations through both public and private enforcement with an intensity unmatched elsewhere in the world" and attributing lower cost of capital to this overall intensity).
140. See, e.g., COMM. ON CAPITAL MKTS. REGULATION, supra note 1, at 71.
141. Stephen Labaton, Accounting Plan Would Allow Use of Foreign Rules, N.Y. TIMES, July 5, 2008, at A1.
142. See, e.g., Gretchen Morgenson, Following Clues the S.E.C. Didn't, N.Y. TIMES, Feb. 1, 2009, at BU1 (noting "our nation's broken-down regulatory apparatus"). Following the financial crisis, there has been increased academic attention devoted to assessing the future and viability of the SEC, including a Virginia Law Review symposium dedicated to such questions. In his introduction to the symposium, Joel Seligman notes that "it is indeed uncertain whether the Commission will survive to celebrate its 100th anniversary-at least in a form familiar to us today." Joel Seligman, The SEC in a Time of Discontinuity, 95 VA. L. REV. 667, 670 (2009).
143. See, e.g., Howell E. Jackson & Mark J. Roe, Public and Private Enforcement of Securities Laws: Resource-Based Evidence, 93 J. FIN. ECON. 207 (2009).
144. Jordan Siegel, Can Foreign Firms Bond Themselves Effectively by Renting U.S. Securities Laws?, 75 J. FIN. ECON. 319, 324 (2005).
145. See, e.g., Coffee, supra note 4, at 261-62 (suggesting that enforcement can be measured "in terms of the number of actions brought" and presenting comparisons of the annual number of enforcement actions in the United States and the United Kingdom). There is no discussion, however, of how each respective agency tracks or reports its enforcement actions. Nor does Coffee discuss whether a U.S. enforcement action is comparable to a U.K. enforcement action or whether the two can be compared for the purpose of evaluating enforcement intensity.
146. Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494 (1977).
147. Press Release, NYSE Euronext, NYSE Group, Inc. 2006 Highlights (Dec. 29, 2006), available at http://www.nyse.com/press/1167392589502.html.
148. Press Release, NYSE Euronext, NYSE Salutes the Baltic States of Estonia, Latvia, and Lithuania (Sept. 24, 2006), available at http://www.nyse.com/press/1190629848623.html.
149. SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES: MARKET SUMMARY 2006, available at http://www.sec.gov/divisions/corpfin/internatl/foreignmarketsumm2006.pdf.
150. According to the SEC, there were 229 companies on the Global Market and 33 on the Capital Market, both of which are NASDAQ markets. See SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES: MARKET SUMMARY 2007, available at http://www.sec.gov/divisions/ corpfin/internatl/foreignmarketsumm2007.pdf. For more information about the organization of NASDAQ, see NASDAQ, Listing Standards and Fees (2009), http://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf.
151. John C. Coffee, Jr., The Impact of Crosslistings and Stock Market Competition on International Corporate Governance, in GLOBAL MARKETS, DOMESTIC INSTITUTIONS 437, 442 (Curtis J. Milhaupt ed., 2003).
152. In May 2008, the SEC's Chief Accountant reported that approximately two-thirds of European companies had deregistered. SEC Official Says Fewer Companies Coming to U.S. Markets in Registered Forum, 40 Sec. Reg. & L. Rep. (BNA) 777, 778 (May 12, 2008).
153. This chart is based solely on SEC lists of International Registered and Reporting Companies. See SEC, INTERNATIONAL REGISTERED AND REPORTING COMPANIES, http://www.sec.gov/divisions/corpfin/internatl/companies.shtml (last visited Feb. 2, 2010).
154. A valuation premium is typically computed using the valuation ratio known as Tobin's q, which is the ratio of market value to book value of assets.
155. See Craig Doidge, G. Andrew Karolyi & René M. Stulz, Why Are Foreign Firms Listed in the U.S. Worth More?, 71 J. FIN. ECON. 205, 206 (2004).
156. Craig Doidge, G. Andrew Karolyi & René M. Stulz, Has New York Become Less Competitive Than London in Global Markets? Evaluating Foreign Listing Choices over Time, 91 J. FIN. ECON. 253, 272 (2009).
157. Luzi Hail & Christian Leuz, Cost of Capital and Cash Flow Effects of U.S. Crosslistings 18 (Weiss Ctr. for Int'l Fin. Research, Working Paper No. 05-2, 2005), available at http://finance.wharton.upenn.edu/weiss/wpapers/05-2.pdf.
158. While the bonding hypothesis has received the most academic attention, numerous alternative explanations for crosslisting have been proposed and are once again gaining traction in the scholarly literature. Initially, some scholars favored a simpler access-to-capital explanation. See Coffee, supra note 21, at 440. Others have emphasized the strategic business motivations behind crosslisting. For example, listing on a foreign exchange may improve product identification among investors and consumers in the host country. It may increase market demand for the firm's products as well as its securities. Amir N. Licht, Crosslisting and Corporate Governance: Bonding or Avoiding?, 4 CHI. J. INT'L L. 141, 145 (2003). Finally, a few scholars have proposed alternative theories of crosslisting related neither to corporate governance nor to capital markets. Amir Licht, for example, suggests that the evidence instead supports a so-called avoiding hypothesis. Id. at 142. According to Licht, because the regulatory regime that is out for rent by foreign issuers differs markedly from the regime that applies to domestic issuers, foreign issuers choose to crosslist in the United States to avoid the "disinfecting sunlight" of their home countries' securities laws. Id. at 162. Cally Jordan, meanwhile, focuses on crosslisting as a mechanism to overcome the "home bias" of U.S. investors. See Cally Jordan, The Chameleon Effect: Beyond the Bonding Hypothesis for Crosslisted Securities, 3 N.Y.U. J. L. & BUS. 37, 43 (2006). Most recently, in a new analysis of crosslisting premia, Kate Litvak has found support for the "early crosslisting literature," which involves overcoming market segmentation. Litvak, supra note 8, at 15.
159. See Doidge et. al, supra note 28, at 254 (noting that "much of the recent literature on crosslistings has emphasized the governance benefit of crosslisting on a major U.S. exchange"); see also Ribstein, supra note 5, at 104 (noting that "bonding seems to be the dominant explanation for crosslisting").
160. Coffee, supra note 21, at 448 (emphasis added); see also Joseph D. Piotroski & Suraj Srinivasan, Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings, 46 J. ACCT. RES. 383, 385 (2008) (noting that "[w]hen effective, this bonding process creates a commitment to adopt stronger corporate governance practices and credibly separates the listing firm from other firms in their home market, resulting in higher market valuations and lower costs of capital").
161. Coffee, supra note 4, at 233.
162. Under both the Securities Act of 1933 and the Securities Exchange Act of 1934, the term "foreign private issuer" refers to any corporation or other organization incorporated or organized under the laws of any foreign country. Nevertheless, there is an exception for an organization whose shares are more than 50% owned by residents of the United States if: the majority of its executive officers or directors are U.S. citizens or residents, more than 50% of its assets are located in the United States, or its principle place of business is the United States. The SEC treats companies that fall within the exception as domestic issuers. SEC Rule 3b-4, 17 C.F.R. § 240.3b-4 (2008).
163. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
164. See Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (2006).
165. Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (2006).
166. SEC Rule 12g3-2(b)(2), 17 C.F.R. § 240.12g3-2 (2008).
167. SEC Rule 12g-1, 17 C.F.R. § 240.12g-1.
168. Regulation S encompasses Rules 901 through 905 of the Securities Act of 1933. See 17 C.F.R. § 230.901-05.
169. 17 C.F.R. § 230.903.
170. 17 C.F.R. § 230.501-08.
171. 17 C.F.R. § 230.144A.
172. Luigi Zingales, The Future of Securities Regulation 16 (Univ. of Chi. Booth Sch. of Bus., Working Paper No. 08-27, 2009), available at http://ssrn.com/abstract=1319648.