Jonathan R. Macey

The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform

Introduction ....................................... 3 I. The Role of the Entrepreneurial Attorney ......... 7 A. The Economic Rationale for Class Action and Shareholders Derivative Litigation ........... 8 B. The Role of the Entrepreneurial Attorney in Class Action and Shareholders Derivative Suits 12 1. The economic theory of agency and its applidation to standard litigation ........... 12 a) M onitoring ......................... 13 b) Bonding ........................... 15 c) Incentives .......................... 17 d) Residual loss ...................... 19 2. Application of agency cost theory to class and derivative cases ..................... 19

Corporate Governance and Commercial Banking: A Comparative Examination of Germany, Japan, and the United States

The current paradigm of corporate governance theory suggests that the Japanese main bank system and the German universal bank system encourage socially optimal corporate decisionmaking. Unlike their Japanese and German counterparts, American banks are barred from taking an active role in corporate governance, both by laws restricting share ownership, and by legal rules which hold banks liable for exerting managerial control over borrowers. The debate among commentators has focused on whether the German and Japanese systems should be viewed as alternatives to the American model. In this article, Professors Macey and Miller challenge the current paradigm by demonstrating that powerful banks may prevent equity claimants from undertaking socially optimal risks, thereby hindering the development of robust capital markets. They conclude that the most effective model is one which large-block shareholders pose a credible threat to incumbent management and banks maximize their comparative advantage in controlling moral hazard.

Regulating Exchanges and Alternative Trading Systems: A Law and Economics Perspective

New trading technologies are transforming securities markets, and with their rise have come important questions regarding the regulation of new and traditional trading mechanisms. This article provides a law and economics perspective on the regulation of alternative trading systems. We argue that alternative trading systems play a distinct role in the market and in particular solve the conflict‐of‐interest problem that exists between brokers and dealers. We propose a general strategy for their regulation that incorporates this economic role. We suggest a regulatory framework that permits providers of services to opt into particular regulatory frameworks as a way of fostering innovation and competition. The functional approach we outline is consistent with the Securities and Exchange Commissions regulatory objectives of fairness, efficiency, and transparency of market transactions.

Observations on the Role of Commodification, Independence and Governance in the Accounting Industry

In this Article, we argue the internal corporate governance structure of the big accounting firm is fundamentally flawed, and that this flaw contributed to the current crisis of confidence in the integrity of public reporting. The incentive structure within accounting firms makes it virtually impossible for auditors to be independent of significant clients like Enron. The result has been a change in the balance of economic power between accounting firms and their clients - individual audit partners suffer from client capture. In addition, to their lack of independence, accounting firms and partners lack accountability in part due to the advent of the limited liability partnership structure. Despite these problems, federal securities laws and regulations require auditors to provide independent audits to companies. The result has been the commodification of audits and a market in which audits are bought and sold. As a consequence, audits no longer serve the economic purpose for which they were required - providing information that protects investors and leads to the efficient pricing of securities. Although the provisions of the Sarbanes-Oxley Act offer some help in resolving the capture, governance, and commodification concerns we raise, we conclude that more is needed. Sarbanes-Oxley established the Public Company Accounting Oversight Board. This Board is to register the public accounting firms, set standards for their reports, inspect and investigate the firms, and, when appropriate, sanction firms and individuals. To be successful, the Board will have to replace the incentive system eliminated with the creation of LLPs with its own set of rules and standards, which it will have to enforce vigorously. In addition, Sarbanes-Oxley provides new standards for auditor independence, establishing a requirement that audit firms rotate the partners assigned to clients in order to prevent capture. We conclude that this provision is less likely to achieve its goal, as long as client satisfaction remains the dominant measure of partner performance. Instead, we argue that until lead audit partners are confident that they can fire dishonest clients without fear that doing so will result in the destruction of their own careers, the problems that contributed to the Enron and other significant corporate failures will continue to exist.

Controlling Insider Trading in Europe and America: The Economics of the Politics

The purchase or sale of corporate stock by employees or other closely associated individuals, when done on the basis of information that is not publicly available, is called insider trading. Insider trading is illegal in the United States, and the Securities and Exchange Commission (SEC) vigorously enforces the laws with both civil and criminal penalties. By contrast, insider trading is legal in most European countries. A few other European countries have mild rules constraining insider trading, but those rules have not been enforced actively.

Bank Failures, Risk Monitoring and the Market for Bank Control

Not since the Great Depression has there been such concern in the popular press about the fundamental stability of the banking industry. This apparent decline in public confidence stems from the unprecedented increase in the incidence of bank failures during the past decade. From 1946 to 1984 the average failure rate for banks was a modest .07%, but from 1984 to 1987 this rate increased five-fold to .37%.1 Although this failure rate is still quite small compared with the failure rate for firms throughout the rest of the economy,2 the large stake that the federal government has in the financial stability of banks, and the widespread perception that healthy banks are especially important to the economy, suggest that concern about the increasing incidence of bank failures is warranted. 3 The absolute number of bank failures is not particularly large. One hundred twenty banks failed in 1985,4 145 failed in 1986,5 and 184

Good Finance, Bad Economics: An Analysis of the Fraud on the Market Theory

The Supreme Courts endorsement of the fraud-on-the-market theory in Basic, Inc. v. Levinson 1 established the efficient capital markets hypothesis (ECMH), a cornerstone of modern finance theory,2 as a decisive tool for resolving legal disputes involving securities fraud and matters of corporate disclosure.3 Although the ECMH has long been an integral part of legal scholarship on the nature and purpose of securities regulation,4 courts have treated it with suspicion, except when

Bank mergers and American bank competitiveness

In this paper we attempt to elaborate on the observation that “the common environmental feature that underlies mergers and acquisitions throughout the U.S. economy is increased competition.”1 Motivating this paper is the sharp contrast between the high cost of bank mergers and acquisitions and the large number of such transactions. The existing legal rules and regulations that govern bank mergers and acquisitions make such transactions very costly. The legal environment dramatically increases the transaction costs of mergers and acquisitions and especially of hostile takeovers in the field of banking.

Exchange-rate management in eastern Europe: A public-choice perspective

Abstract The paper presents a public-choice analysis of the existing exchange-rate regimes in transition economies, with special reference to Eastern Europe. The links between policy making, rent seeking and exchange-rate regimes are thus examined in detail from a theoretical point of view, and then compared with the existing empirical evidence. Some comments about the role of the West and of international organizations are also put forward.

Trans Union Reconsidered

Smith v. Van Gorkom2 (the Trans Union case) is now well-established as one of the most important-and mystifying-corporate law cases of the decade. The Delaware Supreme Court stunned and dismayed the corporate bar by holding that a board of directors violated its duty of care to shareholders by failing to exercise sufficient deliberation before approving a cash-out merger at a fifty percent premium over the market price. The case seemed to augur broad new liability for corporate directors. It immediately received widespread attention, both because it carried important implications for corporate counseling and because it suggested that the Delaware courts might be prepared to increase the rights of shareholders as against incumbent boards under the Business Judgment Rule.3 Not surprisingly, Trans Union sparked lively debate among commentators. Most have disparaged the decision for undermining the Business