Subscribe Subscribe   Find us on Twitter Follow POL on Twitter  



Better bounty hunting in securities litigation?

| No Comments

Amanda M. Rose, Vanderbilt Law, has an interesting paper, "Better Bounty Hunting: How the SEC's New Whistleblower Program Changes the Securities Fraud Class Action Debate":

The SEC's new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits -- rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the bounty program, the Article shows how amending it to include a qui tam provision for Rule 10b-5 violations would offer several advantages over retaining FOTM class actions. Either way, the bounty program has important and previously unrecognized implications that policymakers should not ignore.

As Rose correctly notes, FOTM suits rarely actually provide compensation: they involve transfer payments between sets of innocent shareholders—with a huge inefficient windfall commission paid to the attorneys. Nor do these suits provide deterrence: nearly all of FOTM suits are piggybacking off of public disclosures made by others. Replacing shareholder litigation with whistleblower qui tam suits would maintain or increase the deterrent effect without the social costs of securities litigation. Of course, whistleblower laws can produce their own distortions in the marketplace (already, a Fifth Circuit ruling and SEC regulations create the perverse incentive to hide wrongdoing from internal investigators), and if bounties are too high, there wouldn't be any savings to shareholders. More: Frankel; Rose @ Blue Sky Blog.

Rose already has an impressive collection of interesting papers and bears watching.

Leave a comment

Once submitted, the comment will first be reviewed by our editors and is not guaranteed to be published. Point of Law editors reserve the right to edit, delete, move, or mark as spam any and all comments. They also have the right to block access to any one or group from commenting or from the entire blog. A comment which does not add to the conversation, runs of on an inappropriate tangent, or kills the conversation may be edited, moved, or deleted.

The views and opinions of those providing comments are those of the author of the comment alone, and even if allowed onto the site do not reflect the opinions of Point of Law bloggers or the Manhattan Institute for Policy Research or any employee thereof. Comments submitted to Point of Law are the sole responsibility of their authors, and the author will take full responsibility for the comment, including any asserted liability for defamation or any other cause of action, and neither the Manhattan Institute nor its insurance carriers will assume responsibility for the comment merely because the Institute has provided the forum for its posting.

Related Entries:




Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.