The Securities Act: Does It Permit Companies To Cheat Investors?

New_York_Stock_Exchange_EntranceAuthor’s Note: This post is taking an economic and investor approach to The Securities Act of 1933. This is not to ignore the time and monetary cost of information. It is merely a critique of one portion of a larger regulatory scheme and its effects.

The purpose of the 1933 Securities Act was to protect investors by providing them with information in order to make a sound investment decision. Albeit not articulated at the time of The Securities Act’s inception, the modern application of the Securities Act reflects the Capital Asset Pricing Model and the Efficient Capital Market Hypothesis. Roughly, the efficient capital market hypothesis assumes that the market and the stock prices are a reflection of information available about that security.(1)  As the original standards for reporting requirements and disclosure requirements of the Securities Act have loosened in recent years, have we cheated investors? Are investors not being fairly compensated or informed for the risks they have assumed?

When a security becomes available to the public for the first time, the SEC requires certain disclosures through its registration statement. The registration statement provides basic information about the company and basic financial information. During this process, there are underwriters who analyze and then provide the first price for the security. They will consider the projections of the company, the segment in which it operates, as well as general global and national market conditions. Their ultimate goal, however, is to sell the securities. The underwriters receive a percentage of the final sales price, which incentivizes them to have a higher price than potential fair market value. The SEC helps to regulate this process and civil liabilities and administrative action can provide a disincentive to be overly optimistic about the security’s prospects.

Since 2005, there has been a movement towards reducing the information required from issuers prior to offering securities to the public.

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In Memory of Justice Patrick Crooks

Justice CrooksJustice N. Patrick Crooks was the epitome of a lawyer and judge who lived to serve. In his fifty-two-year legal career, he served as a captain in the office of the Judge Advocate General at the Pentagon and then as a lawyer in private practice in Green Bay, before becoming a Brown County circuit court judge and then justice of the Wisconsin Supreme Court. In 1994 he was named Wisconsin Trial Judge of the Year by the Wisconsin Chapter of the American Board of Trial Advocates. Justice Crooks served on the trial bench for nineteen years and on the Wisconsin Supreme Court from 1996 to his passing, in chambers, last week on September 21.

I was honored to work for Justice Crooks as his clerk during the Wisconsin Supreme Court’s 1999-2000 term.

Justice Crooks approached each case with fresh eyes and an impartial mind. He reasoned through cases carefully and understood that he had a solemn role in deciding a case. Justice Crooks believed in the law and the justice system. Every case was fully analyzed and researched before oral argument. Opinions were to be written to guide lawyers, judges, and Wisconsin citizens. Justice Crooks was proud of his work on the trial bench and felt that his knowledge of the trial courtroom was important to his understanding of cases on appeal.

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Supreme Court Roundup Part Two: King v. Burwell

Obama_signs_health_care-20100323On October 5, I participated in an event at the Marquette University Law School entitled “Supreme Court Roundup” with Cato Institute Scholar Ilya Shapiro.  The event was sponsored by the Law School Chapters of the Federalist Society and the American Constitution Society.  A previous post contained my remarks on Obergefell v. Hodges (the “Gay Marriage case”).  What follows are my prepared remarks on King v. Burwell (the “Obamacare case”).

The issue in this case was whether the Affordable Care Act’s tax credits are available in States that have a federal health insurance exchange rather than a state exchange. In Section 36A, the Affordable Care Act (commonly known as “Obamacare”) states that tax credits “shall be allowed” for any “applicable taxpayer.” Then, in Section 36B, the Act provides that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State.” (emphasis added).

In King v. Burwell, the U.S. Supreme Court, in an opinion written by Chief Justice John Roberts, held that Section 36B allows tax credits to be used for insurance purchased on any exchange created under the Act, including insurance purchased on a federal exchange.

I want to be clear.  I make the following statement with the intent to be as objective and non-partisan as possible.  This litigation was nothing more than a post hoc attack on the Affordable Care Act, using one isolated provision of the law read out of context in order to arrive at a nonsensical meaning, which then used a manufactured theory of legislative intent – a theory without a shred of contemporaneous support in the legislative history – in a desperate attempt to prop up the nonsensical meaning.

The background of how this case arose is illuminating.

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