Posts Tagged ‘Corporate fraud’

Corporate Scandals and Household Stock Market Participation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday April 1, 2014 at 9:01 am
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Editor’s Note: The following post comes to us from Mariassunta Giannetti, Professor of Finance at the Stockholm School of Economics, and Tracy Yue Wang of the Department of Finance at the University of Minnesota.

Corporate scandals have large negative effects on the value of the firms that are discovered having committed fraud (Karpoff, Lee, and Martin, 2008; Dyck, Morse, and Zingales, 2013). Besides inflicting direct losses to shareholders, corporate fraud may also have indirect effects on households’ willingness to participate in the stock market, which may generate even larger losses by increasing the cost of capital for other firms. Evidence of the externalities generated by corporate fraud, however, is quite limited.

…continue reading: Corporate Scandals and Household Stock Market Participation

The Three Justifications for Piercing the Corporate Veil

Posted by Jonathan R. Macey, Yale Law School, on Thursday March 27, 2014 at 9:20 am
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University. The following post is based on an article co-authored by Professor Macey and Joshua Mitts of Sullivan & Cromwell LLP. The views in this post are those of Mr. Mitts and not his employer.

The doctrine of piercing the corporate veil is shrouded in misperception and confusion. On the one hand, courts understand the fact that the corporate form is supposed to be a juridical entity with the characteristic of legal “personhood.” As such courts acknowledge that their equitable authority to pierce the corporate veil is to be exercised “reluctantly” and “cautiously.” [1] Similarly, courts also recognize that it is perfectly legitimate to create a corporation or other form of limited liability company business organization such as an LLC “for the very purpose of escaping personal liability” for the debts incurred by the enterprise. [2]

…continue reading: The Three Justifications for Piercing the Corporate Veil

SEC Enforcement Year in Review

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 3, 2014 at 8:58 am
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Editor’s Note: The following post comes to us from Adam S. Hakki, partner and global head of the Litigation Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication. The complete publication, including footnotes, is available here.

Marked by leadership changes, high-profile trials, and shifting priorities, 2013 was a turning point for the Enforcement Division of the Securities and Exchange Commission (the “SEC” or the “Commission”). While the results of these management and programmatic changes will continue to play out over the next year and beyond, one notable early observation is that we expect an increasingly aggressive enforcement program.

…continue reading: SEC Enforcement Year in Review

Executives’ ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 11, 2014 at 9:15 am
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Editor’s Note: The following post comes to us from Robert Davidson of the Accounting Area at Georgetown University, Aiyesha Dey of the Department of Accounting at the University of Minnesota, and Abbie Smith, Professor of Accounting at the University of Chicago.

In our paper, Executives’ ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk, forthcoming in the Journal of Financial Economics, we examine how and why two aspects of top executives’ behavior outside the workplace, as measured by their legal infractions and ownership of luxury goods, are related to the likelihood of future misstated financial statements, including fraud and unintentional material reporting errors. We investigate two potential channels through which executives’ outside behavior is linked to the probability of future misstatements: (1) the executive’s propensity to misreport (hereafter “propensity channel”); and (2) changes in corporate culture (hereafter “culture channel”).

…continue reading: Executives’ ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk

The SEC’s Refocus on Accounting Irregularities

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 27, 2014 at 9:14 am
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Editor’s Note: The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article by Mr. Ferrillo, Christopher Garcia, and Matthew Jacques of AlixPartners that first appeared in D&O Diary.

On July 2, 2013, the United States Securities and Exchange Commission (the SEC) announced two new initiatives aimed at preventing and detecting improper or fraudulent financial reporting. [1] We previously noted that one of these initiatives, a computer-based tool called the Accounting Quality Model (AQM, or “Robocop”), [2] is designed to enable real-time analytical review of financial reports filed with the SEC in order to help identify questionable accounting practices.

…continue reading: The SEC’s Refocus on Accounting Irregularities

CEO Connectedness and Corporate Frauds

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday January 23, 2014 at 9:13 am
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Editor’s Note: The following post comes to us from Vikramaditya Khanna, Professor of Law at the University of Michigan; E. Han Kim, Professor of Finance at the University of Michigan; and Yao Lu of the Department of Finance at Tsinghua University.

The collective behavior of corporate leaders is often critical in corporate wrongdoing, and the CEO often plays the central role. Yet there is no comprehensive study exploring how CEOs and their influence within executive suites and the boardroom impact corporate wrongdoing. In our paper, CEO Connectedness and Corporate Frauds, which was recently made publicly available on SSRN, we focus on the effects of CEOs’ social influence accumulated during the CEO’s tenure through top executive and director appointment decisions.

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Who Is Responsible for Libor Rate-Fixing?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 26, 2013 at 9:00 am
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Editor’s Note: The following post comes to us from Mark R. Patterson at Fordham University School of Law.

On December 4, the European Commission announced the imposition of €1.7 billion in fines on eight international banks for participation in cartels in euro- and yen-denominated interest-rate derivatives. The banks had conspired on submissions for euro and yen Libor rates, and the fines were imposed under European antitrust law. As EU Commissioner Joaquín Almunia said, “What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other.”

Commissioner Almunia’s comment might have been addressed specifically to U.S. antitrust enforcers. Although the Antitrust Division of the Department of Justice has been involved in some of the settlements that the department has reached with banks, to date none of those settlements has included antitrust liability. Instead, the banks have pled guilty or admitted liability only for fraud, even though the statements issued by the Justice Department when announcing the settlements describe just the sort of collusion to which Commissioner Almunia referred.

…continue reading: Who Is Responsible for Libor Rate-Fixing?

SEC’s Second Annual Whistleblower Program Report Shows Little Change

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday December 21, 2013 at 9:17 am
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Editor’s Note: The following post comes to us from Jonathan Polkes, co-chair of the Securities Litigation Practice Group at Weil, Gotshal & Manges LLP, and is based on a Weil Gotshal alert by Christian Bartholomew and Brianna Benfield Ripa; the complete publication, including footnotes, is available here.

On November 15, 2013, the US Securities and Exchange Commission (“SEC” or “the Commission”) released its Annual Report to Congress on the Dodd-Frank Whistleblower Program (“the Report”). The Report is remarkable for three reasons. First, the Report shows that, despite very significant efforts to publicize the program, the SEC is not seeing a meaningful increase in the number of tips it receives. Indeed, the SEC received essentially the same number of tips in the same categories in 2013 as it did in 2012 (3,283 and 3,001, respectively). Second, consistent with the few awards made under the program, the Report fails to shed any light at all on the SEC’s thought process in making these awards, and provides no insight into how the SEC is applying the highly nuanced factors applicable to award decisions. Finally, the Report does not acknowledge that, for the second year in a row, the largest category of tips were in the “other” category, which suggests that many of these tips are probably meritless, nor does the Report illuminate at all the critical question of how many of the tips the SEC receives actually result in meaningful investigations and cases.

…continue reading: SEC’s Second Annual Whistleblower Program Report Shows Little Change

Do Fraudulent Firms Engage in Disclosure Herding?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 15, 2013 at 9:04 am
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Editor’s Note: The following post comes to us from Gerard Hoberg of the Department of Finance at the University of Maryland and Craig Lewis of the Finance Area at Vanderbilt University.

In our paper, Do Fraudulent Firms Engage in Disclosure Herding?, which was recently made publicly available on SSRN, we present two new hypotheses regarding the strategic qualitative disclosure choices of firms involved in potentially fraudulent activity. First, these firms have incentives to herd with industry peers in order to escape detection. Second, these firms have incentives to locally anti-herd with the same peers on specific aspects of disclosure consistent with achieving fraud-driven objectives. We use text-based analysis of firm disclosures and compare disclosures across firms involved in SEC enforcement actions to benchmarks based on industry, size and age, and also to each firm’s own disclosure before and after SEC alleged violations.

We hypothesize that firms involved in potentially fraudulent activity face tensions when providing qualitative disclosures to the Securities and Exchange Commission, the agency tasked with enforcing anti-fraud laws. Our focus is on the Management’s Discussion and Analysis section of the 10-K, which is where managers have a high level of discretion to describe the key issues facing their firms and to describe their performance in detail. A primary motive is to escape detection, and managers who assume that the SEC is less likely to scrutinize disclosures that resemble industry peers, or that such disclosure is less likely to raise red flags, have incentives to herd with industry peers. On the other hand, the same objectives that lead managers to commit fraud may also provide incentives to anti-herd in their disclosure from industry peers. However, these latter incentives are likely more localized, and anti-herding would be predicted only on disclosure dimensions that might help managers to achieve these objectives.

…continue reading: Do Fraudulent Firms Engage in Disclosure Herding?

2013 Mid-Year Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

Posted by Joseph Warin, Gibson, Dunn & Crutcher LLP, on Wednesday July 24, 2013 at 9:20 am
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Editor’s Note: Joseph Warin is partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher. The following post and is based on a Gibson Dunn client alert; the full publication, including footnotes and appendix, is available here.

Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) continue to be a consistent vehicle for prosecutors and companies alike in resolving allegations of corporate wrongdoing. In the two decades since their emergence as an alternative to the extremes of indictment and outright declination, DPAs and NPAs have risen in prominence, frequency, and scope. Such agreements are now a mainstay of the U.S. corporate enforcement regime, with the U.S. Department of Justice (“DOJ”) leading the way, and the U.S. Securities and Exchange Commission (“SEC”) recently expanding its use of this tool. These types of agreements have achieved official acceptance as a middle ground between exclusively civil enforcement (or even no enforcement action at all) and a criminal conviction and sentence. With the United Kingdom’s recent enactment of its own DPA legislation, the trend toward use of these alternative means for resolving allegations of corporate wrongdoing is poised to continue.

…continue reading: 2013 Mid-Year Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

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