Walter Hutchens’ Blog

ICBC, the world’s largest IPO, did not involve a listing on a US stock market.

The Bank of China did not list shares in the US.

China Construction Bank did not list shares in the US.

Of course, US investors can buy shares in these companies—Hong Kong is outside of China’s Great Currency Wall. But there is a large eco-system around US stock markets (accountants, lawyers and the exchanges themselves) that surely doesn’t like to see these mega IPOs steering clear of the US.

China IPOs aside, there is growing sentiment to trim back some of the perceived excesses of the Sarbanes-Oxley Act. The New York Times reports here on a couple of groups cooking up recommendations on SOX reform and other matters.

One of the groups is headed by Hal Scott, a Harvard professor who also happens to oversee an important annual symposium on China’s financial system.

While I imagine it is unlikely to emerge as a recommendation (or get traction if it does), the Times reports that one prominent securities law scholar has advised scrapping private enforcement of securities fraud altogether. Columbia’s John Coffee suggests the US eliminate private securities litigation, an approach even more draconian than China’s current stance (which requires that a government authority find wrong doing before private shareholder suits can proceed against a company, but at least allows suits once such a finding has been made):

John C. Coffee, a professor of securities law at Columbia Law School and an adviser to the Paulson Committee, said that he had recommended that the S.E.C. adopt the exception to Rule 10b-5 so that only the commission could bring such lawsuits against corporations.

But other securities law experts warned that such a move would extinguish a fundamental check on corporate malfeasance.

“It would be a shocking turning back to say only the commission can bring fraud cases,” said Harvey J. Goldschmid, a former S.E.C. commissioner and law professor at Columbia University. “Private enforcement is a necessary supplement to the work that the S.E.C. does. It is also a safety valve against the potential capture of the agency by industry.”

I agree with Commissioner Goldschmid; it would be shocking, almost on the order of overturning Marbury v. Madison (in which the Supreme Court granted itself the power of judicial review), to eliminate private causes of action under Rule 10b-5. Private enforcement of securities disclosure rules (or, more practically, the threat of private enforcement) is a bedrock of US securities law. It seems virtually indispensable for keeping issuers honest. Jail and administrative enforcement are important, but the investor who loses money (and his or her lawyer) has the greatest incentive to sue to recover some of that loss; we shouldn’t have to simply hope a regulator acts (which probably wouldn’t lead to any recovery for investors, anyway). Coffee is wrong.

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