113 Yale L.J. 269 (2003)

Securities market intermediaries reduce the collective action problem facing investors in the capital markets. Analysts provide securities research. Proxy advisory firms assist investors in determining how to vote their shares. Even shareholders bringing proxy contests can be viewed as providing a collective benefit to the extent the contests are motivated by a desire to increase share value. Despite the services they provide to investors, many intermediaries face financing problems due to pervasive free riding on the part of dispersed shareholders. This can result in underfunding of valuable intermediary services or, alternatively, excessive or duplicative funding of wasteful services. One regulatory response is mandatory financing of intermediaries. Regulators are poorly suited, however, to determine optimal funding levels and to make appropriate allocation decisions. Alternatively issuers, through their managers, can subsidize intermediary services. Issuers may subsidize analysts, for example, through the investment banking fees they pay to brokerage firms. Manager control over allocation of issuer-based funding can, however, corrupt the intermediaries in favor of the managers.

Understanding the problem of intermediary corruption as an outgrowth of the financing problem cautions against simply imposing regulatory prohibitions on voluntary issuer subsidies. Instead, this Article proposes a voucher financing mechanism to separate the source of subsidization from the allocation. Under the proposal, regulators determine a subsidy amount funded through levies on publicly traded firms, roughly equal to the present amount of subsidies that flow from issuers to intermediaries. Shareholders are then given the ability to direct the subsidy dollars to their preferred intermediaries, using vouchers in proportion to their shares.

Voucher financing offers a market-based mechanism to finance intermediaries, resulting in greater flexibility and responsiveness in the provision of intermediary financing. Shareholders may aggregate vouchers from several companies in their portfolios and direct them across different intermediaries to their highest-value use. By providing a common funding mechanism for a range of intermediaries, voucher financing enables shareholders to address problems of both excessive and inadequate intermediary funding. Similarly, shareholder allocation reduces the potential for intermediary corruption. Although voucher financing is subject to problems, including information problems, coordination problems, and shareholder apathy, the Article identifies potential solutions to these problems and argues that voucher financing reflects a substantial improvement over the existing regulation and funding of intermediaries.

113 Yale L.J. 455 (2003)

Scholars writing on insider trading have long believed that insiders can beat the market simply by using nonpublic information to decide when not to trade. Using a simple model, this Essay has shown that the conventional wisdom is wrong. Insiders prevented from trading while in possession of nonpublic information cannot outperform public shareholders, even if they can use such information to abstain from trading. In fact, insiders unable to trade or abstain while in possession of nonpublic information would systematically earn lower trading profits than public shareholders.
 
The Essay has also offered a preliminary analysis of the effects of insider abstention on managers' incentives. It explained why insider abstention is unlikely to create the same types of potential distortions as insider trading. Indeed, insider abstention tends to align managers' interests with those of shareholders, and is therefore likely to improve managers' incentives.
 
This Essay's analysis has important implications for current issues in insider trading regulation. First, the analysis contributes to the "possession versus use" debate by demonstrating that the "possession" standard for Rule 10b-5 liability achieves greater parity between insiders and outsiders than does the "use" standard. Second, the SEC's safe harbor permitting insiders to buy or sell shares pursuant to prearranged trading plans while in possession of material nonpublic information and to cancel the plans while aware of material nonpublic information enables insiders to profit from their access to such information. The SEC could easily eliminate insiders' advantages over public shareholders by not allowing insiders to cancel their plans after becoming aware of material nonpublic information.
 
More fundamentally, the analysis calls for reconsideration of established positions in the larger debate over insider trading. This Essay has shown that the failure of Rule 10b-5 to prevent insiders from using nonpublic information to abstain from trading should be seen neither as an undesirable "loophole" that needs to be closed nor as an embarrassing gap that proves the futility of insider trading regulation. I hope this work removes the shadow cast by insider abstention over the insider trading debate and helps refocus attention on the most important policy issue: the optimal regulation of insider trading.

113 Yale L.J. 533 (2003)

The antitrust laws are meant to govern and promote competition. But how antitrust law should treat nonprofit organizations, whose objectives lie outside the commercial sphere but whose actions nevertheless have economic consequences, is not settled. The Fourth Circuit recently confronted this issue in Virginia Vermiculite, Ltd. v. Historic Green Springs, Inc., in which Virginia Vermiculite, Ltd. (VVL) sued both a competing vermiculite mining company, W.R. Grace & Co. (Grace), and Historic Green Springs, Inc. (HGSI), a nonprofit dedicated to land preservation, under federal and state antitrust and unfair trade laws. Grace had made a series of land donations to HGSI, which VVL claimed had been intended to exclude it from vermiculite reserves in Virginia. In upholding the district court's summary judgment for HGSI, the Fourth Circuit characterized the transactions as unilateral "gift[s]" that HGSI had passively accepted without exercising any "right or economic power."
 
This Comment argues that the court's approach was mistaken. Although the court may not have wanted to expose a nonprofit to liability, its decision did little to clarify how antitrust law should treat such an entity. Had the court engaged in more complete analysis, rather than focusing on a formal category ("gift"), it would have recognized that Grace's donations constituted concerted action, and not merely a gift. Such analysis would have allowed the court to address more directly whether and how nonprofits may be liable under the antitrust laws. Or, if the court wished to avoid these questions, it should have relied on the facts of the case, which showed that VVL had proven neither anticompetitive effect nor antitrust injury, as required under section 1 of the Sherman Act. Instead, the court's decision both failed to recognize the defendants' concerted action and overlooked the question of competitive effect, thereby missing an opportunity to guide courts and businesses as to the proper scope of the antitrust laws.