Policing Public Companies: An Empirical Examination of the Enforcement Landscape and the Role Played by State Securities Regulators

Multiple different securities law enforcers can pursue U.S. public companies for the same misconduct. These enforcers include a variety of federal agencies, class action attorneys, and derivative litigation attorneys, as well as fifty separate state regulators. Scholars and policy makers have increasingly questioned whether the benefits of this multienforcer approach are worth the costs, or whether a more coordinated and streamlined securities enforcement regime might lead to efficiency gains. How serious are these concerns? And what role do state regulators play in the enforcement mix? Whereas the enforcement efforts of the Securities and Exchange Commission and class action lawyers have been well-studied, almost no empirical research has been done on state enforcement. This Article provides an empirical foundation for considering these questions. We reviewed the Item 3 “material litigation” disclosures in the fiscal year 2004–2006 Form 10-Ks filed by every domestic public company that listed common stock on the New York Stock Exchange at any time from 2000–2010—a total of 5,441 Form 10-Ks filed by 1,977 distinct companies. In our unique dataset, 72% of companies disclosed some form of material litigation over the span of the three-year period examined, and 27% disclosed some form of securities litigation. Remarkably, well over half of the companies that disclosed securities litigation reported facing two or more different forms of securities litigation, and nearly 30% reported facing three or more. The securities-related state matters disclosed in our dataset share some interesting characteristics. They tended to target out-of-state firms (68%) and to involve scandals that beset the financial industry (85%). Overwhelmingly, they were accompanied by a related federal action or investigation (91%), and very often were accompanied by related private litigation (67%). Whereas only 34% of states have an elected (as opposed to appointed) securities regulator, these states were responsible for 80% of the state matters disclosed. We ran regressions controlling for other variables that might influence a state’s level of enforcement activity. Our statistically significant results indicate that states with elected enforcers brought securities-related matters at more than four times the rate of other states, and states with an elected Democrat serving as the securities regulator brought matters at nearly seven times the rate of other states. Our findings bring into focus several important public policy questions concerning the use of multiple securities law enforcers in general, and the social value of state enforcement in particular, that merit further exploration