University of Southern California

Equity Compensation and Informant Bounties: How Tying the Latter to the Former May Finally Alleviate the Securities Fraud Predicament in America

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Note by Justin Tyler Hughes
From Volume 82, Number 5 (July, 2009)

Recent Supreme Court decisions, including Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. and Tellabs, Inc. v. Makor Issues & Rights, Ltd., have brought complex securities fraud issues back into the national limelight. Moreover, growing frustration with the Sarbanes-Oxley Act of 2002 and the current financial catastrophe have further intensified securities concerns. Regardless of which side one supports in the ongoing debate regarding appropriate regulation, one thing is certain: securities fraud continues to purge the American markets of billions of dollars per year. With today’s political disposition favoring increased government oversight of corporate America, and with a new presidential regime, the time for reevaluating America’s procedure for detecting and deterring large-scale securities fraud is swiftly approaching.

This Note presents a new approach to securities fraud that aims to increase early detection, enforcement, and deterrence, while easing some of the traditional concerns surrounding the current enforcement system. Part II reviews the history of private securities litigation from the adoption of the Securities Act of 1933 and the Securities Exchange Act of 1934 to the Supreme Court’s recent decisions in Stoneridge and Tellabs. Part III highlights important securities fraud legislation implemented over the past twenty years, concluding with a brief presentation of the Securities and Exchange Commission’s (“SEC’s”) current enforcement powers. Part IV presents some of the traditional concerns regarding the current securities fraud enforcement system with an emphasis on its inability to deter fraudulent behavior. Part V illustrates a new approach to securities fraud that will effectively increase early detection and deterrence without exacerbating the traditional problems with the current system.

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