Conduct as Securities Fraud

[Utset]

Fraudulent Corporate Signals: Conduct as Securities Fraud

Manuel A. Utset

Florida State University College of Law

September 9, 2012

Boston College Law Review, Vol. 54, No. 2, 2013
FSU College of Law, Law, Business & Economics Research Paper No. 12-13
FSU College of Law, Public Law Research Paper No. 616

Abstract:
Paying a dividend, repurchasing shares, underpricing an IPO, pledging collateral, and borrowing using short-term, instead of long-term debt, are all forms of corporate communications: they are “corporate signals” that tell investors certain things about a company’s operations and current financial position, and about the managers’ confidence of its future performance. This article provides the first comprehensive analysis of the relationship between corporate signals and securities fraud. The incentive to communicate using corporate signals has increased in recent years, a phenomenon that, I argue, is due to the growing complexity of public corporations, and, importantly, to a number of changes in Federal securities laws, aimed at better deterring fraud and making companies more transparent. The article makes three major contributions. First, it identifies this deep connection between the use of corporate signals (both truthful and deceptive) and recent changes in securities laws. Second, it identifies significant social costs associated with corporate signaling (which commentators and policymakers have overlooked); signals, I show, encourage stock bubbles, lead to costly “signaling races”, and to the loss of information about companies and industries. Third, the article provides a normative account of how a lawmaker would go about designing anti-fraud provisions under the securities laws, if its goal is to reduce total fraud, and not simply to re-channel deceptive practices, from the realm of written and oral statements to that of deceptive corporate signals.

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