ProfessorAllen Ferrell '95
March 17, 2009
In a recent paper, HLS Professor Allen Ferrell ’95 examines “The Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis.”
Ferrell, with co-authors Jennifer Bethel and Gang Hu (both on the faculty at Babson College), extensively discuss the various economic issues that are raised by the securities class action litigation (such as 10b-5 litigation) arising out of the credit market crisis (Ferrell discussed many of these issues on a recent panel at HLS on the financial crisis. View the webcast.)
The 94-page paper, part of Harvard’s John M. Olin Center’s Program on Corporate Governance discussion paper series, surveys the current securities class action litigation, the nature of the claims and discusses in detail three basic securities law principles that will be fundamental in its resolution: “no fraud by hindsight,” “truth on the market,” and the requirement of loss causation. [Read paper].
“The credit crisis is not solely an economic phenomenon, but a legal one as well. It is widely believed that the substantial decrease in the value of asset-backed securities held by the commercial and investment banks and other purchasers will generate substantial, perhaps even unprecedented levels of litigation,” Ferrell and his co-authors write, noting that securities class-action suit filings increased by almost 50 percent in 2007, with an even higher jump in 2008.
Litigation among market participants, the authors conclude, will either serve to identify “weak links” in the chain of participants who originate, appraise, and service collateral and underwrite, manage, insure, rate, and sell securities, or it will serve “to highlight where the market may have underappreciated certain risks or failed to anticipate particular circumstances.”
Their paper is forthcoming in Brookings-Nomura Papers on Financial Services, Brookings Institution Press, 2009 (Translated into Japanese. Translated into Chinese: Comparative Studies, 39, December 2008, 54-96, China CITIC Press). It has already been widely cited in the securities class action litigation underway.
Ferrell is the Greenfield Professor of Securities Law at Harvard Law School. An expert on capital markets regulation, he has written scholarly articles about securities law and corporate governance. He is chairman of Harvard University’s Advisory Committee on Shareholder Responsibility, a research associate at the European Corporate Governance Institute, and a member of the board of economic advisers to the Financial Industry Regulatory Authority.
Ferrell also recently co-authored a paper, “What Matters In Corporate Governance” (with Alma Cohen and HLS Professor Lucian Bebchuck) which found that corporate governance policies that more firmly entrench existing corporate executives and directors are associated with lower firm values and shareholder returns. The paper was published in the Review of Financial Studies, February 2009; 22.
