for witty phrases made him highly quotable, but his inconsistent voting record left only an ambiguous mark on U.S. law. At age 43, he was among the youngest appointees to the Court, and at age 66 also one of the youngest justices to retire. Born in Jackson, Michigan, on January 23, 1915, Stewart came from old money and a family steeped in law and politics. Educated at University School, Hotchkiss, as well as at Yale, Cambridge, and Yale Law School, he earned his law degree from Yale in 1941. A stint on Wall Street followed. He served in the U.S. Navy during WORLD WAR II and returned to Ohio after the war. After working for a large law firm in his home state, Stewart briefly followed his father’s footsteps into politics. JAMES GARFIELD Stewart had been mayor of Cincinnati and a justice of the Ohio Supreme Court. Potter Stewart served on the city council and as vice mayor, but he soon abandoned political life to build his own legal practice. In 1954 President Eisenhower appointed Stewart to the federal bench. Stewart’s high profile in the Ohio bar made him an attractive candidate for the Sixth Circuit Court of Appeals, where he served for the next four years. He was widely respected for his compe- tence and efficiency as an appellate judge, and Eisenhower returned to him in 1958 when a seat opened on the Supreme Court. Although southern senators who disliked his embrace of SCHOOL DESEGREGATION offered scattered opposi- tion to his appointment, the nomination easily succeeded. On the Supreme Court, Stewart was a moderate justice. He was criticized for indeci- sion, chiefly because he was often the unpre- dictable swing vote in cases that pitted the Warren Court’s activist and judicial restraint blocs against each other. Stewart, however, followed his instincts on the Court without obvious resort to ideology or doctrine. To the question of whether he was liberal or conserva- tive, he replied, “I am a lawyer,” explaining that the labels had little value for him in the political sphere and even less in law. Stewart’s approach in his opinions is notable for its plain-edged pragmatism. In one case, he w rote of OBSCENITY, stating, “I know it when I see it” (Jacobellis v. Ohio, 378 U.S. 184, 84 S. Ct. 1676, 12 L. Ed. 2d 793 [1964]). ▼▼ ▼▼ Potter Stewart 1915–1985 19001900 19501950 19751975 20002000 19251925 ❖ 1915 Born, Jackson, Mich. 1914–18 World War I 1939–45 World War II ◆ 1941 Graduated from Yale Law School 1942–45 Served in U.S. Navy 1950–53 Korean War 1950–53 Served on Cincinnati City Council 1954–58 Sat on the Sixth Circuit Court of Appeals 1961–73 Vietnam War 1962 Dissented in Engel v. Vitale, which outlawed prayer in schools 1965 Dissented in Griswold v. Connecticut ◆ ◆◆ ◆ ◆ ❖ 1985 Died, Hanover, N.H. 1976 Along with Powell and Stevens, wrote judgment allowing resumption of capital punishment in Gregg v. Georgia 1973 Joined majority in Roe v. Wade 1958–81 Served as associate justice of the U.S. Supreme Court 1968 Wrote majority opinion in Jones v. Mayer Potter Stewart. PHOTOGRAPH BY CHASE LTD. COLLECTION OF THE SUPREME COURT OF THE UNITED STATES GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 378 STEWART, POTTER Stewart’s pragmatism did not allow for subjectivity, however. Although he regarded Connecticut’s ban on the use of contraceptives as “uncommonly silly,” he found the law constitutional and dissented from the majority in Griswold v. Connecticut (381 U.S. 479, 85 S. Ct. 1678, 14 L. Ed. 2d [1965]). He agreed with the majority’s expansion of a right to privacy in the landmark ABORTION case, ROE V. WADE, 410 U.S. 113, 93 S. Ct. 705, 35 L. Ed. 2d 147 (1973), but he also attacked the Court’s tendency to invalidate any state law it found unwise. In the arena of civil rights and liberties, Stewart’s moderate outlook clearly revealed itself. He sided with claimants in 52 percent of these cases. Among his most notable decisions in favor of civil liberties was Jones v. Alfred H. Mayer Co., 392 U.S. 409, 88 S. Ct. 2186, 20 L. Ed. 2d 1189 (1968), in which the WARREN COURT upheld measures that protected African Amer- icans against DISCRIMINATION in housing. While on the Warren Court, Stewart dissented in Engel v. Vitale (1962) and Abington Township v. Schempp (1963), which struck down enforced prayer and Bible readings in public schools, respectively. On the Burger Court, Stewart joined the majority in Furman v. Georgia (1972), which declared mandatory death sentences unconstitutional, and also in Gregg v. Georgia (1976), which upheld STATES’ RIGHTS to impose the death penalty in certain extreme situations, such as when one individual deliber- ately kills another. Stewart’s legacy on the Court defies easy categorization. At best, Stewart is remembered for his pragmatism, and at worst for leaving a less than cohesive body of opinions. He retired from the Court in 1981 and died in Hanover, New Hampshire, on December 7, 1985. FURTHER READINGS Amar, Vikram David. 1999. “From Watergate to Ken Starr: Potter Stewart’s ‘Or of the Press’ a Quarter Century Later.” Hastings Law Journal 50 (April). Jacobsen, Joel. 2002. “Remembered Justice: The Backround, Early Career and Judicial Appointments of Justice Potter Stewart.” Akron Law Review 35 (winter). Schwartz, Bernard. 1990. The Ascent of Pragmatism: The Burger Court in Action. Reading, Mass.: Addison-Wesley. v STIMSON, HENRY LEWIS Henry Lewis Stimson was a lawyer and a distinguished public servant, occupying key posts in the administrations of five presidents between 1911 and 1945. As SECRETARY OF STATE, he sought disarmament, while as secretary of war he advocated the use of the atomic bomb against Japan in WORLD WAR II. Stimson was born on September 21, 1867, in New York City. He earned a bachelor’s degree from Yale in 1888, a master’s degree from Harvard University in 1889, and a bachelor of laws degree from Harvard in 1890. He was admitted to the New York bar in 1891 and joined the law firm headed by Elihu Root, a prominent attorney and influential figure in the REPUBLICAN PARTY. In 1906 President THEODORE ROOSEVELT appointed Stimson U.S. atto rney for the South- ern District of New York. He left the post in 1909 to run as the Republican nominee for governor of New York. Although he lost the 1910 election, his stock continued to rise. President WILLIAM HOWARD TAFT named Stimson secretary of war in 1911, a position he held until the end of the Taft administration in 1913, when he returned to his New York law practice. As secretary of war, Stimson continued former secretary Elihu Root’s work in reorga- nizing the Army. Following the outbreak of WORLD WAR I, he adopted an active role in Henry L. Stimson. LIBRARY OF CONGRESS THE BOMBS DROPPED ON HIROSHIMA AND NAGASAKI ENDED THE WAR .THEY ALSO MADE IT WHOLLY CLEAR THAT WE MUST NEVER HAVE ANOTHER WAR . —HENRY L. STIMSON GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION STIMSON, HENRY LEWIS 379 preparing the United States for the conflict. Stimson enlisted in the Army in 1917 and served in France as an artillery officer, ulti- mately reaching the rank of colonel. Stimson did not reenter public service until 1927, when President CALVIN COOLIDGE named him governor of the Philippine Islands. In 1929 President HERBERT HOOVER elevated Stimson to secretary of state, a position that put him on the world stage. As secretary, Stimson sought to continue the policy of military disarmament, participating in the London Naval Conference of 1930. Following the Japanese invasion of Man- churia in 1931, Stimson wrote a diplomatic note to both China and Japan, informing them that the United States would not recognize territorial or other changes made in violation of U.S. treaty rights. The “Stimson Doctrine” was invoked as the rationale for successive economic embargoes against Japan during the 1930s. With the election of President FRANKLIN D. ROOSEVELT, a Democrat, in 1932, Stimson returned to his law practice and to private life. By the end of the 1930s, howev er, with the growing belligerence of Germany and Japan, Stimson emerged as an opponent of U.S. isolationist policies. When World War II began in 1939 , Stimson became a leading member of the Committee to Defend America by Aiding the Allies, urging the U.S. government to provide aid to Great Britain and France. President Roosevelt, who also sought to help the Allies, appointed Stimson secretary of war in 1940. By appointing a Republican to this key post, Roosevelt strengthened bipartisan support for his foreign policy. Stimson remained secre- tary of war during World War II, heading an Army of more than ten million, and he received praise for his quiet but firm administration of the war effort. In 1945, acting as chief presidential adviser on atomic programs, Stimson directed the Manhattan Project, which resulted in the creation of the atomic bomb. He recommended to President HARRY S. TRUMAN that atomic bombs be dropped on Japanese cities of military importance. Truman followed his advice, or- dering the bombings of Hiroshima and Naga- saki that brought a swift end to World War II. Stimson defend ed his recommendation, arguing that the bombings ended the war quickly and therefore saved more lives than were lost. Stimson left office in September 1945. He published his autobiography, On Active Service in Peace and War, in 1948. He died on October 20, 1950, in Huntington, New York. FURTHER READINGS Hodgson, Godfrey. 1992. The Colonel: The Life and Wars of Henry Stimson, 1867–1950. Boston: Northeastern Univ. Press. Schmitz, David F. 2001. Henry L. Stimson: The First Wise Man. Wilmington, Del.: SR Books. STIPULATION An agreement between attorneys that concerns business before a court and is designed to simplify or shorten litigation and save costs. During the course of a civil lawsuit, criminal proceeding, or any other type of litigation, the opposing attorneys may come to an agreement about certain facts and issues. Such an agree- ment is called a stipulation. Courts look with favor on stipulations because they save time and simplify the matters that must be resolved. Stipulations are voluntary, however, and courts ▼▼ ▼▼ Henry Lewis Stimson 1867–1950 18501850 19001900 19251925 19501950 18751875 ❖ 1861–65 U.S. Civil War 1867 Born, New York City ◆ 1890 Earned LL.B. from Harvard University 1906–09 Served as U.S. attorney for the Southern District of New York 1911–13 Served as secretary of war under Taft 1914–18 World War I ◆ 1927 Appointed governor of the Philippine Islands 1929–32 Served as secretary of state under Hoover ◆ 1931 Developed Stimson Doctrine, which refused to recognize Japanese territorial expansion in Manchuria ❖ 1950 Died, Huntington, N.Y. 1939–45 World War II ◆ ◆ 1945 Recommended that atomic bombs be dropped on Japanese cities of military importance 1948 On Active Service in Peace and War published 1940–45 Served as secretary of war under Roosevelt and Truman GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 380 STIPULATION may not require litigants to stipulate with the other side. A valid stipulation is binding only on the parties who agree to it. Courts are usually bound by valid stipulations and are required to enforce them. Parties may stipulate to any matter con- cerning the rights or obligations of the parties. The litigants cannot, however, stipulate as to the validity or constitutionality of a statute or as to what the law is, because such issues must be determined by the court. Stipulations may cover a variety of matters. Parties are permitted to make stipulations to dismiss or discontinue an action, to prescribe the issues to be tried, or to admit, exclude, or withdraw evidence. Durin g a court proceeding, attorneys often stipulate to allow copies of papers to be admitted into evidence in lieu of originals or to agree to the qualifications of a witness. The parties can also enter into agree- ments concerning the testimony an absent witness would give if he were present, and the stipulated facts can be used in evidence. Such evidentiary devices are used to simplify and expedite trials by dispensing with the need to prove uncontested factual issues. Generally, parties to an action can stipulate as to an agreed statement of facts on which to submit their case to the court. Stipulations of this nature are encouraged by the courts. A number of other stipulations have been held to be valid, including those that relate to attorneys’ fees and costs. A stipulation does not need to be in a particular form, provided it is definite and certain. A number of statutes and court rules provide that stipulations reached out of court must be in writing to prevent fraudulent claims of oral stipulation, circumvent disputes con- cerning the terms of the stipulation, and relieve the court of the burden of resolving such disputes. Though an oral stipulation in open court is binding, a stipulation made in the judge’s chamber must be in writing. STOCK A stock is a security issued by a corporation that represents an ownership right in the assets of the corporation and a right to a proportionate share of profits after payment of corporate liabilities and obligations. Shares of stock are reflected in written instruments known as stock certificates. Each share represents a standard unit of ownership in a corporation. Stock differs from consumer goods in that it is not used or consumed; it does not have any intrinsic value but merely represents a right in something else. Neverthe- less, a stockholder is a real owner of a corporation’s property, which is held in the name of the corporation for the benefit of all its stockholders. An owner of stock generally has the right to participate in the management of the corporation, usually through regularly scheduled stockholders’ (or shareholders’) meetings. Stocks differ from other SECURITIES such as notes and bonds, which are corporate obligations that do not represent an ownership interest in the corporation. The value of a share of stock depends upon the issuing corporation’s value, profitability, and future prospects. The market price reflects what purchasers are willing to pay based on their evaluation of the company’s prospects. Two main categories of stock exist: com- mon and preferred. An owner of COMMON STOCK is typically entitled to participate and vote at stockholders’ meetings. In addition to common stock, some corporate BYLAWS or charters allow for the issuance of PREFERRED STOCK.Ifa corporation does not issue preferred stock, all of its stock is common stock, entitling all holders to an equal PRO RATA division of profits or net earnings, should the corporation choose to distribute the earnings as dividends. Pre- ferred stockholders are usually entitled to priority over holders of common stock should a corporation liquidate. Preferred stocks receive priority over com- mon stock with respect to the payment of dividends. Holders of preferred stock are entitled to receive dividends at a fixed annual rate before any dividend is paid to the holders of common stock. If the earnings to pay a dividend are more than sufficient to meet the fixed annual dividen d for preferred stock, then the remainder of the earnings will be distributed to holders of common stock. If the corporate earnings are insufficient, common stockholders will not receive a dividend. In the alternative, a remainder may be distributed pro rata to both preferred and common classes of the stock. In such a case, the pre ferred stock is said to “participate” with the common stock. A preferred STOCK DIVIDEND may be cumula- tive or noncumulative. In the case of cumulative GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION STOCK 381 preferred stock, an unpaid dividend becomes a charge upon the profits of the next and succeeding years. These accumulated and un- paid dividends must be paid to preferred stock- holders before common stockholders receive any dividends. Noncumulative preferred stock means that a corporation’s failure to earn or pay a dividend in any given year extinguishes the obligation, and no debit is made against the succeeding years’ surpluses. Par value is the face or stated value of a share of stock. In the case of common stocks, par value usually does not correspond to the market value of a stock, and a stated par value is of little significance. Par is important with respect to preferred stock, however, because it often signifies the dollar value upon which dividends are figured. Stocks without an assigned stated value are called no par. Some states have eliminated the concept of par value. Blue chip stocks are stocks traded on a securities exchange (listed stock) that have minimum risk due to the corporation’s finan- cial record. Listed stock means a company has filed an application and registration statement with both the SECURITIES AND EXCHANGE COMMIS- SION and a securities exchange. The registration statement contains detailed information about the company to aid the public in evaluating the stock’s potential. Floating stock is stock on the open market not yet purchased by the public. Growth stock is stock purchased for its perceived potential to appreciate in value, rather than for its dividend income. PENNY STOCKS are highly speculative stocks that usually cost under a dollar per share. FURTHER READINGS Hazen, Thomas. 2006. Securities Regulation in a Nutshell. 9th ed. Eagen, Md.: West Group. Palmiter, Allen. 2005. Security Regulation. 3d ed. Boston: Aspen. Soderquist, Larry, and Theresa Gabaldon. 2006. Securities Law: Concepts and Insights. 3d ed. Rochester, N.Y.: Foundation Press. CROSS REFERENCES Capital Stock; Common Stock; Corporations; Par; Pre- ferred; Securities; Stock Market. STOCK DIVIDEND A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation, which is paid in the form of shares of stock, as op posed to money, and increases the number of shares. When a corporation declares a stock divi- dend, it adds undivided profits, which cannot be used to pay dividends, to the capital invested in the corporation, to reflect the additional shares it is issuing. The stockholder’s increased number of shares represent the same propor- tion of the value of the company as the stockholder originally held (that is, the stock- holder owns the same percentage of the corporation as prior to the declaration of the stock dividend); howev er, the cash value of an individual share is not reduced. Shares issued as stock dividends are evi- dence that additional assets have been added to the capital. The value of the shares of a corporation often, but not always, increases following a stock dividend. A stock dividend is actually a part of corporation bookkeeping. A stock split is different from a stock dividend in that no adjustment is made to the capital; instead, the number of shares represent- ing the capital increase. The cash value of an individual share, therefore, decreases in propor- tion to the size of the stock split. STOCK MARKET The stock market is composed of various organized stock exchanges and over-the-counter markets. The trading of SECURITIES such as stocks and bonds is conducted in stock exchanges, which are grouped under the general term stock market. The stock market is an important institution for capitalist countries because it encourages investment in corporate securities, providing capital for new businesses and income for investors. In the 1990s, large num- bers of ordinary persons came to own stock through pension funds, deferred employee savings plans, investment clubs, or mutual funds. The New York Stock Exchange is the oldest (formed in 1792) and largest stock exchange in the United States, but other exchanges operate in many major U.S. cities. The activities of the stock market are closely monitored by the federal SECURITIES AND EXCHANGE COMMISSION (SEC) to prevent the manipulation of stock prices and other activities that lessen investor confidence. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 382 STOCK DIVIDEND Stock exchanges are private organizations with a limited number of members. Stock brokerage houses generally cannot purchase seats on an exchange. Instead, a member of the firm holds a seat personally. In some cases several partners of a brokerage house will be members of an exchange. The price of a seat fluctuates depending on the state of the economy, but seats on the New York Stock Exchange have sold for more than $1 million. Some exchange members are specialists in particular types of securities, while other s act as agents for other brokers. A small number of brokers who pay an annu al fee but are not members also have access to the trading floor. A stock exchange is essentially a marketplace for stocks and bonds, with stockbrokers earning small commissions on each transaction they make. Stocks that are handled by one or more stock exchanges are called listed stocks. For a corporation’s stock to be listed on an exchange, the company must meet certain exchange requirements. Each exchange has its own criteria and standards, but in general a company must show that it has sufficient capital and is in sound financial condition. Once a company is listed, trading in its stock will be suspended if the company’s financial condition deteriorates to the point that it no longer meets the exchange’s minimum requirements. When individuals wish to purchase a stock, they place an order with a brokerage house. The BROKER gets a quotation or price and sends the order to the firm’s repr esentative on the floor of the stock exchange. The representative negoti- ates the sale and notifies the brokerage house. Transactions happen rapidly, and each one is recorded on a computer system and sent immediately to an electronic ticker that displays stock information on a screen. At one time this information was generally only available at stock brokerage houses, but the daily stock ticker is now available on television and through the Internet. New York Stock Exchange transactions may be made in three ways. A cash transaction requires payment and delivery of the stock on the day of purchase. A regular transaction requires payment and delivery of the stock by The trading of stocks on the stock market involves millions of shares per day and has a direct effect on the U.S. economy. As a result, the stock market is closely regulated by the federal government. AP IMAGES Dow Jones Performance After Major U.S. National Security Events Event Date % Change for Day a 6-Months Later 1-Year Later Terrorist Attack 09/11/01 Ϫ7.12% 10.47% Ϫ10.66% Oklahoma Bombing 04/19/95 0.68% 14.92% 32.46% WTC Bombing 02/26/93 0.17% 8.41% 14.07% Operation Desert Storm 01/16/91 4.57% 18.73% 30.14% Panama & Noriega 12/15/89 Ϫ1.53% 7.17% Ϫ5.32% Reagan Shot 03/30/81 Ϫ0.26% Ϫ14.56% Ϫ17.12% Vietnam Conflict 02/26/65 Ϫ0.41% Ϫ0.81% 5.48% Kennedy Assassination 11/22/63 Ϫ2.89% 12.04% 21.58% Sputnik Launched 10/04/57 Ϫ2.01% Ϫ4.59% 15.60% Korean War 06/25/50 Ϫ4.65% 2.36% 9.34% Pearl Harbor 12/07/41 Ϫ3.50% Ϫ9.48% Ϫ1.37% Lusitania Sinks 05/07/15 Ϫ4.54% 36.01% 32.75% a If the event occurred after the U.S. market closed or on a non-trading day, the % change for day reflects the next trading day's activity. SOURCE: Dow Jones web p a g e. ILLUSTRATION BY GGS CREATIVE RESOURCES. REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3 RD E DITION STOCK MARKET 383 noon on the third day following a full business day. Around 95 percent of stock is purchased under these terms. Finally, purchase can be made through a seller’s option contra ct, which requires payment and delivery of the stock within any specified time not exceeding 60 days, though seven days is the most common period. All transactions not made in the stock exchanges take place in over-the-counter (OTC) trading. An OTC transaction is not an auction on the stock exchange floor but a negotiation between a seller and a buyer. Most sales of bonds occur in OTC trading as do most new issues of securities. In the 1980s discount OTC brokerage firms appeared, offering lower commissions on stock transactions for investors who were willing to do more research on their own. By the 1990s, these firms had proliferated. Dealers in OTC trading are not confined to large cities, as are stock exchanges, but can be found in many locations throughout the United States. In 1971 these firms were linked to an electronic communications system and became the National Association of Securities Dealers Automated Quotations (NASDAQ). By the 1990s NASDA Q had become the second largest U.S. stock market. During the late 1990s, a number of investors began engaging in a process called day trading, whereby investors would purchase stock shares and then attempt to sell them quickly thereafter when the prices rose. The phenomenon corre- sponded with the development of stock trading over the Internet, which allowed individuals to trade stocks through their computers without the need for a stockbroker. Many individuals who traded over the Internet also engaged in day trading. Although day trading has some potential for success, analysts have warned that investments take time to develop in order to be successful. Statistics showed that only 10 percent of day traders maintained profitable results, and by the early 2000s, it had become clear that this type of trading would likely result in losses for investors. The health of the U.S. economy is typically measured by the stock market. When stock prices rise and there is a bull market, U.S. business is assumed to be doing well. When stock prices fall and there is a bear market, a downturn in business and the economy is assumed. The stock market crash of 1929 was the signature event that triggered the Great Depression of the 1930s. The crash also led to the enactment of the Securities and Exchange Act of 1934, which created the SEC and federal government oversight of the stock market. Even with government regulation of the stock market, plunges in the value of stocks have led to economic recessions. In the early 1980s, the stock market took a dramatic plunge in value. It was not until the 1990s that the market jumped markedly higher, fueled by technology, software, and Internet stocks. This Dot Com bubble burst in the early 2000s. That and the SEPTEMBER 11TH TERRORIST ATTACKS in 2001 caused the New York Stock Exchange (NYSE) to close for a period of six days, the longest closing since 1933. On Monday, Sep- tember 17, the Dow Jones Industrial Average suffered its greatest point loss in history after the NYSE reopened following the attacks. The U.S. economy slump ed after the attacks, and the stock market struggled. Scandals involving major U.S. corporations had a similarly crippling effect on the stock market. Several large companies were found to have misstated their earnings through faulty or fraudulent accounting practices. In many of these cases, the companies overstated their profits, misleading their investors. Companies involved in such scandals included Enron Corporation, WorldCom, Adelphia, and Xerox. The scandal involving Enron also led to the conviction of accounting firm Arthur Andersen, L.L.P., for obstructing justice when the firm admitted to destroying thousands of Enron documents. The scandals have led to widespread mis- trust of the U.S. corporate world. The SEC issued new rules during 2002 and 2003 regard- ing accounting practices and conflicts of interest among corporate officers in response to the scandals. The rules were designed to regain the trust of the public and investors following the scandals, yet the regulations did not ad- dress the next great stock market downturn in 2008. The subprime mortgage meltdown led to the failure of major U.S. banks and investment firms. The government loaned struggling banks hundreds of billions of dollars, but the stock market was shaken and prices plunged. By mid- 2009 the market had recovered some of its lost value, but analysts predicted it would take time for the economy to recover from the most severe economic crisis since the 1930s. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 384 STOCK MARKET FURTHER READINGS Hazen, Thomas, and David Ratner. 2006. Securities Regula- tions in a Nutshell. 9th ed. St. Paul. Minn.: West Group. Western, David. 2004. Booms, Bubbles, and Busts in the U.S. Stock Market. New York: Routledge. Zandi, Mark. 2008.Financial Shock: A 360-Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis. New York: FT Press. CROSS REFERENCES Common Stock; Preferred Stock; Securiti es; Securities and Exchange Commission. STOCK OPTION A stock option is the right of corporate employees to purchase company stock as a form on non-cash compensation. Stock options are a regular part of compen- sation for corporate executives but lower-level employees may also have the right to purchase company stock. Employee stock options (ESOs) are seen as an incentive for workers to make the company more profitable. Moreover, they are a way to attract talented people when a small company cannot compete with large companies over large salaries. Employees are informed that they can purchase a certain amount of stock at a price and during a time set by the employer. The exercise or strike price the company sets is usually the current STOCK MARKET value. The employee purchases the stock in the hopes that the price will rise over time, leading to periodic sales of stock to generate income. It is not unusual for high-ranking executives to be granted options for hundreds of thousands of shares every year. The valuation of stock options is central to their worth. Executives obviously want the value of the options as low as possible, so as to maximize the spread between the grant price and the market price that the stock eventually attains. Corporate executives and their corpora- tions got into trouble in the mid-2000s over retroactive stock options. The difference between the retroactive price and the current stock price became an expense that could reduce earnings and be TAXABLE INCOME to the recipients. Corporations turned to the practice of backdating options. The corporation gave the options to the employee on one date, but this specified grant date is chosen with hindsight so as to minimize the price. On the day the employee received the options, the stock price for that day exceeded the exercise price, on the specified grant date, which means that the options were immediately profitable. This prac- tice maximized profit for the employees and took all the risk out of the transaction as well. Many corporations failed to disclose to shareholders the backdating of options. Con- cealing this can inflate the company’s earnings. The SECURITIES AND EXCHANGE COMMISSION (SEC)as well as corporate shareholders initiated legal action against corporations and the executives who benefited from backdating. A good exam- ple of the amount of money involved in backdating is the case of William McGuire, chief executive of UnitedHealth Group. A shareholders’ lawsuit led to a 2009 settlement in which the corporation paid $89 5 million, and McGuire paid $30 million to a settlement fund. McGuire also agreed to give up options to buy 3.68 million shares of UnitedHealth. In a separate 2007 agreement with the SEC, McGuire paid a $468 million settlement that included a $7 million fine and reimbursement of four years of incentive- and equity-based compensation. Uni- tedHealth was one of over 200 corporations that were investigated for backdating. The results led many to restate their earnings. FURTHER READINGS Hazen, Thomas. 2006. Securities Regulation in a Nutshell. 9th ed. Eagan, Md.: West Group, 2006. Palmiter, Allen. 2005. Security Regulation. 3d ed. Boston: Aspen. Soderquist, Larry, and Theresa Gabaldon. 2006. Securities Law: Concepts and Insights. 3d ed. Rochester, N.Y.: Foundation Press. CROSS REFERENCES Capital Stock; Common Stock; Corporations; Par; Pre- ferred; Securities; Stock Market. STOCK WARRANT A certificate issued by a corporation that entitles the person holding it to buy a certain amount of stock in the corporation, usually at a specified time and price. A stock warrant differs from a stock option only in that an option is offered to employees and a warrant to the general public. A warrant gives the person holding it a right to subscribe to capital stock. STOCKHOLDER’S DERIVATIVE SUIT A stockholder ’s derivative suit is a legal action in which a shareholder of a corporation sues in the name of the corporation to enforce or defend GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION STOCKHOLDER’ SDERIVATIVESUIT 385 a legal right because the corporation itself refuses to sue. A stockholder’s derivative suit is a type of LITIGATION brought by one or more shareholders to remedy or prevent a wrong to the publicly traded or closely held corporation. In a deriva- tive suit, the PLAINTIFF shareholders do not sue on a CAUSE OF ACTION belonging to themselves as individuals. Instead, they sue in a representative capacity on a cause of action that belongs to the corporation but that for some reason the corporation is unwilling to pursue. The real party in interest is the corporation, and the shareholders are suing on its behalf. Most often, the actions of the corporation’sexecutivesare at issue. For example, a shareholder could bring a derivative suit against an executive who allegedly used the corporation’s assets for personal gain. A derivative suit is different from a direct suit brought by a shareholder to enforce a claim based on the shareholder’s ownership of shares. These direct suits involve contractual or statu- tory rights of the shareholders, the shares themselves, or rights relating to the ownership of shares. Such direct suits include actions to recover dividends and to examine corporate books and records. The principal justification for permitting derivative suits is that they provide a means for shareholders to enforce claims of the corpora- tion against managing officers and directors of the corporation. Officers and directors, who are in control of the corporation, are unlikely to authorize the corporation to BRING SUIT against themselves. A derivative suit permits a share- holder to prosecute these claims in the name of the corporation. Other justifications for deriva- tive litigation are that it prevents multiple lawsuits, ensures that all injured shareholders will benefit proportionally from the recovery, and protects creditors and preferred share- holders against diversion of corporate assets directly to shareholders. In a derivative suit, the shareholder is the nominal plaintiff, and the corporation is a nominal DEFENDANT, even though the corpora- tion usually recovers if the shareholder prevails. Nevertheless, derivative litigation is essentially three-sided because the defendants include the persons who are alleged to have caused harm to the corporatio n or who have personally profited from corporate action. The claim of wrongdo- ing against these defendants is the central issue in a derivative suit, and the interest of the corporation is usually adverse to these defen- dants. Thus, individual defendants are usually represented by attorneys other than the attor- neys for the corporation. The corporation may play different roles in a derivative suit. It may be an active party in the litigation, be entirely passive, or side with the individual defendants and argue that their conduct did not harm the corporation. Generally, the plaintiff shareholder is not required to have a large financial stake in the litigation. As a result, the plaintiff’s attorney is often the principal mover in filing a derivative suit; the attorney locates a possible derivative claim and then finds an eligible shareholder to serve as plaintiff. Consequently, the attorney may have a much more direct and substantial financial interest in the case and its outcome than the plaintiff shareholder who is a purely nominal participant in the litigation. Because most derivative suits are taken on a CONTINGENT FEE basis, the plaintiff’s attorney will receive compensation only on the successful prosecu- tion of the suit or by its settlement. Such a recovery is justified on the theory that it encourages meritorious shareholder suits. Most derivative suits are settle d and thus do not go to trial and appeal. The lead attorney for the plaintiff usually determines whether a proposed settlement is acceptable. The fee to be paid to the lead attorney is usually negotiated as part of the overall settlement of a derivative suit. All aspects of the settlement are subject to JUDICIAL REVIEW and approval, however. Derivative suits have proved controversial. Corporations complain that most litigation is brought at the behest of entrepreneurial attorneys who first find a potential violation and then find a shareholder qualified to maintain the derivative suit. Critics charge that the objective of these suits is to obtain a settlement with the principal defendants and the corporation that provides the attorney with a generous fee. In return for the attorney’s fee, the plaintiff goes away. Derivative suits involve shareholder enforce- ment of corporate obligations, which may intrude on the traditional management powers of the board of directors. Since the 1980s, boards of directors have had considerable success in reasserting control over derivative litigation. States have enacted laws that put a financial roadblock in the way of derivative actions. GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION 386 STOCKHOLDER’ S DERIVATIVE SUIT A minority of states require that the plaintiff make a demand on the shareholders, which is very expensive, before a derivative suit is filed. The shareholder demand requirement may be excused if the plaintiff can show adequate reasons for not making the effort. Many states require certain plaintiff share- holders in derivative suits to give the corpora- tion security for reasonable expenses, including attorneys’ fees, that the corporation or other defendants may incur in connection with the lawsuit. Despite these efforts to restrain deriva- tive actions, they have not prevented the filing of doubtful claims by attorneys seeking a quick settlement. Almost all states require the plaintiff to allege and prove that he first made a GOOD FAITH effort to obtain action by the corporation before filing a derivative suit. This good faith demand requirement is contained in state corporation laws and rules of court. A typical provision is Rule 23.1 of the Federal Rules of Procedure, which states that the plaintiff’s complaint must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action he or she desires from the board of directors or comparable authority and the reasons for his or her failure to obtain the action or for not making the effort.” Plaintiffs have generally not made these demands, however, and have instead sought to convince the court that there were good reasons for not doing so. Much of this reluctance to make a demand can be traced to changes in the corporate law of Delaware in the 1980s. Delaware, which is the principal state of incorporation for the vast majority of publicly held corporations, empowers a corporation to appoint a litigation committee from its board of directors to review shareholder demands. If the litigation committee finds no merit in a demand, it can decide that the suit should not be pursued, and the court must accept the committee’s decision and dismiss the case. The development of the litigation committee has expedited the disposition of many doubt ful derivative claims and possibly some meritorious ones as well. FURTHER READINGS Hamilton, Robert. 2000. The Law of Corporations in a Nutshell. St. Paul. Minn.: West Group. Hazen, Thomas, and David Ratner. 2006. Securities Regula- tions in a Nutshell. 9th ed. St. Paul. Minn.: West Group. Yates, Robbie G. 2002. “An Analysis of Shareholder Derivative Suits in Closely Held Corporations.” Brigham Young Univ. Law Review (winter). CROSS REFERENCE Derivative Action. STOMACH PUMPING CASE See ROCHIN V. CALIFORNIA. v STONE, HARLAN FISKE Harlan Fiske Stone served as associate justice of the U.S. Supreme Court from 1925 to 1941 and as chief justice from 1941 to 1946. A believer in judicial restraint, he was also a defender of CIVIL RIGHTS and civil liberties. Stone was often a lone dissenter in the 1920s and 1930s when con- servatives, who dominated the Court, struck down state and federal legislation that sought to regulate business and working conditions. Harlan Fiske Stone 1872–1946 ❖ 1872 Born, Chesterfield, N.H. ◆◆ 1898 Graduated from Columbia Law School 1944 Smith v. Allwright struck down white primaries; Korematsu v. United States upheld constitutionality of Japanese internment camps 1924 Appointed U.S. attorney general; appointed J. Edgar Hoover head of the Bureau of Investigation 1914–18 World War I 1946 Died, Washington, D.C. 1902 Became professor of law at Columbia 1939–45 World War II ▼▼ ▼▼ 1900 1875 1925 1950 ❖ 1910–23 Dean of Columbia Law School ◆◆◆◆ 1936 Wrote dissent in United States v. Butler 1925 Initiated first U.S. Senate confirmation hearings for federal court appointments 1925–41 Served as associate justice of the U.S. Supreme Court 1938 Footnote in United States v. Carolene Products Company became basis for “strict scrutiny” test ◆◆◆ 1940 Wrote lone dissent in Minersville School District v. Gobitis 1941–45 Served as chief justice of the U.S. Supreme Court 1943 West Virginia State Board of Education v. Barnette overruled Gobitis decision GALE ENCYCLOPEDIA OF AMERICAN LAW, 3RD E DITION STONE, HARLAN FISKE 387 . head of the Bureau of Investigation 191 4–18 World War I 194 6 Died, Washington, D.C. 190 2 Became professor of law at Columbia 193 9–45 World War II ▼▼ ▼▼ 190 0 1875 192 5 195 0 ❖ 191 0–23 Dean of Columbia. 191 5– 198 5 190 0 190 0 195 0 195 0 197 5 197 5 20002000 192 5 192 5 ❖ 191 5 Born, Jackson, Mich. 191 4–18 World War I 193 9–45 World War II ◆ 194 1 Graduated from Yale Law School 194 2–45 Served in U.S. Navy 195 0–53 Korean War 195 0–53 Served. rote of OBSCENITY, stating, “I know it when I see it” (Jacobellis v. Ohio, 378 U.S. 184, 84 S. Ct. 1676, 12 L. Ed. 2d 793 [ 196 4]). ▼▼ ▼▼ Potter Stewart 191 5– 198 5 190 0 190 0 195 0 195 0 197 5 197 5 20002000 192 5 192 5 ❖ 191 5