Should nontrading issuers that make misstatements face civil
liability? Fairness does not require compensation for the resulting trading
losses. Compensation will reduce the disutility in society arising from
trading risks generated by such misstatements, but the gain is very modest
relative to the cost.
The alternative rationale for civil liability, deterrence, depends on
finding insufficient the ordinary social mechanisms to attain public
regulation compliance: governmentally imposed administrative and criminal
sanctions. The usual "private attorney general" argument that civil suits are
a helpful supplement to the efforts of otherwise overstretched public
enforcement officials is open to challenge. Full enforcement of a rule is not
necessarily optimal and a limited budget allocation may represent a political
decision concerning the enforcement level that is. The Paper considers a
number of answers to this challenge. It also considers other arguments for
civil liability: that private litigation is in fact the natural primary
enforcement mechanism for disclosure rule violations, with public
enforcement being the supplement, that civil liability constitutes an efficient
outsourcing to private agents of work the government wants accomplished,
and that civil liability promotes useful legal innovation. On balance, the
deterrence rationale for civil liability is found to be substantial, but would
be more persuasive if the U.S. system were properly reformed.
Description
The Continuing Evolution of Securities Class Actions Symposium
