Civil Liability and Mandatory Disclosure

This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier—an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the issuer, not traders in its shares, because the true social harm from issuer misstatements is poor corporate governance and reduced liquidity. A trader is as likely to be a gainer by selling, as a loser by buying, at the misstatement-inflated price. An issuer publicly offering securities at the time of a violation should be liable to purchasers for the resulting inflation in price. Such liability is an antidote to what otherwise would be an extra incentive not to comply. This design would increase incentives for U.S. issuers to comply with periodic disclosure rules. At the same time, litigation-expensive fraud-on-themarket class actions would be eliminated. So would underwriter liability for lack of due diligence, a sharply diminishing spur for disclosure given the speed of modern offerings. For countries considering implementation of securities disclosure civil liability systems for the first time, this design helps them get it right from the start.