17 U. Kan. L. Rev. 651 (1968-1969)
Escott v. Barchris: How Much Diligence is Due

handle is hein.journals/ukalr17 and id is 667 raw text is: COMMENTS
ESCOTT V. BARCHRIS: HOW MUCH DILIGENCE IS DUE?
Recently, more than one thousand accountants, underwriters, and attorneys as-
sembled in New York at the behest of the American Bar Association's Section of
Corporation, Banking and Business Law. The occasion was a two-day institute1
which considered the impact upon the financial community of Escott v. BarChris
Construction Co.,2 a new interpretation of section 11 of the Securities Act of 1933.
Heralded as a legal blockbuster by the Wall Street Journal4 the case had already
caused considerable concern because of its purported extension of the scope of civil
liability for directors, underwriters, and accountants in connection with new public
offerings of corporate securities. This comment will trace the development of section
11 to its present status in the BarChris case and consider some of the legal and prac-
tical problems it raises.
I. THE HISTORY oF REGISTRATION STATEMENT LIABILITY
The high-level chicanery and flagrant disregard for the interests of the investing
public that contributed to the stock market crash of 1929 clearly demonstrated the
necessity for some form of federal regulation in the securities business.' Congress
initially responded to this need by passing the Securities Act of 1933,' a statute based
almost entirely upon a disclosure theory and designed to modify the former rule of
caveat emptor in the securities markets.7 Issuers of securities offered to the public
were required to disclose by way of a registration statement filed with a federal regu-
latory agency all material information regarding the security so that investors might
appraise its merits. As an enforcement measure, the Act imposed civil liability in
favor of injured investors for an untrue statement of a material fact or . . . [omis-
sion] to state a material fact required to be stated ... or necessary to make the state-
ments [made in such documents] not misleading.' This liability extended to the
issuing corporation, the directors of the issuer and any persons named as about to
become directors, experts such as accountants, engineers, or appraisers, and all
underwriters associated with the offering.'
As might have been expected, the financial community's reaction to the new legis-
lation in general, and especially to the civil liability provisions of section 11, was
hostile. Many feared that such broad, ill-defined provisions would cause the large
investment bankers to refuse to underwrite new offerings, and thus seriously con-
strict public financing.'0 Critics of the civil liability provisions failed to recognize
'The proceedings of the Institute are reported at 24 Bus. LAW. 523 (1969) [hereinafter cited as
Institute].
'283 F. Supp. 643 (S.D.N.Y. 1968).
aSecurities Act of 1933, § 11, 15 U.S.C. § 77k (1964).
'Wall Street Journal, May 14, 1968 at 1, col. 6.
'J. GALERAITH, THE GREAT CRAMu 170-72 (1954).
'Ch. 38, 48 Stat. 74, as amended, 15 U.S.C. S§ 77a-aa (1964).
7H.R. REP. No. 85, 73d Cong., 1st Sess. 2 (1933).
'Securities Act of 1933, S 11(a), 15 U.S.C. S 77k(a) (1964).
'Securities Act of 1933, SS 11(a)(1)-(5), 15 U.S.C. §§ 77k(a)(l)-(5) (1964). The liability is
limited however to actions by those purchasers aquiring securities which were part of the offering
covered by the challenged registration statement. Barnes v. Osofsky, 254 F. Supp. 721, 726 (S.D.N.Y.
1966); Colonial Realty Corp. v. Brunswick Corp., 257 F. Supp. 875 (S.D.N.Y. 1966).
10 See, e.g., James, The Securities Act of 1933, 32 MicH. L. REv. 624, 661 (1934).

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