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2009 Wis. L. Rev. 297 (2009)
Why Civil Liability for Disclosure Violations When Issuers Do Not Trade

handle is hein.journals/wlr2009 and id is 301 raw text is: WHY CIVIL LIABILITY FOR DISCLOSURE VIOLATIONS WHEN ISSUERS DO NOT TRADE? MERRITT B. Fox* 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. Introduction ................................................................... 299 I. The Weakness of the Compensatory Justification .............. 302 A. Fairness Arguments ............................................ 302 B. Risk-Reallocation Arguments ................................. 304 1. Compensation Unlikely to Shift Losses to More Diversified Persons ........................................ 304 2. Compensation Likely to Increase Loss Spreading ..... 304 3. The Effect of Directors and Officers Insurance ....... 305 4. Costs of Providing Limited Loss Spreading and the Alternative of Shareholder Diversification ............. 306 a. Costs of Providing Compensation Through Securities Litigation ................................... 306 b. Diversification as an Alternative .................... 307 c. Investors Who Are Not Broadly Diversified ...... 309 * Michael E. Patterson Professor of Law, Columbia Law School; BA 1968, JD 1976, PhD (Economics) 1980, Yale University. The author wishes to thank Jill Fisch and Jeff Nielsen for their helpful comments on an earlier draft of this Paper and Rachel Epstein for her valuable research assistance.

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