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1992 U. Ill. L. Rev. 691 (1992)
Vicarious Liability for Fraud on Securities Markets: Theory and Evidence

handle is hein.journals/unilllr1992 and id is 701 raw text is: VICARIOUS LIABILITY FOR FRAUD ON SECURITIES MARKETS: THEORY AND EVIDENCE Jennifer H. Arlen* William J. Carney** This article examines the efficiency of vicarious liability for Fraud on the Market. Standard analysis of vicarious liability argues that this rule is efficient. Professors Arlen and Carney argue, how- ever, that in Fraud on the Market cases vicarious liability does not serve the goals of optimal deterrence or optimal risk spreading, nor does it promote optimal loss spreading. Breaking with traditional vicarious liability literature, the au- thors examine monitoring costs in detail, and posit a model that predicts that Fraud on the Market generally occurs when agents fear themselves to be in their last period of employment. An empirical study of Fraud on the Market cases demonstrates that these frauds generally are the product of last period agency costs. The article also shows who pays for securities fraud under a rule of vicarious liability. The empirical study shows that an issuer's po- tential liability for the fraud of its agents is enormous, representing a substantial share of the equity of the firm. Imposing liability on the firm results in a large wealth transfer from one group of innocent investors to another similar group. Because this transfer neither de- ters fraud nor spreads losses, it performs no useful social function. The authors conclude that a rule of agent liability, supplemented with criminal enforcement, is preferable. * Associate Professor of Law, Emory University. BA. 1982, Harvard University; J.D. 1986, Ph.D. (Economics) 1992 New York University. This author would like to acknowledge the financial assistance of the John M. Olin Program at the University of California at Berkeley School of Law. ** Charles Howard Candler Professor of Law, Emory University. BA. 1959, LL.B. 1962, Yale University. The authors wish to acknowledge the helpful comments of Barry Adler Ian Ayres, Theodor Baums, Bernard Black, Richard Craswell, David Haddock Andrew Kull, Fred McChesney, Geoffrey Miller, Roberto Pardolesi, Manuel Utset, Frank Vandall, and participants at faculty workshops at Boston University School of Law, Emory University School of Law, Georgetown Law Center, and Northwestern University School of Law, as well as at the Second Annual Meeting of the American Law and Economics Association and the Eighth Annual Conference of the European Association of Law and Economics. In addition, we would like to acknowledge the helpful and resourceful research assist- ance of Cherie King, Leah McCarty, and Susan Dignan.

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