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10 Lewis & Clark L. Rev. [i] (2006)

handle is hein.journals/lewclr10 and id is 1 raw text is: Lewis & Clark Law Review VOLUME 10 SPRING 2006 NUMBER 1 BUSINESS LAW FORUM BEHAVIORAL ANALYSIS OF CORPORATE LAW: INSTRUCTION OR DISTRACTION? FORUM ARTICLES Reflections on Scienter (and the Securities Fraud Case Against Martha Stewart that Never Happened) Donald C. Langevoort ........................................... This paper considers what research in cognitive psychology and behav- ioral economics has to say about one of the basic state of mind con- structs in the law of fraud: scienter. It takes a clinical approach, examining the securities fraud case that never happened against Martha Stewart. In granting a judgment of acquittal in Stewart's favor on the securities fraud charge, the court seemingly misunderstood the law of scienter, which turns on awareness rather than purpose. But that simply provides an opportunity to think about what awareness means in the context of financial transactions. From publicly available sources, interesting inferences can be drawn about what Martha Stew- art was thinking (and feeling) during the events at issue. The Irrational Auditor and Irrational Liability A. C. Pritchard ............................ 19 This Article argues that less liability for auditors in certain areas might encourage more accurate and useful financial statements, or at least equally accurate statements at a lower cost. Audit quality is promoted by three incentives: reputation, regulation, and litigation. When we take reputation and regulation into account, exposing auditors to potentially massive liability may undermine the effectiveness of reputa- tion and regulation, thereby diminishing integrity of audited financial statements. The relation of litigation to the other incentives that pro- mote audit quality has become more important in light of the sea change that occurred in the regulation of the auditing profession with the adoption of the Sarbanes-Oxley Act. Given these fundamental changes in the regulatory backdrop, I argue that the marginal benefit of litigation has been substantially diminished and in many cases that it is likely to be ineffective in promoting greater audit quality. I pro- pose a knowledge standard for auditor liability in securities fraud cases. Regulatory Responses to Investor Irrationality: The Case of the Research Analyst Jill E . Fisch .................................................... 57 An extensive body of behavioral economics literature suggests that investors do not behave with perfect rationality. Instead, investors are

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