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
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
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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