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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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