Why Civil Liability for Disclosure Violations When Issuers Do Not Trade?

Civil damages liability for securities law periodic disclosure violations has come under attack, particularly fraud-on-the-market class-action lawsuits for investor losses incurred in connection with trading in the secondary market when the issuer has not sold shares. The main line of attack has been the weakness of the compensatory rationale for such suits. Without a compensatory justification, the attackers suggest, the availability of this cause of action is hard to defend given the very substantial use of social resources involved in the litigation that it generates. The critics are right concerning the weakness of the compensatory justification for civil liability. They ignore, however, a second potential justification: deterrence. This Paper considers the deterrence justification for civil liability. The basic question is whether civil liability should provide at least part of the system of incentives for compliance with securities-law periodic disclosure rules, or whether reliance solely on governmentally imposed administrative and criminal sanctions would be better. In most areas of public regulation, enforcement is solely governmental. There are exceptions, however, where government enforcement is supplemented by civil liability. Antitrust, consumer law, environmental law, and governmental procurement fraud prevention are prominent examples in the United States. From a social-policy perspective, is it desirable to include securities disclosure regulation among these exceptions? The analysis here should usefully inform both the ongoing debate concerning securities class-action-lawsuit reform in the United States and discussions abroad concerning increasing the use of civil liability in other countries