Vicarious Liability for Bad Corporate Governance: Are We Wrong about 10b-5?

James C. Spindler

American Law and Economics Review, 2011, vol. 13, issue 2, 359-401

Abstract: I formulate a rational expectations signaling model of vicarious liability for securities fraud, particularly the much criticized "fraud-on-the-market" private class action arising under Rule 10b-5. I show that fraudulent misreporting by managers occurs in the absence of managerial moral hazard--that is, where managers simply maximize shareholder payoffs--and that vicarious liability can serve as an appropriate deterrent, creating separating equilibrium. I then show that the particular remedy under Rule 10b-5 can perfectly deter fraud and perfectly compensate purchasers, and that Rule 10b-5 class actions may function better than critics claim. Copyright 2011, Oxford University Press.

Date: 2011
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