Civil Liability as an Enforcement Tool of Securities Underwriter Gatekeeping Duty

Inaccurate and incomplete disclosure of material corporate information has always been a well-acknowledged problem of capital markets. Corporate disclosure scandals have occurred since the very beginning of modern corporations and are still common today. In early 1900 in the USA it was believed that financial fraud was prevalent, the amount of disclosure was meager and securities sold at the prices far above their value. There were at least 79 notorious stock-watering cases during the period of 1897-1910. In a typical case of that period promoters of the issue would buy up the competing industrial plants in order to merge them and sell to the public the stock in a newly established entity without even disclosing the value of original plants or their value after the merger. Later on such investments would turn out to be a total flop and cause significant losses to investors. The same picture was also observed on the European side. Major changes in securities regulation took place since 1900, notably the introduction of a mandatory disclosure system and various mechanisms of its enforcement. Measures to enforce mandatory disclosure obligations could be roughly divided in two main groups – primary enforcement against the issuer of securities and its internal personal, and secondary or gatekeeper’s enforcement strategy, involving parties somewhat related to the securities distribution. The first group usually includes such enforcement tools as issuer corporate administrative, criminal and civil liability. The second group involves different types of enforcement against independent directors, auditors, lawyers, underwriters etc. All of these enforcement tools should have contributed to the common goal of prevention of misstatements of material corporate information, thus improving the quality of corporate disclosure and the efficiency of capital markets. Nevertheless, more than a century later, misstatement cases are still quite common.