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Gatekeeper Liability

Assaf Hamdani

Hebrew University - Faculty of Law

Southern California Law Review, Vol. 77, p. 53, 2003

The recent crisis in the wake of the Enron debacle has demonstrated the importance of enlisting gatekeepers - such as accountants, underwriters, and lawyers - to prevent corporate fraud. But while a consensus may exist over the basic need to expand liability to gatekeepers, little is known about the appropriate scope of such liability. Going beyond the capital market context, this Article develops a framework to determine the scope of gatekeeper liability for client misconduct. Specifically, the Article analyzes the fundamental tradeoff between the potentially adverse impact of gatekeeper liability on relevant markets and the incentives such liability provides for gatekeepers to foil wrongdoing. Expanding the scope of their liability will make gatekeepers increase the price of their services to reflect their liability exposure. Although initially appealing as a means to screen out wrongdoers, this price increase may turn out to have adverse consequences when clients vary with respect to their wrongful intentions: Rather than screen out wrongdoers, gatekeeper liability may drive out only law-abiding clients. Enhanced liability, however, will also induce gatekeepers to monitor clients and prevent them from committing misconduct. The Article explores the policy implications of this analysis for determining which third parties should face gatekeeper liability, identifying the adequate scope of gatekeeper liability, and recognizing the shortcomings of gatekeeper liability as an instrument of social policy. The Article concludes by putting forward a tentative outline of the proper regime of gatekeeper liability for securities fraud.

Number of Pages in PDF File: 71

Keywords: gatekeepers, strict liability, negligence, securities fraud, secondary liability

JEL Classification: K13, K22, K42

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Date posted: March 17, 2005  

Suggested Citation

Hamdani, Assaf, Gatekeeper Liability. Southern California Law Review, Vol. 77, p. 53, 2003. Available at SSRN: http://ssrn.com/abstract=466040

Contact Information

Assaf Hamdani (Contact Author)
Hebrew University - Faculty of Law ( email )
Mount Scopus, 91905

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