What Due Diligence Dilemma? Re-Envisioning Underwriters' Continuous Due Diligence after WorldCom
72 Pages Posted: 30 Apr 2008 Last revised: 3 Dec 2009
Date Written: May 2009
The recent WorldCom decision is widely believed to pose a due diligence dilemma. This dilemma supposedly forces underwriters for large, established corporations to choose between their clients' desire to issue securities quickly in shelf-registered offering and the obligation to exercise reasonable care in due diligence. According to most commentators, the bar for due diligence set by WorldCom is simply too high to surmount during a shelf takedown. As a result, underwriters will either lose lucrative business or lose their defense to liability for misstatements or omissions in the offering document. And the stakes are high: in WorldCom, the underwriters settled for $6.1 billion rather than test their due diligence defense at trial. Underwriters could avoid this purported quandary if they investigated clients on a continuous basis, and thus, largely completed due diligence before each offering. Yet, scholars generally agree that underwriters perform little such continuous due diligence.
This article casts doubt on that scholarly consensus. This article urges that underwriters for giant corporations may perform more far continuous due diligence than most writers suppose.
This article sheds light on a source of continuous due diligence that has, to date, entirely escaped scholarly attention: investigation outside of the context of securities offerings. The bulge bracket investment banks that underwrite securities for giant corporations typically are organized into client relationship teams. These teams serve all of the bank's clients' financing needs, not just securities underwriting. As such, the team has reason to investigate its clients in many contexts other than securities offerings. This investigation is continuous due diligence by another name - and it may well provide an escape from the underwriter conundrum.
Keywords: automatic registration, bulge bracket, client relationship team, continuous due diligence, product specialist, Rule 176, Rule 415, seasoned issuer, Section 11, shelf offering, shelf takedown, special bracket, underwriter conundrum, WorldCom, WKSI
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