Vicarious Liability for Fraud on Securities Markets: Theory and Evidence

51 Pages Posted: 18 Apr 2012 Last revised: 24 Apr 2012

See all articles by Jennifer Arlen

Jennifer Arlen

New York University School of Law; European Corporate Governance Institute (ECGI)

William J. Carney

Emory University School of Law

Date Written: April 18, 2012


This article examines the efficiency of vicarious liability for Fraud on the Market. Standard analysis of vicarious liability argues that this rule is efficient. Professors Arlen and Carney argue, however, that in Fraud on the Market cases vicarious liability does not serve the goals of optimal deterrence or optimal risk spreading, nor does it promote optimal loss spreading.

Breaking with traditional vicarious liability literature, the authors examine monitoring costs in detail, and posit a model that predicts that Fraud on the Market generally occurs when agents fear themselves to be in their last period of employment. An empirical study of Fraud on the Market cases demonstrates that these frauds generally are the product of last period agency costs.

The article also shows who pays for securities fraud under a rule of vicarious liability. The empirical study shows that an issuer's potential liability for the fraud of its agents is enormous, representing a substantial share of the equity of the firm. Imposing liability on the firm results in a large wealth transfer from one group of innocent investors to another similar group. Because this transfer neither deters fraud nor spreads losses, it performs no useful social function. The authors conclude that a rule of agent liability, supplemented with criminal enforcement, is preferable.

Suggested Citation

Arlen, Jennifer and Carney, William J., Vicarious Liability for Fraud on Securities Markets: Theory and Evidence (April 18, 2012). University of Illinois Law Review, 1992, NYU Law and Economics Research Paper, Available at SSRN:

Jennifer Arlen (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

William J. Carney

Emory University School of Law ( email )

1221 Fairview Road, N.E.
Atlanta, GA 30322
United States
404-373-7198 (Phone)
n/a (Fax)

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