Strict Liability for Gatekeepers: A Reply to Professor Coffee
10 Pages Posted: 16 Nov 2004
This article responds to a proposal by Professor John C. Coffee, Jr. for a modified form of strict liability for gatekeepers. Professor Coffee's proposal would convert gatekeepers into insurers, but cap their insurance obligations based on a multiple of the highest annual revenues the gatekeepers recently had received from their wrongdoing clients. My proposal, advanced in 2001, would allow gatekeepers to contract for a percentage of issuer damages, after settlement or judgment, subject to a legislatively-imposed floor. This article compares the proposals and concludes that a contractual system based on a percentage of the issuer's liability would be preferable to a regulatory system with caps based on a multiple of gatekeeper revenues.
Both proposals mark a shift in the scholarship addressing the problem of gatekeeper liability. Until recently, scholarship on gatekeepers had focused on reputation - not regulation or civil liability - as the key limitation on gatekeeper behavior. Indeed, many scholars have argued that liability should not be imposed on gatekeepers in various contexts, and that reputation-related incentives alone would lead gatekeepers to screen against fraudulent transactions and improper disclosure in an optimal way, even in the absence of liability. From a theoretical perspective, this article is an attempt to move the literature away from a focus on reputation to an assessment of a potential reinsurance market for securities risks, where gatekeepers would behave more like insurers than reputational intermediaries.
Keywords: strict liability, gatekeepers, insurance
JEL Classification: K1, K10, K22
Suggested Citation: Suggested Citation