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44 Brandeis L.J. 549 (2005-2006)
The Due Diligence Defense under Section 11 of the Securities Act of 1933

handle is hein.journals/branlaj44 and id is 557 raw text is: THE DUE DILIGENCE DEFENSE UNDER SECTION 11 OF THE SECURITIES ACT OF 1933 William K. Sjostrom, Jr.* I. INTRODUCTION Section 11 of the Securities Act of 1933 imposes civil liability for misstatements or omissions of material fact from a registration statement.' Potential Section 11 defendants include the issuer, directors, underwriters and accountants. Although Section 11 was designed to have an in terrorem effect on these parties, Section 11 liability is not absolute. A defendant can escape liability with respect to a registration statement that contains a misstatement or omission of material fact by, among other things, proving that the plaintiff knew of the misstatement or omission at the time he acquired the security,3 or proving that the plaintiff's damages did not result from the misstatements or omission.4 Defendants other than the issuer can also escape liability by establishing the due diligence defense.5 This Article explores the due diligence defense in detail. Because the frequency of pre-trial settlements has limited case law on the subject,6 Escot v. BarChris Construction Corporation remains the leading case on the defense even though it was decided nearly 40 years ago.8 The recent consolidated securities fraud litigation against Worldcom, Inc. (captioned In re WorldCom, Inc. Securities Litigation), however, has provided several opinions that address * Assistant Professor, Salmon P. Chase College of Law, Northern Kentucky University. I would like to thank Professor Chris Gulinello for his valuable comments on earlier versions of this Article. I would also like to thank Daniel Cleveland for his excellent research assistance. 1 See 15 U.S.C. § 77k (2006). 2 See William 0. Douglas & George E. Bates, The Federal Securities Act of 1933, 43 YALE L.J. 171, 175 (1933). 3 See 15 U.S.C. § 77k(a). 4 See id. § 77k(e). 3 See id. § 77k(b)(3). 6 CHARLES J. JOHNSON, JR. & JOSEPH McLAUGHLIN, CORPORAT FINANCE AND THE SECURITIES LAWS 328 (3d ed. 2004). 7 283 F. Supp. 643 (S.D.N.Y. 1968). 8 JOHNSON & MCLAUGHLIN, supra note 6, at 328.