Enterprise Liability and Insider Trading

I. PREFACEIn an inconspicuous clause of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA),(1) the securities industry won for itself an immunity that will be the envy of other industries that are afflicted with statutory liabilities for pollution, unsafe products, ad other harms. In private suits for violations of this Act, employers are not liable for offenses of their employees if the employers acted in good faith and did not induce the violations.(2) I will call this the rule of "rebuttable liability."This novel provision rejected not only the rules of liability that most federal courts had applied under the principal Securities Acts,(3) but also a centuries-old tradition of the common law of torts.(4) It was, moreover, hard to reconcile with Congress' professed purpose in enacting ITSFEA to provide "greater deterrence, detection and punishment of violations of insider trading."(5)Under traditional tort law, which most federal courts apply to liabilities under the Securities Acts, employers are liable for the frauds of their employees committed within the scope of their employment or authority without regard to the guilt or innocence of their employers.(6) Federal court decisions in the decades preceding adoption of the Securities Acts had imposed liability on employers for their agents' frauds, even in cries that a Restatement Reporter found extreme.(7) The governing principle has been called "vicarious liability,"(8) "respondeat superior,"(9) and most recently "enterprise liability."(10)ITSFEA's rejection of one of the axioms of tort law suggests a number of questions. Is the rebuttable liability principle more suitable than enterprise liability for insider trading offenses, or for securities frauds in general? If so, is it preferable for torts in general? Or is it, on the other hand, a gift to the securities industry that was slipped into ITSFEA without adequate consideration or justification?In approaching these questions, I will start by reviewing the triumph of enterprise liability in Anglo-American tort law, and compare it with various forms of rebuttable liability that exist in foreign law (Part II). I will then review the rivalry between the two systems of liability in securities law that flourished in federal courts until 1990 (Part III). This review will be followed by an analysis of the commands and implications of ITSFEA (Part IV), after which I will speculate on the consequences of the choice between the two systems of liability (Part V). I will conclude with some guesses about the next steps in the rivalry between these principles (Part VI).I will not, however, revisit the perennial dispute between defenders and denunciators of insider trading.(11) Rather, I will address the means of effectuating the policies against insider trading that have flourished in federal courts since 1946 and have been emphatically endorsed by Congress in the Insider Trading Sanctions Act of 1984 (ITSA)(12) and the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA).(13)II. ENTERPRISE LIABILITY IN OTHER CONTEXTSA. THE PREVALENCE OF ENTERPRISE LIABILITYThe radical significance of excluding enterprise liability from suits on account of insider trading gains perspective when viewed in the light of the principle's conquest of other areas of tort law. Enterprise liability was unknown to the sophisticated legal system of ancient Rome and to the cruder system of medieval England. Under those regimes, employers were generally liable only for their personal misdeeds, as explained by Oliver Wendell Holmes, Jr., in his classic history of agency.(14) But the common law switched, about three centuries ago, to a principle that imposed liability on employers for the torts of their employees and agents committed in the course of their employment or authority, regardless of the employers' fault.(15) The principle was applied to frauds as well as to physical injuries. …