Deliberately Defrauding Investors: The Scope of Liability Comment.

Authors

Andrew R. Simank

Abstract

Since the Enron debacle, shareholders have increasingly filed suit in state and federal courts to recoup financial losses resulting from fraudulent representations made by failing corporations. These shareholders have advanced common law misrepresentation claims against publicly traded companies for alleged fraudulent U.S. Securities and Exchange Commission (SEC) filings. Originally, the scope of liability for common law fraud was very narrow. This scope was later broadened in an attempt to provide protection to individuals commonly victimized by fraudulent behavior. Texas courts have gone to great lengths to ensure the “expectation of influencing conduct” requirement for common law fraud requires more than mere foreseeability before a third party can prevail. In Ernst & Young, L.L.P. v. Pacific Life Insurance, Co., the Texas Supreme Court laid the foundation for the special reason-to-expect-reliance provision by requiring “an especial-likelihood” that a misrepresentation will induce reliance. The Restatement (Second) of Torts extends liability to those who have reason to expect reliance upon misrepresentations communicated to third parties. The Texas Supreme Court’s narrow application of section 531 through the especial-likelihood provision effectively limits the ability of claimants to bring common law securities claims. This application equates to the same standard of liability imposed for negligent misrepresentation, meaning it does not conform to the traditional tort principle of further extending liability for fraudulent-inducement claims. The reason-to-expect standard, if interpreted broadly, allows plaintiffs to state a claim of fraud whether or not a misrepresentation is especially likely to induce reliance. Alternatively, section 536 of the Restatement (Second) creates the presumption that investors are expected to rely on statements filed with the SEC. Policy considerations suggest the rise in corporate fraud warrants greater protection for shareholders. Fraud victims should not be forced to bear losses resulting from highly culpable conduct.

Publisher

St. Mary's University School of Law

Recommended Citation

Andrew R. Simank, Deliberately Defrauding Investors: The Scope of Liability Comment., 42 St. Mary's L.J. (2010).
Available at: https://commons.stmarytx.edu/thestmaryslawjournal/vol42/iss1/3