April 07, 2005
Two Words That Give Me Flashbacks -- Due Diligence
Posted by Christine Hurt

The two words that give former corporate associates night sweats appear in a WSJ story today -- due diligence.  The gist of the story is that now that underwriters are finding themselves on the hook for bond offerings gone bad, perhaps underwriters should engage in more thorough due diligence instead of just relying on the other two gatekeepers, accountants and issuer's counsel, to find problems. 

That suggestion is obviously not a bad idea for underwriters, but the entire inquiry assumes that investors rely on the underwriter's thorough diligence.  The market knows that an underwriter has conflicts -- the investment bank is paid by the issuer and receives commissions from the buyers.  The market discounts the underwriter's stamp of approval and sees the underwriter as a salesman, not as a gatekeeper.

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Comments (2)

1. Posted by lia on April 8, 2005 @ 9:41 | Permalink

Similarly, the two words that give former litigation associates night sweats: DOCUMENT PRODUCTION. Talk about wage-slavery; I used to live across the street from Cravath, and every morning at about 3:00 am I would hear the building staff at the Death Star whistling for the cars come to pick up the associates. What a life!

2. Posted by Royce Barondes on April 12, 2005 @ 5:57 | Permalink

The investors do not merely rely on the underwriters' thorough diligence. They also rely on what one might describe as a "fuzzy" warranty-equivalent provided by section 11 ("fuzzy" because it triggered by negligence).

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