Assessing the Materiality of Financial Misstatements usefully highlights the intersection of accounting law and securities law.  As Larry Cunningham wrote in a comment to this post a while back, this field presents an "amazingly rich field with many current and continuing opportunities" and one that should interest junior scholars.  Because I've been somewhat absent in appreciating of accounting's relationship to securities doctrine, I was happy to get a chance to read Prof. Park's work and learned a lot from the paper.  In no particular order, here are some (hopefully helpful) comments.

·        Park starts with the assumption that ideally "the materiality standard would serve as a significant gatekeeper in screening out trivial from substantial misstatements," and criticizes courts for instead substituting a "nebulous" standard that has resulted in substantial uncertainty by reporting entities.  Here, I think Park significantly understates the current screening effects of materiality doctrine.  As I've shown, judges considering materiality find that about half of considered disclosures are immaterial as a matter of law, and doctrines like puffery and bespeaks caution (which are bright-line rules) have increased in importance over time.  See also Bainbridge & Gulati, How to Judges Maximize, at 116 n.94 (most securities cases decided on MTD, and most determinations involved materiality).  These case-counting findings suggest doubt as to the need to reform materiality.  Indeed, over the last several years, I've seen an emerging consensus that the current state of securities law – from pleadings standards, to materiality, to scienter – has combined to create an such anti-plaintiff environment that the risk of fraud being screened out of court is higher than the likelihood of weak cases finding strike settlements.  Even were this not true, I think Park could do more to develop his thesis that materiality is the appropriate gatekeeping vehicle for in securities cases.  Why not the pleadings/scienter nexus?  Or to put it a different way, why would common-law courts be effective at determining when securities litigation is good for financial markets and investors? Bainbridge & Gulati and most other observers think that judges are looking for any scheme to move these cases off of their dockets, not be thoughtful gatekeepers.

·        Park's discussion of the difference between fundamental and market valuation (pps. 23-5) is lucid and informative, except that I think it comes to the wrong conclusion.  As Park recognizes, fundamental valuation doesn't necessarily track harm to investors (resulting from stock price effects) but instead hypothetical "rational investor[]s".  In my view, Park needs to do more to justify privileging such investors (who will usually be institutional) over ordinary traders.  There could be some unexpected gender effects here, given studies finding that women and men process financial information distinctly. See, e.g., Odean. 

·        In arguing against market materiality measures, Park suggests that event studies may be flawed instruments, and that price movements provide little ex ante guidance.  But, as I'll discuss in just a minute, his proposed solution doesn't much help with the ex ante problem.  As for event studies, I think we'd all agree that they are somewhat of an art form, and that judges evaluating them on SJ are unlikely to be particularly discerning critics.  But I wonder (again) about the missing competing competence argument: why should we conclude that judges would be any better at evaluating competing claims from experts about the fundamentals of accounting?

·        Park argues that materiality findings ought to be based, in part, on the difference between persistent and isolated misstatements.  Recognizing that this distinction is subject to abuse – both by managers and by securities-averse judges - Park urges that we should be wary of attempts to short-circuit the decision making process, potentially resolving it at summary judgment or at trial.  This would a pretty radical (pro-plaintiff) change in securities litigation practice, and not one I think courts are likely to embrace.  It's also somewhat in tension with Park's envisioned early gatekeeper role for materiality doctrine. Moreover, the fact that the definition is something that requires adjudication, and isn't self-evident, makes it harder for me to see why fundamental analysis provides better ex ante guidance for disclosing entities and their agents.  I imagine that executives will be overly self-confident about the likelihood that a misstatement is of the "harmless" short-term variety (as Park argues, they may even believe that they are smoothing earnings to reduce "irrational" market distortions)

·        The paper would be aided by more talk throughout about settlement.  The current system seems designed (especially after recent pleadings decisions from the Supreme Court) to knock out cases at the dismissal stage, and to leave all further cases to settlement in the early stages of discovery.  Park's system, by contrast, appears designed to require extensive discovery about corporate financials before the parties can realistically assess their odds of succeeding on summary judgment. (Securities cases are even less likely than the ordinary civil case to go to trial; I doubt that much securities practice is shaped by the shadow of the too-few jury verdicts.) Park should consider expanding his analysis to consider how and when in litigation lawyers would be able to distinguish between persistent and isolated financial misstatements, and thus what effects, both static and dynamic, it would have on settlement.

·        Park's vicarious liability proposal is intriguing and I agree with much of it.  It is, of course, part of a larger trend to focus on ways to target securities law on agents.  That literature, in turn, is premised on the idea that securities law does a bad job deterring corporate misconduct because the "real wrongdoers" don't feel the sting of sanctions. This literature is terrific, though it strikes me that policymakers would be aided by more empirical (experimental) work that examines the relationship between organization liability and individual psychology.  As always, individual liability proposals must be clear to address about the effects of insurance and indemnification.  Park argues that individual managers will internalize sanctions (notwithstanding D&O) when they are adjudicated to be liable.  This may be correct, although I think that the instances of D&O insurers successfully disclaiming coverage, notwithstanding the language of their policies, are pretty rare.  And of course, an adjudication-contingent D&O liability policy will result in the settlement of more non-meritorious claims.   That is, the more we focus on individual liability, the less likely we are to see adjudication, which will potentially result in more uncertainty for disclosing entities.  Don Langevoort's suggestion that we should instead focus on equitable remedies seems like it could use more discussion here.

That's it!  I hope that Prof. Park finds these comments helpful, and that he continues to focus on this important aspect of securities law doctrine.  The paper is relatively short, quite well-written, and certainly worth readers' time.

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