Jack Coffee, Larry Ribstein, and J.W. Verret testified before the Senate Judiciary Subcommittee on Crime and Drugs today in a hearing titled "Wall Street Fraud and Fiduciary Duties: Can Jail Time Serve as an Adequate Deterrent for Willful Violations?" Start watching here at about 59:00.

Jack makes the case for fiduciary duties for broker-dealers and warns against "Chicken Littles" who might scream that the imposition of fiduciary duties in this context would cause the sky to fall. Right on cue, J.W. follows with an argument that the hindsight bias inherent in fiduciary duty litigation would bring securities markets to a standstill. Larry bats cleanup with an indictment of fiduciary duty in the criminal context (pun intended) on the ground that fiduciary standards are too "amorphous," and he scored a point here by citing the Supreme Court's recent decision in Jones v. Harris as an example of the difficulty of defining fiduciary obligation.

The exchange between Jack and Larry on the vagueness point after the prepared statements is the best part of the hearing. (Start at about 1:26.) In the end, I am inclined to side with Larry on this one, especially when the issue turns to criminal penalties for breach of fiduciary duty. Fiduciary duty is the wrong tool to deal with the problems in securities markets.

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