November 11, 2010
All I Really Need to Know I Learned Reading Escott v. BarChris in Securities Regulation
Posted by Christine Hurt

This past week, we covered Section 11 liability in Securities Regulation, and as law students have for decades now, we parsed through Escott v. BarChris Construction Corp.,, 283 F. Supp. 643 (S.D.N.Y. 1968), one of the few cases in which the court walks through the due diligence defenses available for a cast of characters involved in a public offering.  Whenever I teach this class, I always flashback to my own Securities class, in Spring 1993.  The day we read BarChris, I instantly recorded these things to memory, which I fall back on to this day.

1.    Being a newbie is no excuse.  So what if you agreed to be a director two weeks before a public offering?  If you don't know anything about the company, don't sign the registration statement.  Or, don't become a director until after the offering.  So what if you've been a licensed attorney for three months?  If they send you to do due diligence, then be diligent.  Ask questions.  Figure out what you're supposed to be looking for instead of looking around and saying you don't see anything.  So what if you're a third-year attorney and now you're general counsel?  Be a good one.  Be a pain.  Be annoying.

2.    If you're an attorney for the company, being a director is risky.  You may not have liability as outside counsel, but you'll know enough about the company to blow your due diligence defense as an outside director.

3.    When your Treasurer used to work for your outside auditor, bad things can happen.  This seems self-explanatory.

4.    People lie to their attorneys.  In-house counsel, underwriter's counsel.  Be skeptical.  The law thinks you will be skeptical, so you better be.

5.    Bubbles can happen anywhere.  Including the bowling alley industry.  We just had to look to the 1960's debt financing of bowling alleys to avoid the latest financial crisis.  In Wall Street 2, Gordon Gekko has a framed poster of tulip bulbs.  He should have had a framed poster of a bowling alley.

6.    The worst thing that a judge can ever say to a transactional attorney is that your document is a "scissors and paste-pot job."

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