Interlocking Web of Gatekeepers

The lawyers, investment bankers, accountants and others who monitor and control the disclosure decisions of corporate clients, deterring corporate securities fraud, are generally reviewed independently to determine contributions to failure, such as the recent financial crisis. Andrew Tuch says this unitary methodology overlooks the often real phenomenon of multiple interdependent gatekeepers who form an interlocking web of protection or lack of protection.

Multiple Gatekeepers (available through SSRN) explains and explores the pattern of multiple gatekeeper involvement that characterizes business transactions. It then extends gatekeeper liability theory to account explicitly for the possibility that the fraud-deterrence capacity of gatekeepers will be interdependent, and not simply independent, identifying gaps in the regime that arise from the fragmentation of gatekeeping services and suggesting reforms designed to compel cooperation among gatekeepers to fill them.

One such reform is not excuse an underwriter from liability for relying on information from a gatekeeper that contributes to the risk of wrongdoing. A strict approach to the liability of underwriters would create incentives for them to bargain harder with other gatekeepers.

Another suggestion is to compel cooperation among gatekeepers in addressing disclosure issues that, in the judgment of any gatekeeper, may benefit from cooperation. He cites, as an example, formal “verification meetings” held in the United Kingdom and other Commonwealth jurisdictions. Gatekeepers might share, for example, the results of independent investigations. Guidance for such cooperation might come from professional self-regulatory organizations.

Such recommendations, writes Tuch, “all fall short of the most obvious proposal, of allowing the formation of multi-disciplinary firms that would provide bundled gatekeeping services. Such a development would bring within the boundaries of the firm the various cooperative efforts necessary to certify corporate disclosures, yet might create problems of its own, arising from conflicts of interest.”