Criminalizing fiduciary breach

Cite this Article
Larry Ribstein, Criminalizing fiduciary breach, Truth on the Market (August 23, 2010),

I have posted my Senate testimony from last spring (“Fiduciary Duties of Investment Bankers: Senate Testimony – May 4, 2010”). There I comment on Arlen Specter’s subcommittee’s attempt to use the furor aroused by the SEC’s strike suit against Goldman to make some terrible new law. The subcommittee wanted to go beyond merely imposing new federal securities industry fiduciary duties (the problems with which I discussed recently here and here), but also criminalize those duties. Here’s the abstract:

This testimony before the United States Senate Committee on the Judiciary Subcommittee on Crime and Drugs focuses on two issues: to what extent should investment bankers have fiduciary duties to investors? And should there be criminal liability for willful breach of these duties? The testimony concludes that these duties are the wrong tool for dealing with any problems that might exist in the investment banking industry. Fiduciary duties are an amorphous concept which courts and commentators have applied in many different forms to many different types of conduct. Applying these duties to investment bankers would cast a potentially wide net over not only bad conduct but also conduct that should be viewed as clearly legitimate. Moreover, even under a narrow view of these duties, they are inappropriate for most aspects of investment banking. These problems with fiduciary duties would be significantly exacerbated by imposing criminal liability for their breach.

The Senate hearing was a toxic brew of opportunistic politicians seeking to milk every last political drop out of financial “reform” clamoring aboard misguided litigation by an SEC seeking to salvage its sagging reputation. The naïve but enthusiastic cheerleaders in the financial press didn’t help.

Although the specific legislation I discuss never achieved liftoff, the Senate testimony remains relevant because the underlying issues of over-expanding fiduciary duties and excessive criminalization of corporate conduct will remain with us for some time.