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primary defendant, Landes and Posner state that it is a better result than to rest the entire loss on the innocent victim.(n339)

For the most part we think this argument is persuasive. However, like Landes and Posner, we are not convinced that efficiency requires a non-negligent victim to be fully compensated ex post if contractual mechanisms to shift risk ex ante are not prohibitive.(n340) If a third party creditor, investor, or guarantor knows ex ante that there is a risk that the business to which it trusts its funds may supply it with inaccurate information; that the business's auditor may fail to have the inaccurate information corrected; and that the business may become judgment-proof; the third party can assess that risk and adjust the terms of its loan, guarantee, or investment accordingly. Unlike the victim of a traffic accident or a dangerous defective product, the consumer of uncertain financial information is not powerless ex ante. Although such a party may be nonnegligent, it can be held to have assumed the consequences of a reasonable risk. That is precisely the result of the privity/near privily rule of Ultramares v. Toucher the unknown (to the auditor), albeit foreseeable victim is deemed to have assumed the risk that the business with which it is dealing will become insolvent.

On the other hand, the debacle guarantor-taxpayers have been experiencing with lending institutions indicates that as a third party victim class we have not done an adequate job in assessing the potential for fraud, mismanagement, and misrepresentations of those businesses, nor have we assessed well the probability that accountants might, through negligence, facilitate the dissemination of inaccurate and misleading financial information.(n341) Thus, there remains an arguable need for tort law's sanctions to supplement the corrective powers of financial markets to allocate risk.(n342)

Despite the considerable friction costs of tort law, it is one of our most powerful deterrents. While it does little to deter scoundrels and wastrels who cannot later meet tort judgments, the threat of a lawsuit against solvent ongoing businesses and professional firms does affect their conduct and does induce their taking precautions against accidents. If, however, the judgment threatened is disproportionate to the culpability of the potential tortfeasor (the joint and several rule), the distortions of conduct discussed in the previous subsections can be expected.

We would argue that the more efficient rule would expose an auditor to liability for negligent misrepresentation to reasonably foreseeable third parties, but only to the extent of the percentage of culpability assessed against the auditor at a proceeding in which the conduct of all potential parties is considered, whether solvent or not. This is a pure proportionate several liability rule, or "several rule."(n343) The result, of course, would be to leave some risk with third parties. Inasmuch as that is where the loss falls originally, the refusal to shift some of it through tort law will reduce the friction costs of risk shifting, and by reducing the stakes involved, should reduce the likelihood and expense of litigation.(n344)

Because third parties will bear a higher portion of the risk of negligent misrepresentation under a several rule, they will demand a higher price for their loans, guarantees, and investments. Conversely, parties seeking credit and capital will try to reduce the price demanded by offering more reliable information as an inducement.(n345) The process of acquiring more accurate internal financial information by the credit and capital seeking entity should better enable it to


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