Jon Faust responds to Goldman Sachs caveat emptor defense:
Caveat Emptor Is Not a Business Plan, by Jon Faust: The Securities and Exchange Commission case against Goldman Sachs raises the cherished American principle of caveat emptor — let the buyer beware. The charming story of how this principle came to prominence in American law is remarkably enlightening about recent events.
During the War of 1812, the British blockaded American trade, depressing the price of tobacco stuck inside the United States. On Christmas Eve 1814, the Treaty of Ghent ended the war. Ships bearing the news were dispatched, arriving in New Orleans on Feb. 15.
That night, news leaked ashore to a tobacco buyer named Organ who dashed to Laidlaw & Company at sunup the next morning hoping to seal a previously discussed deal to buy 111 hogsheads of tobacco. Presumably surprised by Organ’s eagerness, Laidlaw’s representative asked if there was any reason for the rush.
Organ apparently dissembled and the deal was done. Almost immediately thereafter, the price of tobacco jumped 30 to 50 percent, and the ensuing lawsuit went to the Supreme Court. (This account is taken from the Supreme Court documents, 15 U.S. 178.)
Writing for the majority, Chief Justice John Marshall ruled that Organ had no obligation to share his information: “The Court is of opinion that he was not bound to communicate it. It would be difficult to circumscribe the contrary doctrine within proper limits…”
What is striking is that caveat emptor arises as a legal principle mainly because of the tangle the courts would get into if they tried to enforce a more ambitious standard of right and wrong.
Chief Justice Marshall’s logic surely applies with even greater force to modern deals between investment banks and sophisticated qualified investors, both of which will be simultaneously working on many deals, each involving sensitive proprietary information.
Caveat emptor makes good sense as a practical limitation on what courts might reasonably be expected to sort out. So should shareholders of Goldman Sachs be concerned? About the suit, I don’t know. More generally, perhaps so.
As I reminded my undergraduates the other day, caveat emptor is a legal principle, not a business plan.