Where the defense comes from
Federal securities law imposes liability for material misstatements or omissions in a registration statement, and investors usually do not need to prove the defendant intended to mislead them. The issuing company itself has no due diligence defense, though it may still argue, for example, that the losses came from something other than the misstatement. Others who can be held responsible, such as directors, signing officers, underwriters, and professionals who certify portions of the document, may raise a due diligence defense by showing that they conducted a reasonable investigation and had reasonable grounds to believe the statements were true. For portions certified by an auditor or another professional, defendants other than that professional generally face a different test that turns on whether they had reason to doubt them.
Why the record from the offering matters
The defense depends heavily on what was actually done at the time and how it was documented. Courts look at the steps taken given each defendant's role and access to information, so an outside director and a lead underwriter are not judged by identical expectations. Useful records include diligence request lists and responses, notes of management and auditor sessions, comfort letters, bring-down calls, board materials, and drafts showing how disclosure changed. These materials should be preserved as soon as litigation is anticipated. Reconstructing a diligence process years later without documents is difficult, and memory alone rarely carries the weight a court needs.
Evaluating the claim and the defense
When a suit is filed, we look first at the claims themselves, since an early motion to dismiss may address whether the challenged statements were false or material at all. We then assess each client's role in the offering, what information was available to them, and what the record shows they did with it. Underwriters often have indemnification and contribution arrangements with the issuer, and directors may have insurance and indemnity rights that need prompt notice. The due diligence defense is usually decided on the facts, and preparing it is a matter of organizing the record carefully from the start.
