A more thorough explanation:

The due diligence defense is a legal defense used against claims of securities fraud under Section 11 of the Securities Act. It is based on the idea that parties involved in creating a registration statement should not be held liable for misrepresentations if they conducted a sufficient investigation.

Under Section 11, the following parties may be held liable for securities fraud if a registration statement contains a misrepresentation:

• Issuers
• Underwriters
• Officers and directors of the issuer
• Experts who helped prepare the registration statement

The due diligence defense is not available for issuers, as they are strictly liable. For other parties, the defense depends on whether they are considered experts or non-experts, and whether the misrepresented part of the registration statement was prepared by experts or not.

Section 11 does not specify which parties are experts and non-experts, but generally:

• Top executive officers of the issuer, underwriters, and outside directors of the issuer with some specific role in the offering are considered non-experts.
• Experts are individuals who gave professional authority to a statement in the registration statement, and include auditors, lawyers, engineers, or appraisers.

The standard that individuals must meet to satisfy the due diligence defense depends on their expert status and the expertise status of the registration statement.

• Non-experts’ standard for non-expertised portions: Reasonably investigate the non-expertised portions of the registration statement, and had reasonable ground to believe and actually did believe the misrepresentation in those portions.
• Non-experts’ standard for expertised portions: Have no reasonable grounds to believe that the portion was untrue and did not actually believe it was untrue.
• Experts’ standard for expertised portions: Have a duty of reasonable investigation in their expertised portions and must have a reasonable ground to believe and actually did believe the statement.
• Experts’ standard for non-expertised portions: Have no liability for non-expertised portions.

An underwriter is a non-expert for a portion of the registration statement that includes financial projections. The underwriter conducts a reasonable investigation of the non-expertised portion and believes it to be true. However, the financial projections turn out to be inaccurate. The underwriter can use the due diligence defense because they met the standard for non-experts’ investigation of non-expertised portions.