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What is most striking about the two opinions is the difference in their tones. The majority engaged in a broader antifraud-type reading, motivated by an underlying concern that fraudsters could escape their just punishment. The majority avoided making technical distinctions between primary and secondary liability that would allow any true bad actors to slip through the cracks of private civil claims. Consistent with that approach, the Court disavowed concern that its reading of subsections a , b and c might result in overlap such that more than one subsection could apply to the same conduct, which would conflict with the canon of construction that no language in a statute should be read to render another provision superfluous.
Only the future will tell whether the Lorenzo decision is a minor gloss on the scope of Rule 10b-5, or whether it signals a willingness to expand the reach of the securities laws and the elimination of a clear distinction between primary and secondary liability, as the dissent warns. The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.
If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct. Home Ideas Thought Leadership. Justices clarify—and potentially expand—securities fraud liability for persons who participate in distributing false statements.
McGuirk In Lorenzo v. PDF: Lorenzo v. Securities and Exchange Commission. Texas appears poised to abandon the Ponzi scheme presumption Commercial Disputes Alert SEC staff releases antifraud guidance for public statements made by issuers of municipal securities Public Finance Alert Previous Next. Nixon Peabody adds to nationally ranked Complex Commercial Disputes practice People Karl D.
Belgum Richard A. Significant relief for many securities industry participants came in when the U. First Interstate Bank of Denver, N. And terrorism, with its myriad facilitators and statutes providing compensation for victims, is a development that very soon may transform aiding and abetting law. Because of the still rippling effect of Central Bank , that opinion is analyzed, and the scope of its effect discussed. The hub of the article is an explanation of the legal elements of the civil causes of action for aiding and abetting fraud and breach of fiduciary duty, respectively.
Whether there are four elements required for the tort, or potentially five or six, depends on the judicial forum, as will be shown. The article then shifts perspective and concludes with a discussion how the outcome may depend on the factual matrix and role of the defendant. Aiding-abetting law has adapted to emerging business torts and new variations of commercial misconduct though if it is part of a legal trend there is no unifying theme—other than adaptability itself.
Civil liability for aiding-abetting pre-existed such well-established doctrines as joint and several liability and product liability, as well as the modern concept of a duty of professional loyalty which is now a frequent context for aiding-abetting claims. The antiquity of aiding-abetting liability has interested the courts in various important decisions, on occasion subtly deployed in support of broadened liability, 2 while on other occasions leading to the conclusion that against the historical background a statute that fails to specify aiding-abetting liability cannot be deemed implicitly to provide for it.
Criminal liability for aiding and abetting was codified in the sixth century by the Roman emperor Justinian, 4 and in Anglo-American law has its origin in the ancient doctrine concerning accessories to crime. Though there is no federal common law of crimes, Congress in enacted what is now 18 U.
In the civil liability context, secondary liability arising from concert of action, though probably incorporating some element of conspiracy between the primary and secondary actor, can be traced back at least years.
Aiding and abetting is, in some instances, easier to establish than conspiracy. For example, while California law holds that one may not be subject to liability for conspiracy unless one owed a preexisting duty to the plaintiff, no such requirement exists with respect to aiding and abetting liability. The current state and likely future development of the body of law of aiding and abetting cannot properly be understood without an analysis of the decision that performed a dramatic amputation: Central Bank of Denver, N.
One of the most important elements of Rule 10b-5 pursuant to the Securities Exchange Act is its statement of the proscribed conduct. The second subsection prohibits the making of a material misstatement or omission. Prior to Central Bank , a significant number of federal courts in nearly every circuit had held that an aider-abettor was subject to civil liability under section 10 b of the Securities Exchange Act and Rule 10b Perhaps because of the agreement among federal circuits as to aiding and abetting liability for securities fraud, the issue did not reach the Supreme Court until nearly sixty years after enactment of section 10 b of the Securities Exchange Act.
The Court, did, however, speculate as to policy reasons why Congress may not have wished to allow for aiding and abetting liability:. Because of the uncertainty of the governing rules, entities subject to secondary liability as aiders and abettors may find it prudent and necessary, as a business judgment, to abandon substantial defenses and to pay settlements in order to avoid the expense and risk of going to trial.
Therefore, in a decision often regarded as unfortunate in public policy terms because of the apparent upsurge in large-scale commercial misconduct subsequently associated with it—though its interpretation of the Securities Exchange Act remains largely unscathed 45 —the Court held there is no cause of action under section 10 b for aiding and abetting securities fraud.
Significantly, the Central Bank Court explained that the absence of aiding-abetting liability under Section 10 b did not mean secondary actors were insulated from liability under the securities laws. Any individual or company who employs a manipulative device or makes a material misstatement on which a purchaser or seller of securities relies may be liable as a primary violator under Rule 10b Enron Corp.
In re Enron Corp. Under the scheme theory, a person who substantially participates in a manipulative or deceptive scheme can incur primary liability, even if the fraudulent statements linking the scheme to the securities markets are made by others. It has, however, been observed that during the thirty years in which aiding-abetting liability was recognized, courts generally failed to establish clear distinctions between conduct giving rise to aiding-abetting liability and conduct giving rise to primary liability.
Such conduct, plaintiffs maintain, is sufficient for a violation of Rule 10b-5 even after Central Bank , because the violator was a primary offender even if others were more directly responsible. These courts have held that a secondary actor cannot incur liability under Rule 10b-5 for a statement not attributed to that actor at the time of its dissemination.
After Global Crossing, Worldcom and Enron followed one another in alarming fashion having been foreshadowed by less celebrated but hardly less fraudulent schemes involving Sunbeam Corporation, Bennett Funding, Inc.
Imposition of liability on those actors for securities fraud is left, therefore, to state securities acts, and common law principles of aiding and abetting, the requisites of which are discussed below, both in the context of securities violations and other misconduct. Aiding and abetting liability concerns, to a significant extent, a particular state of mind.
The plaintiff must show whether the defendant intended to facilitate wrongdoing. However, the analysis may, in a departure from general tort principles, consider not merely intent, but motive. Did the alleged aider-abettor have a noteworthy, perhaps undue, pecuniary interest in the consummation of the fraud or misdealing?
More broadly, the judicial decisions explore what the defendant knew regarding the misconduct , for none would argue that one who has unwittingly held the door for the bank robber intended to aid and abet through such assistance.
An aider and abettor of a fraud is regarded as equally responsible, in terms of civil liability, with the perpetrators of the scheme. However, because aiders and abettors, unlike conspirators, do not agree to commit, and are not subject to liability as joint tortfeasors for committing, the underlying tort, they may be subject to liability irrespective of whether they owed to the plaintiff the same duty as the primary violator.
The plaintiff must allege and prove that it has been defrauded or otherwise victimized by tortious conduct by one other than the aiding-abetting defendant. If the claim is for aiding and abetting fraud, then the elements of fraud must be alleged with the requisite specificity, 69 though the other elements of aiding and abetting ordinarily are subject to a liberal notice pleading standard, pursuant to Rule 8 a of the Federal Rules of Civil Procedure.
Because the primary actor may not be party to the case, establishing the primary wrong may be a particular challenge. In one case, for example, a bankrupt company alleged that an ex-director of another company Bioshield had aided and abetted the acts of a current officer Moses in subverting a planned merger.
Plaintiff sued Elfersy individually for having aided and abetted alleged fraud by Bioshield in the merger negotiations. Elfersy had continued to advise Bioshield concerning patent, technological and scientific matters. Furthermore, though Elfersy may have had his own economic interests in mind that was not alone sufficient to satisfy the scienter requirement.
More expansive holdings, however, abound. Courts have found direct proof of scienter , or facts sufficient to permit the requisite inference, to have been evidenced by a knowledge of wrongdoing, b motive on the part of the alleged aiderabettor, or, occasionally, by c reckless disregard by the aider-abettor of information that it was facilitating wrongful acts, as discussed more fully below.
Commentators have stated that the knowledge of wrongdoing requirement means the aider-abettor must do more than merely provide assistance: he or she must have known the nature of the act being assisted. Knowledge of the fraud must be pled by stating how the defendant knew of the wrongdoing. It has been held that a complaint must contain factual allegations either stating directly or implying that those dealing with the tortfeasor knew or should have known the tortfeasor was breaching a duty to the victim.
In a leading case, Neilson v. Union Bank of California, N. Leahey Construction Co. The court found that the requisite knowledge on the part of the bank was shown by the following circumstances:. Notably, the four-day loan in Leahy was an unusual transaction and thus easily gave rise to an inference the bank knew what was going on.
A contrasting result is found in Ryan v. Royal Oaks Motor Car Co. California courts have suggested that, in addition to the conventional elements for aiding-abetting, a plaintiff also must allege the defendant participated in the breach for reasons of its own financial gain or advantage. In Geman v. Securities Exchange Commission , a brokerage firm began an undisclosed practice of executing trades as principal with its brokerage customers. Mere knowledge of the underlying misconduct is insufficient to give rise to aider-abettor liability.
Affirmative assistance also has been deemed adequately pled where a weather derivatives trading company knowingly agreed to pay any proceeds obtained under dummy policies in order to conceal from an insurer the existence of reinsurance policies. State Street Bank and Trust Co. State Street Bank allegedly had demanded that Sharp, its borrower, obtain new sources of financing to retire the State Street debt.
Nevertheless, the court held that all of these allegations were merely omissions or failures to act. The bank also allegedly knew that absent its consent, the transaction would not be consummated. On the one hand, this seems repugnant; on the other hand, [the] discovery that Sharp was rife with fraud was an asset of State Street, and State Street had a fiduciary duty to use that asset to protect its own shareholders [from the consequences of its own bad loan], if it legally could.
One could say that State Street failed to tell someone that his coat was on fire or one could say that it simply grabbed a seat when it heard the music stop. The moral analysis contributes little. Where the fraud has involved a course of conduct occurring over an extended period of time or a series of transactions, it may not be necessary to include detailed allegations of the facts of each transaction of the fraudulent scheme.
Most successful fraud claims involve active misrepresentations, as opposed to concealment, because many jurisdictions do not recognize fraudulent concealment absent a duty to disclose or other special circumstances. For example, in , in connection with the Enron scandal, a United States district court sitting in New York issued the first decision holding financial institutions potentially culpable with respect to the Enron Ponzi scheme.
The Unicredito decision cogently recognizes that some types of structured financing arrangements may play an indispensable role in facilitating corporate fraud. However, an important exception exists when the circumstances gave rise to a duty to warn, advise, counsel, or instruct the plaintiff. For example, where the defendant breached a governmentally imposed and public obligation to disclose information to the Internal Revenue Service, which was alleged to have caused plaintiff to be misled, the defendant was subject to liability as aider and abettor.
In most jurisdictions, aider-abettor status based solely on non-disclosure by the defendant probably can be established only when the defendant had a confidential or fiduciary relationship with the victim. One group of investors alleged, in the context of federal securities law, that a surety for an investment trust owed the investors a duty of disclosure the breach of which gave rise to aider-abettor status. Causation is an essential element of an aiding and abetting claim.
Fiduciary duties exist on the part of such persons as attorneys, trust administrators, and director and officers. Consequently, while fraud constitutes the largest source of aiding and abetting claims, breaches of fiduciary duty are close behind.
As is not infrequent in the case of fraud, the perpetrator of the breach of fiduciary duty may be an individual or small company with little resources, whereas the aider-abettor may be a large institution with deep pockets. Knowledge on the part of the aider-abettor that a fiduciary relationship was being breached can adequately be pled by allegations that a fiduciary relationship existed, that the defendant knew of it, and that the defendant knew it was being breached.
This means that [plaintiff ] must prove [defendant] knew two things: That [defendant] owed a fiduciary duty to [plaintiff ], and that [defendant] was breaching that duty. It is not enough for [plaintiff ] to show that [defendant] would have known these things if it had exercised reasonable care.
The court noted, however, that plaintiff is not required to show the defendant acted with an intent to harm the plaintiff. A notable recent breach of fiduciary duty case, employing a relatively liberal standard, is Higgins v. New York Stock Exchange, Inc. Plaintiffs alleged that the terms of the merger agreement heavily and unfairly favored existing shareholders of Archipelago over the NYSE owners.
The CEO of NYSE, defendant Thain, was allegedly self-interested in the merger, based on his financial involvements with defendant Goldman Sachs, a brokerage house that also was a major shareholder in Archipelago. It was alleged that Thain slanted the proposed merger agreement in favor of Archipelago for the ultimate benefit of Goldman Sachs and himself as a large Goldman Sachs shareholder.
The decision to retain Goldman Sachs to advise NYSE in the merger was approved by the NYSE board and by CEO Thain, who refused to recuse himself from the decision despite his close ties to Goldman Sachs and his fiduciary duties to the NYSE, which, according to the complaint, prohibits directors from deliberating in a matter in which they are personally interested.
The complaint alleged that when the defendant bank decided to end its own metals financing program, it had looked for alternative lenders to assume the loans it had extended to dealers. Clark sold all or nearly all of the metals the bank transferred to the trading company, frequently to purchase additional loans from the bank, as well as metals futures contracts. However, when the price of silver rose in , the company lost a large sum, was unable to purchase enough metals to replace the collateral it had sold, and filed for bankruptcy.
They pointed out: i the company was a metals dealer which regularly traded metals, and; ii the bank had no reason to believe the company had not otherwise covered its positions for example through futures contracts. The trustee contended the bank knew the company was selling the metals and was close to insolvent, and that the bank knew the silver metals market was volatile and typically full of unscrupulous lenders.
Nevertheless, unlike an action based on conspiracy, aiding and abetting liability may, according to several decisions, be satisfied by proof that a defendant acted recklessly. Because of this elevated duty, when a secondary actor renders assistance the nexus between assistance and harm to the plaintiff frequently is apparent, or should be. Aiding and abetting doctrine is reasonably well defined; however, close analysis reveals nuances that may be distinct to a particular fact pattern.
Given such distinctions, there is much to be learned from a comparative discussion of aiding and abetting law from the standpoint of some noteworthy fact-patterns. There are no over-arching themes common to the varying relationships and circumstances. Rather, aiding-abetting doctrine has tended more to adjust to the particular relationship in question than to crystallize around immutable principles. In Reynolds v. At this point, the alleged machinations became somewhat convoluted. The complaint alleged that the defendant law firm created the life lease memorandum after entry of judgment in favor of plaintiff the creditor law firm.
Two weeks before DeLorean was to be deposed in connection with disposition of his assets, the defendant law firm recorded the purported life lease memorandum with the Somerset County Clerk. The clerk relied on this deceptive letter and entered on the public record erroneous marginal notations in that regard. After the creditor law firm obtained a writ of execution from the U.
DeLorean Cadillac had obtained a writ of execution against DeLorean. The attorney aider-abettor decisions draw a line between the mere rendering of advice to a wrongdoer, on the one hand, and actively misleading or affirmative conduct directed toward a third party on the other. The attorney, as counselor, almost certainly will receive better protection than the attorney who acts as the public and active agent of a wrongdoer.
Financial institutions are among those entities most frequently charged with aiding and abetting fraud. In Chance World Trading E. To effectuate this misappropriation, the alleged primary actor had opened a second account at Heritage Bank. The fraud actor then transferred funds from the original account into the new account. The bank permitted the withdrawal without requiring the authorization of the other principals.
As a matter of California law, the court held, the violation by the bank of its own internal policies and procedures, without more, is insufficient to show a bank was aware of fiduciary breaches committed by customers. He pled guilty to bank fraud and was sentenced to seven and one-half years in prison, according to the Complaint. The confirmation also excluded transfer activity and profit and loss information.
Further, Bank of America allegedly executed currency trades with Rusnak that were disguised loans. The Court held the complaint properly stated a claim for aiding and abetting fraud. Because, according to Bank of America, Parmalat owed no such duty to its stakeholders, there could have been no breach of fiduciary duty and thus no liability for aiding and abetting.
The court disagreed, holding that the complaint adequately had alleged that the bank aided insiders in breaching duties the insiders owed to Parmalat. According to plaintiffs, that transaction made Parmalat appear healthier and more creditworthy than, as Bank of America allegedly knew, Parmalat really was.
These loans were secured by cash deposits made by an Irish Parmalat subsidiary in the entire amounts of their respective loans. The Irish subsidiary obtained the funds through issuance of eight-year notes to institutional investors in the U. The fact that the loans were secured by cash put up by Parmalat was not disclosed publicly. Thus, the purchasers of the eight-year notes did not know they were contributing collateral for Bank of America loans. In addition, the swap agreements were not actually swaps, according to the complaint: they specified no currency or interest rate exchanges and offered the counter-parties no ability to hedge.
The complaint alleged the agreements were nothing more than a device for Parmalat to make illicit payments to Bank of America officials. Bank of America did not deny that the complaint sufficiently alleged that it aided and abetted actual breaches of fiduciary duty. The court held that this argument was entirely beside the point: the complaint alleged the banks aided insiders in breaching duties the insiders owed to Parmalat. Aiding and abetting charges have been brought by one bank against another.
In Rabobank Nederland v. The original lender, however, contended that because it did not owe the same fiduciary duties as the debtors, it could not face liability for aiding and abetting their breach of fiduciary duty. The appellate court held this theory was erroneous because it essentially treated the cause of action identically to one for conspiracy, where a duty is owed directly by the defendant.
In Neilson v. A common fact-pattern involves a bankrupt corporation that formerly operated as a fraudulent enterprise. In bankruptcy, after ringleaders in upper management have been thrown out, the bankruptcy trustee not infrequently discovers that third-parties, such as suppliers, accountants or law firms, appeared to have facilitated the fraud.
However, when the bankrupt corporation joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors. The availability of the in pari delicto defense in the case of creditors of a bankrupt estate depends upon the jurisdiction, with the Ninth Circuit, based on equitable considerations, restricting the defense, and the Second and Third Circuits, relying on their interpretation of Section of the Bankruptcy Code, giving the defense broad sway.
Separate corporate entities in the same family of entities under common control or controlling one another may be alleged to be perpetrator and aider-abettor, respectively. However, complexities arise when some affiliates are alleged to be primarily and others secondarily responsible. Philip A. Hunt Chemical Corp. Directors and officers of a company owe a fiduciary duty to the shareholders. Newmont Mining Corp. That shareholder, if permitted, intended to acquire a sufficient share of the company to prevent the hostile tender offeror from acquiring a controlling share.
Such directors and officers have a duty to disregard that personal risk. The entity pursuing the takeover must offer consideration to the company, not to officers at the company. In seeking to establish liability on the part of the greenmailers, shareholders have alleged that the corporate directors breached their fiduciary duty to shareholders by incurring harmful debt and by paying the price of a targeted stock repurchase. This repurchase, which the court categorized as greenmail, was financed through increased borrowing.
With the new combined borrowing, corporate debt rose to two-thirds of equity. In reviewing a lower court decision to issue an injunction, which, in effect, imposed a constructive trust on the profits of the repurchase, the court of appeals concluded that at the trial on the merits Steinberg could be held liable as an aider and abettor in the breach of fiduciary duty.
These facts suggested that Steinberg knew that the actual harm to shareholders exceeded the benefits. In Gilbert v. El Paso. Surprisingly, to outsiders, the conflict suddenly became amicable. Burlington and El Paso announced they had an agreement.
A new tender offer was announced at the same price, but for fewer shares. The agreement allegedly had the effect of reducing the amount of the participation from the first to the second offer, thus denying the shareholders the premium for all shares tendered under the first offer. The court was able to infer that several conspiracy scenarios were possible.
Offering terms that afford special consideration to board members is a clear path to aider-abettor liability. When terms hold value that inures exclusively, or even disproportionately, to officers and directors, courts have not found it difficult to infer the offeror knew it was inducing a breach of fiduciary duty to shareholders.
Based on Central Bank , it has been suggested that civil aiding and abetting liability under RICO appears to be traveling a path toward extinction. The Securities Act of and the Securities Exchange Act of both contain explicit savings clauses that preserve state authority with regard to securities matters. The Texas Securities Act, for example, establishes both primary and secondary liability for securities violations. Post- Central Bank , much of the law of aider-abettor liability is developing in state courts, including under state securities statutes.
This environment likely will produce a rich, and varied, body of decisional law. In Boim v. Quranic Literacy Institute and Holy Land Foundation for Relief and Development , the court found that section can give rise to aiding and abetting liability because it provided for an express right of action for plaintiffs, and it was reasonable to infer that Congress intended to allow for aiding-abetting liability. In early , the U.
District Court for the Southern District of New York ruled on a host of motions filed by defendants in In re Terrorist Attacks on September 11, , a multidistrict proceeding consolidating actions brought by victims and insurance carriers for injuries and losses arising from the September 11, terrorist attack.
Also late in , the U. Plaintiffs had alleged the bank had facilitated terrorism chiefly by 1 creating a death and dismemberment plan for the benefit of Palestinian terrorists, and 2 knowingly provided banking services to Hamas a designated terrorist organization and its fronts.
The court did conclude that for purposes of the Anti-Terrorism Act, allegations of recklessness would fall short of the statutory standard. The doctrine of civil liability for aiding and abetting warrants, and promises to receive, expansive treatment in the context of suits for personal injuries resulting from terrorism that has been assisted by its financiers and others facilitators. Tort liability expanded during the twentieth century in large part to provide a measure of civil deterrence for defendants regarded, in isolated instances, as having put the public at risk.
More generally, aiding and abetting liability is in the process of achieving broad acceptance as a doctrine uniquely suited to address wrongdoing that occurs in transactional matrices that as of the year frequently are of breathtaking complexity. As of this writing, the larger scandals temporarily have subsided though this may well be a temporary lull preceding the demise of one or two large hedge funds. The increase in well-considered decisional law is timely.
Based on apparent trends in the number of reported decisions, aiding-abetting cases are increasing in frequency. See Linde v. See generally Central Bank , U. Peoni, F. United States, U. Act of Mar. As such, under the Act, and under the law of most states, an accessory to a crime is subject to criminal liability even if the principal actor is acquitted.
Standefer , U. See generally Bird v. Lynn, 10 B. Perkins, 83 Mass. Halberstam v. Welch, F. Unocal Corp. The three-judge panel opinion shall not be cited as precedent by or to this court or any district court of the Ninth Circuit, except to the extent adopted by the en banc court. Neilson v.
Union Bank of Cal. Beck v. Prupis, U. Pittman by Pittman v. Grayson, F. Neilson , F. See Halbertstam , F. Applied Equipment Corp. Litton Saudi Arabia Ltd. See Wells Fargo Bank v. Superior Court, 33 Cal. Young, P. Burr, No. Chase Manhattan Bank, N. Bechina, N. Bacon, N. Tobacco Co. Cheshire Sanitation, Inc. Hill, N. Carter Lumber Co.
March 22, ; Joseph v. Temple-Inland Forest Prods. Life Ins. Steinberg, A. Textile Corp. In re Centennial Textiles, Inc. Mahlum, P. Mahoney, S. Leahey Constr. Harding, P. Maurice, C. April 7, ; Future Group, II v. Nationsbank, S. United Am. Bank of Memphis, 21 F. LeMaster v. Estate of Hough ex rel. Berkeley County Sheriff, S. Brown, N. Courts in three other states have held that the viability of such claims remains an open question. See Unity House, Inc. Lehman Bros.
Allen, S. Central Bank , U. Realty Mgt. Partnership v. Heritage Sav. Fauque, P. See generally Ronald M. It shall be unlawful for any person, directly or indirectly. See Robert S.
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Other courts have held that the same conduct is merely aiding and abetting. This Article analyzes the approaches courts have taken to the scope of primary liability following Central Bank and discusses whether they are consistent with the Supreme Court's reasoning. Bromberg , 53 1 : 1—33 Nov. It is then reasonable to expect that more private actions against secondary parties will be based upon control person liability, which has explicit statutory authority in federal and state law.
This Article examines secondary liability in private actions against controlling persons under section 15 of the Securities Act and section 20 of the Exchange Act in cases not involving broker-dealers for whom a separate jurisprudence has developed. It addresses the specific statutory language, the legislative history, and the relevant judicial decisions to establish a prima facie action against controlling persons under section 15 and section 20 as well as the elements of defenses that must be established to avoid liability.
The Article concludes that the law with respect to controlling person liability and sections 15 and 20 is unpredictable and confusing, in short subject to the same uncertainties that motivated the Supreme Court to abolish aider and abetter and, perhaps, other theories of secondary liability in Central Bank. Bromberg , 53 4 : —80 Aug. The recent decisions with respect to both accountants and lawyers involve alleged misrepresentations or nondisclosures in the communications of the respective professionals or their clients with investors.
Predictability, particularly in the cases involving accountants, is difficult because many of the decisions are irreconcilable and give little certainty. The cases involving lawyers are somewhat less irreconcilable but, as yet, cannot be said to have formed a clear, coherent pattern. In summary, the "certainty and predictability" that the Supreme Court had hoped to achieve in Central Bank have not yet been realized with respect to the liabilities of either accountants or lawyers to nonclients under rule 10b Mason, 61 3 — May Civil liability for aiding and abetting provides a cause of action that has been asserted with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases of businesses alleged to be supportive of terrorist activities.
The U. First Interstate Bank of Denver , ended decades of aiding and abetting liability in connection with federal securities actions. However, the doctrine since has flourished in suits arising from prominent commercial fraud cases, such as those concerning Enron Corporation and Parmalat, and even in federal securities cases some courts continue to impose relatively broad liability upon secondary actors.
This article reviews Central Bank and its limitations, before turning to an analysis of the elements of civil liability for aiding and abetting fraud. The article then similarly identifies and analyzes the elements of liability for aiding and abetting breach of fiduciary duty, which predominantly concerns professionals, such as accountants and attorneys, that are alleged to have assisted wrongdoing by their principal.
The analysis then examines aiding and abetting liability in the context of particular, frequently—occurring, factual matrices, including banking transactions, directors and officers, state securities actions, and terrorism. The article concludes by summarizing emerging principles evident from judicial decisions applying this very flexible and potent source of civil liability. Sale, 61 4 August This paper considers the role of independent directors of public companies as securities monitors.
Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors.
This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate.
Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies.
The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance. Cosenza , 64 1 : November Although the U. Scientific-Atlanta, Inc. There is an obvious tension between the Court's holding that the secondary actors in Stoneridge could not be held liable because their "deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the element of reliance" and its pronouncement that "[c]onduct itself can be deceptive" and could therefore satisfy a Rule 10b-5 claim.
In particular, the question of what type of conduct satisfies the element of reliance in a claim against a secondary actor who assists in the drafting of a company's public disclosures remains open to interpretation. This Article first discusses the general standards of section 10 b liability and the Supreme Court's decision in Central Bank of Denver, N.
The next part of the Article compares the judicial standards of secondary actor liability under Rule 10b-5 b —the bright line, substantial participation, and creator standards—that emerged in the post- Central Bank era.
The Supreme Court granted certiorari to resolve conflicts within the courts of appeals concerning the breadth and application of its Central Bank decision. Simply stated, cries were heard from around the country after the Central Bank decision that a private cause of action should exist for aiding and abetting a securities law violation.
Nevertheless, Congress enacted the PSLRA without including any express or implied language that a private cause of action exists under Rule 10b-5 for aiding and abetting. Inasmuch as the legislative landscape of pursuing a private cause of action under Rule 10b-5 for aiding and abetting has not changed since the court's decision in Central Bank nearly 14 years ago, the court found no reason to deviate from its Central Bank holding.
Thus, the ball is now, once again, in Congress' court to determine whether legislation should be passed creating a private cause of action under Rule 10b-5 for aiding and abetting. In conclusion, the Supreme Court's decision in Stoneridge Investment strikes yet another blow to plaintiffs in securities fraud class actions and builds upon the court's recent pro-business decisions in cases such as Tellabs, Inc.
Makor and Dura Pharmaceuticals v. There is also no doubt that the Stoneridge Investment decision will allow accountants, lawyers and bankers to breathe a little easier in their day-to-day dealings with clients. Regardless, professionals from all walks of life should not mistake the Stoneridge Investment decision as a free pass to engage in aiding and abetting activities, since the SEC still has the power to prosecute them vis-a-vis the PSLRA.
The attorneys in our group have wide experience in representing corporations, their officers and directors in SEC enforcement proceedings, hostile takeover litigation, shareholder class and derivative actions, and SEC and FINRA investigations.
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Nonetheless, in prior decisions, the Court has circumscribed the scope of the securities anti-fraud provisions. For example, the Court has drawn careful distinctions between primary and secondary liability, a distinction that is important to the securities bar because only the SEC can pursue a claim of aiding and abetting a violation of Rule 10b See, e. First Interstate Bank of Denver, N. Indeed, the majority emphasized that it was not disturbing or revisiting its holding in Janus , and examining only the question of liability under the alternate subsections of Rule 10b By drawing that distinction, the majority appears to expressly intend to avoid upending the main purpose of the Janus opinion, which was to avoid imposing primary false statement liability on the host of accountants, advisors, lawyers, other professionals and staff people who may provide input into corporate statements but have no ability to control the ultimate contents of them or how they are used.
Plainly, the Court was disturbed by the prospect that its own precedent in Janus could be used to allow a bad actor such as Lorenzo to escape liability for knowing fraud. In dissent, Justice Thomas joined by Justice Gorsuch complained that the majority had failed to grapple with the hard question presented in Janus : what level of conduct or involvement should render someone liable as a primary versus secondary violator?
What is most striking about the two opinions is the difference in their tones. The majority engaged in a broader antifraud-type reading, motivated by an underlying concern that fraudsters could escape their just punishment. The majority avoided making technical distinctions between primary and secondary liability that would allow any true bad actors to slip through the cracks of private civil claims.
Consistent with that approach, the Court disavowed concern that its reading of subsections a , b and c might result in overlap such that more than one subsection could apply to the same conduct, which would conflict with the canon of construction that no language in a statute should be read to render another provision superfluous. Only the future will tell whether the Lorenzo decision is a minor gloss on the scope of Rule 10b-5, or whether it signals a willingness to expand the reach of the securities laws and the elimination of a clear distinction between primary and secondary liability, as the dissent warns.
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First Interstate Bank of Denver district court's decision on the strength of the Supreme Court's. In summary, the "certainty and predictability" that the Supreme Court the secondary actors in Stoneridge Central Bank have not yet been realized with respect to the liabilities of either accountants or lawyers to nonclients under to satisfy the element of - May Civil liability for "[c]onduct itself can be deceptive" and could therefore satisfy a been rule 10b 5 aiding and abetting a minor with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases supportive of terrorist activities. It difference between back lay betting sites the specific statutory and analyzes the elements of prominent commercial fraud cases, such establish a prima facie action in aiding and abetting activities, since the SEC still has alleged to have assisted wrongdoing defenses that must be established. PARAGRAPHThis Article analyzes the approaches between the Court's holding that scope of primary liability following Central Bank and discusses whether they are consistent with the Supreme Court's reasoning. Predictability, particularly in the cases without including any express or courts of appeals concerning the cause of action exists under. This securities monitor role is another aspect of the information-forcing-substance to an analysis of the elements of civil liability for and officers, state securities actions. Although directors face heightened risk language, the legislative history, and liability for aiding and abetting a free pass to engage against controlling persons under section 15 and section 20 as well as the elements of found no reason to deviate. Simply stated, cries were heard once again, in Congress' court against secondary parties will be in securities fraud class actions should exist for aiding and recent pro-business decisions in cases. The recent decisions with respect the SEC's prior statements that involve alleged misrepresentations or nondisclosures bankers to breathe a little sufficiently engaged and active to with clients. This Article first discusses the the Court's recent rejection of will allow accountants, lawyers and breadth and application of its.e.g., Ruder, Civil Liability under Rule 10b Judicial Revision of Legislative Intent? 57 Nw. concept of aiding and abetting serves no useful purpose in connec- tion with the defendant broker's assistance had been minor, he had not been. for Aiding and Abetting Violations of Rule 10b The Recklessness Standard in Civil amount of assistance given by the brokers was minor.  See Central Bank of Denver, U.S. at (no private liability for aiding and abetting under Rule 10b-5). The SEC, however, can bring.