Securities Law - Should Congress Enact Legislation Allowing Those Who Aid And Abet Securities Law Violations To Be Held Liable?

A recent survey was distributed by Opinion Research Corporation to determine if investors in securities markets should have additional rights. About 1,000 people responded. Seventy-four percent (74%) stated that there should be additional rights to seek redress for losses as a result of corporate wrongdoing. Ninety percent (90%) believe that those who participate in financial fraud such as knowingly engaging in sham transactions should be held accountable to investors.

The President of the National Association Of Shareholder And Consumer Attorneys, Ira Schochet, in a press release stated, “America must understand that Congress and the Administration must substantially increase accountability in our financial markets in order to protect investors and reduce the likelihood of systemic crisis.” Schochet, a partner in the New York law firm of Labaton Sucharow, is an experienced securities class action lawyer. Schochet also stated that the survey results show an overwhelming support for Congress to restore liability for those who aid and abet securities fraud and for those who manipulate public disclosures. Schochet said that Congress can accomplish these goals in part by reversing the principles set forth in Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., 522 U.S. 148 (2008) and Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) In Stoneridge, the U.S. Supreme Court held that those who aid and abet securities fraud are not liable. In that case, customers and suppliers of a cable company helped Stoneridge inflate its revenue by engaging in sham transactions to mislead the issuers’ auditors. The U.S. Supreme Court held that because the customers and suppliers owed no duty to the investors, they were not primarily liable for the fraud.
In Central Bank the U.S. Supreme Court held that the delay in updating an old land appraisal until after a closing was aiding and abetting unlawful conduct but did not give rise to primary liability under Section 10(b)(5). Specifically, the Court stated at p. 179: “[f]rom the fact that Congress did not attach private aiding and abetting liability to any of the express causes of action in the securities Acts, we can infer that Congress likely would not have attached aiding and abetting liability to § 10(b) had it provided a private § 10(b) cause of action.”

Senator Arlen Specter recently introduced legislation to give litigants a cause of action against aiders and abettors of securities fraud. Senator Specter recommended that the Securities Exchange Act of 1934 be amended to provide for private civil actions. Specter also stated that fraud involving companies such as Enron, Refco, Tyco and Worldcom have shown that secondary actors such as lendors, bankers, business affiliates and lawyers actively participate on occasion in actions that enable securities fraud. He went on to make reference to a decision by United States District Court Judge, Gerald Lynch in In re Refco Inc. Sec. Litig., SD NY No. 1-05-CV-08628 (March 2009) in which Judge Lynch suggested Congress reexamine the aiding an abetting issue. The Refco case involved a securities class action against Chicago law firm Mayer Brown LLP over its alleged role in the Refco fraud. The claims against Mayer Brown were dismissed.

Judge Lynch stated that:
“While the impulse to protect professionals and other marginal actors who may too easily be drawn into securities litigation may well be sound, a bright line between principals and accomplices may not be appropriate....There are accomplices and there are accomplices … some civil accomplices are deeply and indispensably implicated in wrongful conduct.”

The U.S. Better Business Bureau quickly issued a statement opposing the proposed legislation. Doubtless the proposed legislation will be opposed by the Republican members of the senate.