Academic

This is the result we've all been waiting for (OK, maybe just me).  Joseph Collins, as you may recall, is a partner in Mayer, Brown and was named in a shareholder suit under Rule 10b-5 for committing securities fraud as the outside counsel for Refco.  He claimed he had no idea that fraud was occurring and that he was kept in the dark.  A district court judge dismissed the lawsuit against him, reminding us all that parties may not be sued as aiders and abetters to securities fraud, but only as primary actors.  And, the court, must have reasoned, no jury could find by a preponderance of the evidence that Mr. Collins was a primary actor in the Refco securities fraud.  Now, in private securities litigation speak, this doesn't mean that a jury couldn't find that Collins knew about the fraud and kept going; in fact, the district judge thought that was almost surely true.  But to find that Collins perpetrated securities fraud against investors after Stoneridge Investors v. Scientific-Atlanta, the investors must have known that the fraudulent statements were coming from Collins in order to have "relied" on him.  So, since the fake documents that were prepared by Collins were put in filings without investors really associating them with the law firm, Collins is in the clear as far as a private civil lawsuit goes.

Well, now a jury has found that beyond a reasonable doubt, Mr. Collins committed securities fraud.  Not just that he was engaged in a conspiracy to commit securities fraud, but also that he committed two counts of securities fraud.

One of these would seem to be wrong to a bystander just walking by, observing.  How could the evidence against someone be enough for a criminal conviction, but not enough for a civil lawsuit?  The short answer is because the elements of criminal fraud don't require much, and the elements of securities fraud, at least for private parties, do.  The prosecutor doesn't have to prove that anyone relied or was damaged by Collins' fraud -- only that he knew of the fraud and kept going.  Because we have made a decision that the frivolous securities lawsuit is inefficient and too costly for defendants to bear, we require private plaintiffs to prove (basically without discovery) that they relied on the particular actor's part of the fraud and that they were economically damaged.  This, obviously can lead, and has in this instance led, to some crazy situations.  What a crazy world if Mr. Collins is sufficiently blameless to avoid civil liability but must spend part of his life in prison for the same act.  Sentencing will come later.  The CEO is in prison for 16 years; the President for 10 years.

If readers are interested in the legal structures and practices that make it possible for this disconnect, feel free to read The Undercivilization of Corporate Law (33 J. Corp. L. 361 (2008)).