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Securities Fraud Aiders and Abettors Better Watch Out

Senator Arlen Specter (D-Pa.) has proposed a bill which would create a cause of action for private litigants seeking to sue individuals or businesses for aiding/abetting securities fraud. Since the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), private litigants have only been able to sue primary violators for securities fraud under Section 10(b) of the 1934 Securities Exchange Act.  At present, only the Securities and Exchange Commission can bring an action for aiding and abetting securities fraud violations. Proponents of the proposed bill, however, believe that the SEC has not or cannot do enough on its own and that would-be plaintiff investors need more resources.

So what does this mean for the future of securities litigation? From the plaintiff's perspective, the ability to bring a cause of action against aiders and abettors will almost certainly provide them with relief not otherwise available. In the wake of such scandals as Enron, Tyco, Madoff and numerous other Ponzi-schemes, many of which are just coming to light, plaintiffs would be able to sue individuals and businesses who would otherwise not meet the definition of a "primary violator" under Section 10(b). No longer would Plaintiffs be effectively confined to suing a defunct corporation and jailed management.  Accounting firms, law firms and other tangential parties with deep pockets could face exposure. Of course, it remains unclear how aiding and abetting liability could be found against such "secondary" actors without somehow altering the now stringent "scienter" and particularity" pleading requirements for securities fraud. Perhaps this is why, in addition to the proposed aiding/abetting bill, Senator Specter also introduced earlier this month a bill that would seemingly allow plaintiffs to survive early motion practice by defendants to dismiss cases for failure to meet these requirements.

Will the pendulum swing in favor of plaintiffs? Maybe. And proponents of the bill have compelling arguments as to why it should. Since Central Bank was decided in 1994, Congress has, for the most part, taken steps to make it progressively more and more difficult for private securities litigants to maintain securities fraud suits. In part, this was in response to rising fears of "strike suits" or what some characterize as abusive or frivolous litigation - a fear which studies have shown, in hindsight, may not have been justified. Moreover, those in favor of the proposed bill will surely point to the numerous scandals that have been uncovered in the past decade and a half as grounds for paring back stringent securities fraud pleading standards. And this dovetails into the argument that the SEC, standing alone, cannot do enough to protect defrauded investors.

It is anyone's guess whether the securities fraud laws will be reformed in the near future. Health care has taken center stage in congressional debates and that will probably not leave room for much else. For now, the prospect of extended securities fraud liability will have to suffice as a deterrent to aiders and abettors.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on August 17, 2009 (boomark / email).