You can sue primary violators of Rule 10b-5. You cannot sue those who merely aid and abet a securities fraud. Trouble is, the line between primary violators and those who aid and abet a securities fraud moves like the San Andreas fault.
In the landmark Central Bank of Denver case, the US Supreme Court ruled that there is no private right of action available against those who aided and abetted another to commit securities fraud. In other words, you can't sue people who merely helped another to defraud you.
Ever since the Central Bank decision, there has been considerable disagreement about where to draw the line between aiders and abettors and primary violators (who, unlike aiders and abettors, can be sued for investment losses).
The debate about who can be sued for securities fraud cannot be settled until there is a consensus line in the sand type test for separating primary violators from mere helpers.
The following post, reprinted from Jim Hamilton’s World of Securities Regulation, describes the SEC's position on a major point of controversy in the "who to sue" debate.
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In an amicus brief filed in the Second Circuit Court of Appeals, the SEC said that attribution of a false or misleading statement to a person is only one means by which that person can create the statement and thus be a primary violator under the Central Bank rubric. A person who, acting with the requisite scienter, creates a misstatement is a primary violator regardless of whether the victim knows the person’s identity. Thus, the SEC disagreed with the district court’s holding that, in order for a person to be a primary violator with respect to a publicly disseminated false or misleading statement, the person must have been identified to potential investors as the maker of the statement or, in other words, the statement must have been attributed to the person at the time it was made. Pacific Management Company LLC v. Mayer Brown LLP, CA-2, on appeal from SD NY, 09-1619-cv.
This is a Rule 10b-5 private damages action. While the SEC, unlike a private party, has express statutory authority to bring aiding and abetting claims, there are instances where the Commission might need to assert a claim for primary liability. The SEC is concerned that the district court appeared to recognize language in the Second Circuit’s 2008 ruling in US v. Finnerty suggesting in dictum that attribution is required even in a government law enforcement action.
In Central Bank v. First Interstate Bank, the Supreme Court drew a distinction between persons who aid and abet securities fraud violations and primary violators of Rule 10b-5, ruling that private parties cannot bring actions against aiders and abettors, only against primary violators. The Court said that secondary actors, such as lawyers and accountants, could be primary violators if they made a false or misleading statement.
In the SEC’s view, a person makes a false and misleading statement and can thus be liable as a primary violator of Rule 10b-5 when he or she creates the statement. In this context, a person creates the statement if they write or speak the statement or if they provide the false or misleading information that another person puts into the statement or if they allow the statement to be attributed to them. For example, a person who actually drafted an offering document containing false or misleading statements can be a primary violator, as can a person who supplied the writer with the false or misleading information in the document, as can a person who signed the offering document or otherwise acknowledged to investors that the statements were his or her own.
The SEC argued that its position is consistent with the Court’s Central Bank ruling. The Court did two things in Central Bank, said the SEC, first the Court held that there is no private right of action for aiding and abetting under Rule 10-5 but only for primary violations and, secondly, it stated that a plaintiff would have a private cause of action against a secondary actor for primarily violating Rule 10b-5 when the secondary actor was a primary violator, that is, had, among other things, made a false or misleading statement. According to amicus, the Court thus excluded liability when a person’s responsibility for a false or misleading statement did not rise to the level of a primary violation and made clear that if a person’s liability did rise to that level, then the person would be liable even though he or she might not have been the principal actor in the alleged fraudulent activity.
The word ‘’make’’ as used in Central Bank, noted the SEC, does not give rise to a requirement that only a person who has been identified to investors can be deemed to have made a statement. A person can ``make’’ a false or misleading statement anonymously or indirectly through someone else.
A test imposing primary liability when a person creates a false or misleading statement reflects both of the Central Bank concerns, said the SEC. Such a person is, with regard to the statement, not just an aider and abettor, he or she is responsible for the statement coming into being. As such, the person should be held primarily liable. And, continued amicus, a person creating a false or misleading statement would be primarily liable without regard to whether he or she acted alone or with others. They would also be primarily liable regardless of whether they initiated the false or misleading statement.
The SEC also contended that an attribution requirement would shield significant misconduct from liability by allowing a person who created a false or misleading statement to escape primary liability by acting anonymously or in another’s name. Thus, the SEC reasoned that an attribution requirement could provide a defense for the person having the greatest culpability for a deception.
Thank you Jim Hamilton’s World of Securities Regulation.
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There is an answer to the "who to sue" question-
Sue anyone you have a reasonable and good faith belief may have played a core role in committing securities fraud.
Then just wait for the motion to dismiss based on Central Bank of Denver...
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