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Aiding and Abetting Securities Fraud

Rule 10b-5 (the primary prohibition against securities fraud) does not touch on aiding and abetting in terms of securities liability. See Central Bank of Denver v. First Interstate of Bank of Denver, 511 U.S. 164 (1994); Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 552 U.S. 148 (2008).

This is important for a number of reasons. A wronged party has a right to a civil action against any person found liable under the securities laws. Transactions can be overturned and money damages are sometimes rewarded. As such, several indirect parties — accountants, investment bankers, attorneys, etc. — are free from large amounts of civil liability initiated by other private citizens (The SEC can file a civil suit).

This oversight has ruffled the feathers of many in Congress. Senator Arlen Spector, before being voted out of office, introduced legislation which would make aiders and abetters liable for civil damages. Congresswoman Maxine Waters introduced similar legislation. To date, though, the efforts are still stalled in Congress. The state of the law could change.

However, it is important to emphasize that the absence of aiding and abetting liability does not mean that secondary actors always escape liability. Such indirect actors who themselves employ a manipulative device or make material misstatements or omissions on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5. See Central Bank of Denver v. First Interstate of Bank of Denver, 511 U.S. 164, 191 (1994).

As you can imagine, the distinction between a primary violator and secondary violator is unclear.

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