Aiding and Abetting
The Implications of Central Bank
Joel Seligman, 49(4): 1429–49 (Aug. 1994)
This Article addresses seriatim: (i) 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); (ii) the implications of that decision; and (iii) what should be the appropriate liability standard in derivative claims.
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.—The Beginning of an End, Or Will Less Lead to More?
Lisa Klein Wager and John E. Failla, 49(4): 1451–66 (Aug. 1994)
This Article explores the implications of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A ., 511 U.S. 164 (1994), from a practitioner's vantage point. In particular, it identifies the most likely areas of future litigation related to alternative theories of liability that may be asserted against parties who traditionally have been charged with aiding and abetting securities fraud. The authors question whether the demise of aiding and abetting liability will, as a practical matter, lessen the likelihood that professionals and other "outsiders" will be sued.
Central Bank of Denver v. SEC
Simon M. Lorne, 49(4): 1467–78 (Aug. 1994)
The author, General Counsel of the SEC, presents a hypothetical future opinion of the Supreme Court. The opinion demonstrates that the Court's recent decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), cannot properly be read as precluding the possibility that the SEC may still bring enforcement actions seeking injunctive or other civil relief against those who aid or abet violations of section 10(b) and rule 10b-5.
The Future of Aiding and Abetting and Rule 10b-5 After Central Bank of Denver
David S. Ruder, 49(4): 1479–87 (Aug. 1994)
This Article urges Congress to amend section 10(b) of the Exchange Act—which is highly unlikely to happen— to provide aider and abettor liability and suggests that Congress may be faced with the need to deal with a Supreme Court majority that will be limiting the law of securities fraud under rule 10b-5.
SEC v. Central Bank: A Draft Opinion for the Court's Conference
Edward C. Brewer, III and John L. Latham, 50(1): 19–46 (Nov. 1994)
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the Supreme Court held that section 10(b) of the Exchange Act does not create aiding and abetting liability. That decision involved private parties suing under the section 10(b) implied right of action. After Central Bank, the SEC has dismissed most of its aiding and abetting claims and requested that Congress amend section 10(b), but is pursuing a small number of test cases in which it maintains that the decision does not apply to its enforcement actions under the existing statute. Simon M. Lorne, General Counsel of the SEC, presented a hypothetical opinion to that effect in Central Bank of Denver v. SEC, 49 BUS. LAW. 1467 (1994), and three other symposium Articles commented on the questions and problems raised by the Central Bank decision. The authors, who are counsel of record to an individual aiding and abetting defendant in a test case in the Eleventh Circuit and the Northern District of Georgia, present a contrary hypothetical opinion explaining why, after Central Bank, the SEC may not pursue aiding and abetting claims under the existing section 10(b).
A New Standard for Aiders and Abettors Under the Private Securities Litigation Reform Act of 1995
Lewis D. Lowenfels and Alan R. Bromberg, 52(1): 1–12 (Nov. 1996)
Generally speaking, during the past twenty years, the elements to be proved to establish an action for aiding and abetting securities violations by private parties or by the SEC have been same: (i) a primary violation by another person; (ii) some degree of the defendant's knowledge of the primary violation, recklessness, or other scienter; and[fj(iii) substantial assistance by the defendant. 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), eliminated damage actions brought by private parties for aiding and abetting securities violations. The Private Securities Litigation Reform Act of 1995 unequivocally reaffirmed the SEC's authority to maintain civil enforcement actions in court against aiders and abettors. The central thesis of this Article is that the Reform Act (i) will require the second element of aiding and abetting to scale upward to a "knowing" or full scienter requirement, eliminating the constructive knowledge in the form of recklessness and "should have known" which had previously sufficed in some cases; and (ii) will require the third element of aiding and abetting to scale upward to require the SEC to prove that the actions and/or inactions of the alleged aider and abettor were a substantial proximate causal factor of the primary violation and loss, eliminating the "but for" causation which had previously sufficed in some SEC cases.
Secondary Liability Under Rule 10b-5: Still Alive and Well After Central Bank?
Gareth T. Evans and Daniel S. Floyd, 52(1): 13–34 (Nov. 1996)
Although in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the Supreme Court held that there is no aiding and abetting liability in a private action under rule 10b-5, the Court recognized that secondary actors are still subject to liability for primary violations. Since Central Bank, numerous lower courts have struggled with the issue of when the conduct of secondary actors (such as accountants, underwriters, and lawyers) gives rise to primary as opposed to aiding and abetting liability. Some courts have imposed primary liability on secondary actors for assisting in the preparation of statements that are alleged to contain misrepresentations or omissions. Other courts have held that the same conduct is merely aiding and abetting. This Article analyzes the approaches courts have taken to the scope of primary liability following Central Bank and discusses whether they are consistent with the Supreme Court's reasoning.
Controlling Person Liability Under Section 20(a) of the Securities Exchange Act and Section 15 of the Securities Act
Lewis D. Lowenfels and Alan R. Bromberg, 53(1): 1–33 (Nov. 1997)
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), eliminated federal private securities actions against secondary parties based upon aiding and abetting and possibly on conspiracy, respondeat superior, and common law agency as well. It is then reasonable to expect that more private actions against secondary parties will be based upon control person liability, which has explicit statutory authority in federal and state law. This Article examines secondary liability in private actions against controlling persons under section 15 of the Securities Act and section 20 of the Exchange Act in cases not involving broker-dealers (for whom a separate jurisprudence has developed). It addresses the specific statutory language, the legislative history, and the relevant judicial decisions to establish a prima facie action against controlling persons under section 15 and section 20 as well as the elements of defenses that must be established to avoid liability. The Article concludes that the law with respect to controlling person liability and sections 15 and 20 is unpredictable and confusing, in short subject to the same uncertainties that motivated the Supreme Court to abolish aider and abetter and, perhaps, other theories of secondary liability in Central Bank.
Liabilities of Lawyers and Accountants Under Rule 10b-5
Lewis D. Lowenfels and Alan R. Bromberg, 53(4): 1157–80 (Aug. 1998)
Following 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), abolishing aiding and abetting liability in private actions, accountants and lawyers remain potentially liable to nonclients under rule 10b-5 on grounds of primary liability in connection with their clients' securities fraud. The recent decisions with respect to both accountants and lawyers involve alleged misrepresentations or nondisclosures in the communications of the respective professionals or their clients with investors. Predictability, particularly in the cases involving accountants, is difficult because many of the decisions are irreconcilable and give little certainty. The cases involving lawyers are somewhat less irreconcilable but, as yet, cannot be said to have formed a clear, coherent pattern. In summary, the "certainty and predictability" that the Supreme Court had hoped to achieve in Central Bank have not yet been realized with respect to the liabilities of either accountants or lawyers to nonclients under rule 10b-5.
Civil Liability for Aiding and Abetting
Richard C. Mason, 61(3):1135—1182 (May 2006)
Civil liability for aiding and abetting provides a cause of action that has been asserted with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases of businesses alleged to be supportive of terrorist activities. The U.S. Supreme Court, in its 1994 decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver , ended decades of aiding and abetting liability in connection with federal securities actions. However, the doctrine since has flourished in suits arising from prominent commercial fraud cases, such as those concerning Enron Corporation and Parmalat, and even in federal securities cases some courts continue to impose relatively broad liability upon secondary actors. This article reviews Central Bank and its limitations, before turning to an analysis of the elements of civil liability for aiding and abetting fraud. The article then similarly identifies and analyzes the elements of liability for aiding and abetting breach of fiduciary duty, which predominantly concerns professionals, such as accountants and attorneys, that are alleged to have assisted wrongdoing by their principal. The analysis then examines aiding and abetting liability in the context of particular, frequently–occurring, factual matrices, including banking transactions, directors and officers, state securities actions, and terrorism. The article concludes by summarizing emerging principles evident from judicial decisions applying this very flexible and potent source of civil liability.
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
Applying Stoneridge to Restrict Secondary Actor Liability Under Rule 10b-5
Todd G. Cosenza, 64(1): 59-78 (November 2008)
Although the U.S. Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., was widely viewed as a sweeping rebuke of the application of "scheme" liability to secondary actors, the Court's decision also raised some questions regarding the precise scope of secondary actor liability under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. There is an obvious tension between the Court's holding that the secondary actors in Stoneridge could not be held liable because their "deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the element of reliance" and its pronouncement that "[c]onduct itself can be deceptive" and could therefore satisfy a Rule 10b-5 claim. In particular, the question of what type of conduct satisfies the element of reliance in a claim against a secondary actor who assists in the drafting of a company's public disclosures remains open to interpretation.
This Article first discusses the general standards of section 10(b) liability and the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. The next part of the Article compares the judicial standards of secondary actor liability under Rule 10b-5(b)—the bright line, substantial participation, and creator standards—that emerged in the post- Central Bank era. It then discusses Stoneridge and the Court's recent rejection of secondary actor "scheme" liability under Rule 10b-5(a) and (c). Finally, it reviews recent applications of Stoneridge and analyzes the implications of these decisions going forward.
Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations
Eric S. Klinger-Wilensky and Nathan P. Emeritz, 71(1): 53-86 (Winter 2015/2016)
The liability of RBC in last year’s In re Rural/Metro decision was derivative of several breaches of fiduciary duty by the Rural/Metro directors, including those directors’ failing “to provide active and direct oversight of RBC.” In discussing that failure, the Court of Chancery stated that a “part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management and their advisors.” In the year since Rural/Metro, there has been an ongoing discussion—in scholarly and trade journals, courtrooms and the marketplace—regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve. In this article, we set out our belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor. We then discuss four contractual provisions that, we believe, are helpful in providing the active and direct oversight that was found lacking in Rural/Metro.
The Case Against Fiduciary Entity Veil Piercing
Mohsen Manesh; 72(1): 61-100 (Winter 2016/2017)
The doctrine of USACafes holds that whenever a business entity (a “fiduciary entity”) exercises control over and, therefore, stands in a fiduciary position to another business entity (the “beneficiary entity”), those persons exercising control, whether directly or indirectly, over the fiduciary entity (the “controller(s)”) owe a fiduciary duty to the beneficiary entity and its owners. Focusing on control as the defining element, courts have applied this far-reaching doctrine across all statutory business forms—including corporations, limited partnerships, and limited liability companies—and through successive tiers of parent-subsidiary entity structure to assign liability to the individuals who ultimately exercise control over an entity. In this respect, USACafes enables what two prominent business law jurists have aptly described as “a particularly odd pattern of routine veil piercing.”
This article argues that USACafes is a needless doctrine that stands in conflict with other, more fundamental precepts of law and equity. Accordingly, when presented with the opportunity, the courts of Delaware and other jurisdictions should reject its holding. Instead, the law ought to respect the fiduciary entity for what it is: a legal person separate and apart from its owners and controllers. If the limited liability veil of a fiduciary entity is to be pierced, then it should be under the more rigorous legal standard that courts have traditionally applied in veil-piercing cases.