Plaintiffs’ lawyers disagree. In recent years, the Supreme Court “has taken an excessively narrow and constricted view of liability for secondary actors,” according to Ira Schochet, a partner at Labaton Sucharow and president of the National Association of Shareholder and Consumer Attorneys. His nonprofit organization supports the SEC’s recent amicus brief and Specter’s bill. The most recent Supreme Court decision on the issue, StoneRidge v. Scientific Atlanta, allows corporations’ gatekeepers to “effectively be immune from legitimate claims by injured investors,” the group asserts.
In StoneRidge, the judges decided earlier this year that business partners of Charter Communications could not be held culpable for the cable company’s sham transactions because they had not themselves issued any publicly disseminated statements that could have misled investors. That case made moot the Enron investors’ suit against the banks accused of helping the now-collapsed energy giant misrepresent its financial health.
As it is, wrongdoers convicted of fraudulent activities don’t necessarily have to pay up in civil court — as long as they can show they merely aided and abetted the fraud, but were not the primary culprit in the wrongdoing. For instance, Collins, the Mayer Brown partner in the Refco case, is awaiting sentencing after being found guilty of conspiracy and securities-fraud charges last month. However, in the civil case, the judge ruled Collins cannot be sued by Refco investors that accuse him of helping the firm hide critical financial data from investors.
Collins was found guilty of drafting misleading information that was published in Refco’s financial reports. While he wrote the text, investors did not know he wrote it, and therefore weren’t fooled by him, in the eyes of the court. Collins’s attorney did not respond to CFO.com’s request for comment. In a statement to CFO.com, Mayer Brown noted “that the SEC’s brief states explicitly that it is not arguing for either affirmance or reversal of [the judge's] decision.” In addition, the SEC is not asking the lower court to reconsider its dismissal of the law firm from the case.
The Private Securities Litigation Reform Act of 1995 is often cited in these cases, as it aims to limit frivolous lawsuits involving securities laws. Essentially, the act allows private litigants to sue only if they can prove the accused company did more than just aid and abet the wrongdoing. On the other hand, the SEC can take up their cause by collecting damages from those aiding and abetting the fraud.
However, the SEC has continually reminded the courts that private litigation cases still have a purpose “because they supplement the civil law enforcement actions the Commission brings,” the regulator wrote in its amicus brief last week, siding with the Refco investors.
The SEC noted that the lower court’s judge, Gerard Lynch, had too narrowly interpreted the rules. “In the Commission’s view, 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,” the commission’s attorneys wrote.
Unlike Lynch, the SEC believes a person who creates a misstatement could be considered a primary violator even if investors did not know who made the misstatement (such as in anonymous online postings or, in the case at hand, a lawyer who drafts the management’s discussion and analysis text in a financial filing).
However, Lynch apparently thought his hands were tied. In his opinion on the Refco case earlier this year, the judge noted that the high court and Congress “have declined to provide a private right of action for victims of securities fraud against those who merely — if otherwise substantially and culpably — aid a fraud that is executed by others.”
Lynch further suggested that the issue should be raised again. He called it “perhaps dismaying” that people who have participated in a fraudulent scheme could be convicted but do not have to pay damages to their victims. Citing the U.S. Code, he wrote, “In the criminal context when the Godfather orders a hit, he is only an accomplice to murder — one who ‘counsels, commands, induces, or procures’ — but he is nonetheless liable as a principal for the commission for the crime.”