Corporations and their directors and officers face an increased risk of being sued by the Securities and Exchange Commission for aiding and abetting the frauds of other companies, the SEC’s former enforcement chief says.
To be sure, the chances of Congress boosting plaintiffs’ ability to sue on such grounds have dimmed with the loss of a Democratic supermajority in the Senate. But a newly aggressive SEC under chairman Mary Schapiro is likely to pursue aiding-and-abetting actions vigorously, according to Linda Chatman Thomsen, the head of the commission’s enforcement division from 2005 to 2009.
“Regardless of what changes legislatively,” she said at a D&O liability conference in New York last Wednesday, “I would not be surprised, under the appropriate circumstances, to see this commission pushing on aiding and abetting.” In contrast, under previous chairman Christopher Cox there was “pushback” at the SEC against the notion of bringing actions against a broadening scope of companies under the theory, she said.
In July 2009, Sen. Arlen Specter introduced a bill that would amend the U.S. Securities Exchange Act of 1934 “to subject to liability in a private civil action any person that knowingly or recklessly provides substantial assistance to another person (aids and abets)” in the commission of a fraud. If enacted, the bill would greatly expand the number of parties that could be found in violation of securities laws and could make business partnering riskier, observers say.
Such a law became necessary to would-be plaintiffs when the U.S. Supreme Court, in its January 2008 Stoneridge Investment Partners v. Scientific Atlanta decision, threw out the use of the notion of “scheme liability” in shareholder suits against alleged aiders and abettors.
SEC Rule 10b-5, codified under the 1934 act, formed the basis for scheme liability. The rule made it unlawful to “employ any device, scheme, or artifice to defraud.” Employing that theory, the commission has pursued, with varying degrees of intensity over the years, “secondary” actors in frauds: companies that have helped “primary” players cook the books, for example.
At the conference, Thomsen, now a partner in the law firm Davis Polk & Wardwell, recalled her use of the theory in cases the commission brought against Citigroup, JPMorgan Chase, and Merrill Lynch for aiding and abetting in Enron misdeeds. Acknowledging her “distinct bias here,” she went on to assert that “some of the best Enron-related cases were the cases against the banks [that] were brought on aiding-and-abetting theories. I think they probably pushed the envelope — but they pushed the envelope appropriately.”