|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
10b-5 'Scheme' Liability
Gregory A. Markel and Gregory G. Ballard
The National Law Journal. November 13, 2006
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EXCERPT: 'Central Bank' allowed for secondary-actor liability 9th Circuit modified the basic test promoted by SEC In securities fraud class actions, billions of dollars can be at stake depending on the answer to the unsettled question of to what extent a defendant who has not made a misstatement or omission may be liable for participating in a 'scheme' to defraud under subsections (a) or (c) of Rule 10b-5, 17 C.F.R. 240. Rule 10b-5 was promulgated by the U.S. Securities and Exchange Commission (SEC) pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b). Plaintiffs have invoked the scheme theory in lawsuits arising from major corporate scandals in recent years such as Enron Corp. and Global Crossing--plus many cases that have garnered fewer headlines. The costs of settling cases in which district courts have denied motions to dismiss such theories can be massive. Financial-institution defendants in securities class actions stemming from the collapse of Enron have already paid nearly $7 billion in settlements. Yet there is no consensus on what exactly it means to participate in (as opposed to aiding and abetting) a fraudulent 'scheme' under § 10(b), or even whether such a theory of liability is valid. Courts have articulated conflicting standards, none of which offers reliable guidance as to what kinds of conduct may give rise to liability. The confusion is part of the aftermath of the U.S. Supreme Court's holding in Central Bank of Denver N.A. v. First Interstate Bank of Denver N.A., 511 U.S. 164 (1994), that civil liability under § 10(b) must be premised upon a primary violation of § 10(b) and Rule 10b-5, not on the mere aiding and abetting of another person's fraud. Citing Santa Fe Indus. Inc. v. Green, 430 U.S. 462, 471-74 (1977), the court wrote: '[W]e...conclude that the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act.' 511 U.S. at 177. The Supreme Court also stated that '[t]he absence of § 10(b) aiding and abetting liability does not mean that secondary actors in the securities markets are always free from liability.' Rather, '[a]ny person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under Rule 10b-5, assuming all of the requirements for primary liability...are met.' Id. at 191. Since issuers of securities are sometimes in financial straits when class actions arise, plaintiffs' lawyers like to be able to reach the deep pockets of 'secondary actors.' In an effort to avoid Central Bank 's elimination of aiding and abetting claims, plaintiffs in recent years have turned to 'scheme' liability, to expand the range of potential defendants. |
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