Should Section 10(b) Rule 10b-5 of the Securities Acts be amended to allow private right of action for aiding and abetting?

I. Introduction

The Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted in response to the Stock Market Crash of 1929 that ushered in the Great Depression. [1]  In passing the Acts, Congress’ intention was to implement regulations that would govern the ways securities were bought and sold in the United States and to protect individual consumers from securities fraud. Specifically, Section 10(b) of the 1933 Act and Rule 10b-5 of the 1934 Act regulate fraud in connection with the purchase or sale of a security. [2] To obtain a conviction under these provisions, it must be proved that:

(1)     (a) the defendant engaged in a fraudulent scheme, or

(b) made a material misstatement, or

(c) omitted material information to one to whom the defendant
    owed a duty;

(2)    the scheme, misstatement, or omission occurred in connection with the purchase or sale of a security; and

(3)    the defendant acted “willfully.” 

[3] From the time Congress passed the laws in the early 1930’s, there has been debate over exactly who could be held liable for securities fraud under Section 10(b) and Rule 10b-5. For the most part, courts have understood the antifraud provisions to extend liability to “primary violators,” those who actually make material misstatements or omissions or commit a manipulative act or acts. In Central Bank of Denver v. First Interstate Bank of Denver [4] and again in Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc. [5] the United States Supreme Court considered the issue of whether to adopt a theory of “scheme” or “aider and abettor” liability. According to the holdings in those cases, shareholders can only sue parties directly involved in a fraud, and not third parties who indirectly aid or abet the fraud. [6] As the Court put it, the issue before it was “whether private civil liability under Section 10(b) extends as well to those who do not engage in the manipulative or deceptive practice, but who aid and abet the violation.” [7] In both cases, the Court held that “because the text of Section 10(b) does not prohibit aiding and abetting … a private plaintiff may not maintain an aiding and abetting suit under 10(b).” [8] In Central, the court explained that its decision was guided by statutory interpretation, noting that “[i]f … Congress intended to impose aiding and abetting liability, we presume it would have used the words ‘aid’ and ‘abet’ in the statutory text. But it did not.” [9]

II. New Legislation: S.1551, the Liability for Aiding and Abetting Securities Violations Act of 2009

A year after the Court defended this interpretation of Section 10b in Stoneridge, as if responding to its “Congressional intent” argument posed by the majority in that case, Senator Arlen Specter (D-PA) introduced S.1551, the Liability for Aiding and Abetting Securities Violations Act of 2009. [10] The bill, introduced in July 2009 and co-sponsored by Senators Edward E. Kaufman (D-DE), Jack Reed (D-RI) and Sheldon Whitehouse (D-RI), would repeal the Supreme Court’s decisions in Central and Stoneridge by amending the securities laws to allow private litigation against a person that provides “substantial assistance” in a violation of the securities laws. The language of the proposed bill states:  

For purposes of any private civil action implied under this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of this title, or of any rule or regulation issued under this title, shall be deemed to be in violation of this title to the same extent as the person to whom such assistance is provided.

[11] In effect, the bill would permit private civil actions against aiders and abettors, including accountants and attorneys. The aider and abettor liability proposed by Sen. Specter reflects the “substantial participation approach” advocated by the plaintiffs in Wright v. Ernst & Young LLP. [12] There, plaintiffs claimed that Ernst & Young violated the antifraud provisions of the 1933 and ’34 Acts by orally approving materially false and misleading financial statements made by the company which it was auditing. [13] In turn, that company disseminated that information to the public in a press release. [14] As a basis for liability, the plaintiffs argued that the Court of Appeals for the Second Circuit should adopt a “substantial participation approach,” under which third-party defendants, like Ernst & Young, would be held primarily liable for statements made by others in which the defendant had significant participation. [15] The Court in that case declined to adopt such a rule and refused to extend liability to those who did not actually make fraudulent or misleading statements to the public. [16] Instead, the Court utilized a “bright-line approach,” under which a third party’s review and approval of documents containing fraudulent statements is not actionable under Section 10(b) because one must make the material misstatement or omission in order to be a primary violator. [17] In other words, the Court refused to extend liability to a defendant who did not actually make the misleading statement or omission. If Sen. Specter’s bill is passed, the “substantial participation approach” would essentially replace the “bright line approach” used by the Supreme Court in Central and Stoneridge. The question remains, should this bill be adopted?

III. The Debate: Should the Bill Be Passed?

On September 17, 2009, the bill had its first committee hearing at a session of the Subcommittee on Crime and Drugs of the United States Senate Committee on the Judiciary (“Subcommittee”). During that hearing, the Subcommittee heard testimony from University of Michigan Law Professor Adam Pritchard, who outwardly opposes the bill. Among Professor Pritchard’s many concerns over the bill, he states that its enactment would essentially “tear down the safeguards instituted in Central and Stoneridge and create the potential for the securities laws to be injected in a wide range of ordinary commercial transactions.” [18] Pritchard is most concerned over the prospect of increased “strike suits” filed against deep-pocket, third-party defendants. [19] The professor suggests that litigation aimed at “aiders and abettors” will be detrimental to the economic strength of the United States and significantly raise the cost of capital. [20] In his testimony before the Subcommittee on September 17, Professor Pritchard articulated the potential negative effects of the proposed legislation:

Giving the plaintiffs’ bar aiding-and-abetting authority would offer class action lawyers one more weapon with which to shake down settlements. Here the obvious targets would be available deep pockets with some contractual connection to the corporation, such as accountants, lawyers, and banks … Aside from the threat of bankruptcy, shifting liability from the corporation to these third parties only puts an additional link in the chain of the pocket shifting problem.  Professionals providing services to public corporations will demand compensation for bearing the risks of liability.  Moreover, these advisors will begin more aggressively monitoring statements in order to protect themselves from litigation risk.  The additional time spent on monitoring will not only duplicate the corporation’s efforts to ensure accuracy; it will also be redundant across the multiple advisors working on a common document.  Shareholders will bear those costs; securities class actions are not a free lunch.

[21] In essence, Pritchard believes that the bill will hurt the competitiveness of U.S. capital markets and financial centers and expand the potential liability and litigation expense for innocent third parties. Professor Pritchard is not the only one having trouble seeing the potential benefits of this bill. Professor William Jacobson, director of the securities law clinic at Cornell University Law School, has reservations about extending liability for securities fraud to a third-party defendant who did not make a fraudulent statement. “The person who assists in the sham transaction isn’t the person making the public statement or the public filing,” said Jacobson. [22] Along with Pritchard and other experts in the field of securities law, Professor Jacobson is worried that the bill will benefit plaintiffs’ attorneys more than shareholders. “Whether it actually helps investors, it’s hard to say,” he said. “But it's certainly going to help investors’ lawyers – there’s no question about that.” [23]

On the other hand, there are many who believe that the bill is necessary to provide relief for investors who have fallen victim to securities fraud aided by third-party actors. Columbia Law Professor John Coffee testified before the Subcommittee in support of the bill, stating that civil aiding and abetting liability is necessary to provide compensation for defrauded investors and to deter third-party actors, like accountants and lawyers, from intentionally or recklessly assisting a corporation in defrauding shareholders. [24]  Sitting before the Subcommittee on September 17, Coffee rebuked claims by opponents of Specter’s proposed legislation that, if passed, the bill would have a negative effect on capital markets:

[P]rivate liability for aiding and abetting violations makes sense because (1) the critical gatekeepers of the capital markets – accountants, investment banks, securities analysts, credit rating agencies, and sometimes law firms – will not otherwise face liability and will remain underdeterred in most instances, and (2) these gatekeepers can be more easily deterred than the primary violator because they do not stand to receive the same gain as the primary violator. In contrast, the primary violator may be essentially undeterrable by civil penalties.
[25] Coffee’s support for the bill, it seems, rests on an assumption that by threatening the gatekeepers with aider and abettor liability, securities fraud will be prevented more frequently. However, Coffee does not assess the risk of increased “strike suits” against third-party defendants. Even assuming that the bill will have the deterring effect cited by its proponents, it is unclear whether the benefit of decreased fraud will outweigh the costs of increased strike-suits against deep-pocketed gatekeeper companies.

IV. Conclusion

While it appears that the bill has an equal amount of support and opposition within Congress, it is becoming increasingly clear that it will probably not reach the Senate floor for debate by the end of the year, as the legislative calendar is quite full with issues concerning health care reform. While the time-line for this bill is not certain, shareholders can rest assured that this debate will not go away indefinitely. As the United States remains in the midst of a serious recession, voices for stricture regulation in regard to the purchase and sale of securities are growing louder and more insistent.


[1] Donna M. Nagy, Richard W. Painter, Margaret v. Saches, Securities Litigation and Enforcement: Cases and Materials, 2nd ed., 2003.

[2] Id.

[3] J. Kelly Strader, Sandra D. Jordan, White Collar Crime: Cases, Materials, and Problems, 2nd ed., 2009.

[4] 511 U.S. 164 (1994).

[5] 128 U.S. 761 (2008).

[6] Supra Note 4.

[7] Id. at 167.

[8] Id. at 191.

[9] Id. at 177.  

[10] S.1551 (2009)

[11] Id.

[12] 152 F.3d 169 (2nd Cir. 1998).

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Adam C. Pritchard, Evaluating S. 1551: The Liability for Aiding and Abetting Securities Violations Act of 2009, Before the United States Senate Committee on the Judiciary, Subcommittee on Crime and Drugs, Sept. 17, 2009.

[19] Leslie A. Platt, Kimberly M. Melvin, Senate Subcommittee Takes up Repeal of Stoneridge, Central Bank, September 18, 2009,

[20] Id.

[21] Pritchard, Supra Note 19.

[22] Suzanne Barlyn, Update: Compliance Watch: Bill Would Fuel More Investor Fraud Suits, Wall Street Journal, Aug. 5, 2009,

[23] Id.

[24] Kevin M. LaCroix, Specter’s “Aiding and Abetting” Bill: Why it Could Pass and Why it Matters, September 21, 2009,

[25] John C. Coffee, Jr., Evaluating S. 1551: The Liability for Aiding and Abetting Securities Violations Act of 2009, Before the United States Senate Committee on the Judiciary, Subcommittee on Crime and Drugs, Sept. 17, 2009.