Central Bank limited private aiding and abetting claims

• But plaintiffs still craft 10b-5 claims by asserting that secondary actors have primary liability

SEC continues to bring aiding and abetting cases

• Under 10b-5 and other rules

Supreme Court grants cert in secondary liability case

• Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. and Motorola, Inc.

• Supreme Court order 3.26.07  At page 2

• To  decide whether claims of alleged participation in a fraudulent scheme by a non-speaking defendant can state a claim for primary liability or whether such claims are prohibited aiding and abetting liability
• Defendants at issue made no statements to the supposedly injured shareholders but, instead, are accused of providing assistance to other actors who owed a duty of disclosure to these shareholders and who actually made the supposedly false or misleading statements

• Defendants made no statements to the injured shareholders
• Are instead accused of assisting other actors who actually made the false or misleading statements

• Commentary

• Alston & Bird  4.06.07

Opinion

• Established broad principles that

• Private plaintiff cannot bring an aiding and abetting claim under 10b-5
• Nonetheless, secondary actors can still have 10b-5 liability, if requirements for primary liability are otherwise met

• A 5-4 decision, didn't illuminate these principles

• Courts have since split over how to apply these principles

Until Enron, cases followed one of two prongs:

• Bright line standard
• Substantial participation standard

Bright line standard secondary actors must:

• Make a false or misleading statement
• Know or should know it will be communicated to investors
• Be publicly identified with the statements
• 2nd Cir:  Shapiro v Cantor 1997
              Wright v Ernst & Young 1998
• 10th Cir:  Anixter v Home-Stake Production 1996
• 11th Cir:  Ziemba v Cascade International 2001

Substantial participation standard

Bright line standard applied to a law firm

In re: CFS-related Securities Fraud Litigation
(ND Okla 3.22.02)

• Claims brought by purchasers of privately-placed CFS asset-backed securities
• Including claims against Mayer, Brown & Platt, CFS' counsel

• Court adopts report and recommendation of magistrate, who applies Central Bank and Anixter to find that Mayer Brown:

• Doesn't have 10b-5 liability for CFS' private placement memos
• But can have 10b-5 liability for its legal opinions and negative assurance letters, including to subsequent purchasers

• In response, many major US law firms have made changes to their forms of opinion and negative assurance letters

In re: Enron -- Newby v Enron (S.D. Tex 12.20.02)

• Putative class action on behalf of Enron security holders
• Denies motions to dismiss by six investment banks,
  Arthur Andersen and Vinson & Elkins
• Grants motions to dismiss by three investment banks and
  Kirkland & Ellis
• Judge Harmon rules that 10b-5 liability can apply if a person or entity "creates a misrepresentation"
• Can include Vinson & Elkins, based on facts asserted by plaintiffs
• Judge applies standard suggested by SEC in an amicus curiae submission see pages 47 - 61 of opinion (in PDF reader, pages 51-64 of 310)
• Revisits the Supreme Court's Central Bank decision
  rejects the "bright line" prong of post-Central Bank decisions
  criticizes the "substantial participation" prong of post-Central Bank decisions

• Notably, for 10b-5 liability to apply, a secondary actor need not:

• Initiate the misrepresentation
• Be a signatory to the document with the misrepresentation
• Be identified in the document with the misrepresentation
• Disseminate the misrepresentation

• Scienter still required

• Vinson & Elkins represented Enron; its opinion reached public investors
• Kirkland & Ellis represented only Enron SPEs in private transactions

• SEC amicus brief

• Originally filed in Klein v Boyd 1998
• See SEC testimony -- text at notes 7 and 8 for explanation

• Lead plaintiff press release  12.20.02
• Article - New York Law Journal  12.30.02

Larry Roda (KPMG consultant counsel)  2008

Joseph P. Collins (Refco counsel)  2007

SEC_CODE_REF_0090001192884

First Bancorp  2007

BAWAG P.S.K. Bank  (Refco)  2006

Scientific-Atlanta  2006

Merrill Lynch  2003

J P Morgan Chase / Citigroup 2003

Logicon executive / Legato Systems  2003

AIG / Brightpoint  2003

Simpson v Homestore.com

• SEC amicus brief  Oct 2004
• SEC reply brief Feb 2005

• Re: appropriate test for finding a defendant to be a primary violator rather than an aider and abettor

Klein v Boydh

• SEC amicus brief  April 1998

• Re: appropriate test for finding a defendant to be a primary violator rather than an aider and abettor

Stoneridge v Scientific-Atlanta