Aiding and Abetting Liability in SEC Cases.

Section 20(e) authorizes the Commission to enforce securities-law violations against any person who “knowingly or recklessly” provides “substantial assistance” to another person or entity who violates any provision of the federal securities laws.

To successfully establish liability under Section 20(e), the SEC must prove that the defendant:

• acted “knowingly or recklessly”;
• provided “substantial assistance”; and,
• acted “with respect to” a primary violation of the federal securities laws committed by another party.

While Section 20(e) adopts the term “any person,” it is intended in a broad sense. As a result, it reaches outside professionals as well, including attorneys, accountants, auditors, appraisers, and other individuals who help entities violate the federal securities laws.

The authority to bring actions under Section 20(e) is granted to “the Commission.” This means that while Section 20(e) exposes individuals to SEC liability, it does not grant individuals (i.e. private investors) a private right of action under the Exchange Act.

While Section 20(e) adopts the term “recklessness,” the section does not define what conduct constitutes recklessness. However, this is not a new concept. An SEC aider is liable if he or she acted recklessly or knowingly, which are standards familiar to anyone accustomed to dealing with intentional torts. An SEC aider could be found liable under Section 20(e) for providing substantial assistance in connection with a violation of the federal securities laws regardless of whether the aider is found to have acted knowingly or recklessly.

While the federal securities laws impose liability on those that work for the entities that violate the laws, Section 20(e) requires that an aider need not work for the entity committing the primary violation. The fact that the aider did not work for the entity does not mean that the aider cannot be held liable under Section 20(e).

For individuals, evidence that negates knowledge and recklessness should be sufficient to defeat the scienter element of a claim under Section 20(e).

Which Laws Let the SEC Pursue Aiding and Abetting?

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 929O) explicitly added “recklessness” to Section 20(e). Section 20(e) extends liability to “any person” who knowingly or recklessly assists another in violating “any provision of this Act, any rule or regulation promulgated thereunder, or any other rule or regulation promulgated under the authority of this Act.” In other words, Section 20(e) applies to any violation of the Exchange Act, its corresponding rules and regulations, and its statutory regulations.

While securities fraud under Rule 10b-5 is a common issue in cases involving aiding and abetting liability, it is not the only violation that can trigger liability under Section 20(e). The federal securities laws also contain parallel aiding provisions that mirror Section 20(e) of the Exchange Act, and these mirror provisions allow the SEC to pursue enforcement actions for violations of the following federal securities laws as well:

• Securities Act Section 15(b);
• Investment Company Act Section 48(b); and,
• Investment Advisers Act Section 209(f).

Although Congress enacted Section 20(e) of the Exchange Act through the Private Securities Litigation Reform Act of 1995, this section is substantial in scope. Under Section 20(e), individuals and other persons that aid and abet an Exchange Act violation are considered to have “violated the Exchange Act with respect to such violation” and are “considered to have violated the Exchange Act... to the same extent that principals are treated as violators.”

While these provisions provide the SEC with the authority to pursue enforcement actions for aiding and abetting, they also limit the ability of private plaintiffs to pursue claims under the Exchange Act. For example, the Supreme Court’s decision in Central Bank of Denver N.A. effectively bars implied private claims for aiding and abetting under Section 10(b). While this decision does not affect the SEC’s authority to pursue enforcement actions for aiding and abetting, it does not seem to provide a private right of action under Section 20(e) in connection with Section 10(b) either.

When Does Conduct Count as Substantial Assistance?

Does the SEC Need a Judgment Against the Primary Violator to Establish Aiding and Abetting Liability?

No, the SEC does not need to obtain a judgment against the primary violator to establish aiding and abetting liability against a third party. In other words, the SEC can seek to hold an individual or entity accountable for providing substantial assistance without necessarily pursuing a liability claim against the individual or entity that allegedly committed the primary violation.

While it is generally best to have an existing judgment against the primary violator (or at least establish that the primary violator acted with the intent to commit a securities-law violation), the SEC can pursue enforcement actions for aiding and abetting regardless of whether it is able to hold the primary violator accountable.

What Level of Assistance Counts as “Substantial Assistance” Under Section 20(e) and Rule 40?

While the definition of what constitutes “substantial assistance” is left to the courts, the U.S. Supreme Court established the guiding standard in SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012). In this case, the court found that an aider and abettor must have provided “conscious assistance” to make a primary violation “successful,” and that a third party cannot be held liable in this situation without the “ requisite level of scienter.” To establish liability for providing substantial assistance in this situation, the SEC must show that the alleged aider and abettor did not just inadvertently contribute to the primary violation, but did so consciously with the purpose of helping it to succeed.

What Does the Apuzzo Standard Mean?

The Apuzzo standard is a relatively high bar to meet. However, it is important to note that the Apuzzo court evaluated scienter and substantial assistance together rather than as separate elements of Section 20(e). The aiders-and-abettor’s conduct must not only be substantial in the sense that it made a difference to the primary violation, but it must also make sense with the aiders-and-abettor’s state of mind. In other words, the aider or abettor’s act must be consistent with an intent to facilitate a violation of the federal securities laws.

Does Inaction Count as Providing “Substantial Assistance” under the Apuzzo Standard?

As a general rule, inaction does not count as substantial assistance. However, this is subject to some exceptions. Under the Apuzzo standard, intentional inaction should count as providing substantial assistance when the aider’s behavior was designed to facilitate the primary violation in some way. Similarly, reckless inaction should count as providing substantial assistance when the alleged aider had a duty to act.

The question of what is considered to be a duty to act in this situation is subject to debate in many cases. However, if a third party has a contractual, statutory, or otherwise recognized duty to act, and its failure to do so results in a violation of the federal securities laws, it can be held liable for “substantial assistance” under Section 20(e) of the Exchange Act.

Can Professionals Face Aiding and Abetting Liability in SEC Enforcement Actions?

Yes, while aiding and abetting liability is most commonly seen in SEC cases against individuals who are involved in the primary violation (or who are involved in fraudulent business transactions that result in primary liability), professionals such as attorneys, accountants, auditors, appraisers, and others can face aiding and abetting liability in SEC enforcement actions as well. In many of these cases, the SEC’s enforcement division argues that the alleged aide has been paying a fee to “look the other way” and that such professional services constitute substantial assistance under the circumstances involved.

However, similar to individuals who work for the entity that committed the primary violation, outside professionals can only face aiding and abetting liability under Section 20(e) if the SEC is also able to establish the other elements of the claim. Thus, outside professionals can defend against aiding and abetting liability claims by challenging the SEC’s establishment of scienter and substantial assistance as necessary to incur liability under the law.

Does the SEC Need to Establish the Primary Violation to Establish Aiding and Abetting Liability?

Yes. Unlike substantial assistance, which can prove the scienter element of the claim under Section 20(e) in certain circumstances, the existence of a primary violation is an absolute requirement for establishing aiding and abetting liability. If the alleged aider’s aiding and abetting liability is based on a primary violation that did not actually occur, the claim cannot succeed. This is because aiding and abetting liability is derivative in nature, and if the theory of the primary violation is invalid, the theory regarding aiders and abettors necessarily must fail.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

What Did Apuzzo Actually Decide About Causation?

In short, Apuzzo decided that establishing proximate causation is not an element of the SEC’s civil claims under the Exchange Act and Rule 10b-5. Instead, as Apuzzo found, the SEC must establish that the defendants violated the Exchange Act and Rule 10b-5 with the requisite intent (scienter), and that their violations resulted in a violation.

Importantly, the court discussed causation while reviewing the district court's dismissal of the SEC's complaint, which it reversed. The decision therefore does establish what the SEC must allege to state an aiding and abetting claim; the case was resolved on the pleadings rather than after a trial.

The Second Circuit decided Apuzzo on a case-by-case basis, meaning its ruling that the SEC need not show proximate cause only applies to the specific circumstances at hand. In addition, the case was decided in the Second Circuit, meaning that the decision binds only federal courts in New York, Connecticut, and Vermont. At the time of this writing, Apuzzo is not nationwide law.

Moreover, when an appellate court reviews trial court decisions, the trial court's verdict will be overturned only if no reasonable jury could have reached it on the evidence presented. The preponderance standard is the civil standard, meaning that the party with the most substantial or convincing evidence will prevail.

When analyzing causation in civil litigation, there are two types of causation. While proximate cause is not an SEC element, it is important to note that but-for cause is.

But-for causation is often referred to as “actual causation.” This asks if the outcome would have occurred “but for” a defendant’s act. This is commonly used in cases to help a jury determine if the defendant is responsible for a particular injury.

Proximate cause, on the other hand, is often viewed as a limit on the scope of a defendant’s responsibility. This refers to the “legal remoteness” of the result that follows the defendant’s act. In many cases, this asks if the plaintiff’s injury was within a “reasonable range” of the defendant’s act.

When the government established that the defendant’s act violated the Exchange Act and Rule 10b-5, it met the element of causation. By proving that the violation resulted in an alleged harm, it also met the element of causation under the Exchange Act. The Apuzzo court then observed that while these facts did not prove that the violation “caused” the harm that ensued in the case, there was still enough evidence to hold the defendants liable. It then went on to explain that the law did not require the SEC to prove that the defendant’s act caused the primary violation.

In other words, Apuzzo’s holding regarding proximate cause doesn’t mean that the SEC no longer has to prove the existence of but-for causation in order to establish an element of its civil claim. Instead, the Second Circuit found that meeting the element of causation does not require the SEC to prove proximate cause, and instead, it will rely on the jury and appellate reviews to determine whether the violation led to the outcome that it did.

What Penalties and Professional Consequences Can the SEC Seek?

Civil Penalties and Disgorgement

• Statute of Limitations: Generally, Section 2462 provides a five-year statute of limitations for civil penalty claims brought by the government.
• Civil Penalties: The Exchange Act also contains Section 21(d)(3), which expressly grants the SEC authority to seek civil penalties in SEC enforcement actions.
• Disgorgement: The Exchange Act also contains Section 21(d)(7), which expressly grants the SEC authority to seek disgorgement in SEC enforcement actions.
• Extension of the Statute of Limitations: The SEC can also use Section 21(d)(8) to extend the statute of limitations in certain cases involving allegations of aiding and abetting.

- Disgorgement: Under Section 21(d)(8), the SEC has 10 years to bring a disgorgement action when it alleges scienter (the requisite level of knowledge or recklessness).

- Other Enforcement Measures: The SEC can also use Section 21(d)(8) to bring enforcement actions seeking the following remedies within 10 years (rather than the five-year period afforded by Section 2462):

- Injunctions

- Officer and director bars

- Profession or industry bars

- Professional suspensions

- Cease-and-desist orders

Professional Consequences

Outside of these enforcement actions, the SEC has the authority to censure or deny professionals the privilege to practice before the Commission. SEC Rule 102(e) specifically allows the SEC to pursue disciplinary action in the following cases:

• When the SEC is pursuing civil enforcement action for fraud, or attempts to defraud the Commission or a company that files with the Commission
• When the SEC is pursuing civil enforcement action for the issuance or use of fraudulent or inaccurate reports, and it would not be in the public interest to permit a professional to continue to provide services to public companies

Rule 102(e) explicitly reaches “attorneys, accountants, auditors, appraisers, agents, consultants, actuaries, indexers, or other professionals or individuals who assist, in any manner or capacity, persons or companies” who need the privilege to practice before the Commission.

Equitable Relief

Section 21(d)(5) also provides the SEC with the authority to pursue “all forms of equitable relief” (including injunctive relief) “as the Commission determines in each case to be in the public interest or beneficial to investors.” This, of course, includes injunctive relief against third parties, such as attorneys and other outside professionals who are alleged to have committed aiding and abetting violations. This authority also includes the authority to freeze assets and seek other equitable relief that is specifically tailored to the circumstances at hand.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.