By James Hamilton, J.D., LL.M.
It may be that the US Supreme Court’s Central Bank opinion will be completely revisited this year or next based on petitions filed with the Court and one cert. already granted. Simply put, in Central Bank, the Court ruled that there is no private action for aiding and abetting securities fraud by secondary actors, such as lawyers and accountants. However, there can still be aiding and abetting liability in SEC enforcement actions since the Court’s ruling is limited to private actions.
The Central Bank ruling was issued in 1994. As I recall, at the time some people called for Congress to legislatively overrule the opinion, but Congress never did. As a rule, legislative overrulings of Supreme Court opinions are difficult and rare. But now it appears that the Court is about to review the 1994 precedent.
Enron investors have asked the Supreme Court to review a Fifth Circuit split panel decision that secondary actors, such as investment banks and accountants, who act in concert with public companies in schemes to defraud investors cannot be held liable as primary violators of Rule 10b-5 unless they directly make public misrepresentations; owe the shareholders a duty to disclose; or directly manipulate the market for the company’s securities through practices such as wash sales or matched orders. (Regents of the University of California v. Credit Suisse First Boston, 06-20856, March 19, 2007)
At most, said the appeals court, the banks could have aided and abetted Enron’s deceit by making its misrepresentations more plausible but their conduct did not rise to primary liability under Rule 10b-5. And, under the Supreme Court’s Central Bank ruling, there is no private action for secondary aiding and abetting liability under Rule 10b-5. The investment banks owed no duty to Enron’s shareholders, emphasized the panel.
In their petition to the Supreme Court, the investors note that the Fifth Circuit found there is a conflict in the circuits as to Rule 10b-5 and Central Bank regarding scheme liability, which is liability of secondary actors for primary violations of the antifraud rule. The investors argue that the SEC disagrees with the Fifth Circuit’s narrow reading of the antifraud rule and that the Supreme Court’s precedents support scheme liability.
The Supreme Court has already agreed to review a ruling by the Eighth Circuit Court of Appeals rejecting scheme liability in the Central Bank context. In re Charter Communications Securities Litigation, CA-8 2006, No. 06-43.
The investors in the Enron petition argue that Central Bank did not immunize bankers from liability for engaging in complex securities frauds. Since the majority in the Enron ruling relied heavily on Charter, which the Court has accepted for review, the investors ask that their case be reviewed with Charter as a superior vehicle to resolve the scheme liability issues.