Tuesday, June 22, 2010

Specter Amendment Having Last Hurrah

An amendment offered by Rep. Maxine Waters in the House-Senate conference on the financial reform legislation mirrors an amendment offered to the Senate bill by Senator Arlen Spector (D-PA) that would overturn two US Supreme Court opinions and provide a private right of action for aiding and abetting securities fraud. The Waters and Specter amendments essentially mirror the Liability for Aiding and Abetting Securities Violations Act, S. 1551, introduced by Sen. Spector in 2009. The amendments would legislatively overrule what Senator Specter has called ``two errant decisions of the Supreme Court’’, namely the 1994 Central Bank of Denver v. First Interstate Bank ruling and the 2008 ruling in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. The immunity from suit that Central Bank confers on secondary actors, said the senator, has removed much-needed incentives for them to avoid complicity in and even help prevent securities fraud; and all too often left the victims of fraud uncompensated for their losses.

House conferees voted to adopt the Waters Amendment. The Senate rejected the idea of creating a private Rule 10b-5 cause of action against secondary actors in a securities fraud. But the Senate countered with the offer of a mandated GAO study on the costs and benefits of creating a private right of action against aiders and abettors of securities fraud.

The Specter Amendment would take the limited, but important, step of amending the Exchange Act to authorize a private right of action under §10(b), the antifraud provision, and other, less commonly invoked, provisions of the Act, against a secondary actor who provides substantial assistance to a person who violates the securities antifraud rule. Any suit brought under the proposed Specter Amendment would be subject to the heightened pleading standards, discovery-stay procedures, and other defendant-protective features of the Private Securities Litigation Reform Act of 1995.

Until the Central Bank ruling, noted the senator, every circuit of the Federal Court of Appeals had concluded that §10(b)'s private right of action allowed recovery not only against the person who directly undertook a fraudulent act, the primary violator, but also anyone who aided and abetted the actor. A five-Justice majority in Central Bank narrowed §10(b)'s scope by holding that its private right of action extended only to primary violators.When Congress debated the legislation that became the Private Securities Litigation Reform Act of 1995, then-SEC Chair Arthur Levitt and others urged Congress to overturn Central Bank, said Sen. Specter, but Congress declined to do so. Cong. Record, July 30, 2009, S8564.

The PSLRA authorized only the SEC to bring aiding and abetting enforcement litigation. But in the senator’s view, SEC enforcement actions have proved to be no substitute for suits by private plaintiffs. The SEC's litigating resources are too limited for the SEC to bring suit except in a small number of cases, he averred, and even when the SEC does bring suit it cannot recover damages for the victims of fraud.n Stoneridge, the Court ruled that secondary non-speaking actors said to have participated with a company in a securities fraud scheme were not liable in a private action under Rule 10b-5 since the acts of suppliers said to have participated in the fraud were too remote to satisfy the antifraud rule’s reliance requirement.Since the company was free to do as it chose in preparing its books, conferring with its auditor, and issuing its financial statements, reasoned the Court, the investors cannot be said to have relied upon any of the deceptive acts of the suppliers said to have assisted the fraud.Senator Specter said that the Stoneridge opinion made matters still worse for defrauded investors.

While Central Bank had at least held open the possibility that secondary actors who themselves undertake fraudulent activities could be held liable as primary violators, he said, Stoneridge largely foreclosed that possibility.In Stoneridge, a divided Court held that §10(b)'s private right of action did not reach two vendors of a cable company that entered into sham transactions with the company knowing that it would publicly report the transactions in order to inflate its stock price. The Court conceded that the suppliers engaged in fraudulent conduct prescribed by §10(b), but held that they were not liable in a private action because only the issuer, not they, communicated the transaction to the public.