Saturday, October 27, 2012

Senator Specter Championed Cause of Private Investor Actions for Aiding and Abetting Securities Fraud

It was with regret that we note the recent passing of Senator Arlen Specter. Senator Specter was very active in the area of securities regulation. One cause that Senator Specter championed over the years was the enactment of legislation providing for a private right of action for aiding and abetting securities fraud. During the deliberations that led up to the passage of the Dodd-Frank Act, the Specter Amendment to the Senate bill  would have overturned two US Supreme Court opinions and provided a private right of action for aiding and abetting securities fraud.  An amendment offered by Rep. Maxine Waters in the House-Senate conference on the financial reform legislation mirrored the Specter Amendment.

In turn, the Waters and Specter Amendments essentially mirrored the Liability for Aiding and Abetting Securities Violations Act, S. 1551, introduced by Sen. Spector in 2009. The Amendments would have legislatively overruled 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, but the Senate rejected the idea of creating a private Rule 10b-5 cause of action against secondary actors in a securities fraud. 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, which ultimately passed.

The Specter Amendment would have taken 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 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.