S. 1551 - Arlen Specter measure would restore aiding and abetting liability in securities fraud cases

There is no stronger case for judicial recognition of an implied cause of action than when a statute declares a wrong. Aiding and abetting a fraud has been a crime for 100 years. 18 U.S.C. § 2 declares:

“(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal”

That substantial aid to a fraudulent scheme is actionable has been declared, as Justice Stevens observed (dissenting) in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994):

“In hundreds of judicial and administrative proceedings in every Circuit in the federal system, the courts and the SEC have concluded that aiders and abettors are subject to liability under §10(b) and Rule 10b-5.”

Yet the U.S. Supreme Court, in Stone Ridge Investment Partners v. Scientific Atlanta, 552 U.S. 148 (2008), held that liability even for active aiding and abetting of a fraud is not permitted under the Securities and Exchange Commission Act of 1934, 15 U.S.C. §§ 78a et seq., and the SEC’s Rule 17 C.F.R § 240.10b-5 which supports a tort remedy for securities fraud.

A measure introduced by Arlen Specter (D. PA) the Evaluating S.1551: The Liability for Aiding and Abetting Securities Violations Act of 2009 would overturn Stone ridge and embrace a private cause of action against those who knowingly aid and abet a fraud - whether law firms, accountants, or investment advisors.

Recognition of a private cause of action in tort is an elementary proposition. It is embraced by the Restatement of Torts (2d) which declares, in § 876 (b) that an actor is liable for harm resulting to a third person as a result of the tortious conduct of another “if he . . . knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other.”

At a hearing September 17, 2009 held by the Senate Judiciary subcommittee on crime and drugs Columbia Professor John Coffee supported the measure - albeit urging caps on damages for secondary tortfeasors. In a post-Madoff world, in which the SEC was hoodwinked by a con artist whose scheme was exposed (to no effect) by an independent observer - Harry Markopolos, the need for a private remedy seems blazingly clear. Coffee’s written testimony is HERE. Video of the hearing is HERE. The complete record of the hearing can be found HERE.