As noted yesterday, the SEC has apparently decided to weigh in to support shareholders in their effort to get the US Supreme Court to take certiorari in Regents v. Credit Suisse, a case arising out of the collapse of Enron.  The case involves the reach of Section 10(b) and Rule 10b-5 of the Exchange Act.  We are discussing these cases over the next week or so. 

We begin with a review of the relevant law.  Section 10(b) of the Exchange Act prohibits “any person, directly or indirectly,” from employing a “manipulative or deceptive device or contrivance” in contravention of any rules of the Commission. Rule 10b-5 in turn prohibits a person from making an “untrue statement of material fact” or from employing “any . . . scheme . . . to defraud.”

The starting place in this area isCentral Bank v. First Interstate of Denver, 511 US 164 (1994). The case is not an easy precedent.  Despite unanimity by all of the circuits considering the issue, the Supreme Court found, in a 5-4 vote, that Section 10(b) and Rule 10b-5 did not encompass liability for aiding and abetting securities fraud.  In reaching the conclusion, the Court did not rely on any language in the relevant relevant rules or sections but the absence of language.  See Id. at 177 (“If, as respondents seem to say, Congress intended to impose aiding and abetting liability, we presume it would have used the words "aid" and "abet" in the statutory text.  But it did not.”).

The only slight exception was the discussion of the language in Section 10(b) that prohibited fraud committed “directly or indirectly.”  The majority noted that this language did not encompass "aiding and abetting" liability.  “[A]iding and abetting liability extends beyond persons who engage, even indirectly, in a proscribed activity; aiding and abetting liability reaches persons who do not engage in the proscribed activities at all, but who give a degree of aid to those who do.”  The Court, therefore, concluded that the two phrases were not synonymous but otherwise provided little guidance into what the phrase actually meant.

Nor did the analysis of the facts of the case provide much insight into the reach of the provision.  Central Bank was an indenture trustee for an earlier set of bonds issued by a Building Authority largely controlled by a developer. In advance of a second issue of bonds, Central Bank (which would serve as indenture trustee for this issuance as well) learned that an appraisal for property to be used as collateral for the second issue appeared “optimistic.”   Moreover, Central Bank allegedly knew that the appraisal would be used by purchasers.  The Court did not analyze these facts and explain why they resulted in secondary rather than primary liability.  Instead, the majority viewed the characterization of the Plaintiffs as conclusive.  

• “Respondents concede that Central Bank did not commit a manipulative or deceptive act within the meaning of § 10(b). Instead, in the words of the complaint, Central Bank was ‘secondarily liable under § 10(b) for its conduct in aiding and abetting the fraud.’ Because of our conclusion that there is no private aiding and abetting liability under § 10(b), Central Bank may not be held liable as an aider and abettor.”

In other words, since the Plaintiffs argued only that Central Bank met the definition of primary violator (and why should they, since all circuits recognized aiding and abetting liability), the Court would not go beyond that characterization.  See 511 US at 193 ("While we have reserved decision on the legitimacy of the theory in two cases that did not present it, all 11 Courts of Appeals to have considered the question have recognized a private cause of action against aiders and abettors under § 10(b) and Rule 10b-5.") (Stevens, J., dissenting).