The financial reform bill
now working its way through Congress will include an amendment to the
securities laws allowing private civil actions for aiding and abetting
liability, if an amendment Senator Arlen Specter proposed on May 4, 2010 is
part of the final bill. According to the Blog of the Legal Times (here), in conjunction with a Senate Judiciary subcommittee
meeting and on behalf of himself and 11 other senators, Specter introduced an
amendment to the financial reform bill that would impose liability on "any
person that knowingly provides substantial assistance to another person in
violation of this title." The proposed amendment can be found here. (Hat Tip: Point of Law blog.)
Although the securities
laws currently allow for the SEC to pursue aiding and abetting enforcement
actions, the Supreme Court held in the Stoneridge case that there is no private
right of action for aiding and abetting liability under the federal securities
LexisNexis Corporate & Securities Law Community materials related
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.]
As discussed at greater
length here, in July 2009, Senator Specter introduced S. 1551,
"The Liability for Aiding and Abetting Securities Violations Act of
2009," which proposed to legislatively overturn Stoneridge.
Although Committee hearings were held in connection with that bill, it had
not made it out of the Committee. In April 2010, Representative Maxine
Waters separately introduced a House version of essentially the same bill, H.R.
5042, which was referred to the House Judiciary Committee.
Though there are now
alternative versions of the aiding and abetting liability bill in each of the
two houses of Congress, neither bill had progressed out of committee. Had the
bills made it out of committee on their own, they undoubtedly would have
occasioned debate and discussion. Specter's proposed amendment to the financial
reform bill, which is substantially similar to the previously introduced
stand-alone bills, potentially could provide a short cut way around that likely
debate and discussion.
It remains to be seen
whether Senator Specter's initiative to add the aiding and abetting amendment
to the financial reform bill will ultimately become a part of the bill that is
put before the Senate. But if the amendment is incorporated into the financial
reform bill, it would only be one small part of a massive and controversial
piece of legislation that will occasion intense partisan debates on a wide
variety of issues, most of them much higher profile that than those involved in
To be sure, passage of
the financial reform bill itself is by no means assured. But debate on the bill
will undoubtedly focus on the proposed systemic reforms embodied in the
legislation. It is unlikely that Specter's proposed amendment, if included in
the bill, would itself occasion extensive additional debate or even materially
affect the ultimate passage of the bill. Indeed, the aiding and abetting
liability provision arguably has a greater chance of being enacted as an
accessory to a larger reform bill than it might have on its own.
Were the provision to be
enacted into law, either on its own or as part of a larger piece of
legislation, it could represent a significant increase in the potential
liability exposure under the securities laws for accountants, lawyers, and
other professionals who might be in a position to be alleged to have provided
"substantial assistance" to a primary violator.
But the increase in
potential liability exposure is not limited just to these outside
professionals. As I discuss in greater length in my earlier post on S. 1551, the circle of persons whose
liability exposure potentially could be increased by the enactment of the
proposed aiding and abetting liability provision includes other public
companies and their directors and officers.
Indeed, in the Stoneridge
case itself, the defendants who were alleged to have aided and abetted Charter
Communications were vendors who did business with Charter and who allegedly
engaged in "round trip" transactions with Charter.
In other words, were
Senator Specter's bill to pass, it would not only greatly expand the potential
securities liability exposure for companies' outside professionals. It would
also expand the potential securities liability exposure of all companies that
transact business with public companies.
Were this aiding and
abetting provision to be enacted into law, it would have significant
implications for insurers that provide professional liability insurance for the
outside professional gatekeepers. It could also have potentially significant
implications for D&O insurers as well, and as I also discussed in my prior post, the definition of the term "securities
claim" used in D&O insurance policies could become particularly
important. The critical issue will be whether the term is defined to restrict
"securities claims" to claims involving securities of the insured
company, or whether the term is defined to include any alleged violation
of the securities laws.
Finally, it should not be
overlooked that the universe of companies that might potentially become the
target of an aiding and abetting claim is not limited just to other public
companies. Any company, including even private a private company, that does
business with a public company might potentially be alleged to have provided
"substantial assistance" to the public company's securities law
For all of these reasons,
the legislative progress of the aiding and abetting liability provision should
be of keen interest to the entire professional liability insurance community,
including the D&O insurance community. The possibility of the provision's
inclusion in the financial reform bill will make this a particularly
complicated issue to monitor.
Read the Will the Financial Reform Bill Include An Aiding and Abetting
Liability Provision? in its entirety at D&O Diary, a blog by Kevin
other LexisNexis Corporate & Securities Law Community materials related to
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.