Will the Financial Reform Bill Include An Aiding and Abetting Liability Provision?

Will the Financial Reform Bill Include An Aiding and Abetting Liability Provision?

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 laws. [See other LexisNexis Corporate & Securities Law Community materials related to 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 Specter's amendment.

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 violations.

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 LaCroix.

See other LexisNexis Corporate & Securities Law Community materials related to Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.