Let’s say you and three friends decide to rob a bank. One of your friends decides he will go into the bank with a gun, your other friend says he will collect the money in a bag from the tellers, but you, cleverly, say you’ll drive the get away car. As you drive away with your two friends, and the money, you realize you all forgot about the silent alarm. Five blocks from the bank you are surrounded by cops. At your trial, you stand up and say, “Your honor, my two friends are the ones that actually robbed the bank, all I did was drive the car.” What do you think the judge would say? Right…you’re looking at some serious jail time.
On the other hand, if this crime were in the area of securities fraud, where by the way you can steal a heck of a lot more money than you can robbing a bank, the judge would say, “Yes, Sir, we apologize for having inconvenienced you, you are free to go”. This is the result of the latest pearl of wisdom from the Supreme Court of the United States. In Stoneridge Investment Partners v. Scientific-Atlanta the Supreme Court held that secondary actors in securities fraud….the figurative getaway drivers, can not be held liable in private actions.
The reasoning is this…..since the essence of securities fraud is the reliance on a material misstatement (or omission), the only one an aggrieved investor can sue is the person who actually made the misstatement, or, when otherwise giving information, withheld something. You can not recover from the man behind the curtain prompting, helping, enabling, pulling the strings, but whom you never spoke to directly. Technically he made no misstatement directly to you. Those who aided and abetted, that enabled, that supported the fraud, those whose help was crucial to the execution of the fraud, but who, like the getaway driver, didn’t actually rob the bank, or directly make a misstatement in this case, are not liable to investors.
What next…..well curiously, while our getaway driver, or the man behind the curtain, may not be liable to investors in a private right of action, they may be found liable in SEC enforcement actions, including facing the possibility of going to jail for securities fraud. So, under the current statutory scheme, they are culpable enough to go to jail, but not culpable enough to be sued by investors. What the Supreme Court has done is throw this back to Congress. In effect the Supreme Court is saying: “We are not going to fix your sloppy law writing skills. If you want to hold these aiders and abettors, or secondary actors, liable for securities fraud in private lawsuits, you have to write the law that says that. If you write it that way we will enforce it that way. But the way the laws are written now, we don’t see the language that would permit us to allow these private suits to go forward. ” The ball is now squarely in Congress’ court.