The potential exposures that directors and officers of publicly traded and privately held corporations may increase significantly if the class action plaintiff’s bar is successful in pushing a pending bill through Congress.
Under the proposed Senate bill, “Liability for Aiding and Abetting Securities Violations Act,” publicly traded and privately held corporations’ directors and officers may now be exposed to private rights of action for aiding and abetting under the federal securities laws as a third-party or secondary actor for the actions of their customers or suppliers.
It’s important to know that the very purpose of securities law enforcement is to both deter financial fraud and to compensate investors—a requirement for instilling investor confidence and trust in an ideally efficient capital market. In this role, federal regulators can bring actions against primary and secondary actors. (Under the view of the law, primary actors are directors and officers of corporations. Secondary actors, such as service providers that include vendors and suppliers to attorneys, accountants, bankers, and credit agencies, are aiding and abetting the fraud of the primary actors.) Private actions against secondary actors, however, are currently limited under federal securities law.
In January 2008, a Supreme Court ruling in Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., concluded that “the implied [private] right of action does not reach the customer/supplier com-panies because the investors did not rely upon their statements or representations,” effectively limiting exposure of one company to private securities lawsuits brought by the plaintiff’s bar because another company defrauded its investors. SEC Commissioner Paul Atkins, expressing his support of the Supreme Court decision in an op-ed column in the Wall Street Journal, wrote: “Exposing one company to class-action lawsuits because another company defrauded its investors is not fair or just to shareholders who shoulder the burden of class-action settlements…Broadening the scope of securities laws can damage capital markets. Subjecting new classes of defendants to lawsuits raises the costs of being a public company, deters overseas firms from doing business here, and shifts securities offerings away from domestic capital markets to the detriment of U.S. investors.”
Today, that decision is in danger of being overturned by Congress.
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