Fifth Circuit Notes Split Re Scope of Primary Liability for Secondary Actors under Section 10(b) of the Securities Exchange Act

Per Regents of University of California v. Credit Suisse First Boston (USA), Inc., --- F.3d ----, 2007 WL 816518 (Mar. 19, 2007):

Section 10(b) [of the Securities Exchange Act] does not give rise to aiding and abetting liability. In Central Bank, the Court emphasized that securities fraud liability is an area of the law that demands certainty and predictability. Secondary liability brings neither; instead it gives rise to confusion about the extent of secondary actors' obligations and invites vague and conflicting standards of proof in divers courts. See Cent. Bank, 511 U.S. at 188. Unfortunately, the Court has left some uncertainty in this regard.

Though the Court conclusively foreclosed the application of secondary liability under § 10(b), it stated that secondary actors such as investment banks and accountants can be liable as primary violators in some circumstances. Id. at 191. The Court has never, however, precisely delineated the boundary between primary and secondary liability. As the district court noted, the lower courts have struggled to do so, and our circuit has not previously announced a standard that conclusively governs this case.

Although plaintiffs try to reconcile the cases, the Eighth and Ninth Circuits have split with respect to the scope of primary liability for secondary actors.FN24 The district court adopts a rule advocated by the Securities and Exchange Commission (“SEC”), in an amicus curiae brief before the Ninth Circuit, under which primary liability attaches to anyone who engages in a “transaction whose principal purpose and effect is to create a false appearance of revenues.” We agree with the Eighth Circuit that the SEC's proposed test (by which we are not bound) is too broad to fit within the contours of § 10(b).

FN24. Compare Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1048 (9th Cir.2006) (“[T]o be liable as a primary violator of § 10(b) for participation in a ‘scheme to defraud,’ the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme.”), petition for cert. filed (Oct. 19, 2006) (No. 06-560) with In re Charter Commc'ns, Inc., Sec. Litig., 443 F.3d 987, 992 (8th Cir.2006) (“[A]ny defendant who does not make or affirmatively cause to be made a fraudulent statement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under § 10(b) or any subpart of Rule 10b-5.”), petition for cert. filed (July 7, 2006) (No. 06-43).