On September 17th of last year, the U.S. Senate Committee on the Judiciary's
Subcommittee on Crime and drugs held a hearing on the "Liability
for Aiding and Abetting Securities Violations Act of 2009". Senator
Arlen Specter, a Democrat from Pennsylvania, introduced the S. 1551, which
Specter stated was intended to overturn two "errant" decisions
of the Supreme Court - Central Bank of Denver v. First Interstate Bank
of Denver and Stoneridge Investment Partners. To accomplish this reversal,
S. 1551 amends the Securities and Exchange Commission Act of 1934 to authorize
a private right of action against those aiding and abetting securities fraud.
Prior to Central Bank, which was decided by the Supreme Court in 1994,
private litigants could sue aiders and abettors under Section 10(b) of
the 1934 Act. After Central Bank and continuing with Stoneridge in 2008,
the Court placed constraints on the ability of a plaintiff in a civil
securities lawsuit to maintain an action against secondary actors like
auditors, accountants, bankers, and lawyers. Specter's bill would
place liability on "any person that knowingly or recklessly provides
substantial assistance to another person" in violation of the Act.
During the hearing, Tanya Solov of the North American Securities Administrators
Association argued in favor of S. 1551, noting that if secondary actors
such as accountants and lawyers "are allowed to avoid liability for
their actions, there will be no deterrent to prevent them from engaging
in fraudulent schemes." Also in favor of the bill was Columbia University
law professor John C. Coffee, Jr., but he called for the addition of caps
on the amount of any recovery, $2 million in the case of an individual
and $50 million in the case of a public corporation.
Robert Giuffra, Jr., a partner at Sullivan & Cromwell LLP and chief
counsel of the U.S. Senate Banking Committee during the Clinton administration,
opposes S. 1551, arguing that it "would hurt the competitiveness
of U.S. capital markets and financial centers and vastly expand the potential
liability and defense costs of innocent third parties that do business
with public companies." He was concerned that there would be pressure
to settle such cases because the ambiguity of the terms stipulating liability
would create uncertainty about the applicable legal standard.
The bill awaits mark-up by the Judiciary Committee, a necessary step before
the Committee can report it to the full Senate for consideration. It is
far from clear whether the legislation will be taken up by the 111th Congress,
either on its own or as part of other financial reform bills.