Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 29, 1994 TAG: 9406020002
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
In a close 5-to-4 vote, a majority of the justices - those generally viewed as the conservatives - held that people who merely "aid and abet" securities fraud cannot be held liable in private civil law suits. They said Congress never intended the law to be that broad.
The result makes it more difficult for people who believe they have been defrauded to seek damages. They can, as usual, go after the primary wrong-doers, but those primary defendants - those who issued the securities - may well be insolvent because of their financial problems.
The court decision rules out going after secondary defendants, such as accountants and lawyers who advised the primary perpetrators but whose own actions did not involve fraud. Often it is those people who offer the deepest pockets for plaintiffs seeking damages.
At issue in the Supreme Court case, for instance, was the behavior of Central Bank of Denver, which served as trustee for a bond issue for a planned residential and commercial development in Colorado Springs, Colo.
The terms of the bond issue required that the appraised value of the property equal 160 percent of the bonds, and several companies questioned the accuracy of an outdated appraisal in the face of declining property values. But Central Bank agreed in 1988 to delay independent review of the appraisal until six months after closing on the bond issue.
Before the review was completed, the authority defaulted on the bonds.
The plaintiffs, who had invested in the bonds, sued the bond issuing authority, the developer, underwriters and others. But the Supreme Court ruled April 19 that they could not sue Central Bank as an "aider and abettor" on the grounds that Congress had no such intention.
Observers such as The New York Times and the National Law Journal said it will be harder for the average person to sue for fraud and even for the Securities and Exchange Commission to go after some securities fraud cases.
"The ruling is a huge victory for accountants, who reacted with glee, and to a lesser extent for lawyers who advise companies," Floyd Norris wrote in a recent column in The New York Times. "Both groups have faced suits saying they aided and abetted frauds."
The result for SEC enforcement will be "bizarre," columnist Arthur Mathews wrote in last week's National Law Journal.
The SEC, he said, can revoke a broker's license for aiding and abetting, "but it cannot obtain an injunction against the broker for the same conduct. It can obtain a civil money penalty against that broker in an administrative proceeding," Mathews wrote, "but it cannot seek a civil penalty against the broker in federal court."
Douglas W. Densmore, a specialist in banking and securities law with the Roanoke firm of Woods, Rogers & Hazlegrove, said the decision makes it more difficult to sue lawyers and accountants, who are most affected.
The plaintiffs' lawyers, he said, must think about how to cloak allegations against them in terms of primary liability instead of their past secondary position as aiders and abettors. In the area of securities law, Densmore said, it is "not so difficult to make those kinds of allegations."
Several local accountants said last week they had no knowledge of the case.
Gene Rosen of Mechanicsville, president-elect of the Virginia Society of Certified Public Accountants, said the professional group has not taken a position on the issue. "But it is a huge victory for certified public accountants. CPAs can now offer services to their clients (who are subject to regulation by the Securities and Exchange Commission) and not fear frivolous lawsuits as they relate to securities."
Rosen said the decision will not have a negative effect on the quality of services rendered by the profession. "In fact, because of our strong code of professional conduct, CPAs will continue to provide quality professional service."
Paul Mahoney, who teaches securities law at the University of Virginia Law School, said lawyers and accountants are usually the people charged with aiding and abetting. Among lawyers, he said, those who help the securities industry will view the decision as good while those who represent plaintiffs will see it as detrimental.
Individual investors who believe they have been defrauded will object to the decision, said Mahoney, who is associate professor of law. But he said it may help average investors by lowering the cost of professional services. Some observers, Mahoney said, think the decision might reduce the incentive for professionals to prevent primary violations.
Mahoney said commentators who believe that securities litigation helps to control the actions of those who issue them generally condemn the decision.
On the other hand, those who believe the suits are largely a means of siphoning money to plaintiffs' lawyers without a deterrent effect think the rule is a good one, Mahoney said.
Lyman Johnson, professor of law at Washington and Lee University Law School, said the decision will substantially lessen the probability of professional advisers being found liable.
Johnson, who teaches securities law, predicted that the Securities and Exchange Commission will try to persuade Congress to include aiding and abetting in the statutes. The Supreme Court, he said, has taken the position that Congress can correct the law if that's what it wishes.
Some observers say that a change in the law would force professionals to be more effective in enforcing compliance by those they assist, Johnson said.
The SEC would like a change in the law for its own enforcement effort, he said. And the SEC believes that securities professional are critical in structuring securities issues, he added, so such a law would put the liability on them for their actions.
James Kern, a securities industry specialist for Ferguson, Andrews & Associates Inc. in Roanoke, said Congress may clarify the law because the whole area is unclear. Aiding and abetting was more like negligence than fraud.
Kern said the public interest may be better served by suing the parties who have a direct hand in commiting fraud. Aiding and abetting, he said, was often used as "a dragnet to pull in all the people with deep pockets."
by CNB