2nd Circuit Clarifies Standard for Aiding and Abetting Liability in SEC Enforcement Actions

On Aug. 8, 2012, the U.S. Court of Appeals for the 2nd Circuit clarified its view of the pleading requirements applicable to claims brought by the U.S. Securities and Exchange Commission for alleged “aiding and abetting” violations of the federal securities laws. In SEC v. Apuzzo, No. 11-696, 2012 WL 3194303 (2d Cir. Aug. 8, 2012), the 2nd Circuit held that the SEC is not required to plead or prove that the alleged aider and abettor “proximately caused” a primary securities law violation. In so holding, the 2nd Circuit reversed a contrary decision by the U.S. District Court for the District of Connecticut.

Aiding and Abetting Under the Federal Securities Laws

To establish a claim for aiding and abetting, the SEC must plead and prove: (1) the existence of a securities law violation by the primary  party; (2) the aider and abettor’s knowledge of the primary violation; and (3) “substantial assistance” by the aider and abettor in the achievement of the primary violation. The 2nd Circuit’s decision in Apuzzo focused on what the SEC must plead and prove to establish the “substantial assistance” element of an aiding and abetting claim.¹

Factual and Procedural Background of the Apuzzo Case

In Apuzzo, the SEC brought an enforcement action against Joseph F. Apuzzo for aiding and abetting a securities law violation through his alleged role in facilitating an allegedly fraudulent accounting scheme. Apuzzo was the chief financial officer of the Terex Corporation, a heavy equipment manufacturer, from 1998 to 2002. The SEC alleged that Apuzzo assisted United Rentals, Inc. (“URI”), a Terex customer and one of the largest equipment rental companies in the world, in consummating two “sale-leaseback” transactions in 2000 and 2001. The SEC alleged that the “sale-leaseback” transactions allowed URI to recognize revenue prematurely and inflate profit from URI’s sales. Apuzzo allegedly acquiesced to the transactions in exchange for URI’s agreement to indemnify Terex against any losses stemming from the transactions, as well as URI’s agreement to make substantial purchases of new equipment from Terex.

Apuzzo moved to dismiss the SEC complaint for, among other things, failure adequately to allege the “substantial assistance” element of the aiding and abetting claim. The U.S. District Court for the District of Connecticut agreed with Apuzzo and dismissed the SEC’s complaint. The district court held that the SEC failed to allege facts sufficient to establish that Apuzzo’s conduct “proximately caused” the primary violation of the securities laws, which the court concluded was required to satisfy the “substantial assistance” element of the SEC’s aiding and abetting claim. 

The 2nd Circuit Clarifies that in Enforcement Actions, the SEC is Not Required to Plead or Prove “Proximate Cause”

The 2nd Circuit reversed the district court, holding that, in enforcement actions brought under 5 U.S.C. § 78t(e), the SEC is not required to plead or prove that the alleged aider and abettor “proximately caused” the primary securities law violation. The court explained that unlike a private plaintiff seeking damages, the SEC is not required to establish injury, since the purpose of an enforcement action is deterrence, not compensation. According to the court, the lack of an injury requirement in SEC enforcement actions obviates the need to show “proximate causation,” a concept rooted in tort law that links the alleged wrongful act to the resulting injury.  Further, the court noted that requiring the SEC to show “proximate causation” to establish aiding and abetting liability would, in effect, hamstring the SEC’s ability to bring aiding and abetting claims because the primary violation will almost always be the direct cause of the injury, not the activities of the aider and abettor.

After rejecting the lower court’s ruling respecting “proximate cause,” the 2nd Circuit clarified that “the appropriate standard for determining the substantial assistance component of aider and abettor liability in an SEC civil enforcement action is the Judge [Learned] Hand standard” set forth in United States v. Peroni, 100 F.2d 401 (2d Cir. 1938), i.e., that the defendant “associated himself with the venture, that the defendant participated in it as something that he wished to bring about, and that he sought by his action to make it succeed.” Apuzzo, 2012 WL 3194303, at *6 (internal alterations deleted). Using this standard, the court concluded that the SEC had adequately alleged Apuzzo’s “substantial assistance” in the primary violation. 

Implications

In rejecting the notion that there is a “proximate cause” requirement in an SEC aiding and abetting claim, Apuzzo makes it easier for the SEC to plead and prove aiding and abetting liability in enforcement actions. It remains the case, however, that there is no private right of action for aiding and abetting a violation of the federal securities laws. Accordingly, Apuzzo is of no help to the plaintiff’s class action securities bar.

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¹ In its seminal ruling in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the U.S. Supreme Court established that private litigants may not bring aiding and abetting claims for violations of the federal securities laws. Shortly thereafter, Congress enacted a statute expressly allowing the SEC, but not private litigants, to pursue claims for aiding and abetting violations of the federal securities laws. 15 U.S.C.  § 78t(e).