10(b) or Not 10(b)?: Yanking the Security Blanket for Attorneys in Securities Litigation

Abstract

The renewed debate over whether and, if so, how defrauded investors can hold attorneys liable for perpetrating securities fraud is now a decade old. Until 1994, attorneys could be held liable by private plaintiffs when they aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”). In 1994, the Supreme Court, in Central Bank of Denver v. First Interstate Bank of Denver, held that a private plaintiff could not bring suit against a defendant for aiding and abetting a Section 10(b) violation. A five-four majority of the Justices held that only primary liability under Section 10(b) was actionable by private plaintiffs. This decision was a windfall for attorneys and other non-issuer defendants such as accountants, analysts, and underwriters who had historically been brought into Section 10(b) lawsuits as aiders and abettors. After Central Bank, private plaintiffs could only sue these potential defendants if the defendants themselves had violated Section 10(b), as opposed to merely assisting others who were violating Section 10(b). The implications of the Central Bank decision were huge: the attorney conspirators who were critical to effectuating fraudulent transactions now appeared to be almost unreachable by defrauded investors. In the decade since Central Bank, federal courts have struggled with this issue. Clearly, the federal courts want to adhere to the Supreme Court’s edict in Central Bank disavowing the “aiding and abetting” liability of attorneys under Section 10(b). At the same time, the courts recognize that, at least in certain situations, attorneys should be held liable as primary violators of (as opposed to aiders and abettors under) Section 10(b). Some federal appellate courts have attempted to establish tests to categorize when to hold attorneys liable as primary violators of Section 10(b) (as opposed to unreachable aiders and abettors). Other courts have essentially preserved aiding and abetting liability in apparent contravention of Central Bank. Finally, certain courts have allowed clearly fraudulent behavior to escape liability. A schizophrenic jurisprudence has evolved. This Article attempts to guide the federal judiciary through a principled application of Section 10(b) to attorneys. The federal judiciary must take a more principled approach to resolving attorney liability under Section 10(b). On the tenth anniversary of Central Bank, investor confidence remains dramatically low, and corporate misconduct is rampant. Absent a principled and purposeful application of Section 10(b) to attorneys, incidents of corporate misconduct will not abate. Attorneys need a compelling reason to disassociate themselves from fraudulent transactions, or investors will continue to be fleeced through attorney-aided acts of corporate deceit. The judiciary must aggressively apply Section 10(b) to attorneys as primary violators.