Academic journal article Vanderbilt Law Review

Attorneys, Accountants, and Bankers, Oh My! Primary Liability for Secondary Actors in the Wake of Stoneridge

Academic journal article Vanderbilt Law Review

Attorneys, Accountants, and Bankers, Oh My! Primary Liability for Secondary Actors in the Wake of Stoneridge

Article excerpt

I. BUDDY SCHWARTZ AND THE AMERICAN DREAM

Mervin "Buddy" Schwartz, Jr., embodied the American Dream. A Pennsylvania resident, Schwartz began working for Hershey Foods in 1961 as a maintenance mechanic.1 He eventually became a member of the local union's executive board.2 A hard worker providing for his family, Schwartz had a thirteen-year perfect attendance record and often worked overtime.3 He even managed to attend night classes and obtained an associate's degree in Bible studies.4

Lacking any financial training, Buddy Schwartz relied on the retirement plan and 401k5 Hershey provided for his retirement.6 Because he contributed the maximum allowable amount out of each paycheck to his 401k, he was able to retire in 1999 at the age of sixty with retirement assets worth approximately $284,000.7 He rolled these assets over to Merrill Lynch so his son, James Schwartz, a financial advisor, could manage them.8 Not only did he retire early, but Buddy Schwartz and his wife, Louise, also were able to purchase a retirement home in Arizona to be close to family.9 For Buddy Schwartz, the American Dream was coming true.

This all changed, however, when James called his father in 2000 to tell him about a hot growth stock10 for a "fast-growing and stable company" called Enron.11 Relying on positive Merrill Lynch analyst opinions, James advised his father to invest in Enron, which he did by purchasing about $30,000 worth of preferred stock.12

Imagine Schwartz's despair when the Enron scandal erupted in 2001, and he lost his initial investment and was forced to sell his retirement home in Arizona.13 Imagine his outrage when he discovered that his brokerage firm, Merrill Lynch, was lying and scheming with Enron to make its financial statements look more promising than they actually were through fraudulent transactions.14 Imagine his heartbreak when the Fifth Circuit destroyed his American dream in one stroke by failing to certify a nationwide class that would have included Schwartz and other defrauded investors. According to the court, the fraudulent actions did not give rise to primary liability under § 10(b) of the Securities Exchange Act of 1934.15

Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") prohibits the use of "any manipulative or deceptive device ... in connection with the purchase or sale of any security."16 In addition, the Securities and Exchange Commission ("SEC") promulgated Rule 10b-5 to provide an enforcement action against those "employ [ing] any device, scheme, or artifice to defraud" or "engag[ing] in any act, practice, or course of business which [sic] operates or would operate as a fraud or deceit upon any person" regarding the purchase or sale of any security.17 Courts have found an implied private cause of action under Rule 10b-5 that is available to private individuals like Schwartz.18 However, in the case of secondary actors such as, inter alia, banks, investment firms, attorneys, and accountants, the Supreme Court thus far has dismissed claims for "aiding and abetting" liability brought under either § 10(b) or Rule 10b-5.19 As a result, a plaintiff such as Schwartz who wishes to bring a claim against a secondary actor under § 10(b) must demonstrate that the secondary actor behaved in such a way as to sustain a claim for primary liability.20 The Court has not clearly established what plaintiffs must demonstrate to find a secondary actor primarily liable. That question has consistently led to splits among the federal circuit courts.

Originally, claims against secondary actors were brought under Rule 10b-5(b) as misrepresentation claims.21 In response to these claims, the Second Circuit developed a restrictive Bright Line Test that requires a plaintiff to demonstrate that the secondary actor made a false or misleading statement or omission that can be attributed to him or her at the time of public dissemination.22 The Ninth Circuit developed an alternative standard, couched in terms of "aiders and abettors," that finds liability where there is "(1) the existence of an independent primary wrong, (2) actual knowledge or reckless disregard by the aider and abettor of the wrong and of his or her role in furthering it, and (3) substantial assistance in the wrong. …

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