Recently, Mary Jo White, Chair of the Securities and Exchange Commission (SEC), announced that the SEC will begin using a new approach to pursue violations of the federal securities laws. The approach calls for a renewed focus on an obscure section of the Securities Exchange Act of 1934 (the “’34 Act”) – Section 20(b). Section 20(b) makes it “unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of [the ’34 Act] or any rule or regulation thereunder through or by means of any other person.”1 In criminal law, this is referred to as the “innocent instrumentality” doctrine under which a person can be held criminally responsible for causing an innocent person to commit a crime.
As explained by Ms. White, Section 20(b) potentially represents a powerful tool to ensnare individuals that use innocent intermediaries to commit securities law violations. As a result, the number of people subject to enforcement actions will likely expand. Additionally, Ms. White’s announcement begs the question of whether the plaintiffs’ bar will begin to invoke Section 20(b) to effect an end-run on the Janus limitation on primary ’34 Act liability.
Approximately three years ago, the U.S. Supreme Court ruled in Janus Capital Grp., Inc. v. First Derivative Traders that for purposes of Section 10(b) liability, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”2 The Court explained this rule by drawing an analogy to the relationship between a speechwriter and a speaker. “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”3 Thus, under Janus, only the speaker and not the speechwriter could be liable under Section 10(b).
Interestingly, the majority declined to address “whether Congress created liability for entities that act through innocent intermediaries in [Section 20(b)].”4 The dissent, however, seems to have suggested that Section 20(b) does create a private right of action. “If the majority believes, as its footnote hints, that § 20(b) could provide a basis for liability in this case . . . then it should remand the case for possible amendment of the complaint.”5
It is important to note that Janus involved claims brought by private investors. Whether Section 20(b) does in fact create a private right of action remains unclear. As the dissent noted, “[t]here is a dearth of authority construing Section 20(b).”6Moreover, there is no clear consensus among the lower courts.
In Fiero v. Fin. Indus. Regulatory Auth., Inc., the Second Circuit, without providing any analysis, held that private parties could bring actions for damages pursuant to Section 20(b).7 In contrast, in SEC v. Stringer, the United States District Court for the District of Oregon held that “[u]nlike Section 20(a), Section 20(b) is specifically geared toward government actions.”8 It should be noted, however, that Section 20(b) and Section 10(b) use similar language, to wit: “It shall be unlawful for any person, directly or indirectly . . . .”9 There is a private right of action under Section 10(b). Hence, despite the dearth of authority construing Section 20(b), courts could find that Section 20(b) is not only available to the SEC, but also to private litigants seeking damages in civil suits against public corporations.
Given that this development may increase the focus by regulators and plaintiffs’ lawyers on individual directors and officers, a company’s D&O insurance program is the best protection and defense in any ensuing regulatory or civil action. Ensuring that the program provides adequate limits and coverage to account for the defense of several individuals in such litigation is therefore essential.