On August 8, 2012, the Second Circuit “clarif[ied] that, in enforcement actions brought under [Section 20(e)], the SEC is not required to plead or prove that an aider and abettor proximately caused the primary securities law violation.” SEC v. Apuzzo, 2012 WL 3194303, at *7 (2d Cir. Aug. 8, 2012) (Rakoff, J.) (Apuzzo II).1
“Section 20(e) of the Securities Exchange Act of 1934 allows the SEC, but not private litigants, to bring civil actions against aiders and abettors of securities fraud.” Id. at *6. “The SEC may bring such an action against ‘any person that knowingly provide[d] substantial assistance’ to a primary violator of the securities laws.” Id. (quoting 15 U.S.C. § 78t(e)). In order to state an aiding and abetting claim under Section 20(e), the SEC must plead “(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party; (2) ‘knowledge’ of this violation on the part of the aider and abettor; and (3) ‘substantial assistance’ by the aider and abettor in the achievement of the primary violation.” SEC v. DiBella, 586 F.3d 553, 566 (2d Cir. 2009) (Wesley, J.) (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985) (Meskill, J.)).
Here, the SEC claimed that “defendant Joseph Apuzzo [had] aided and abetted securities law violations through his role in a fraudulent accounting scheme.” Apuzzo II, 2012 WL 3194303, at *1. Allegedly “with Apuzzo’s assistance,” United Rentals, Inc. (“URI”) and its chief financial officer “carried out two fraudulent ‘sale-leaseback’ transactions” that were “designed to allow URI to ‘recognize revenue prematurely and to inflate the profit generated from URI’s sales.’” Id. at *2. Apuzzo’s role in the alleged scheme included “execut[ing] various agreements that disguised URI’s continuing risks and financial obligations” and “approv[ing] inflated invoices[.]” Id.
The District of Connecticut “concluded that the SEC had adequately alleged [Apuzzo’s] actual knowledge of the violation.” Id. at *5. For example, the court found that the SEC’s allegations “support[ed] a conclusion that … Apuzzo knew that the results from the transactions would be inaccurately reflected in URI’s financial statements if the true structure of the transactions was not known to URI’s auditor[.]” SEC v. Apuzzo, 758 F. Supp. 2d 136, 148 (D. Conn. 2010) (Thompson, J.). However, “the district court found that the SEC had not adequately alleged substantial assistance.” Apuzzo II, 2012 WL 3194303, at *5. “Specifically, the district court held that the ‘substantial assistance’ component required that the aider and abettor proximately cause the harm on which the primary violation was predicated,” and found that the SEC’s complaint “did not plausibly allege such proximate causation.” Id. at *1. The SEC appealed.
The Court Determines That Proximate Causation Is Not a Requirement for Pleading “Substantial Assistance”
Because Apuzzo did not contest the district court’s finding with respect to the “actual knowledge” allegations, “the only disputed question on appeal [was] whether the facts alleged plausibly [pled] that Apuzzo [had] substantially assisted the primary violator in committing the fraud.” Id. at *6.
In considering the “substantial assistance” requirement, the Second Circuit turned to “the welldeveloped law of aiding and abetting liability in criminal cases.” Id. The Apuzzo II court reasoned that “if the conduct of an aider and abettor is sufficient to impose criminal liability, a fortiori it is sufficient to impose civil liability in a government enforcement action.” Id.
The Second Circuit noted that “[n]early seventy-five years ago, Judge Learned Hand famously stated that in order for a criminal defendant to be liable as an aider and abettor, the Government … must [ ] prove ‘that he in some sort associate[d] himself with the venture, that [the defendant] participate[d] in it as something that he wishe[d] to bring about, [and] that he [sought] by his action to make it succeed.’” Id. (quoting United States v. Peoni, 100 F.2d 401, 402 (2d. Cir. 1938) (Hand, J.)). “The Supreme Court later adopted Judge Hand’s formulation.” Id. (citing Nye & Nissen v. United States, 336 U.S. 613, 619 (1949) (Douglas, J.)).
The Second Circuit found Judge Hand’s standard to be “clear, concise, and workable,” and held that it is “the appropriate standard for determining the substantial assistance component of aider and abettor liability in an SEC civil enforcement action[.]” Id. at *6-7. Notably, the Second Circuit rejected Apuzzo’s contention “that substantial assistance should … be defined as proximate cause[.]” Id. at *6. The court explained that this “argument ignores the difference between an SEC enforcement action and a private suit for damages.” Id. “‘Proximate cause’ is the language of private tort actions; it derives from the need of a private plaintiff, seeking compensation, to show that his injury was proximately caused by the defendants’ actions.” Id. “But, in an enforcement action, civil or criminal, there is no requirement that the government prove injury, because the purpose of such actions is deterrence, not compensation.” Id.
The Second Circuit further explained that “the statute under which the SEC here proceeds, 15 U.S.C. § 78t(e), was passed in the wake of [Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (Kennedy, J.)] to allow the SEC to pursue aiders and abettors who, under the reasoning of Central Bank, were not themselves involved in the making of the false statements that proximately caused the plaintiffs’ injuries.” Id. at *7. “This statutory mandate would be undercut if proximate causation were required for aider and abettor liability in SEC enforcement actions.” Id. Because “the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud,” the Second Circuit found that “most aiders and abettors would escape all liability if such a proximate cause requirement were imposed[.]” Id.
The Complaint Adequately Alleges Apuzzo’s “Substantial Assistance”
Applying Judge Hand’s standard for aider and abettor liability, the Second Circuit found it “clear that the [c]omplaint plausibly alleges that Apuzzo [had] provided substantial assistance to the primary violator in carrying out the fraud[.]” Id. at *8. “Apuzzo associated himself with the venture, participated in it as something that he wished to bring about, and sought by his action to make it succeed.” Id.
The Second Circuit also took into account Apuzzo’s “high degree of actual knowledge of the primary violation (the second component of aiding and abetting)” when considering whether he rendered “substantial assistance.” Id. The court explained that “the three components of the aiding and abetting test ‘cannot be considered in isolation from one another.’”
Id. (quoting DiBella, 587 F.3d at 566). “Where, as here, the SEC plausibly alleges a high degree of actual knowledge, this lessens the burdens it must meet in alleging substantial assistance.” Id.
The Second Circuit found that “[i]t is particularly appropriate to consider the degree of scienter in evaluating substantial assistance in light of the test for substantial assistance” based on Judge Hand’s standard for aider and abetter liability. Id. at *9. “[I]f a jury were convinced that the defendant had a high degree of actual knowledge about the steps he was taking and the role those steps played in the primary violation, they would well be justified in concluding that the defendant’s actions, which perhaps could be viewed innocently in some contexts, were taken with the goal of helping the fraud succeed.” Id.
“In sum,” the Second Circuit “conclude[d] that the [c]omplaint should not have been dismissed because it adequately alleged that Apuzzo [had] aided and abetted the primary violator in carrying out his fraudulent scheme.” Id. at *11. The Second Circuit reversed the district court’s opinion and remanded for further proceedings consistent with its opinion.