Although a Mayer Brown lawyer was criminally convicted of securities fraud and sentenced to seven years of prison for his role in helping Refco, Inc. create sham transactions and make false SEC filings, the Second Circuit recently held that the lawyer and his former firm could not be liable for civil securities fraud under Section 10(b) of the Securities Exchange Act. Section 10(b) requires a plaintiff to show reliance on the false statement of a defendant. Secondary actors, such as lawyers and accountants, are not liable, the Court held, for a statement that they helped create but are not attributable to them. Plaintiffs simply cannot satisfy the reliance prong for this type of behind the scenes conduct.

The plaintiffs and the SEC urged the Court to adopt a broader theory of liability for those who helped “create” a false statement, even if their name is not attached to that statement. Relying on the U.S. Supreme Court’s decision last year in Stoneridge which reaffirmed that there is no civil liability for aiding and abetting securities fraud, the Second Circuit refused to adopt the “creator” theory. The Second Circuit stated that it favored a bright line theory requiring a false statement to be attributed to the secondary actor to ensure the smooth functioning of capital markets.

The concurring opinion noted that the Circuits were not in agreement on the circumstances under which secondary actors could be liable for their knowing participation in helping others mislead the market. The Court noted that a prior Second Circuit opinion allowed a claim to proceed against an officer under Section 10(b), even though the false statement was not directly attributed to the officer. The Court in Mayer Brown left open the question of whether the distinction between outside actors, such as lawyers and accountants, justified the bright line test for them but not the insiders at an issuer. This may be a case that the Supreme Court will take to clarify the differences among the Circuits.