The SEC pursued Joseph Apuzzo, the CEO of Terex Corp., for his role in two fraudulent sale-leaseback transactions orchestrated by United Rentals, a customer of Terex. The allegation was that Apuzzo had helped United Rentals in inflating its revenue figures while disguising the risks it was exposed to and the extent of its obligations. The New York district court found that while Apuzzo clearly knew of the scheme and its intent to mislead, he had not ‘substantially assisted’ in it and was not liable as an aider and abettor under the Securities Exchange Act of 1934. The district court reasoned that because Apuzzo was not the proximate cause of the injury that resulted from Terex’s fraud he had not provided substantial assistance to the underlying scheme.
This was wrong, said Rakoff J of the 2d Circuit on appeal: SEC v Apuzzo (2d Cir, 8 August 2012). ‘Proximate cause’ is the language of private tort actions but is an inappropriate touchstone in the context of an enforcement action by the SEC, which is not required to prove injury. Deterrence is the objective in enforcement proceedings, not restitution. The real test for aider and abettor liability, established by Justice Learned Hand in US v Peoni, 100 F2d 401 (2d Cir, 1938), is whether the defendant associated himself with the venture, participated in it as something he wished to bring about and sought by his action to make it succeed. This test is ‘clear, concise, and workable’ and has, moreover, stood the test of time. To require causation to be established would undermine the very purpose of aider and abettor liability, as the activities of someone who assists in another’s fraud are rarely the direct cause of any resulting injury. On the facts, it was clear that Apuzzo had aided and abetted the fraudulent scheme, given his high degree of knowledge of what Terex was up to.
The decision will clearly make it easier for SEC enforcement staff to go after alleged aiders and abettors. Amendments under the Dodd-Frank Act which lower the level of intent required for aiding and abetting from ‘knowing’ to ‘reckless’ misconduct, but which were not in effect when Apuzzo was filed, will also help the SEC in pursuing those who assist in the securities violations of third parties.