The US Court of Appeals for the Second Circuit recently held that when the Securities and Exchange Commission brings an enforcement action against a defendant that has allegedly aided and abetted a securities law violation, the SEC is not required to plead that the defendant has proximately caused the injury resulting from the violation.
The SEC charged defendant, the chief financial officer of an equipment manufacturer, with aiding and abetting a fraudulent accounting scheme that violated federal securities laws. In order to bring an enforcement action against a defendant for aiding and abetting a securities violation, the SEC must adequately plead: (1) the existence of securities law violation by the primary party; (2) defendant’s knowledge of the violation; and (3) “substantial assistance” by the defendant in the achievement of the violation. The District Court held that for the SEC to adequately plead that the defendant had “substantially assisted” in a securities violation, the SEC must plead that the defendant had proximately caused the injury that resulted from the alleged securities violation. The District Court found that the SEC had not adequately pleaded proximate causation and dismissed the complaint. The SEC appealed the dismissal to the Second Circuit.
The Court of Appeals reversed. It found that the SEC could successfully plead that an aider and abettor defendant had “substantially assisted” in the achievement of a securities violation without pleading that the defendant had proximately caused an injury that resulted from the violation. The Court reasoned that because SEC enforcement actions against aiders and abettors were to deter future securities violation, as opposed to direct compensation for the injury resulting from the violation, proximate causation of the injury was not a required component of liability.
The Court of Appeals reexamined the SEC’s allegations against defendant and found that the SEC had sufficiently pleaded all of the elements of aider and abettor liability, including “substantial assistance.” Accordingly, the Court of Appeals reversed the District Court’s grant of defendant’s motion to dismiss.
SEC v. Apuzzo, No. 11–696–cv, 2012 WL 3194303 (2d Cir. August 8, 2012).