Second Circuit Expands The Scope Of SEC Aiding And Abetting Claims

Author:Mr Bradley Foster, Matthew G. Nielsen and Sara J. Chesnut
Profession:Andrews Kurth LLP

Last week, the Second Circuit issued a significant decision expanding the power of the SEC to bring "aiding and abetting" cases against secondary actors who contribute to securities fraud. In SEC v. Apuzzo, the Second Circuit held that the SEC is not required to prove an alleged aider and abettor "proximately caused" the fraud, rejecting a contrary decision from the district court and effectively lowering the bar for SEC aiding and abetting claims.

Private litigants cannot bring aiding and abetting claims, but the SEC is expressly permitted to do so. To establish aiding and abetting liability, the SEC must prove: (1) a primary securities violation occurred; (2) the aider and abettor had knowledge of the primary securities violation; and (3) the aider and abettor provided substantial assistance in the securities violation. The Second Circuit's decision in Apuzzo dealt with the third element, addressing the standard of proof to show "substantial assistance."

The SEC accused Joseph Apuzzo, the former CFO of Terex, of aiding and abetting the securities fraud of one of Terex's customers. Specifically, the SEC accused Apuzzo of assisting Terex's customer URI in misrepresenting its financial results by inflating the profit from the sale of used equipment and in prematurely recognizing the revenue from those sales. Apuzzo allegedly agreed to allow Terex to enter into the inflated transactions because URI secretly agreed to indemnify Terex for any losses and to take over Terex's resale obligations, and because URI promised to make additional large purchases of new equipment from Terex.

Relying on earlier Second Circuit decisions, the district court dismissed the SEC's complaint against Apuzzo on the grounds that the SEC had failed to adequately plead the "substantial assistance" prong of the aiding and abetting standard, since Apuzzo's actions were not the proximate cause of the URI's accounting violations. The Second Circuit reversed the district court, holding that proximate cause was not the appropriate standard for determining substantial assistance in an SEC enforcement action. The court...

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