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. The SEC may bring such an action against “any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this chapter." 15 U.S.C. § 78t(e). Similarly, the Missouri Securities Act provides under Section 409.6-604 that the Commissioner may bring an enforcement action against a person who has materially aided, is materially aiding, or is about to materially aid an act, practice, or course of business constituting a violation of the Act.
There are no Missouri cases addressing the aiding and abetting liability under the Missouri Securities Act. However, “Missouri courts have often looked to cases decided by courts from other jurisdictions to aid in comprehending the definitional limitations of the [Missouri Securities] Act, particularly when the language of the federal and state securities statutes involved is nearly identical.” Moses v. Carnahan, 186 S.W.3d 889, 904 (Mo. App. W.D. 2006) (finding that the Missouri Securities Commissioner was justified in looking to federal cases interpreting the federal Securities Acts in construing the meaning of the term “offer” as contained in the Missouri Uniform Securities Act).
The only Eighth Circuit case to directly address aiding and abetting liability under § 20(e) of the Securities Exchange Act is S.E.C. v. Shanahan, 646 F.3d 536 (8th Cir. 2011). In that case, the court noted that to establish aiding and abetting liability , the SEC must prove (1) a primary violation of the securities laws; (2) “knowledge” of the primary violation on the part of the alleged aider and abettor; and (3) “substantial assistance” by the alleged aider and abettor in achieving the primary violation. Id. at 547 (citing K & S P'ship v. Cont'l Bank, N.A., 952 F.2d 971, 977 (8th Cir.1991), cert. denied, 505 U.S. 1205, 112 S.Ct. 2993, 120 L.Ed.2d 870 (1992)). The court also stated that “[n]egligence ... is never sufficient,” and “a bare inference that the defendant must have had knowledge” of the primary violator's transgressions is insufficient. Id. The Eighth Circuit found that the SEC failed to make its case against an outside director of a corporation because it failed to prove “knowledge” of the corporation's alleged primary violations.
In a footnote, the court noted that Section 20(e) had recently been amended to include liability for “any person that ... recklessly provides substantial assistance to another person in violation of a provision of this chapter." See Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111–203, § 929O, 124 Stat. 1376, 1862 (July 21, 2010), codified at 15 U.S.C. § 78t(e). However, this amendment was not applicable to the appeal before the court.
There have been no reported cases located which have addressed the "recklessly" providing substantial assistance element of an aiding and abetting claim. However, it is generally understood that reckless conduct means that the actor realized or should have realized there was a strong probability his conduct would cause the injury. It follows that "recklessly" providing substantial assistance would, at the least, amount to providing substantial assistance in situations where the actor should have realized a primary violation of the securities laws. This of course lowers the bar for what the SEC must plead and prove in order to make a claim for aiding and abetting.
The SEC has also been aided by recent court decisions interpreting the "substantial assistance" element of an aiding and abetting claim. In S.E.C. v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) cert. denied, 133 S. Ct. 2855 (U.S. 2013), the district court had found that the SEC had not adequately alleged substantial assistance. Specifically, the court held that “the [C]omplaint contains factual allegations which taken as true support a conclusion that there was a ‘but for’ causal relationship between Apuzzo's conduct and the primary violation, but do not support a conclusion that Apuzzo's conduct proximately caused the primary violation.” Concluding that such proximate causation was required to satisfy the “substantial assistance” component of aider and abettor liability, the district court granted the motion to dismiss.
The Second Circuit found that in the context of an enforcement action by the government, where the goal is deterrence and not compensation, proximate cause is too stringent a standard to apply. Instead, to satisfy the substantial assistance element, the SEC must allege and prove facts sufficient to show that a defendant “in some sort associate[d] himself with the venture, that he participate[d] in it as in something that he wishe[d] to bring about, [and] that he [sought] by his action to make it succeed.” Id. at 206. As such, the Second Circuit reversed the decision of the district court.
The Dodd-Frank amendment and the Apuzzo decision reflect enhancements to the SEC’s ability to bring aiding and abetting claims against individuals who assist in carrying out a fraudulent scheme. Arguably a claim can now be brought even if an individual did not have actual knowledge of the primary violation and even if the individual's actions do not result in direct harm.