The financial reform bill now working its way through Congress will include an amendment to the securities laws allowing private civil actions for aiding and abetting liability, if an amendment Senator Arlen Specter proposed on May 4, 2010 is part of the final bill. According to the Blog of the Legal Times (here), in conjunction with a Senate Judiciary subcommittee meeting and on behalf of himself and 11 other senators, Specter introduced an amendment to the financial reform bill that would impose liability on "any person that knowingly provides substantial assistance to another person in violation of this title." The proposed amendment can be found here. (Hat Tip: Point of Law blog.)
Although the securities laws currently allow for the SEC to pursue aiding and abetting enforcement actions, the Supreme Court held in the Stoneridge case that there is no private right of action for aiding and abetting liability under the federal securities laws.
As discussed at greater length here, in July 2009, Senator Specter introduced S. 1551, "The Liability for Aiding and Abetting Securities Violations Act of 2009," which proposed to legislatively overturn Stoneridge. Although Committee hearings were held in connection with that bill, it had not made it out of the Committee. In April 2010, Representative Maxine Waters separately introduced a House version of essentially the same bill, H.R. 5042, which was referred to the House Judiciary Committee.
Though there are now alternative versions of the aiding and abetting liability bill in each of the two houses of Congress, neither bill had progressed out of committee. Had the bills made it out of committee on their own, they undoubtedly would have occasioned debate and discussion. Specter’s proposed amendment to the financial reform bill, which is substantially similar to the previously introduced stand-alone bills, potentially could provide a short cut way around that likely debate and discussion.
It remains to be seen whether Senator Specter’s initiative to add the aiding and abetting amendment to the financial reform bill will ultimately become a part of the bill that is put before the Senate. But if the amendment is incorporated into the financial reform bill, it would only be one small part of a massive and controversial piece of legislation that will occasion intense partisan debates on a wide variety of issues, most of them much higher profile that than those involved in Specter’s amendment.
To be sure, passage of the financial reform bill itself is by no means assured. But debate on the bill will undoubtedly focus on the proposed systemic reforms embodied in the legislation. It is unlikely that Specter’s proposed amendment, if included in the bill, would itself occasion extensive additional debate or even materially affect the ultimate passage of the bill. Indeed, the aiding and abetting liability provision arguably has a greater chance of being enacted as an accessory to a larger reform bill than it might have on its own.
Were the provision to be enacted into law, either on its own or as part of a larger piece of legislation, it could represent a significant increase in the potential liability exposure under the securities laws for accountants, lawyers, and other professionals who might be in a position to be alleged to have provided "substantial assistance" to a primary violator.
But the increase in potential liability exposure is not limited just to these outside professionals. As I discuss in greater length in my earlier post on S. 1551, the circle of persons whose liability exposure potentially could be increased by the enactment of the proposed aiding and abetting liability provision includes other public companies and their directors and officers.
Indeed, in the Stoneridge case itself, the defendants who were alleged to have aided and abetted Charter Communications were vendors who did business with Charter and who allegedly engaged in "round trip" transactions with Charter.
In other words, were Senator Specter’s bill to pass, it would not only greatly expand the potential securities liability exposure for companies’ outside professionals. It would also expand the potential securities liability exposure of all companies that transact business with public companies.
Were this aiding and abetting provision to be enacted into law, it would have significant implications for insurers that provide professional liability insurance for the outside professional gatekeepers. It could also have potentially significant implications for D&O insurers as well, and as I also discussed in my prior post, the definition of the term "securities claim" used in D&O insurance policies could become particularly important. The critical issue will be whether the term is defined to restrict "securities claims" to claims involving securities of the insured company, or whether the term is defined to include any alleged violation of the securities laws.
Finally, it should not be overlooked that the universe of companies that might potentially become the target of an aiding and abetting claim is not limited just to other public companies. Any company, including even private a private company, that does business with a public company might potentially be alleged to have provided "substantial assistance" to the public company’s securities law violations.
For all of these reasons, the legislative progress of the aiding and abetting liability provision should be of keen interest to the entire professional liability insurance community, including the D&O insurance community. The possibility of the provision’s inclusion in the financial reform bill will make this a particularly complicated issue to monitor.
Radian Group Subprime Securities Lawsuit Dismissed Again, This Time With Prejudice: As discussed at greater length here, on April 9, 2009, Eastern District of Pennsylvania Judge Mary McLaughlin granted the motion to dismiss the subprime related securities complaint that had been filed against Radian Group and certain of its directors and officers, holding that plaintiffs had failed to adequately allege scienter. However, the dismissal was without prejudice. The plaintiffs filed an amended complaint and the defendants renewed their motions to dismiss.
In a May 3, 2010 order (here), Judge McLaughlin again granted the defendants’ motions to dismiss, this time with prejudice.
The lawsuit related to an affiliate company in which Radian was a minority owner, Credit Based Servicing & Asset Securitization (C-Bass), an investor in the credit risk of subprime residential mortgages. Radian was a joint venturer in the affiliate with MGIC, with which Radian also had an agreement to merge.
The plaintiffs alleged that the defendants made false and misleading statements about C-Bass’s profitability and liquidity position and thus, the value of Radian’s investment in C-Bass. The statements allegedly inflated Radian’s share price, which led to losses to shareholders when Radian announced an impairment of its investment on July 30, 2007. The turbulence surrounding the C-Bass affiliate may also have undermined the pending merger with MGIC. Further background about the case can be found here.
In order to try to overcome the hurdles that led to the dismissal of their prior complaint, the plaintiffs amended complaint added more information regarding the defendants’ alleged knowledge of C-Bass’s troubles; more details regarding the merger of Radian and MGIC (which transaction, it was alleged, Radian was motivated to make motivations in order to preserve); and more details to bolster insider trading allegations.
Judge McLaughlin concluded that "the plaintiffs have failed to sufficiently amend their complaint to allege facts that give rise to a strong inference of scienter."
An Impertinent Remark About the Radian Group Decision: In addition to the actual holding itself, another aspect of Judge McLaughlin’s ruling is also of interest. With regard to the plaintiffs’ additional allegations about the defendants’ supposed knowledge of C-Bass’s problems, Judge McLaughlin noted instead of supporting a finding of scienter, "they serve to establish that the market at large knew of the subprime industry’s downward trend."
She then added "Indeed, this is not the first action to arise from the subprime mortgage crisis, nor the first to be dismissed." For the latter point she cited a number of other subprime securities suit dismissals (including the dismissal of the separate C-Bass related securities lawsuit filed against MGIC, about which refer here).
Judge McLaughlin is indeed correct that there have been many other subprime related lawsuits filed – over 200 by my count. In addition, as has been well-documented on this blog, there have been quite a number of dismissal motions granted in these cases. But a review of the full tally of dismissal motion rulings, which can be accessed here, shows that there also have been quite a number of dismissal motion denials, in addition to the rulings where the motions were granted.
Given that many motions have been denied, the fact that the motions have been granted in the cases she cites lacks any particularly persuasive effect (except of course with reference to the MGIC case, which undeniably is relevant). Simply referring to a few of the dismissals without referring to the motion denials represents an incomplete picture. Given the mix of case rulings, the fact that there have been some dismissals, in and of itself, does not seem particularly conclusive of anything.
Rating Agencies Lose Another Dismissal Motion: According to a May 4, 2009 Bloomberg article (here), a California state court judge has denied the motions of the rating agency defendants to dismiss the negligent misrepresentation claims that had been brought against them by the California Public Employees Retirement System (Calpers).
According to the article, Calpers had sued the rating agencies, alleging that the "faulty risk assessments on structured investment vehicles caused $1 billion in losses." Among the investment vehicles to which the rating agencies had given their highest ratings and that are the subject of the case is Cheyne Financial, which is also the subject of a separate lawsuit pending in federal court in Manhattan, in which Judge Shira Scheindlin had also denied the rating agencies’ motions to dismiss (about which refer here).
As detailed in Andrew Longstreth’s May 4, 2010 article on AmLaw Litigation Daily about the latest ruling, the California judge rejected the rating agencies’ argument that their rating opinions represented protected speech under the First Amendment. As Longstreth points out, the plaintiffs may be believe they now have a road map to overcoming this legal hurdle, in part due to Judge Scheindlin’s rulings in the New York case.