In Securities and Exchange Commission v. Apuzzo, 689 F.3d 204 (2nd Cir. 2012), the U.S. Court of Appeals for the Second Circuit clarified that, in enforcement actions against persons who aid or abet a Rule 10b-5 securities violations, the SEC is not required to plead or prove that the person(s) proximately caused the primary securities law violation. This relaxation of the SEC’s burden of proof when bringing an enforcement action should be duly noted by financial professionals who are already the focus of increased regulation and a motivated enforcement regime.
While liability for aiding and abetting is not authorized by either the 1933 or 1934 Act, a 1995 legislative change (in the Reform Act of 1995) authorized the SEC to bring enforcement actions against “any person that knowingly provides substantial assistance to another person in violation” of the securities laws. In Apuzzo, the Second Circuit Court of Appeals clarified the necessary elements for this type of enforcement action. In bringing an enforcement action against Joseph F. Apuzzo, the former chief financial officer of Terex Corporation (“Terex”), the SEC alleged that Apuzzo aided and participated in a fraudulent accounting scheme in violation of Section 20(e) of the Securities Exchange Act of 1934. The primary securities violation was allegedly committed by United Rentals, Inc. (“URI”) and its former chief financial officer Michael J. Nolan in a sale-leaseback scheme. In short, various parties executed various agreements which allowed URI to recognize revenue in a way that inflated its profits. The SEC alleged, specifically, that Mr. Apuzzo executed agreements that allowed URI to inflate profits.
To prove a violation of Section 20(e) of the Securities Exchange Act of 1934, the SEC must prove the following three elements: 1) the existence of a securities law violation by the primary violator of the securities law (as opposed to the aiding and abetting party); 2) knowledge of the violation by the aider and abettor; and 3) substantial assistance by the aider and abettor in the achievement of the primary violation. Mr. Apuzzo moved to dismiss the case, arguing that the SEC failed to establish that he provided substantial assistance to the primary violation of securities laws (those being committed by Nolan and URI). The district court agreed and dismissed the case. In reversing the dismissal, the U.S. Court of Appeals for the Second Circuit rejected the basis for the district court’s decision and held that the SEC need not plead or prove proximate cause—that Mr. Apuzzo’s conduct led to or “proximately caused” the primary securities violation—to satisfy the “substantial assistance” element. The Court explained that “[w]hile a plaintiff must prove reliance (a concept closely akin to causation) in a private securities fraud suit...there is no such requirement in an SEC enforcement action.” Applying this test, the Second Circuit found that the SEC’s Complaint plausibly alleged that Apuzzo provided substantial assistance to the primary violator (i.e., URI) in carrying out the fraud.
The Apuzzo decision clarifies the standard for evaluating the “substantial assistance” component of aider and abettor liability, and can be seen as an expansion of the SEC’s authority to pursue enforcement actions against persons who do not directly violate securities laws but “aid and abet” others in doing so.
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