2nd Circuit Eases SEC’s Burden in Aiding and Abetting Fraud Cases
The U.S. Court of Appeals for the 2nd Circuit has lowered the bar for the Securities and Exchange Commission to successfully bring enforcement actions against “aiders and abettors” of securities fraud. In SEC v. Apuzzo, the 2nd Circuit ruled that the SEC “is not required to plead or prove that an aider and abettor proximately caused the primary securities law violation” to establish the substantial assistance element for an aiding and abetting claim. This new and more relaxed standard could lead to increased SEC enforcement actions against individuals, particularly in cases involving misconduct related to financial statements and accounting.
In Apuzzo, the SEC charged Joseph Apuzzo, former CFO of a global manufacturing company, with aiding and abetting securities law violations through his role in a fraudulent accounting scheme. The SEC alleged Appuzo aided and abetted the scheme by signing leaseback agreements that he knew were designed to allow a third-party rental company to improperly recognize revenue to meet earnings forecasts. The lower court, applying the standard for private plaintiff actions, found the SEC failed to adequately allege Appuzo “proximately caused” the harm arising from the third-party’s fraudulent scheme and dismissed the case.
The 2nd Circuit, however, disagreed with the district court. The 2nd Circuit ruled that the SEC need not establish proximate cause in civil enforcement actions; rather the proper test in such cases is whether the aider and abettor “in some sort associated himself with the venture, that he participated in it as in something that he wished to bring about, and that he sought by his action to make it succeed.” The 2nd Circuit reasoned the SEC should not be held to the higher “proximate cause” standard because, unlike private plaintiffs, the SEC files suits mainly to deter unlawful conduct. Further, applying the higher standard to the SEC would let too many aiders and abettors off the hook, since “many if not most aiders and abettors would escape all liability if such a proximate cause requirement were imposed, since, almost by definition, the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud, however much they contribute to the success of the scheme.”
This decision clarifies and meaningfully reduces the SEC’s burden to allege and ultimately prove aiding and abetting fraud claims in securities enforcement actions. The impact of this decision is particularly broad because many publicly traded companies have operations in New York, making them subject to the jurisdiction of New York courts where Apuzzo is now the law.