There is a circuit split on the issue of primary vs. aiding-and-abetting liability. Under the "bright line" test adopted by the Second Circuit, primary liability for securities fraud (as opposed to aiding-and-abetting liability, which is not available in private actions) only exists if the alleged misstatement is attributable on its face to the defendant.
Other circuit courts, however, have applied a more relaxed standard. The Fourth Circuit has found that it is sufficient for a plaintiff to adequately allege that (a) the defendant "participated" in the making of the misstatement, and (b) "interested investors would have known that the defendant was responsible for the statement at the time it was made, even if the statement on its face is not directly attributable to the defendant." Earlier this year, the Supreme Court granted cert in that case - Janus Capital Group v. First Derivative Traders - and presumably will resolve the circuit split.
In the interim, the Fifth Circuit has issued a decision expressly agreeing with the Second Circuit and adopting the "bright line" test. In Affco Investments 2001 LLC v. Proskauer Rose, L.L.P., 2010 WL 4226685 (5th Cir. Oct. 27, 2010), the court considered whether a law firm could have primary liability based on its provision of tax opinions that were alleged to be part of a fraudulent scheme. The company that promoted the scheme informed investors that "several major national law firms" had vetted the investments. Although plaintiffs claimed to have relied on the tax opinions, the court found that they failed to allege "that they ever saw or heard any Proskauer work product before making their decision, nor do they explicitly allege that the promoters identified Proskauer as one of the 'major national law firms.'" Accordingly, the plaintiffs "failed to show reliance on Proskauer" and the law firm could not be a primary violator.
Holding: Dismissal affirmed.
Quote of note: "Knowing the identity of the speaker is essential to show reliance because a word of assurance is only as good as its giver. Clients engage 'name-brand' law firms at premium prices because of the security that comes from the general reputations of such firms for giving sound advice, or for winning trials. Specific attribution to a reputable source also induces reliance because of the ability to hold such a party responsible should things go awry."Posted by Lyle Roberts at November 5, 2010 9:26 PM | TrackBack