Simpson v. AOL: The SEC, an Amicus, and the Definition of Primary Liability under Rule 10b-5

The SEC has apparently agreed to support the cert petition filed by the shareholders in Regents v. Credit Suisse.  The case involves the meaning of primary liability under Rule 10b-5.

This will not be the first case involving this issue where the SEC has filed an amicus brief.  The Commission also did so in Simpson v. AOL/Time Warner.  In the brief, the Commission proposed the following test for determining when a person is considered a primary violator:

• "Any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator of Section 10(b) and Rule 10b-5(a); any person who provides assistance to other participants in a scheme but does not himself engage in a manipulative or deceptive act can only be an aider and abettor."

The Commission also stated its belief that “engaging in a transaction whose principal purpose and effect is to create a false appearance of revenues” qualifies as a deceptive acts.  As the Commission opined, “[n]othing in the rules of causation suggests that only the final act in a scheme to defraud meets the causation requirement… Thus, a prior deceptive act, from which the making of the false statements follows as a natural consequence, can constitute a sufficient step in the causal chain to support a finding of reliance.”

The Court of Appeals agreed with the Commission’s that transactions intended to “create a false appearance of revenues” are deceptive acts. However, the court held this alone is not enough for primary liability. Instead, the court determined that the defendant’s “own conduct” must have the “principal purpose and effect of creating a false appearance of fact in furtherance of the scheme.”

The court’s opinion and the full text of the SEC’s amicus brief can be found on the DU Corporate Governance website.