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From Securities Regulation Daily, June 24, 2013

Justices Will Not Hear Aiding and Abetting Case

By Mark S. Nelson, J.D.

The Supreme Court today declined to hear a case that had asked the Court to decide whether Exchange Act Section 20(e)’s “substantial assistance” language requires the SEC to allege that a person charged with civil aiding and abetting was the proximate cause of the primary securities law violation. Joseph F. Apuzzo had appealed a Second Circuit opinion finding that the district court improperly dismissed the SEC’s aiding and abetting claim against him. The Second Circuit had previously denied rehearing en banc.

Background. The SEC’s case against Mr. Apuzzo arose from his alleged involvement in accounting fraud. According to the Second Circuit’s opinion, Mr. Apuzzo, as Terex Corporation’s (Terex) CFO, helped broker a deal in which United Rentals, Inc. (URI) would sell used industrial equipment to General Electric Capital Corporation (GE Capital) and lease back the equipment.

Terex was to sell the equipment for GE Capital after the lease-back period ended with Terex providing a residual value guarantee. URI was to buy new equipment from Terex to raise Terex’s sales results. URI, however, allegedly had a secret deal to indemnify Terex for losses from the guarantee.

The purpose of the scheme was to let URI recognize revenues from the deal early to boost its profits. However, under GAAP, URI was barred from doing this because its indemnification agreement with Terex precluded the transfer of ownership risks and rewards. Mr. Apuzzo allegedly helped to conceal URI’s role by executing related agreements and by approving inflated Terex invoices.

Opinion below. The Second Circuit, speaking through U.S. District Court Judge Jed Rakoff, who sat by designation, said that “substantial assistance” in the Exchange Act Section 20(e) context is the same as for similar criminal cases. Said the court: “In assessing this issue, we draw guidance from the well-developed law of aiding and abetting liability in criminal cases; for if the conduct of an aider and abettor is sufficient to impose criminal liability, a fortiori it is sufficient to impose civil liability in a government enforcement action.”

Mr. Apuzzo’s main argument in his certiorari petition was that the Second Circuit’s Apuzzo opinion diverged from earlier cases in the Second and other circuits. Specifically, the Second Circuit’s DiBella opinion had required a showing that the person charged with aiding and abetting was the proximate cause of the primary securities violation.

Said the Second Circuit in DiBella, “[s]ubstantial assistance, in turn, requires a showing that ‘the aider and abettor proximately caused the harm to [the victim] on which the primary liability is predicated’” (citing the Second Circuit’s Bloor opinion). According to Mr. Apuzzo, opinions in the First and Eighth circuits also conflicted with the Second Circuit’s opinion in his case.

The Second Circuit in Apuzzo clarified that “substantial assistance” means a defendant’s association or participation in a venture with the desire to successfully execute that venture. The court noted that Judge Learned Hand crafted this standard in the Second Circuit’s 1938 Peoni opinion and that the Supreme Court approved the standard in its 1949 opinion in Nye & Nissen.

The Second Circuit also noted that proximate cause is a key element in private suits but inapt in government enforcement actions. Proximate cause, said the court, is required in tort suits to show that the defendant caused the plaintiff’s injury. Regulatory enforcement actions, by contrast, seek to deter conduct instead of prove injury.

Although the Second Circuit said its older cases may be puzzling, they do not require the SEC to allege that an aider and abettor was the proximate cause of a primary securities law violation. The court said that a contrary view would foil Exchange Act amendments made after the Supreme Court barred private aiding and abetting suits in Central Bank. The court noted that many aiders and abettors may dodge SEC charges if proximate cause is required because few of these persons directly cause the underlying violation. The court also said that a Dodd-Frank Act amendment to Section 20(e) was not implicated.

In Apuzzo, the district court had found that, while the SEC did allege that Mr. Apuzzo had actual knowledge of the primary securities violation, the SEC failed to allege Mr. Apuzzo’s substantial assistance. The district court said that substantial assistance requires the SEC to allege that an aider and abettor was the proximate cause of the primary violation. The Second Circuit reversed because the district court had applied the wrong substantial-assistance standard.

The case is No. 12-1118.

Attorneys: Aaron M. Street (Baker Botts L.L.P.) for Joseph F. Apuzzo.

Companies: General Electric Capital Corporation; Terex Corporation; United Rentals, Inc.

MainStory: Top Story AccountingAuditing DistrictofColumbiaNews DoddFrankAct FraudManipulation

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