Secondary Liability for Securities Fraud: Gatekeepers in State Court

61 Pages Posted: 8 Apr 2011 Last revised: 25 Sep 2012

See all articles by Jennifer J. Johnson

Jennifer J. Johnson

Lewis & Clark College Paul L Boley Library

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2011

Abstract

The recent economic meltdown exposed numerous Ponzi schemes. When promoters of fraudulent ventures are unable to provide restitution to their victims, plaintiffs seek out other sources of repayment including professionals and other secondary participants in the transactions that precipitated their losses. Although most scholars agree that professionals can perform an important role in deterring securities fraud, scholarly opinions vary widely on the appropriate liability regime, if any, that these gatekeepers should face.

While civil liability for secondary participants in securities fraud was once well accepted in the federal courts, in 1994 the Supreme Court invalidated such claims as beyond the purview of Section 10(b) of the 1934 Securities Exchange Act and Rule 10b-5. In contrast, there is a robust tradition of aiding and abetting liability in most state blue sky statutes. Unlike the federal implied Rule 10b-5 cause of action, state blue sky laws contain express secondary liability statutes that do not have strict scienter standards or rigorous pleading requirements. Indeed, some state statutes are negligence based and contain burden-shifting provisions that require non-seller defendants to establish that they were not negligent in failing to discover the seller's fraud.

This Article traces the development of secondary liability under state securities laws and contrasts various state regimes and their federal counterparts. It also reviews federal efforts to restrict states from adjudicating securities related claims. Relying on available empirical evidence, the Article ultimately concludes that Congress should reverse its propensity of the last decade to preempt state securities actions and should recognize the valuable contribution of such actions in addressing fraud, particularly fraud committed upon retail investors.

Suggested Citation

Johnson, Jennifer J., Secondary Liability for Securities Fraud: Gatekeepers in State Court (April 5, 2011). Delaware Journal of Corporate Law (DJCL), Vol. 36, No. 2, 2011, Lewis & Clark Law School Legal Studies Research Paper No. 2011-7, Available at SSRN: https://ssrn.com/abstract=1803762

Jennifer J. Johnson (Contact Author)

Lewis & Clark College Paul L Boley Library ( email )

10015 S.W. Terwilliger Blvd.
Portland, OR 97219
United States

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