Second Circuit Holds that Allegation of Actual Knowledge Not Necessary for SEC to State Claim Against Aiders and Abettors

SEC

On August 8, the U.S. Court of Appeals for the Second Circuit overturned a district court holding that an individual must be a proximate cause of harm to be found liable as an aider and abettor of securities misconduct. SEC v. Apuzzo, No. 11-696, 2012 WL 3194303 (2nd Cir. Aug. 8, 2012). The SEC's civil enforcement action alleges that the individual defendant assisted another firm and its CFO (the primary violators) in carrying out fraudulent securities transactions. In his motion to dismiss, the defendant argued that the SEC did not adequately allege that he had actual knowledge of the violation or that he rendered substantial assistance to the primary violators. The district court dismissed the case, holding that to properly claim substantial assistance, the SEC must allege facts that support the conclusion that the defendant was a proximate cause of the violation. On appeal, the court invalidated the district court’s proximate cause test and held that to properly allege substantial assistance in support of securities misconduct, the SEC need only allege that the individual associated himself with the undertaking and willfully participated in efforts to make it succeed. After applying this lower threshold, the appeals court reversed and remanded the case, concluding that the SEC sufficiently pled that the defendant aided and abetted the primary violators.