[Congressional Record Volume 155, Number 117 (Thursday, July 30, 2009)]
[Senate]
[Pages S8564-S8565]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER (for himself, Mr. Reed, and Mr. Kaufman):
  S. 1551. A bill to amend section 20 of the Securities Exchange Act of 
1934 to allow for a private civil action against a person that provides 
substantial assistance in violation of such Act; to the Committee on 
the Judiciary.
  Mr. SPECTER. Mr. President. I have sought recognition to urge support 
for the legislation I just introduced, the Liability for Aiding and 
Abetting Securities Violations Act of 2009. My legislation would 
overturn two errant decisions of the Supreme Court--Central Bank of 
Denver v. First Interstate Bank of Denver, 511 U.S. 164, 1994, and 
Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 
U.S. 148, 2008, by amending the Securities Exchange Act of 1934 to 
authorize a private right of action for aiding-and-abetting liability.
  The Act's main anti-fraud provision, Sec. 10(b), makes it ``unlawful 
for any person, directly or indirectly,'' to commit acts of fraud ``in 
connection with the purchase or sale of any security.'' Nearly fifty 
years ago the Court implied a private right of action under Sec. 10(b). 
The result was that investors could recover financial losses caused by 
violations of 10(b) and the companion regulation issued by the SEC 
commonly known as ``Rule 10b-5.''
  Until Central Bank, every circuit of the Federal Court of Appeals had 
concluded that Sec. 10(b)'s private right of action allowed recovery 
not only against the person who directly undertook a fraudulent act--
the so-called primary violator--but also anyone who aided and abetted 
him. A five-Justice majority in Central Bank, intent on narrowing 
Sec. 10(b)'s scope, held that its private right of action extended only 
to primary violators.
  When Congress debated the legislation that became the Private 
Securities Litigation Reform Act of 1995, PSLRA, then-SEC chairman 
Arthur Levitt and others urged Congress to overturn Central Bank. 
Congress declined to do so. The PSLRA authorized only the Securities 
and Exchange Commission, SEC, to bring aiding-and- abetting enforcement 
litigation.
  It is time for us to revisit that judgment. The massive frauds 
involving Enron, Refco, Tyco, Worldcom, and countless other lesser-
known companies during the last decade have taught us that a stock 
issuer's auditors, bankers, business affiliates, and lawyers--sometimes 
called ``secondary actors''--all too often actively participate in and 
enable the issuer's fraud. Federal Judge Gerald Lynch recently observed 
in a decision calling on Congress to reexamine Central Bank that 
secondary actors are sometimes ``deeply and indispensably implicated in 
wrongful conduct.'' In re Refco, Inc. Sec. Litig., 609 F. Supp. 2d. 
304, 318 n.15, S.D.N.Y.

[[Page S8565]]

2009. Professor John Coffee of Columbia Law School, a renowned expert 
on the regulation of the securities markets, has even laid much of the 
blame for the major corporate frauds of this decade on the 
``acquiescence'' of the ``outside professionals''--especially 
accountants, securities analysts, and corporate lawyers--responsible 
for ``preparing, verifying, or certifying corporate disclosures to the 
securities markets.'' Coffee, ``Gatekeeper Failure and Reform: The 
Challenge of Fashioning Relevant Reforms,'' 84 Boston University Law 
Review 301, 304, 2004.
  The immunity from suit that Central Bank confers on secondary actors 
has removed much-needed incentives for them to avoid complicity in and 
even help prevent securities fraud, and all too often left the victims 
of fraud uncompensated for their losses. Enforcement actions by the SEC 
have proved to be no substitute for suits by private plaintiffs. The 
SEC's litigating resources are too limited for the SEC to bring suit 
except in a small number of cases, and even when the SEC does bring 
suit, it cannot recover damages for the victims of fraud.
  Last year's decision in Stoneridge made matters still worse for 
defrauded investors. Central Bank had at least held open the 
possibility that secondary actors who themselves undertake fraudulent 
activities prescribed by Sec. 10(b) could be ``held liable as . . . 
primary violator[s].'' Stoneridge has largely foreclosed that 
possibility. A divided Court held that Sec. 10(b)'s private right of 
action did not ``reach'' two vendors of a cable company that entered 
into sham transactions with the company knowing that it would publicly 
report the transactions in order to inflate its stock price. The Court 
conceded that the suppliers engaged in fraudulent conduct prescribed by 
Sec. 10(b), but held that they were not liable in a private action 
because only the issuer, not they, communicated the transaction to the 
public. That remarkable conclusion put the Court at odds with even the 
Republican Chairman of the SEC.
  My legislative response would take the limited, but important, step 
amending of the Exchange Act to authorize a private right of action 
under Sec. 10(b) (and other, less commonly invoked, provisions of the 
Act) against a secondary actor who provides ``substantial assistance'' 
to a person who violates Sec. 10(b). Any suit brought under my proposed 
amendment would, of course, be subject to the heightened pleading 
standards, discovery-stay procedures, and other defendant-protective 
features of the PSLRA.
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