Securities Law | Expert Legal Commentary
July 6, 2010
PIMCO v. Mayer Brown: Adopting the “Attribution” Standard for Secondary Actors
Pacific Investment Management Co. v. Mayer Brown
Josh Lawler of Zuber Lawler & Del Duca and Joel Ginsberg
The Second Circuit has held that secondary actors can be held liable for Rule 10b-5 damages actions only for false statements attributed directly to the secondary actor at the time of their dissemination. In Pacific Investment Management Co. v. Mayer Brown, 603 F.3d 144 (2nd Cir. 2010), the Court of Appeals for the Second Circuit specifically rejected the “creator standard” of liability in favor of the “attribution standard” of liability because only under the latter can plaintiffs demonstrate specific reliance upon a defendant’s conduct
This case arises out of the meltdown of Refco Inc. (“Refco”), formerly one of the world’s largest broker-dealers in derivatives, currency, and futures. In 2005, it was revealed that top officials at Refco had conducted fraudulent transactions between the firm and third parties to hide hundreds of millions in Refco debt. The scandal drove Refco into bankruptcy. This civil suit was brought by plaintiffs who purchased Refco securities before discovery of the fraud.
Among the defendants were Mayer Brown and firm partner Joseph Collins, who served as outside counsel for Refco. Plaintiffs alleged that Mayer Brown and Collins were involved in 17 fraudulent transactions as the company’s lawyers, and that they participated in drafting three Refco documents that misrepresented the Company’s debt. In 2009, Collins was convicted of two counts each of securities fraud and wire fraud and a single count of conspiracy for drafting portions of Refco offering documents that contained false information. He was sentenced to seven years in prison.
In the civil complaint, the plaintiffs alleged that Mayer Brown and Collins were liable for securities fraud under Rule 10b-5 because they drafted, reviewed, and participated in creating false statements in Refco documents. The documents did identify the firm as representing Refco in the transactions, but none of them specifically attributed any information or representations in the documents to the firm or Collins.
The Southern District of New York dismissed the case against Mayer Brown and Collins. The plaintiffs appealed. Pacific Investment Management Co. v. Mayer Brown, 603 F.3d 144 (2nd Cir. 2010).
The “attribution standard,” not the “creator standard,” applies for secondary actor liability
In their appeal, the plaintiffs urged the Second Circuit U.S. Court of Appeals to adopt a “creator standard” and hold that a defendant “can be liable for creating a false statement that investors rely on, regardless of whether that statement is attributed to the defendant at the time of dissemination.” 603 F.3d at 151 (emphasis in original).
But the Second Circuit rejected plaintiffs’ argument, affirming the lower court’s dismissal of the case. After reviewing U.S. Supreme Court guidance and the Second Circuit’s own prior precedent, the Second Circuit panel concluded that a false statement must be directly attributed to secondary actors like attorneys and accountants at the time of dissemination in order for the secondary actor-defendant to be liable in a private damages action for securities fraud under Section 10(b). 603 F.3d at 155. Because none of the allegedly false statements in Refco’s documents were directly attributed to Mayer Brown or Collins, the dismissal was proper.
The Second Circuit panel acknowledged that despite the “seemingly clear” requirement of direct attribution in Wright v. Ernst & Young, 152 F.3d 169 (2nd Cir. 1998), “our subsequent decisions may have created uncertainty or ambiguity with respect to when attribution is required,” including the Court’s decision in In re Scholastic Corp. Securities Litigation, 252 F.3d 63 (2nd Cir. 2001), in which the Second Circuit held that a corporate officer could be liable for misrepresentations made by the corporation even though none of the representations were directly attributable to that officer. 603 F.3d at 153-154. The Court intended that its clear rejection of a creator standard and requirement of direct attribution for secondary liability under Rule 10b-5 would resolve any confusion. Id. at 154-155.
Similarly, the Court found that Mayer Brown and Collins could not be held liable to the plaintiffs for participating in a scheme to defraud. Relying on Stoneridge Investment Partners v. Scientific-Atlanta Inc., 552 U.S. 148 (2008), the Second Circuit found that without the ability to demonstrate reliance on the defendants’ conduct, the plaintiffs could not hold Mayer Brown and Collins liable under Rule 10b-5. Id. at 156. Because the statements were attributed to and filed by Refco, not Mayer Brown and Collins, the plaintiffs could only articulate a Rule 10b-5 action against Refco. The Court wrote that the direct attribution requirement “is consistent with our preference for a bright line rule distinguishing primary violations of Rule 10b-5 from aiding and abetting.” Id.
PIMCO clarifies that, at least in the Second Circuit, secondary actors cannot be liable for private damages claims under Rule 10b-5 unless false statements were directly attributed to that secondary actor at the time of dissemination. Regardless of the secondary actor’s demonstrated criminal culpability – even admitted participation in the scheme – without direct attribution, plaintiffs cannot demonstrate reliance, according to the Second Circuit. The mere assertion in a complaint that an actor participated in the fraud will prove insufficient to survive a motion to dismiss, a result that may essentially insulate perpetrators of fraud from private civil liability.
While PIMCO establishes a clear rule regarding secondary actor liability under Rule 10b-5, it does leave open the question raised in In re Scholastic Corp. of what standard applies to corporate insiders – whether direct attribution similarly applies to corporate insiders, or whether a lower standard applies.
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