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Recent Developments in Secondary Liability Under Section 10(b) and Rule 10b-5 - Central Bank Encounters the 'Perfect Storm'

Article by Douglas C. Conroy & Ryan K. Roth Gallo

Introduction

In 1994, the United States Supreme Court eliminated "aiding and abetting" liability in private federal securities fraud actions. Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U. S. 164, 168 (1994) (hereinafter, Central Bank).1 That decision also sounded the death knell for "conspiracy" allegations.2 Since Central Bank, the courts have struggled with various species of line-drawing between "primary" involvement sufficient for liability under Central Bank and "secondary" involvement exempted under that decision's reasoning. In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), in an effort to raise the bar for securities fraud plaintiffs hoping to survive motions to dismiss.

A long-awaited recent decision issued in In re Enron Corp.3 denying most of the secondary actors' motions to dismiss, despite the barriers created by Central Bank and the PSLRA, may herald the arrival of new and inherently elusive standards for attributing liability to the banks, law firms, and accounting firms, which had enjoyed substantial degrees of immunity to certain types of Rule 10b-5 claims post-Central Bank. Ironically, for a legal standard and statutory structure contemplating uniform application by federal courts across the United States, judicial interpretations of Central Bank and the PSLRA have led to an increasing number of inter-circuit and intra-circuit conflicts as to numerous controlling principles of liability. These numerous conflicts are also highlighted in the Enron court's approach to both Central Bank and to o...

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