In August, the U.S. Court of Appeals for the Second Circuit changed or, in its own words, “clarified” the standard required for the Securities and Exchange Commission (SEC) to plead aiding and abetting liability in a federal securities case. SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (Rakoff, J.). Apuzzo held that, to meet the requirement of “substantial assistance” in §20(e) of the Securities Exchange Act of 1934, the SEC is “not required to plead or prove that an aider and abettor proximately caused the primary securities law violation,” but instead must show “that [the defendant] in some sort associated himself with the venture, that he participated in it as something that he wished to bring about, and that he sought by his action to make it succeed.”1 The parties in Apuzzo had not disputed that proximate cause was required to be pled and proved, nor had either party argued for the criminal aiding and abetting test adopted in Apuzzo.2
Joseph Apuzzo has now filed a petition for rehearing en banc.3 In the petition, Apuzzo makes two points: Procedurally, the Apuzzo panel was not at liberty to change the long-settled proximate cause requirement for “substantial assistance” reaffirmed just three years ago in SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009). Substantively, in removing the proximate cause requirement, the Second Circuit failed to, among other things, heed the text and legislative history of §20(e).
Because the Apuzzo decision has been widely publicized,4 we provide only a brief background here. In December 2007, the SEC filed a complaint alleging that United Rentals Inc. (URI), one of the largest equipment rental companies in the world, engaged in fraudulent sale-leaseback transactions intended to increase its reported revenue. Apuzzo, then CFO of a third company, was alleged to have aided and abetted URI’s fraudulent sale-leaseback scheme by arranging for his company to guarantee the purchaser against any risk of loss and obtaining indemnification from URI for his company’s own risk of loss. The SEC alleged that Apuzzo acted with actual knowledge that the result of these transactions would be URI’s accounting fraud.
In September 2008, the district court dismissed the SEC complaint against Apuzzo, finding that, while actual knowledge was sufficiently alleged, the SEC had not adequately alleged that Apuzzo had “substantially assisted” the primary violation because it failed to meet the proximate cause requirement.5 On appeal, the Second Circuit reversed the “substantial assistance” decision, holding the SEC did not have to plead proximate cause to adequately allege “substantial assistance” but instead “must show that the defendant ‘in some sort associated himself with the venture, that he participated in it as in something that he wished to bring about, and that he sought by his action to make it succeed.’”6
En Banc Review?
In his petition, Apuzzo argues that the Second Circuit decision did not follow the rule of interpanel accord when it improperly “overruled” DiBella. Apuzzo claims the panel “directly contravened circuit precedent in holding that the SEC need not prove that an aider and abettor’s actions proximately caused the primary violation in a securities-fraud case” and noted that the Second Circuit is “bound by a decision of a prior panel unless and until its rationale is overruled, implicitly or expressly, by the Supreme Court or this court en banc.”7 Apuzzo explains that DiBella “reaffirmed” that “substantial assistance requires a showing that ‘the aider and abettor proximately caused the harm to [the victim] on which the primary liability is predicated’” in SEC actions for aiding and abetting.8 Apuzzo thus claims that the holding in DiBella was overruled by Apuzzo and therefore a rehearing en banc is required to resolve the apparent interpanel conflict.
In Apuzzo, the court observed that “our case law has not always made the distinction with clarity” between private plaintiff causation requirements in aiding and abetting cases before Central Bank9 (when the Supreme Court prohibited such private actions), and SEC enforcement actions.10 Thus, according to Apuzzo, the district court may have “assumed” the SEC was required to plead the defendant’s actions were a proximate cause of the primary violation “[b]ut there is no reason to carry this requirement over to the context of SEC enforcement actions.”11
The panel dismissed DiBella as having cited proximate cause language from an “inapposite” pre-Central Bank civil securities case, Bloor v. Carro, Spanbock, Londin, Rodman & Fass,12 which “addressed the lack of a causal link between the primary violation and injury to investors, not the lack of a distinct causal link between the aider’s substantial assistance and the primary violation.”13 Nonetheless, as Apuzzo contends in his petition, DiBella did find Bloor’s language “still controlling and relevant” to an SEC enforcement action post-Central Bank and used the proximate cause test to analyze “whether the defendant’s actions proximately caused the primary violation, not (as the panel implied) whether the defendant’s actions proximately caused harm to some individual.”14
Apuzzo goes on to argue that the court’s action in “overruling” established circuit precedent was exacerbated by the fact that the parties had not contested—and therefore had not briefed—”the SEC’s well-established burden.” In the District Court, the SEC position was “crystal clear”: “[i]n the context of aiding and abetting securities fraud, the Second Circuit has adopted a proximate cause standard such that to prevail, a plaintiff must allege that the defendant’s substantial assistance proximately caused the harm on which the primary liability is predicated.”15 On appeal, while the SEC “quibbled” with the phrase “proximate cause,” it agreed that “an aider and abettor’s conduct must be a substantial causal factor in the fraud,”—an “identical” test.16 Apuzzo concludes that only the en banc court can overrule circuit precedent and “should consider doing so only after full briefing in which the parties join issue on the question.”17
The Merits of ‘Apuzzo’
Apuzzo also briefly addresses the merits of Apuzzo. He argues that the Second Circuit committed error because it ignored the text and legislative history of §20(e), improperly adopted a test based on the criminal aiding and abetting statute, and provided no valid reasons for exempting the SEC from having to establish an aiding and abetting violation pursuant to well-established circuit precedent.18
Apuzzo argues the criminal aiding and abetting test does not meet the “substantial assistance” requirement of §20(e) which is “naturally interpreted” to mean that the defendant’s actions be a substantial causal factor in the fraud, and ignores that §20(e) “codified case law requiring proof of such proximate causation.”19 He notes that when Congress amended §20(e)’s scienter requirement in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act,20 it did not change the “substantial assistance” requirement, “further ratifying the correctness of DiBella.”21
Apuzzo criticizes the court’s reasoning for adopting the criminal aiding and abetting standard as the new test for “substantial assistance,” to wit: “if the conduct of an aider and abettor is sufficient to impose criminal liability, a fortiori it is sufficient to impose civil liability in a government civil action.”22 Apuzzo argues that this “maxim” is a “non sequitur” and disregards the holding in DiBella, the statutory text of §20(e) and its case law forebears—all of which require the SEC to show that an aider and abettor’s actions proximately caused the primary violation. The new standard does not require that the defendant’s actions “substantially assisted the fraud” but only that the defendant “wished to bring it about” and “sought” to make it succeed; nor does it “require the defendant’s actions to be ‘substantial’ in any sense,” requiring only that he “in some sort” associated himself with the venture.23
Apuzzo distinguishes the “substantial assistance” language of §20(e) from the criminal aiding and abetting statutory language: “whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”24 He contends that the Apuzzo test for “substantial assistance,” taken from a 1938 Second Circuit decision of Judge Learned Hand in a criminal case, United States v. Peoni, 100 F.2d 401 (2d Cir. 1938), is “perfectly appropriate” for applying the criminal aiding and abetting statute but is “manifestly inappropriate” for applying the “vastly different” text and history of §20(e).25 Noting that Congress knows how to incorporate criminal aiding and abetting language when it wants to, citing the Investment Advisers Act’s aiding and abetting language, Apuzzo argues that Congress’ word choice here indicates an intent to cover only those who substantially contribute to causing securities fraud.26 Apuzzo speculates that perhaps Congress did not want the SEC to invoke the preponderance standard and a lower scienter standard to reach those who play only a minor role in fraudulent schemes. “Congress could have reasonably concluded that the government must satisfy the no-reasonable-doubt standard and criminal scienter standard if it wishes to pursue those who played only a marginal role in a fraud.”27
Lastly, Apuzzo argues that no valid rationale was provided for not requiring proximate cause.28 Saying the court incorrectly equated the proximate cause requirement with proof that the defendant’s actions caused injury to investors, Apuzzo contends that proximate causation “tests whether the defendant’s causal role in the fraud—the ‘substantial[ity]‘ of his ‘assistance’ in the primary violation, as the statute puts it—was serious enough to warrant liability, not whether the defendant’s actions caused harm to any given individual.”29
The Future of ‘Apuzzo’
As far back as Central Bank, the Supreme Court observed that the SEC’s argument that recklessness is sufficient scienter for aiding and abetting liability was inconsistent with use of the criminal aiding and abetting standard.30 The Supreme Court noted that §2 requires intentional wrongdoing and, quoting its prior adoption of Hand’s test, proof that the defendant “in some sort associated himself with the venture, participated in it as in something he wishe[d] to bring about, that he [sought] by his action to make it succeed.”31 Now that the reckless standard has been codified in §20(e), can the criminal test used in Apuzzo stand alongside that scienter standard? It certainly seems inconsistent for the SEC to plead a defendant was reckless in not knowing about the fraud but nonetheless rendered substantial assistance to it by associating himself with the fraud, participating in it as something he wished to bring about and sought by his action to make succeed.
Since the Apuzzo events took place prior to the 2010 amendment to §20(e), the reckless standard was not applicable.32 Nonetheless, the new Apuzzo “substantial assistance” test is intended to apply in all cases. Citing DiBella, Apuzzo notes the three components of aiding and abetting “cannot be considered in isolation from one another,” so the theory of primary liability, the degree of actual knowledge and the amount of substantial assistance must all be considered together.33 Substantial actual knowledge, Apuzzo concludes, lessens the burden to plead and prove substantial assistance, and conversely, the greater the participation in the fraud the lesser the scienter burden.34 Perhaps this sliding scale between knowledge and substantial assistance can be used to reconcile the criminal aiding and abetting test with the reckless standard of scienter. However, it does not change the fact that recklessness is sufficient scienter under §20(e) or that the criminal aiding and abetting test, by its very language, was intended as a test for intentional wrongdoing.
Apuzzo contemplates an expansion of conduct subject to aiding and abetting liability, observing that “most aiders and abettors would escape liability” if proximate cause is required since their acts “are rarely the direct cause of the injury brought about by the fraud, however much they may have contributed to the scheme.”35 And, the SEC is now likely to increase its use of §20(e) to cover a significantly expanded pool of potential aiders and abettors. However, Central Bank expressed concern, albeit while assessing private actions, that unclear rules for determining aiding and abetting liability lead to a lack of predictability for those providing services to participants in the securities business—”an area that demands certainty and predictability.”36 Eventually, whether in this case or some future case, the Supreme Court will consider aiding and abetting liability in SEC enforcement actions and it will be interesting to see what test it fashions.
Sarah S. Gold is a partner and Richard L. Spinogatti is a senior counsel at Proskauer Rose. Massiel Pedreira, an associate at the firm, assisted in the preparation of this article.
1. Apuzzo, 689 F.3d at 212-13.
2. This test for “substantial assistance” comes from a 1938 decision of Judge Learned Hand establishing the standard for criminal aiding and abetting. Apuzzo, 689 F.3d at 212 (citing United States v. Peoni, 100 F.2d 401, 402 (2d Cir. 1938)).
3. Petition for Rehearing En Banc, SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (No. 11-696) (filed Sept. 24, 2012) (hereinafter “Apuzzo Pet.”).
4. See e.g. Barbara L. Trencher and Niall O’Hegarty, “Apuzzo Invites Aiding and Abetting Securities Fraud Enforcement Actions,” NYLJ (Sept. 19, 2012) (describing in detail the facts of the case, the procedural history and the Second Circuit decision).
5. SEC v. Apuzzo, 758 F.Supp.2d 136, 146, 150 (D. Conn. 2010).
6. Apuzzo, 689 F.3d at 213.
7. See Apuzzo Pet. at 4-5 (citing In re Sokolowski, 205 F.3d 532, 534-35 (2d Cir. 2000)). See also Frontera Resources Azerbaijan v. State Oil of the Azerbaijan Rep., 582 F.3d 393, 399-400 (2d Cir. 2009) (holding that “our court’s decisions are binding until overruled by us sitting en banc or by the Supreme Court” but recognizing “an exception to this general rule where there was been an intervening Supreme Court decision that casts doubt on our controlling precedent”).
8. Apuzzo Pet. at 4 (quoting DiBella, 587 F.3d at 566 (quoting Bloor v. Carro, Spanbock, London, Rodman & Fass, 754 F.2d 57, 62 (2d Cir. 1985))). See also DiBella, 587 F.3d at 566, n.9 (“Since Bloor, the Supreme Court has held that ‘a private plaintiff may not maintain an aiding and abetting suit under §10(b).’ However, because this comes to us as an SEC enforcement action and not a private suit, Bloor’s language is still controlling and relevant”) (internal citations omitted).
9. Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994).
10. Apuzzo, 689 F.3d at 213.
12. Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir. 1985).
13. Apuzzo, 689 F.3d at 213, n.10.
14. Apuzzo Pet. at 7 (emphasis in original).
15. Id. at 5 (emphasis in original).
16. Id. (citing First Nationwide Bank v. Gelt Funding, 27 F.3d 763, 769 (2d Cir. 1994)).
17. Id. at 3.
18. Id. at 10-15.
19. Id. at 10.
20. The Dodd-Frank Act amended §20(e) by adding the words “or recklessly” after “knowingly.”
21. Apuzzo Pet. at 14.
22. Id. at 11 (citing Apuzzo, 689 F.3d at 212).
23. Id. 11.
24. Id. at 11-12 (citing 18 U.S.C. §2(a)) (emphasis in original).
25. Id. at 12.
26. Id. at 12-13.
27. Apuzzo Pet. at 13.
28. Id. at 14.
29. Id. at 15.
30. Central Bank, 511 U.S. at 1454-55.
31. Id., quoting Nye & Nissen v. United States, 336 U.S. 613, 619 (1949) (internal quotation marks from United States v. Peoni omitted).
32. Apuzzo noted that the amendment to §20(e)’s scienter requirement by the Dodd-Frank Act did not apply to the case. Apuzzo, 689 F.3d at 211, n.6.
33. Id. at 214.
34. Id. at 214-15.
35. Id. at 213. This argument is part of Apuzzo’s contention that the Apuzzo panel conflated injury causation with proximate cause of the violation. Apuzzo Pet. at 14.
36. Central Bank, 511 U.S. at 1454.