§ 5.1.2.2.3 AIDING AND ABETTING UNDER § 44-2003(A)

• Jurisdiction: Arizona

§ 5.1.2.2.3 Aiding and abetting under § 44-2003(A)

The issue left open in Sell—whether aiding and abetting is embraced by § 44-2003(A)—can be understood only in light of the meaning that participation and inducement had when § 44-2003 was enacted. As explained below, in 1951 aiding and abetting was not a distinct theory of civil liability.¹⁷⁵⁷ Instead, aiding, and aiding and abetting, were just two of many ways to incur liability on the basis of knowingly participating in fraud.¹⁷⁵⁸

Section 44-2003 was enacted in 1951 against a backdrop of common law and statutory blue-sky law. At the time, neither the blue-sky laws nor the common law treated aiding and abetting as a distinct theory of civil liability.¹⁷⁵⁹ Similarly the provisions in the First and Second Restatement of Torts that are commonly cited to support aiding and abetting do not use those words.¹⁷⁶⁰ Instead, the Restatements refer to joint liability for assisting and encouraging.¹⁷⁶¹ Aiding and abetting as a distinct theory of securities-law

liability would not come for nearly 15 years, until 1966.¹⁷⁶²

At common law the prevailing standard for joint-and-several liability in fraud cases was knowing participation in the fraud.¹⁷⁶³ Participation under the common-law cases could take many forms. Professor Prentice lists the following as examples: "aiding" or "aiding and abetting" fraud, "acting in concert, encouraging, commanding, countenancing, advising, counseling, directing, joining in, procuring, approving, and other forms of knowing participation."¹⁷⁶⁴ Thus, knowingly aiding or, to use the traditional doublet—aiding and abetting—was only one of many ways to incur liability for knowingly participating in fraud.¹⁷⁶⁵

In 1951, courts did not even consider aiding and abetting a distinct (from participatory) theory of securities-law liability. Criminal liability for aiding and abetting was a centuries-old doctrine.¹⁷⁶⁶ But a court in 1951 was no more likely to distinguish civil liability for aiding and abetting from knowing participation than to bifurcate proximate cause into loss causation and transaction causation.¹⁷⁶⁷

To be sure, references (almost always without elaboration) to aiding and abetting appear in common-law fraud cases.¹⁷⁶⁸ But before 1966, only a small number of noncriminal, securities cases mention aiding and abetting. The cases consist of a line of SEC enforcement actions¹⁷⁶⁹ and a single Rule 10b-5 damage action.¹⁷⁷⁰ Only a few of these cases, all of which are SEC injunctive actions, were decided before the 1951 Act's passage.¹⁷⁷¹

It was not until 1966 that aiding and abetting as a distinct theory of civil liability for securities violations attracted attention.¹⁷⁷² Until the Brennan case in 1966,¹⁷⁷³ the courts, treated civil liability for aiding and abetting fraud as merely one of many ways to knowingly participate in fraud.¹⁷⁷⁴ Consequently, it was not until long after the 1951 Act's passage that terminology and pleading conventions changed so that judges and practitioners began to think and write about aiding and abetting as a discrete form of civil liability in securities actions.¹⁷⁷⁵

Participation. In 1951—rather than describe joint-and-several liability in a fraud case as aiding and abetting—courts, lawyers, and legislators would more likely have described the liability as based on participation, encouraging, or substantially assisting the primary wrongdoer.¹⁷⁷⁶ The 1951 Act's drafters would have expected participation to carry its common-law meaning.¹⁷⁷⁷ Under the common law, virtually all courts and treatises treated aiding and aiding and abetting as forms of participation.¹⁷⁷⁸ The 1951 legislature—and knowledgeable statutory readers—would have assumed as a matter of course that the participate-or-induce standard included knowingly aiding or aiding and abetting fraud.¹⁷⁷⁹ In drafting what became § 44-2003 it was far more natural to refer to participation-and-inducement liability—words that appear throughout the common-law cases—than to separately refer to liability for aiding and abetting.¹⁷⁸⁰

Liability for aiding or encouraging a fraudulent securities sale seems to have been the reasoning in two early Arizona decisions decided after the 1951 Act's passage. In one decision the Supreme Court upheld statutory liability for indirectly participating in fraud.¹⁷⁸¹ In the other, the Court of Appeals approved liability against a secondary actor who actively aided a fraudulent sale.¹⁷⁸²

Inducement. Although knowing participation was the predominant standard for joint-and-several liability,¹⁷⁸³ inducement was another principle that the common law used to extend responsibility to culpable actors involved in fraud. Under the common law, a defendant who fraudulently sold stock through third parties was liable as an inducer even though the defendant did not personally participate in the sale.¹⁷⁸⁴ Similarly, a defendant who encouraged a fraudulent sale was treated as an inducer subject to liability.¹⁷⁸⁵ Inducers also included defendants who persuaded or prevailed upon a plaintiff to purchase securities fraudulently sold by a third party.¹⁷⁸⁶

The 2010 decision in Grand II is particularly in point on the continued existence of aiding-and-abetting liability through § 44-2003(A)'s inducement standard. In Grand II, the Supreme Court discussed the meaning of inducement and concluded that encouraging an investor to purchase a security is classic inducement:

[The complaint] alleges that, through their acts and omissions, the defendants encouraged the [plaintiff] to buy stock from others in the aftermarket. This is classic inducement.¹⁷⁸⁷

This formulation of inducement tracks the formulation of aiding and abetting by encouragement adopted by the Arizona Supreme Court in the Wells Fargo decision.¹⁷⁸⁸ It hardly matters whether the defendant's conduct is called inducement or aiding and abetting. If the defendant encourages the primary wrongdoer's fraud, the defendant is an inducer whose liability follows.

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Notes:

^[1757]See infra notes 1766-75 and accompanying text.

^[1758]See infra notes 1763-65 and accompanying text.

^[1759]See Prentice, Stoneridge, supra note 1551, at 624-33 (explaining that aiding and abetting as a distinct theory of secondary liability did not exist until 1966); see also Prentice, Scheme Liability, supra note 1727, at 368 ("Until Brennan v....