Secondary Liability for Aiding or Abetting After Central Bank of Denver

• Publication year: 1994
• Pages: 1792

23 Colo.Law. 1792 Colorado Lawyer 1994.

1994, August, Pg. 1792. Secondary Liability for Aiding or Abetting After Central Bank of Denver

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1792

Vol. 23, No. 8, Pg. 1792

Secondary Liability for Aiding or Abetting After Central Bank of Denver

by Bradford J. Lam

Editor's Note:

The two articles in this month's Business Law Newsletter provide two views on Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., a recent landmark decision by the U.S. Supreme Court concerning the liability of professionals who advise issuers of securities.

Aiding and abetting liability is a common law doctrine that has been applied to federal crimes under 18 U.S.C. § 2.(fn1) Liability for aiding and abetting is imposed to advance the goals of the federal statute proscribing the primary offense or when the statute's structure and text indicate a congressional intent to incorporate such liability

Until April 19, 1994, all eleven U.S. Circuit Courts of Appeals that had considered the question had recognized a private right of action for fraud against aiders and abettors under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), the main anti-fraud provision of the federal securities law, and Rule 10b-5 promulgated thereunder.(fn2) In a five-to-four ruling on that date, the U.S. Supreme Court held in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.(fn3) that because § 10(b) does not contain an explicit aiding and abetting provision that applies to private suits brought under the Exchange Act, it does not allow investors to file suits charging that someone "aided or abetted" deceptive acts involving securities transactions.(fn4) The dissent noted that the majority decision was inconsistent with long-established Securities and Exchange Commission ("SEC") and judicial precedent.

The decision reflects a reluctance to permit securities fraud suits against lawyers, accountants and other financial advisors when their roles are tangential to the purported wrongdoing. This article addresses aider and abettor liability after Central Bank under other federal criminal statutes involving fraud.

The Central Bank Case

Central Bank arose when investors sued participants in a 1988 sale of municipal bonds intended to finance a planned community in Colorado Springs, Colorado. After the issuing authority defaulted on the bonds, the investors sued Central Bank of Denver, which had served as trustee for the offering and allegedly aided in the fraud. The U.S. District Court for the District of Colorado granted summary judgment to Central Bank. The District Court found that Central Bank did not act knowingly or recklessly in assisting the primary violation of § 10(b) because it was not aware of concerns about the accuracy of a 1988 appraisal of the project, or that purchasers would rely on the 1988 appraisal to evaluate the collateral for the bonds.

The Tenth Circuit Court of Appeals reversed on the grounds that Central Bank was aware of concerns about the accuracy of the 1988 appraisal and knew both that the sale of the 1988 bonds was imminent and that purchasers were using the 1988 appraisal to evaluate the collateral for the...