Chapter 16 - § 16.12 • ATTORNEY LIABILITY UNDER RULE 10b-5

• Jurisdiction: Colorado

§ 16.12 • ATTORNEY LIABILITY UNDER RULE 10b-5

Attorneys are frequently the target of claims resulting from the acts of their clients. It is clear that attorneys performing "ministerial functions" are not liable for the bad deeds of their clients unless they had actual knowledge of the fraud. "Ministerial functions" generally include drafting documents used in an offering.²⁷³ The Western District of Oklahoma dismissed a case against attorneys who had rendered legal opinions and prepared relevant documents for a scheme to defraud investors. In dismissing the complaint against the attorneys, the court said that the complaint "clearly stops short of alleging that [the] lawyer and law firm made any representations to the plaintiffs, much less representations on which the plaintiffs relied."²⁷⁴

When holding secondary actors liable as primary violators under Rule 10b-5, the Second, Third, and Eleventh Circuits apply a relatively strict test. These courts have held that a secondary actor cannot incur liability under Rule 10b-5 for a statement not attributed to the actor at the time the statement is disseminated. Mere "review and approval" is insufficient to impose primary liability on a secondary actor.²⁷⁵ The Third Circuit says that, where the plaintiffs are not able to show "'a mental state embracing intent to deceive, manipulate or defraud,'" the plaintiffs must show "'highly unreasonable [conduct] involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'"²⁷⁶

In Thompson v. Paul,²⁷⁷ the Ninth Circuit surveyed case law from the Third, Fifth, Sixth, and Seventh Circuits and found that a clear rule emerges:

An attorney who undertakes to make representations to prospective purchasers of securities is under an obligation, imposed by Section 10(b), to tell the truth about those securities. That he or she may have an attorney-client relationship with the seller of the securities is irrelevant under Section 10(b).²⁷⁸

In Johnson v. Colip,²⁷⁹ an attorney drafted a prospectus and attended meetings with prospective investors. He was sued by disgruntled investors. The court held the attorney potentially liable when, as an agent of the issuer, "his or her affirmative conduct or failure to act when reasonably expected to do so at a meeting of...