The SEC on a Forum Shopping Spree: SEC Enforcement Power and Control Person Liability After Dodd-Frank

• Author: Brianna L. Gates
• Position: J.D. Candidate, The University of Iowa College of Law, 2014; B.B.A. The University of Iowa, 2011
• Pages: 393-414

The SEC on a Forum Shopping Spree:

SEC Enforcement Power and Control

Person Liability After Dodd–Frank

Brianna L. Gates∗

ABSTRACT: In 2010, Congress passed the Dodd–Frank Wall Street

Reform and Consumer Protection Act (“Dod d–Frank”) in response to the

collapse of the United States e conomy. Prior to Dodd–Frank, two separate

circuit splits existed. One circuit split a ffected the Securities and Exchange

Commission’s (“SEC”) ability to b ring control person liability actions

against executives whose subordinate s violated securities laws. The other

circuit split concerned the proof requirements in control person actions. This

lack of uniformity made it difficult for th e SEC to hold executives

accountable for securities violations th at occurred under its watch, as the

SEC was both unsure as to whether it could bri ng control person liability

claims altogether in some jurisdictions, and in others it seriously questioned

the likelihood that it could succeed . Partially attributing the reces sion to

financial regulation failures, Congress and President Obama , via Dodd–

Frank, responded by expanding th e SEC’s subpoena powers, by granting it

nationwide subpoena power for civil a ctions, and resolving one of the circuit

splits, ensuring the SEC’s ability to at least bring control pe rson liability

claims in all jurisdictions. However , there remains a circuit split over the

proof requirements attendant to such actions. While some circuits impo se

relatively lenient requirements, under the Second and Third Circuits’

rigorous standard, one who co ntrols a person who was liab le for a securities

violation can be held liable to the same extent as the co ntrolled person (i.e.,

the primary violator) only upo n a showing that he or she culpably

participated in the violation. In light o f the SEC’s newfound subpoe na

power and its solidified abili ty to institute enforcement actio ns in all

jurisdictions, it may now seek to avoid the Second and Third Circuits’

rigorous “culpable participation” sta ndard, and thus engage in undesirable

forum shopping. Forum shopping can create unnecessary expenses a nd lead

∗ J.D. Candidate, The University of Iowa College of Law, 2014; B.B.A. The University of

Iowa, 2011. Thank you to my parents, grandparents, friends, and Nick Long for their

encouragement and support throughout law school. Also, thank you to the Iowa Law Review

Volume 98 and 99 editors and writers for their hard work on this Note.

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394 IOWA LAW REVIEW [Vol. 99:393

to injustice. Accordingly, this Note a rgues that the Supreme Court should

finish what Dodd–Frank started, resolve the remaining circuit split by

rejecting “culpable participat ion” and thereby strengthen the SEC’s

enforcement power while avoiding SEC forum shopping.

I. INTRODUCTION .................................................................................... 395

II. BACKGROUND ...................................................................................... 397

A. THE ORIGINS OF CONTROL PERSON LIABILITY, THE SECURITIES

ACTS, AND DODD–FRANK ................................................................ 397

1. Section 20(a) of the Securities Exchange Act ..................... 397

2. The Dodd–Frank Act ............................................................ 399

B. DODD–FRANK PROVISIONS THAT IMPACT CONTROL PERSON

LIABILITY ...................................................................................... 400

1. Dodd–Frank Section 929P(c) Resolve d the “Person”

Circuit Split: The SEC Is a Person Under Section 2 0(a) .... 401

2. Dodd–Frank Section 929E: The Subpoen a Power .............. 403

III. CIRCUIT SPLIT CONCERNING WHETHER “CULPABLE PARTICIPATION”

IS A REQUIRED ELEMENT OF A CONTROL PERSON LIABILITY CLAIM ...... 405

A. THE MAJORITY VIEW: NO REQUIREMENT OF CULPABLE

PARTICIPATION .............................................................................. 405

B. THE MINORITY VIEW: CULPABLE PARTICIPATION REQUIRED .............. 407

IV. AFTER DODD–FRANK ENHANCED THE SEC’S ENFORCE MENT AND

SUBPOENA POWERS, THE SEC WILL LIKELY ENGAGE IN FORUM

SHOPPING TO AVOID THE “CULPABLE PARTICIPATION” ELEMENT ........ 408

V. THE SUPREME COURT SHOULD RESOLVE THE REMAINING CIRCUIT

SPLIT BY REJECTING THE “CULPABLE PARTICIPATION” STANDARD ........ 410

A. THE PLAIN MEANING OF SECTION 20(A) DOES NOT REQUIRE

“CULPABLE PARTICIPATION” ........................................................... 410

B. REJECTING THE MORE RIGOROUS “CULPABLE PARTICIPATION”

STANDARD FOLLOWS THE TREND TOWARD INCREASED

ENFORCEMENT ............................................................................... 412

C. RESOLVING THE CIRCUIT SPLIT WILL CREATE UNIFORMITY AND

CERTAINTY ACROSS ALL CIRCUITS ................................................... 412

D. ADOPTION OF THE MAJORITY TEST WILL HELP THE SEC PREVENT

FUTURE FINANCIAL CRISES .............................................................. 413

VI. CONCLUSION ....................................................................................... 414