Textualist statutory interpretation kills section 10(b) "aiding and abetting" liability.

• Author: Meetre, Steven A.
• Position: Securities Exchange Act of 1934

IN First Central Bank of Denver v. First Interstate Bank of Denver,(1) the U.S. Supreme Court held that there is no private aiding and abetting liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule lob-5 of the Securities and Exchange Commission. The decision eliminated the judicially implied private right of action by which allegedly defrauded investors could sue securities and accounting professionals--typically accounting firms, brokerages, law firms and banks--who aided and abetted a primary violator--typically a securities issuer or underwriter. A five-justice majority strictly interpreted Section 10(b), focusing on its text and rejecting the dissent's admonition to adhere to the 1934 act's general purpose of investor protection and the principle of stare decisis.

Central Bank has weighty ramifications for securities litigation under Section 10(b) and other provisions of the securities laws, but the decision is also an interesting illustration of the relationship between the textualist and purposivist factions of the Supreme Court when engaged in statutory interpretation. The majority opinion by Justice Kennedy is a vivid example of how the Court has utilized the textualist approach, which began in the 1970s, to narrow the scope of Section 10(b). The dissent by Justice Stevens is notable for its employment of both purposivist and dynamic theories of statutory interpretation when the precedents for strict interpretation were numerous.

Central Bank is a legally provocative decision, not only for the field of securities law but also for students and critics of the modem Supreme Court and the relationship between its conservative and more liberal factions.

SECURITIES ACTS

1. Section 10(b) Implied Private Rights of Action

   The primary purposes of the Securities Act of 1933 and the 1934 act were to protect investors and promote market stability and efficiency.(2) The statutes attempt to ensure full disclosure in securities transactions, to empower the SEC to bring civil and criminal actions against violators of the acts, and to provide investors with private remedies when defrauded in the securities markets.(3) However, Section 10(b) of the 1934 act, 15 U.S.C. [sections] 78j(b), does not expressly provide for a private remedy against primary violators or against aiders and abettors, and the legislative history does not indicate that Congress contemplated a private remedy. Section 10(b) is an enabling statute that grants the SEC authority to promulgate rules.

   Labeled "Manipulative and Deceptive Devices," it provides:

   It shall be unlawful for any person, directly or

   indirectly, by the use of any means or instrumentality

   of interstate commerce or of the mails, or of

   any facility of any national securities exchange--...

   (b) To use or employ, in connection with the

   purchase or sale of any security registered on a

   national securities exchange or any security not so

   registered, any manipulative or deceptive device

   or contrivance in contravention of such rules and

   regulations as the [Securities Exchange] Commission

   may prescribe as necessary or appropriate in

   the public interest or for the protection of investors.

   Based on that authority, in 1942 the SEC promulgated Rule 10b-5, its "catch-all" anti-fraud provision:

   It shall be unlawful for any person, directly or

   indirectly, by the use of any means or instrumentality

   of interstate commerce, or of the mails

   or of any facility of any national securities exchange,

   (a) To employ any device, scheme, or artifice

   to defraud,

   (b) To make any untrue statement of a material

   fact or to omit to state a material fact necessary in

   order to make the statements made, in the light of

   the circumstances under which they were made,

   not misleading, or

   (c) To engage in any act, practice, or course of

   business which operates or would operate as fraud

   or deceit upon any person,

   in connection with the purchase or sale of any

   security.(4)

   In the absence of specific statutory language, the federal courts have implied a private right of action against primary violators under Rule 10b5,(5) a stance reaffirmed in Central Bank.(6) Prior to Central Bank, federal courts also implied a private right of action against aiders and abettors of primary violators,(7) and twice the Supreme Court had reserved consideration of and decision on the issue.(8) Before Central Bank, ten of the 11 federal courts of appeals acknowledged that a private right of action existed for Section 10(b) aiding and abetting liability, although they lacked a consensus regarding the applicable standard for that liability.

   The availability of Rule 10b-5 implied private rights of action to investors has been controversial. It has served as a powerful weapon in securities litigation against alleged primary violators as well as aiders and abettors.(9) If a securities plaintiff pleads a case that can withstand a motion to dismiss or for summary judgment, a professional organization--a law or accounting firm, for instance--most likely will settle rather than risk more extensive liability from a jury verdict.

   Securities defense lawyer Harvey Pitt has stated that, although some securities class actions have merit, many reflect "efforts by plaintiffs' attorneys seeking to find some deep-pocketed defendant to hold responsible for either the legitimately questionable acts of impecunious principals, or to compensate someone for a drop in the market price of securities."(10) Nevertheless, some commentators and, of course, the securities plaintiff's bar, argue that Rule 10b-5 and the aiding and abetting cause of action serve the 1934 act's primary purpose of investor protection.(11)

2. Statutory Interpretation and Section 10(b)

   Since the Section 10(b) implied private right of action and, prior to Central Bank, the aiding and abetting implied private right of action, have been such a powerful tools for securities plaintiffs, it was inevitable that federal courts would face the task of interpreting Section 10(b), defining its scope and enumerating its elements. With no congressional guidance, the courts struggled to provide legal rationales to support a judicial implication of a private right of action.

   Statutory interpretation goes to the heart of not only the U.S. legal system, but its entire system of government. Of the three branches of the federal government, only Congress possesses the power to enact laws. Because of its necessary reliance on compromise, the legislative process inherently produces unclear statutory language. Often it is a court's interpretation of the language that determines the application and effect of legislation.

   When interpreting statutory language or a statutory scheme, courts utilize tools of statutory interpretation and construction to ascertain the provision's meaning for application to the case at bar. Statutory "interpretation" should be distinguished from statutory "construction." Statutory construction refers to the judicial process of giving meaning to words in the text of a statutory provision. While similar, statutory interpretation is a broader inquiry that may take into account other elements to give meaning to a provision, such as legislative history and aids, general statutory purpose, or policy considerations.

   The analysis of judicial behavior utilizing theoretical statutory interpretation has received a great deal of academic attention in the past 15 years.(12) Four schools of statutory interpretation--textualism, intentionalism, purposivism, and public choice, or dynamic theory--receive the most support in the academic literature.

   1. Textualism

      Textualism, sometimes labeled new textualism, is the most conservative theory of statutory interpretation and requires judges to adhere to the statutory text. A judge should examine the statutory language's "plain meaning" to determine the statute's meaning to be applied to the case at bar. As proponents of judicial restraint, textualists claim that the "legislative purpose is expressed by the ordinary meaning of the words used" and, although plain meaning "will not always identify the legislature's actual [or intended] meaning, textualism is willing to accept plain meaning as a reasonable approximation of legislative intent."(13)

      Beginning in 1976 with Ernst & Ernst v. Hochfelder,(14) the Supreme Court started to interpret the scope of conduct prohibited by Section 10(b) more restrictively, rejecting broader rationales and establishing numerous precedents that utilized textualist interpretations.(15) Indeed, the Central Bank Court appeared poised to address the issue of the availability of the aiding and abetting implied right of action when, sua sponte, it directed the parties to submit briefs on the availability issue, although the...