First Circuit Says That Failure to Disclose Securities Law Violation May Not Create Personal Liability
The U.S. Court of Appeals for the First Circuit dismissed an SEC claim against three officers of a mutual fund company’s administration affiliate for aiding and abetting securities law violations by failing to disclose “as-of” transactions that affected mutual fund shareholders. The case involved a scheme by various individuals working at the administration company to conceal losses resulting from failure to invest the proceeds of a defined contribution plan. The scheme used a series of “as-of” transactions and accounting entries to back-date the trades, which had negative economic consequences to other fund shareholders. The three dismissed defendants were present at a meeting where the scheme was discussed and signed accounting representation letters several years later. The First Circuit dismissed the SEC’s appeal from a District Court dismissal. The court opined that “One cannot aid and abet a fraudulent scheme that is already complete.” The court did not accept the SEC’s argument that the company’s ongoing fiduciary duty created an ongoing securities law violation that could only be cured through disclosure: “[t]he non-disclosures did not cause either the transactions or the concrete losses resulting from them.” The court did note that defendants who conceal a scheme could be liable for other crimes such as perjury or obstruction of justice. Additionally, the aiding and abetting claim might stand if the defendant makes a “contemporaneous assurance” to hide the scheme.
OUR TAKE: Knowing about wrongdoing but failing to report it does not necessarily result in a securities law violation. Nevertheless, the SEC will remember this case in future actions where it will make sure that it alleges an ongoing duty or a tacit “contemporaneous assurance.”