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Aiding and Abetting Securities Violations

On Behalf of | Jul 20, 2015 | Securities Laws, Uncategorized

SEC v. Apuzzo

When we think about third party liability in securities violations, we tend to think service providers (e.g., lawyers, accountants, or brokers) that somehow participated in preparation of false or misleading statements in connection with the sale of securities.  While that is certainly true in many cases, it is not always the case.  Here’s a case in point showing how a third-party business partner can be liable.

In SEC v. Apuzzo,[1] United Rentals, Inc. (“URI”) engaged in fraudulent sale-leaseback transactions whereby it sold used equipment to General Electric Credit Corp. (“GECC”) and leased it back for a short period.[2]  URI then convinced Terex Corp. (“Terex”), an equipment manufacturer, to resell the equipment with a residual value guarantee to GECC at the end of the lease period and to purchase any equipment that remained unsold at the end of the remarketing period.[3]  To secure Terex’s participation, URI secretly agreed to indemnify Terex for any losses Terex incurred from the transactions and to make substantial purchases of new equipment from Terex to improve Terex’s year-end sales.[4]  The whole point of this scheme was for URI to immediately recognize the revenue generated by the equipment sale, which it was not allowed to do under Generally Accepted Accounting Principles (“GAAP”), in order to meet its announced earnings expectations.[5]  Apuzzo, Terex’s CFO, knew this to be the case, yet he signed various agreements and approved inflated invoices to facilitate the scheme.[6]

On appeal, Apuzzo did not contest the trial court’s finding of his actual knowledge of the fraud[7] and, thus, the only issue to be decided was whether he substantially assisted URI in committing the fraud.[8]  Apuzzo argued that substantial assistance should be defined as proximate cause, but the court flatly rejected the argument on grounds that it is the language of private tort actions, not SEC enforcement actions, the purpose of which are deterrence, not compensation.[9]  Finding that Apuzzo “associated himself with the venture, participated in it as something that he wished to bring about, and sought by his action to make it succeed,” with a high degree of actual knowledge, the court reversed the trial court’s dismissal of the complaint.[10]

Okay, maybe this is a rare situation, indeed, where a primary violator boldly engages a third-party business partner in a fraudulent scheme, but what about corporate officers, directors, or other employees?  Don’t they, by virtue of their position and authority, always render substantial assistance to their company?

While we are not aware of any recent enforcement action against an employee where the SEC alleged purely secondary aiding and abetting liability, the Dodd-Frank makes it much easier for the SEC to do so by adding the “recklessness” language.  In other words, it is possible that a high-ranking employee who approves or certifies false or misleading statements or documents as part of his or her job could be liable for aiding and abetting in connection with a securities violation, if he or she knew or should have known about the wrongdoing, even if he or she did not commit the wrongdoing him/herself.

Additionally, an employee who is in a position to control a wrongdoer directly or indirectly runs the risk of being held jointly and severally liable, unless he or she acted in good faith and did not directly or indirectly induce the act.[11]  This so-called control person liability, along with the aiding and abetting liability, may result in harsh consequences for some senior employees, such as a manager or supervisor.  Thus, in order to avoid incurring liability for someone else’s wrongdoing, it is critical to have a system of internal controls, such as policies, procedures, and employee training, and instill a culture of ethics and compliance to ensure that financial information of the company is accurately reported to the management and disseminated to the investors.

Our strong recommendation is, if a transaction doesn’t “feel right,” that the person or persons involved should engage counsel promptly and discuss whether their actions could give rise to liability and take appropriate planning and corrective actions.

This post was a part of a multi-post blog series on aiding and abetting liability.  You can find the other post by searching our blogs.  If you have any questions about the content of this blog series or other issues not discussed here, please contact us.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or

[1] See generally SEC v. Apuzzo, 2012 WL 3194303 (Aug. 8, 2012).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] The case was decided under an older statute that did not include the “reckless” language

[8] Id.

[9] Id.

[10] Id.

[11] 15 U.S.C. § 78t(a).