The Primary Liability of Securities Lawyers

In the Supreme Court of the United States' decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., the Court recognized that lawyers participating in a securities offering may be primarily liable under Section 10(b) of the Securities Exchange Act of 1934 and under one of its amplifying rules, Rule 10b-5, promulgated by the Securities and Exchange commission. Additionally, the Court rejected aiding and abetting liability not as bad policy but as beyond the scope of Section 10(b). The lasting effect of the Court's decision is the requirement of defrauded investors to relinquish the expediency of a three-element cause of action for aiding and abetting and to return to the five-element cause of action judicially implied for primary violators of Rule 10b-5. Lawyers charged with primary liability typically defend themselves by arguing, first, that even if a misrepresentation or omission were made, it was made solely by the client, and, second, that they lacked the requisite intent to deceive, a determination which involves a context-based analysis of whether the lawyer's conduct recklessly departs from the applicable standards of care. However, it is those very standards of care applicable to securities lawyers, requiring the lawyer's independent determination of the appropriate level of disclosure, which in most instances refute both arguments. Where the securities lawyer has failed to abide by these standards, he or she will have a difficult time escaping liability by simply casting all the blame on the client. Thus, the requisite shift from secondary to primary liability should not prove particularly difficult. In this article, the author first provides a brief description of the role and customary practices of securities lawyers in a securities offering in order to demonstrate their authority and control over the disclosure process. Then, the author addresses certain significant decisions that have reaffirmed the securities lawyer's primary role in managing the disclosure process. The author concludes that a securities lawyer whose conduct in preparing a disclosure document for a securities offering recklessly departs from the standards applicable in this highly-specialized area is not simply an aider or abettor, but a primary violator of Rule 10b-5's anti-fraud proscription