As Susan Weiswasser reports in the current issue of The Pomerantz Monitor, two pieces of legislation recently introduced in the United States Senate, both sponsored by Arlen Specter of Pennsylvania, could, if passed, prove very important to plaintiffs. Both would effectively overrule Supreme Court decisions that made surviving motions to dismiss or getting relief for the acts of secondary actors in securities cases more difficult.
The Anti-Twombly Act. The first bill deals with the way plaintiffs have to present claims in their complaints to survive a motion to dismiss. Rule 8 of the Federal Rules of Civil Procedure requires, among other things, that a plaintiff make “a short and plain statement of the claim showing that the pleader is entitled to relief.” The standard for deciding whether a complaint satisfied Rule 8 was established in the 1957 Supreme Court case Conley v. Gibson. The Court held that the Federal Rules “do not require a claimant to set out in detail the facts upon which he bases his claim.” It stands to reason that plaintiffs very often will not have detailed facts available until after they have filed suit and obtained discovery from the defendants. The language the Conley Court used to describe this standard — that dismissal is improper “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief” — would be quoted by courts reviewing motions to dismiss for the next 50 years.
Then, in 2007, the Court decided Bell Atlantic v. Twombly, and created a new standard — often referred to as the “plausibility standard” — which requires that, to survive a motion to dismiss, a plaintiff must provide “enough facts to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, decided earlier this year, reinforced Twombly’s message noting that “[t]he plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Since Twombly was decided, it is reported that motions to dismiss have been filed with much greater frequency.
Senator Specter’s bill would restore the pleading standard set forth in Conley v. Gibson. In his comments introducing the bill, Specter, a lawyer, made the point that “[n]ot until a plaintiff has had access to relevant information in the defendant’s possession during the discovery process . . . can the plaintiff normally offer evidence to support the complaint’s allegations.” Since the Federal Rules do not allow federal courts to pass on the merits of a case until plaintiffs have submitted evidence, either on summary judgment or at trial, Specter expressed the inappropriateness of requiring plaintiffs to do more than provide defendants with notice.
The Anti-Stoneridge Act. Second on Specter’s agenda is a bill that will restore securities fraud liability for aiders and abettors. While Congress had not specifically created a private right to sue aiders and abettors under the securities laws, until 1994 courts had allowed suits against accountants, lawyers, business associates and the like who assist primary violators in carrying out schemes to defraud investors.
In Central Bank of Denver v. First Interstate Bank of Denver, the Supreme Court dealt a serious blow to investors, holding that no private right of action for aiding and abetting could be had under the securities laws. Thus investors lost the ability to pursue wrongdoers who often played an indispensable role in perpetrating a fraud in spite of not being primary violators. Analyzing Congress’s intent as expressed in the text of the statute, the Court ruled that a cause of action against one who had not committed the manipulative or deceptive act could not be inferred. The majority discounted arguments that the availability of such a claim functioned as a deterrent to those who might provide behind-the-scenes assistance to actual violators of section 10(b).
Less than a year later, Congress introduced the Private Securities Litigation Reform Act (PSLRA). The SEC, which had filed a friend-of-the-court brief in Central Bank in support of maintaining the aiding and abetting cause of action, pressed Congress to overturn the Central Bank decision in the new law. Congress refused, delegating the right to bring an action for aiding and abetting to the SEC alone. The bill passed over President Clinton’s veto.
Recently, the Court had another look at who could be sued for securities fraud. In Stoneridge Investment Partners v. Scientific-Atlanta, where the Pomerantz firm represented plaintiffs, the Court considered whether the Central Bank decision barred a suit against a party who engaged in deceptive conduct but made no public statements about that conduct. The Court ruled that deceptive acts could create primary liability under the securities laws, as long as investors relied on those deceptive acts. Because the deceptions in Stoneridge were directed at the auditors, rather than the public, the Court held that investors could not have relied on them and thus could not prevail.
Senator Specter’s bill would recreate the private right of action for aiding and abetting, so that “any person that knowingly or recklessly provides substantial assistance” to a primary violator could be held liable for securities fraud. Specter is likely to have support for this bill beyond investors and the plaintiffs’ bar. As Specter pointed out in his introduction of the bill, Judge Gerald Lynch of the federal court in Manhattan recently wrote in an opinion that Congress’s choice to deny investors a private right of action against aiders and abettors:
“may be ripe for legislative reexamination. While the impulse to protect professionals and other marginal actors who may too easily be drawn into securities litigation may well be sound, a bright line between principals and accomplices may not be appropriate. There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder – one who ‘counsels, commands, induces or procures’ but he is nonetheless liable as a principal for the commission of the crime. Likewise, some civil accomplices are deeply and indispensably implicated in wrongful conduct.”
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