January 29, 2008

US Supreme Court Limits Banks, Law Firms, and Accountants' Exposure to Aiding and Abetting Liability

In today’s specialized and interconnected business world, banks, law firms, and accountants often find themselves drawn into litigation over financial statements that are either incomplete or false. The Enron and WorldCom cases are great examples of this. In those cases, plaintiffs, often shareholders and creditors, sue law firms, banks, and accountants, alleging that they are liable for their losses because they “aided and abetted” directors and officers who defrauded the company and shareholders. Atkinson Conway & Gagnon has litigated these claims on several occasions in Alaska, both in the course of defending banks and law firms and in representing corporations against accountants that have aided company officers and directors in defrauding the corporation.

This theory of liability, also known as “tortuous assistance of breach of fiduciary duty” can significantly expand the liability of accountants, banks, and law firms, including exposing them to joint and several liability in states that otherwise provide for strict allocation of fault, such as Alaska.

On January 15, 2008, the United States Supreme Court issued an important decision limiting the scope of “aiding and abetting claims.”. Ruling 4 to 3, the United States Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 did not authorize a private right of action against third parties for aiding and abetting violations of securities law. Instead, plaintiffs who wish to sue banks, accountants and law firms for securities law violations must show that they relied upon an affirmative material misrepresentations by those entities. While banks, law firms, and accountants may be subject to aiding and abetting liability when they have a direct relationship with aggrieved plaintiffs, this is an important decision that limits the liability faced by banks, accountants, and law firms in the shareholder lawsuits that are so often filed when negative financial information is released by corporations.