Opinion ID: 571318
Heading Depth: 2
Heading Rank: 1

Heading: The Law of Aiding and Abetting

Text: 12 To determine aiding and abetting liability, this circuit has adopted a tripartite test, the elements of which are: 13 (1) a securities laws violation by the primary party (as opposed to the aiding and abetting party); 14 (2) knowledge of the violation on the part of the aider and abettor; and 15 (3) substantial assistance by the aider and abettor in the achievement of the primary violation. 16 FDIC v. First Interstate Bank of Des Moines, N.A., 885 F.2d 423, 429 (8th Cir.1989). For the purposes of this appeal, we assume a securities laws violation by the primary party. Therefore, we need only examine the second and third elements of our test.
17 For aiding and abetting liability, the knowledge element is critical. Although the Supreme Court's holding in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), clearly establishes scienter as a necessary element for a primary violation of 10b and Rule 10b-5, this holding does not mandate the knowledge element needed for aiding and abetting liability. Without the holding in Ernst, knowledge would still be necessary because it is inherent in the terms aiding and abetting themselves. If it were otherwise, aiding and abetting would be indistinguishable from simply aiding. This would cast too wide a net, bringing under it parties involved in nothing more than routine business transactions. See David S. Ruder, Multiple Defendants in Securities Law Fraud Cases: Aiding and Abetting, Conspiracy, In Pari Delicto, Indemnification, and Contribution, 120 U.Pa.L.Rev. 597, 632 (1972). For instance, without the knowledge element, a party who, in the normal course of business, transmits documents necessary to consummate a sale may be held liable as an aider and abetter if the transmission somehow aided a securities laws violation. Knowingly engaging in a customary business transaction which incidentally aids the violation of securities laws, without more, will not lead to liability. See id. 18 The word abetting actually provides the knowledge element required in aiding and abetting. [T]he word 'abet' includes knowledge of the wrongful purpose of the perpetrator and counsel and encouragement in the crime. People v. Terman, 4 Cal.App.2d 345, 40 P.2d 915, 916 (1935). Therefore, aiding and abetting not only requires assistance, but also knowledge of a wrongful purpose. As we shall see later, this knowledge requirement also permeates the third element of our test. 19 We do not mean to suggest that an alleged aider and abettor may escape liability by simply claiming he was ignorant of the securities laws; however, a bare inference that the defendant 'must have had' knowledge of the primary violation is insufficient. Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 497 (7th Cir.1986). Some knowledge must be shown, but the exact level necessary for liability remains flexible and must be decided on a case-by-case basis. Negligence, however, is never sufficient. 20 In Metge v. Baehler, 762 F.2d 621 (8th Cir.1985), we stated that the knowledge and substantial assistance elements should be considered relative to one another ... [and] 'where there is a minimal showing of substantial assistance, a greater showing of scienter is required.'  Id. at 624 (quoting Stokes, 644 F.2d at 784). A party who engages in atypical business transactions or actions which lack business justification may be found liable as an aider and abettor with a minimal showing of knowledge. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1010 (11th Cir.1985). Conversely, a party whose actions are routine and part of normal everyday business practices would need a higher degree of knowledge for liability as an aider and abettor to attach. See Metge, 762 F.2d at 625. Recklessness satisfies the knowledge requirement where the defendant owes a duty of disclosure to the plaintiff. The Second Circuit aptly articulated the reasoning for accepting recklessness in Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978). There, the court stated: 21 Proof of a defendant's knowledge or intent will often be inferential and cases thus of necessity cast in terms of recklessness. To require in all types of 10b-5 cases that a factfinder must find a specific intent to deceive or defraud would for all intents and purposes disembowel the private cause of action under § 10(b). 22 Id. at 47 (citations omitted). See also FDIC, 885 F.2d at 433 (holding a bank had recklessly ignored signs of a depositor's misappropriation). 23 Under the federal securities laws, a duty to disclose 'arises from the relationship between parties,' and will exist if there is 'a fiduciary or other similar relation of trust and confidence between them.'  Schatz v. Rosenberg, 943 F.2d 485, 490 (4th Cir.1991) (quoting Dirks v. SEC, 463 U.S. 646, 658, 103 S.Ct. 3255, 3263, 77 L.Ed.2d 911 (1983) and Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108, 1114, 63 L.Ed.2d 348 (1980), respectively). Fiduciary relationships and their concomitant duty to disclose may be established by state or federal law. See FDIC, 885 F.2d at 433 (duty existed under 12 C.F.R. § 7.5225 (1981)); Jordon v. Duff & Phelps, Inc., 815 F.2d 429, 436 (7th Cir.1987) (stating that the obligation to break silence is itself based on state law), cert. dismissed, 485 U.S. 901, 108 S.Ct. 1067, 99 L.Ed.2d 229 (1988); Lanza v. Drexel & Co., 479 F.2d 1277, 1291 (2d Cir.1973) (looking to state law for the fiduciary duties of a corporate director). Where neither state nor federal law has established a duty, the court may still find one by examining five nonexclusive factors under the following test: 24 1. the relationship of the defendant to the plaintiff; 25
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29 Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 653-54 (9th Cir.1988), cert. denied, 493 U.S. 1002, 110 S.Ct. 561, 107 L.Ed.2d 556 (1989); see also Arthur Young & Co. v. Reves, 937 F.2d 1310, 1330 (8th Cir.1991). 2. Substantial Assistance 30 If a defendant's knowledge of the securities laws violation is established, we move to the third prong of the analysis--substantial assistance. The assistance must be such that it is  'a substantial factor in causing the resulting'  violation. Metge, 762 F.2d at 624 (quoting Landy v. FDIC, 486 F.2d 139, 163 (3rd Cir.1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974)). There must be a  'substantial causal connection between the culpable conduct of the alleged aider and abettor and the harm to the plaintiff.'  Id. (quoting Mendelsohn v. Capital Underwriters, Inc., 490 F.Supp. 1069, 1084 (N.D.Cal.1979)). By culpable conduct we mean conduct that has some element of blameworthiness. The defendant must have some degree of knowledge that his actions are aiding the primary violator. [I]t is not sufficient that [the defendant] ... engage in acts which, as it turned out, did give assistance ... to the [plaintiff]. Wayne R. LaFave & Austin W. Scott, Jr., Criminal Law § 6.7(c), at 580 (2d ed. 1986). If a defendant has a general awareness of his role in the primary violator's wrongful activity, however, this may be sufficient to satisfy the knowledge requirement. FDIC, 885 F.2d at 430-31. 31 Where a duty to disclose exists, we again allow a recklessness standard to fulfill the knowledge requirement implicit in the substantial assistance element. Additionally, silence is included in the substantial assistance calculus if a duty to disclose exists. Metge, 762 F.2d at 625. Therefore, if the defendant has a duty to disclose, the court may deem recklessness in failing to disclose information as substantial assistance. 32 However, the recklessness involved must be severe recklessness 33 limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it. 34 Woods, 765 F.2d at 1010 (quoting Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir.) (en banc), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981)).