Opinion ID: 1367722
Heading Depth: 3
Heading Rank: 2

Heading: Creator Standard v. Attribution Standard

Text: Plaintiffs and the SEC urge us to adopt a creator standard that would require us to hold that a defendant can be liable for creating a false statement that investors rely on, regardless of whether that statement is attributed to the defendant at the time of dissemination. They argue that their proposed standard is consistent with the law of the Circuit. They distinguish Wright and Lattanzio on the ground that the defendants in those cases were not alleged to have created the false statements in question, but rather, merely reviewed false statements created by others. Plaintiffs and the SEC contend that, notwithstanding the broad language that suggests attribution is always required, these cases are best read as holding that a defendant can be liable if he or she creates a false or misleading statement or allows a false statement to be attributed to him or her. Their position finds some support in dicta from one of our recent cases. See United States v. Finnerty, 533 F.3d 143, 150 (2d Cir.2008) (describing Wright as holding that under Central Bank, a defendant `cannot incur primary liability' for a statement neither made by him nor `attributed to [him] at the time of its dissemination' (emphasis added) (quoting Wright, 152 F.3d at 175)). Notwithstanding the dicta in United States v. Finnerty , we reject the creator standard for secondary actor liability under Rule 10b-5. An attribution requirement is more consistent with the Supreme Court's guidance on the question of secondary actor liability. Furthermore, a creator standard is indistinguishable from the substantial participation test that we have disavowed since Wright, and it is incompatible with our stated preference for a bright line rule. See Wright, 152 F.3d at 175. Accordingly, secondary actors can be liable in a private action under Rule 10b-5 for only those statements that are explicitly attributed to them. The mere identification of a secondary actor as being involved in a transaction, or the public's understanding that a secondary actor is at work behind the scenes are alone insufficient. See Lattanzio, 476 F.3d at 155. To be cognizable, a plaintiff's claim against a secondary actor must be based on that actor's own articulated statement, or on statements made by another that have been explicitly adopted by the secondary actor. See id.
The Supreme Court has never directly addressed whether attribution at the time of dissemination is required for secondary actors to be liable in a private damages action brought pursuant to Rule 10b-5. Nevertheless, the Court's recent decision in Stoneridge is instructive. The Supreme Court's focus on reliance in Stoneridge favors a rule, such as attribution, that is designed to preserve that element of the private right of action available under Rule 10b-5. See Wright, 152 F.3d at 175 (noting that an attribution requirement prevents plaintiffs from circumvent[ing] the reliance requirements of the [Exchange] Act). In Stoneridge, which dealt primarily with deceptive conduct rather than false statements, the Court rejected claims brought pursuant to Rule 10b-5 against an issuing firm's customers and suppliers. 552 U.S. at 153, 128 S.Ct. 761. The Court held that plaintiffs' claims failed as a matter of law because plaintiffs could not demonstrate that they rel[ied] upon [defendants'] own deceptive conduct and because [i]t was [the issuing firm] Charter, not [defendants], that misled its auditor and filed fraudulent financial statements. Id. at 160-61, 128 S.Ct. 761 (emphasis added); id. at 159, 128 S.Ct. 761 (Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10b private cause of action. (emphasis added)). We think that reasoning is consistent with an attribution requirement in the context of claims based on false statements. If a plaintiff must rely on a secondary actor's own deceptive conduct to state a claim under Rule 10b-5(a) and (c), it stands to reason that a plaintiff must also rely on a secondary actor's own deceptive statementsand not on statements conveyed to the public through another source and not attributed to the defendantto state a claim under Rule 10b-5(b). More generally, Stoneridge stands for the proposition that reliance is the critical element in private actions under Rule 10b-5. This general proposition, applied to the specific issue of secondary actor liability, further supports an attribution requirement. Attribution is necessary to show reliance. Where statements are publicly attributed to a well-known national law or accounting firm, buyers and sellers of securities (and the market generally) are more likely to credit the accuracy of those statements. Because of the firm's imprimatur, individuals may be comforted by the supposedly impartial assessment and, accordingly, be induced to purchase a particular security. Without explicit attribution to the firm, however, reliance on that firm's participation can only be shown through an indirect chain . . . too remote for liability. Stoneridge, 552 U.S. at 159, 128 S.Ct. 761.
The creator standard championed by plaintiffs and the SEC cannot be reconciled with our unambiguous rejection of a substantial participation test in favor of a bright line rule. In Wright, we noted that some courts applying a substantial participation test had imposed liability on secondary actors based on their significant role in drafting and editing false documents or their `intricate[ ] involv[ment]' in the creation of false documents. See Wright, 152 F.3d at 175 (emphases added) (quoting a district court's description of In re Software Toolworks, 50 F.3d 615, 628 n. 3 (9th Cir.1994) and In re ZZZZ Best Securities Litigation, 864 F.Supp. 960, 970 (C.D.Cal.1994)). We went on to explain, however, that the Second Circuit had rejected a substantial participation test in favor of a bright line rule. Id. A creator standard is effectively indistinguishable from a substantial participation test. According to the SEC, the creator standard would extend liability to secondary actors who supplied the writer with false or misleading information or `caused' a false or misleading statement to be madeeven if the statement disseminated to the public made no mention of the defendant. SEC Br. at 7, 10. [4] As we explained in Lattanzio, however, a [p]ublic understanding that [a secondary actor] is at work behind the scenes does not create an exception to the requirement that an actionable misstatement be made by the [secondary actor] and [u]nless the public's understanding is based on the [secondary actor's] articulated statement, the source for that understanding . . . does not matter. 476 F.3d at 155 (emphasis added). Insofar as a creator standard would impose liability on secondary actors, such as defendants here, for their role in drafting and editing false documents on behalf of an issuing firm, it would mark a radical departure from our precedents. An attribution requirement, on the other hand, is consistent with our preference for a bright line rule distinguishing primary violations of Rule 10b-5 from aiding and abetting. See Wright, 152 F.3d at 175 (explaining that, [i]n Shapiro, we followed the `bright line' test). An attribution requirement makes clearto secondary actors and investors alikethat those who sign or otherwise allow a statement to be attributed to them expose themselves to liability. Those who do not are beyond the reach of Rule 10b-5's private right of action. A creator standard establishes no clear boundary between primary violators and aiders and abettors, and it is uncertain what level of involvement might expose an individual to liability. Even the SEC struggles to define the precise contours of the creator standard, noting that a person would arguably not cause a misstatement where he merely gave advice to another person regarding what was required to be disclosed and then that person made an independent choice to follow the advice. SEC Br. at 10-11 (emphasis added). A bright line rule such as an attribution requirement also has many benefits in application. An attribution requirement is relatively easy for district courts to apply and avoids protracted litigation and discovery aimed at learning the identity of each person or entity that had some connection, however tenuous, to the creation of an allegedly false statement. Furthermore, as the Supreme Court has explained, securities law is an area that demands certainty and predictability. Central Bank, 511 U.S. at 188, 114 S.Ct. 1439 (quoting Pinter v. Dahl, 486 U.S. 622, 652, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988)). Uncertainty can lead to many undesirable consequences, [f]or example, newer and smaller companies may find it difficult to obtain advice from professionals. A professional may fear that a newer or smaller company may not survive and that business failure would generate securities litigation against the professional, among others. Id. at 189, 114 S.Ct. 1439. Uncertainty also increases the costs of doing business and raising capital. See Ralph K. Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L.J. 945, 962 (1993) (describing the need to avoid overbroad and amorphous doctrine and to craft legal rules with bright lines as a means of reducing the cost of capital and explaining that [o]verbreadth and uncertainty deter beneficial conduct and breed costly litigation (emphasis added)), cited with approval in Central Bank, 511 U.S. at 189, 114 S.Ct. 1439 [5] ; see also Central Bank, 511 U.S. at 188, 114 S.Ct. 1439 ([A] shifting and highly fact-oriented disposition of the issue of who may be liable for a damages claim for violation of Rule 10b-5 is not a satisfactory basis for a rule of liability imposed on the conduct of business transactions. (internal quotation marks and brackets omitted)). A creator standard would inevitably lead to uncertainty regarding the scope of Rule 10b-5 liability and potentially deter beneficial conduct. See Winter, ante, at 963 ([O]verdeterrence in regulating capital markets . . . will deter activity that we wish to encourage.). For the foregoing reasons, we conclude that even if Wright and Lattanzio were not read explicitly to require attribution in every case, an attribution requirement is most consistent with our Circuit's preference for a bright line approach to the question of secondary actor liability. Accordingly, we reject the creator standard advanced by plaintiffs and the SEC and we reaffirm our jurisprudence in Wright and Lattanzio namely, that a secondary actor cannot incur primary liability under [Rule 10b-5] for a statement not attributed to that actor at the time of its dissemination. Wright, 152 F.3d at 175; see Lattanzio, 476 F.3d at 154 (Under Central Bank, [a secondary actor] is not liable for merely assisting in the drafting and filing of [allegedly false statements].). [6]