Opinion ID: 534191
Heading Depth: 2
Heading Rank: 4

Heading: Aiding and Abetting a Violation of Federal Securities Law.

Text: 48 The Turturs contend that the district court erred in rejecting their claim that National Union aided and abetted a fraudulent scheme in violation of federal securities law. The defendants sought to amend their answer to assert this claim as an additional counterclaim. Although no formal amendment occurred, the district court addressed and dismissed this contention, finding it to be without merit. We agree with that disposition. 49 The substance of the Turturs' contention is that there were material misstatements in the PPM for which National Union may be held legally accountable. Although the Turturs do not specify what provision of the federal securities laws has been violated, we assume that they claim a violation of section 10(b) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b) (1982), and rule 10b-5, 17 C.F.R. § 240.10b-5 (1988), promulgated thereunder. 4 It is claimed that National Union aided and abetted a securities fraud because it knew of misstatements in the PPM and failed to disclose them to the Turturs. 50 In rejecting this claim, the district court placed explicit reliance upon IIT v. Cornfeld, 619 F.2d 909 (2d Cir.1980). That case makes clear that to establish an aiding and abetting securities violation, there must be shown (1) a securities law violation by a primary party, (2) scienter on the part of the aider and abettor, and (3) substantial assistance by the aider and abettor in the achievement of the primary violation. 619 F.2d at 922. In connection with the third requirement, we said: Apart from a case like [Brennan v. Midwestern United Life Ins. Co., 417 F.2d 147 (7th Cir.1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970) ], inaction can create aider and abettor liability only where there is a conscious or reckless violation of an independent duty to act. 619 F.2d at 927. Brennan involved a corporation that refrained from reporting to regulatory authorities its knowledge that a broker was manipulating its stock, which had the effect of increasing the value of [the corporation's] over-the-counter stock, to the benefit of [the corporation's] efforts to accomplish a merger with another company. 619 F.2d at 926. 51 We viewed Brennan as posing an exception to the general rule because of the offending corporation's conscious and specific motivation for not acting. Id. at 927. If we were to extend that exception to National Union, whose sole apparent motive was to collect the premium for its Guarantee, the exception would swallow the rule, since almost any entity playing a role in a securities transaction will have some economic motivation for doing so. Rather, as we stated more recently in Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir.1983), inaction can provide a basis for liability, in the absence of a duty to act, only when designed intentionally to aid the primary fraud. The Turturs have not raised a genuine issue of material fact concerning any such participation by National Union in the alleged fraud by ANA. They must therefore establish some duty to act on the part of National Union. 52 The district court correctly found, however, that National Union owed no duty of disclosure to the Turturs. Such a duty arises when one party has information 'that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.'  Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108, 1114, 63 L.Ed.2d 348 (1980) (quoting Restatement (Second) of Torts § 551(2)(a) (1976)); see also Dirks v. S.E.C., 463 U.S. 646, 654-55, 103 S.Ct. 3255, 3261-62, 77 L.Ed.2d 911 (1983). It is clear that the Turturs, who never dealt directly with National Union, had no contacts or transactions with National Union from which a relationship of trust and confidence could be established. 5 Moreover, in general, a surety does not owe a fiduciary duty to its principal. See In re McNeil, 22 B.R. 408, 413 (E.D.Tenn.1982); cf. Schlifke v. Seafirst Corp., 866 F.2d 935, 945 (7th Cir.1989) (Execution of a contract in support of a bank loan, in itself, falls far short of creating a fiduciary relationship.); Schneberger v. Wheeler, 859 F.2d 1477, 1480 (11th Cir.1988) (lending bank had no fiduciary duty to borrowers who invested loan proceeds in limited partnership), cert. denied, --- U.S. ----, 109 S.Ct. 2433, 104 L.Ed.2d 989 (1989); Jett v. Sunderman, 840 F.2d 1487, 1493 (9th Cir.1988) (same). In view of the undisputed facts and the applicable precedents, we see no basis to impose a duty of disclosure to the Turturs upon National Union, and accordingly no liability for a violation of federal securities law. This claim was therefore properly dismissed upon National Union's motion for summary judgment.