Opinion ID: 628267
Heading Depth: 3
Heading Rank: 2

Heading: Aider and Abettor

Text: 31 Appellants maintain that fact issues remain concerning Home and Graham's liability under Sec. 10(b) of the 1934 Act 21 and Rule 10b-5. 22 Those who aid and abet securities fraud are subject to Rule 10b-5 liability; but, we have emphasized recently that this added layer of liability ... is particularly problematic.... We should be exacting in determining whether aider and abettor liability can be demonstrated. Akin v. Q-L Invest., Inc., 959 F.2d 521, 525 (5th Cir.1992). 32 To establish liability, the plaintiff must show (1) that the primary party committed a securities violation; (2) that the aider and abettor had general awareness of its role in the violation; and (3) that the aider and abettor knowingly rendered substantial assistance in furtherance of it. Abell v. Potomac Ins. Co., 858 F.2d 1104, 1126 (5th Cir.1988) (internal quotations omitted), vacated, Fryar v. Abell, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989). 23 33 For the first element, we again assume underlying securities fraud. See notes 27 and 28, infra. Underlying the other two elements--general awareness and knowing substantial assistance--is a single scienter requirement that varies on a sliding scale from recklessness to conscious intent. Abell, 858 F.2d at 1126-27. The plaintiff must show conscious intent, unless there is some special duty of disclosure, or evidence that the assistance to the violator was unusual in character and degree. Akin, 959 F.2d at 526, 531. 24 In the latter two instances, a recklessness standard applies. 25 Id. 34 Throughout the district court proceedings, appellants maintained that Equity violated Sec. 10 and Rule 10b-5 by inducing appellants to invest in Courtside through oral and written misrepresentations. 26 Their aiding and abetting allegations were based on Home and Graham's continued participation in the Courtside transaction despite their receipt of the Duane Memo, which, according to appellants, provided a blueprint of Equity's fraud. 35 The district court concluded that the summary judgment record lacked probative evidence of Home and Graham's substantial assistance in the alleged violations, 27 relying primarily on its findings that they did not owe appellants a duty of disclosure, and that the activities described were simply grist of the mill. We agree, and stress that appellants also failed to meet the scienter requirement underlying the latter two elements of the prima facie case. 28 36 First, we address appellants' assertion that Home and Graham had a duty to disclose the contents of the Duane Memo. They urge, inter alia, that this duty of disclosure arises from Home's status as their surety. Home and Graham counter by stating that generally, a surety has no legal duty of disclosure. As our court noted in Akin, the theory of liability based on a special duty of disclosure is mushy and difficult to apply, as the source and scope of such a duty is not based on any textual provision of the securities laws, but appears to be a specie of federal common law. 959 F.2d at 526. We thus refrain from specifically defining the disclosure obligations of a surety and its agent; rather, applying relevant factors annunciated by our court in First Virginia Bankshares v. Benson, 559 F.2d 1307 (5th Cir.1977), cert. denied, Walter E. Heller & Co. v. First Virginia Bankshares, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978), and applied by other circuits, see Arthur Young & Co. v. Reves, 937 F.2d 1310, 1330 (8th Cir.1991), cert. denied, Reves v. Ernst & Young, --- U.S. ----, 112 S.Ct. 1165, 117 L.Ed.2d 411 (1992); Jett v. Sunderman, 840 F.2d 1487, 1493 (9th Cir.1988); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir.1986), cert. denied, 480 U.S. 946, 107 S.Ct. 1604, 94 L.Ed.2d 790 (1987), 29 we conclude that Home and Graham did not have such a duty. 37 We first examine the parties, relative access to the information to be disclosed. First Virginia Bankshares, 559 F.2d at 1314. To be sure, the summary judgment record reflects that Home and Graham were privy to additional information due to their involvement with the issuance of the bonds, and from Graham's prior dealings with Equity; however, as stated, the standard is relative access to the information to be disclosed . Id. (emphasis added). Because appellants neglect to demonstrate that such access supplied Home and Graham with superior knowledge of the allegedly misleading aspects of the PPM, 30 this factor does not weigh in their favor. 31 38 We next examine the benefit derived from the sale of securities. Home and Graham received a premium of $257,060 for bonding a risk of almost $5 million. Given the risk of loss, this factor only slightly supports a duty to disclose. 39 As for the third factor, the defendant's awareness of plaintiff's reliance on defendant in making its investment decisions, id., appellants once again misconstrue their burden. They must set forth evidence that they relied on Home and Graham in making their investment decisions, not that they relied on misrepresentations in the PPM. There is no evidence that potential investors viewed Home and Graham's involvement as approval of the merits of the investment, or otherwise relied on Home and Graham, much less evidence that Home and Graham were generally aware of such reliance. Rather, Home's identity as surety was not revealed until the first supplement to the PPM, which also contained a disclaimer specifically included to prevent such reliance. 32 Needless to say, this factor does not support a duty to disclose. 40 Finally, we can quickly dispose of the fourth factor, the defendant's role in initiating the purchase or sale, id., as it is undisputed that neither Home nor Graham had contact with investors regarding their investment decisions. In sum, we conclude from our analysis of the above factors that Home and Graham did not owe appellants a duty of disclosure. 41 Appellants next maintain that even if Home and Graham lacked a duty to disclose, their participation in the formation of the E-C partnerships constituted substantial assistance, unusual in scope and degree; thus, they need not prove conscious intent, only recklessness. Once again, we disagree. 42 Although there is evidence that Home and Graham were included in discussions regarding the possible failure to fully subscribe Courtside by the closing date, we agree with the district court that there is no evidence that their role extended beyond that of a surety and bonding agent. Rather, the only evidence of involvement by Home and Graham was their refusal to bond the remaining 40 units under one partnership, and subsequent agreement to bond the units under four partnerships (the E-C partnerships); decisions central to their designated function. We thus consider the above assistance, even if substantial, see Insurance Co. of North America v. Dealy, 911 F.2d 1096, 1101 (5th Cir.1990) (the routine extension of a loan does not amount to substantial assistance), to be merely grist of the mill. 33 43 Because appellants failed to establish either a duty of disclosure or atypical assistance, they must provide evidence of conscious intent, rather than recklessness. (In considering whether they meet this burden, we assume, without deciding, that Home and Graham's involvement constituted substantial assistance.) The record is devoid of such evidence; thus, summary judgment is appropriate. See, e.g., Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1449 (5th Cir.1993) (internal quotations omitted) (Summary judgment, to be sure, may be appropriate, even in cases where elusive concepts such as motive or intent are at issue, ... if the nonmoving party rests merely upon conclusory allegations, improbable inferences, and unsupported speculation.). 44 With apparently good intentions, Graham forwarded the Duane Memo to Equity, and suggested that Equity incorporate its counsel's suggestions. Home and Graham's continued participation, despite Equity's failure to adopt some of the suggestions, does not signal their intent to further the fraudulent scheme. 34 As we stated in Abell, 858 F.2d at 1128, [a]roused suspicions ... do not constitute actual awareness of one's role in a fraudulent scheme. Moreover, to prove plainly that an alleged abettor intended to violate the securities laws, plaintiffs must prove more than that the abettor recklessly ignored danger signals. 45 Likewise, Home and Graham's receipt of a reasonable premium for participation in the transaction does not supply a motive. We agree with the Second Circuit that almost any entity playing a role in a securities transaction will have some economic motivation for doing so. National Union Fire Insurance Co. v. Turtur, 892 F.2d 199, 207 (2d Cir.1989). 35 46 In sum, in view of the lack of evidence of intent, the district court properly disposed of appellants' aiding and abetting claim. 36