New Standards for Aiding and Abetting

In a recent case, SEC v. Joseph F. Apuzzo, a three-judge panel of the Second Circuit Court of Appeals made it significantly easier for the SEC to hold individuals liable for aiding and abetting another’s securities fraud. The Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, and amendments contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, also make it more likely that the SEC will pursue aiding-and-abetting charges against individuals.

In view of these developments, executives should take steps to minimize their potential individual liability. The first step, the author suggests, is to instill a culture of compliance within the organization. He recommends involving experts early in the process. In-house staff in key departments (e.g. accounting and legal) should be involved in drafting and finalizing public disclosures, and the company’s auditors and lawyers should be consulted regularly.

The author notes that whistleblower programs have been given sharper teeth, and executives should now assume that whenever an issue is reported within the company, the SEC may have received the same information. No red flags should be ignored.

In addition, D&O policies should be reviewed to determine coverage for SEC actions. In some instances, policies advance defense costs, and sometimes they extend coverage to SEC investigations as well as filed litigation. Making sure the company has appropriate insurance will alleviate the significant financial burden an SEC investigation can create, avoiding some unpleasant surprises.