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Senators Lose Will to Allow Pursuit of Aiders and Abettors

As reported by Reuters here the House approved amendments to the Financial Reform Bill  H.R. 4173. The amendment would reinstate the grounds for private civil actions for aiding and abetting in securities fraud -- i.e., overturning the U.S. Supreme Court decision in Stoneridge Investment Partners v. Scientific Atlanta in which the Roberts Court let third parties who assist the frauds go free. The logic went something like this:

  1. Defendants actually and knowingly  assisted in sham transactions that misrepresented the financial results of a public company.
  2. Defendants had no duty to the investors of another company, nor did they make any public statements about the transactions.
  3. Hence, investors did not rely on their conduct when making their investment decisions!!!!

And therefore, unless Congress says otherwise, the Defendants can now move on and help the next fraudster with impunity.

But, as Reuters also reported, Senator Chris Dodd, who helped lead the charge in 2004 and 2005 to make it more difficult to sue his campaign donators from the accounting and banking industry, has once again stood in the path of accountability. Dodd was instrumental in the passage of the Private Securities Litigation Reform Act that made it impossible to sue anyone who commits securities fraud unless you can get the facts usually soley in the possession of the fraudsters themselves. Now again, the Senate negotiators for the Financial Reform Bill rejected the amendments to reinstate liability in favor of a "STUDY." Reuters quotes Dodd as saying "The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point." So let's have a study.

This is probably the last chance to get such liability reinstated and Dodd well knows that a STUDY is the kiss of death. He is not really standing up for the little guy in protecting his friends. The lawyers, accountants, bankers, who act as gatekeepers cannot be allowed to assist fraud and line their pockets. The main culprit often has too few resources to pay the damages, is bankrupt, or otherwise judgment proof. Even the SEC cannot recover damages from those who aid and abet. In large part that is why we have the financial/banking mess we have now.

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