Central Bank of Denver v. First Interstate Bank of Denver: The Supreme Court Chops a Bough From the Judicial Oak: There is no Implied Private Remedy to Sue for Aiding and Abetting Under Section 10(b) and SEC Rule 10b-5

"In hundreds of judicial and administrative proceedings in every circuit in the federal system, the courts and the SEC have concluded that aiders and abettors are subject to liability under § 10(b) and Rule 10b-5 . . . .⁽¹⁾ [The Court has] reache[d] out to overturn a most considerable body of precedent."⁽²⁾

  Introduction

For nearly thirty years, the judiciary in our federal system has recognized, under section 10(b) of the 1934 Securities and Exchange Act⁽³⁾ and Securities and Exchange Commission (SEC) Rule 10b-5⁽⁴⁾ promulgated thereunder,⁽⁵⁾ an implied private right to sue for aiding and abetting. Despite the absence of an express statutory remedy under section 10(b), civil aiding and abetting liability has been recognized and fully developed in eleven federal circuits.⁽⁶⁾ Employing this form of liability, commonly referred to as secondary liability,⁽⁷⁾ plaintiffs have targeted the "deep pockets" of accountants,⁽⁸⁾ lawyers,⁽⁹⁾ bankers,⁽¹⁰⁾ and other ancillary securities professionals.⁽¹¹⁾

Since 1946, when the first federal district court recognized an implied private remedy to sue for violations of section 10(b) and SEC Rule 10b-5,⁽¹²⁾ United States courts of appeals and district courts have construed section 10(b) and Rule 10b-5 liberally.⁽¹³⁾ Often citing the need to effectuate the broad, remedial purposes of the securities acts, lower courts have applied general tort theories to create new implied private rights.⁽¹⁴⁾

In 1966, a federal district court in Indiana found an implied private right to sue for aiding and abetting a violation of section 10(b).⁽¹⁵⁾ The court found that the implied remedy was "a natural and logical complement" to the existing implied private remedy in Rule 10b-5.⁽¹⁶⁾ Over the next twenty-eight years, the aiding and abetting doctrine became firmly entrenched in the complex securities regulatory scheme. Although the doctrine has been criticized in recent years in light of Supreme Court holdings dealing with implied private remedies, all federal courts continued to uphold the private section 10(b) and Rule 10b-5 implied right to sue for aiding and abetting.⁽¹⁷⁾

After twice reserving comment on whether section 10(b) conferred an implied right to sue for aiding and abetting,⁽¹⁸⁾ the Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver⁽¹⁹⁾--a case asking the Justices to clarify an element under the implied cause of action--sua sponte decided whether the implied private right exists under section 10(b) and Rule 10b-5.⁽²⁰⁾ Despite its settled construction, the Central Bank Court held that a private plaintiff could not sue for aiding and abetting under section 10(b).⁽²¹⁾ The Court's decision and its broad ramifications have generated a flurry of both criticism and credence.⁽²²⁾

The purpose of this Comment is to analyze the Supreme Court's decision in light of previous Supreme Court section 10(b) holdings and the development of section 10(b) civil aiding and abetting liability in the federal system. Part II will provide a brief, yet essential, backdrop to the Court's April 1994 controversial decision.⁽²³⁾ Part II will also set forth the general scheme of the securities laws including a brief overview of the landmark securities legislation, a look at section 10(b) of the 1934 Act, and the promulgation of SEC Rule 10b-5.⁽²⁴⁾ Part II will then trace the development of civil aiding and abetting liability under section 10(b) and discuss the relevant Supreme Court decisions that have impacted implied private rights under the federal securities laws.⁽²⁵⁾ Part III will focus on the Supreme Court's decision in Central Bank.⁽²⁶⁾ Under this Part, a comprehensive recapitulation of both the majority and dissenting opinions will follow.⁽²⁷⁾ Part IV will analyze the Court's reasoning and discuss the likely implications of the Court's holding.⁽²⁸⁾ A conclusion follows in Part V.⁽²⁹⁾

  Background

A.  Section 10(b) & SEC Rule 10b-5 Historical Beginnings

The federal securities laws originate from two landmark pieces of securities legislation--the Securities Act of 1933 (1933 Act)⁽³⁰⁾ and the Securities Exchange Act of 1934 (1934 Act).⁽³¹⁾ Enacted to combat the victimization of public investors from widespread fraud and manipulation following the late 1920s, the legislation marked a shift from the doctrine of caveat emptor⁽³²⁾ toward principles of consumer protection.⁽³³⁾ The shift did not occur, however, without the input of securities participants.⁽³⁴⁾ Accordingly, the legislation represents a balance between safeguarding investors and limiting federal intervention in the securities marketplace.⁽³⁵⁾

1.  Securities & Exchange Act of 1934

While the 1933 Act addressed the initial distribution of securities to public investors, it is the 1934 Act that regulates post-distribution securities activity. Principally, the 1934 Act (1) oversees and regulates the securities markets, (2) affords a measure of disclosure to would-be investors, (3) prevents fraud in securities trading and manipulation of the markets and provides remedies should such occur, and (4) controls the amount of credit extended in the marketplace.⁽³⁶⁾ To this end, the 1934 Act sets forth, inter alia, requirements pertaining to issuers,⁽³⁷⁾ securities exchanges,⁽³⁸⁾ broker-dealers,⁽³⁹⁾ as well as stock ownership.⁽⁴⁰⁾ The 1934 Act also created the SEC, the regulatory agency entrusted with enforcing the federal securities laws.⁽⁴¹⁾ Furthermore, to accomplish the 1934 Act's broad objectives, Congress provided several enforcement remedies designed to reinforce its provisions.⁽⁴²⁾

Through the years, the 1934 Act has been amended to reflect changing legislative mandates. The most comprehensive reassessment occurred in 1975.⁽⁴³⁾ Notwithstanding its revisions, the underlying purpose and framework of the original legislation has remained intact.

2.  Section 10(b) and SEC Rule 10b-5

Section 10(b) is one of several enforcement measures designed to prohibit fraudulent conduct.⁽⁴⁴⁾ The statutory text of section 10(b) is structured as an enabling provision.⁽⁴⁵⁾ The text itself, therefore, prohibits nothing.⁽⁴⁶⁾ Rather, Congress empowered the SEC to promulgate rules that prohibit manipulative and deceptive conduct.⁽⁴⁷⁾ Section 10(b), therefore, is violated when an SEC Rule promulgated under that section is violated.⁽⁴⁸⁾ Despite the absence of an express private remedy in the text of section 10(b), it has become the most widely-used provision to address securities violations.⁽⁴⁹⁾ Enacted primarily to combat new and creative fraudulent means or contrivances, it has been characterized as the "catch-all" provision of the antifraud measures.⁽⁵⁰⁾

By 1941, however, creative fraudulent devices were circumventing the complex regulatory scheme.⁽⁵¹⁾ For instance, the regulatory scheme did not prevent an issuer, or an officer or director of an issuer, from purchasing its own securities through fraudulent contrivances.⁽⁵²⁾ To close the apparent loophole, the SEC urged Congress to amend section 10(b).⁽⁵³⁾ Unsuccessful in its endeavor, the SEC, in accordance with its section 10(b) statutory powers,⁽⁵⁴⁾ promulgated its own rule under the section.⁽⁵⁵⁾ It seems clear, though, that at the time that Rule 10b-5 was promulgated, the SEC contemplated that it would be used only as another tool for SEC enforcement, and did not envision the creation of a new private cause of action.⁽⁵⁶⁾

The broad language contained in section 10(b) and Rule 10b-5 has allowed the judiciary in private litigation to fashion the details of the antifraud provision. In fact, judicial construction of section 10(b) and Rule 10b-5 has inferred that Congress intended to imply a private remedy to sue for violations of section 10(b) and Rule 10b-5.⁽⁵⁷⁾ In addition, courts have rejected the need for a contractual relationship, or privity, to exist between the purchaser and seller of securities.⁽⁵⁸⁾ Furthermore, the Federal Rules of Civil Procedure permit an individual plaintiff to represent "all persons similarly situated in a single class action lawsuit."⁽⁵⁹⁾ Consequently, section 10(b) and Rule 10b-5 litigation has mushroomed.⁽⁶⁰⁾ This explosion of Rule 10b-5 litigation led Chief Justice Rehnquist to appropriately characterize the Rule as "a judicial oak which has grown from little more than a legislative acorn."⁽⁶¹⁾ In fact, the proliferation of the litigation inspired the "father of 10b-5"⁽⁶²⁾ to concede that "`even when paternity is established, it is well known how little control parents have over their children when they grow up.'"⁽⁶³⁾

a.  The Implied Private Right to Sue for Violations of Rule 10b-5

In 1946, just four years after the promulgation of SEC Rule 10b-5, a federal district court in Pennsylvania recognized an implied private right to sue for violations of section 10(b) and Rule 10b-5 in Kardon v. National Gypsum Co.⁽⁶⁴⁾ In Kardon, the court applied general tort principles and the tort law maxim ubi jus ibi remedium--where there is a right there is a remedy--to find an implied private remedy under section 10(b) and Rule 10b-5.⁽⁶⁵⁾ Twenty-five years later, Supreme Court Justice William Douglas, in Superintendent of Insurance v. Bankers Life & Casualty, Co.,⁽⁶⁶⁾ recognized the implied private remedy in a footnote--without a legal justification--stating that "[i]t is now established that a private right of action is implied under § 10(b)."⁽⁶⁷⁾

The broad language in section 10(b) and Rule 10b-5 led the Supreme Court to construe the text "`not technically and restrictively, but flexibly to effectuate its remedial purposes.'"⁽⁶⁸⁾ Accordingly, the implied private right to sue has been characterized as "well-established"⁽⁶⁹⁾ and "simply beyond peradventure."⁽⁷⁰⁾ The Court has stated that the implied private right to sue for Rule 10b-5 violations was "a necessary supplement to [SEC] action" and thus consistent with ensuring that Congress's broad remedial purposes in enacting the 1934 Act were fulfilled.⁽⁷¹⁾ Over the years, Rule 10b-5 has been used by aggrieved plaintiffs to sue defendants for, inter alia, insider trading,⁽⁷²⁾ corporate mismanagement involving deception,⁽⁷³⁾ manipulative conduct,⁽⁷⁴⁾ and false SEC filings.⁽⁷⁵⁾

b.  Expansion into Secondary Actors

The proliferation of section 10(b) and Rule 10b-5 litigation has broadened the class of defendants beyond those who simply violate the statutory provisions of section 10(b) and Rule 10b-5.⁽⁷⁶⁾ Defendants now include persons who contribute in an ancillary manner to the violation, such as aiders and abettors, conspirators, or employers.⁽⁷⁷⁾ This form of liability--commonly referred to as secondary liability--is broadly defined as "the judicially implied civil liability which has been imposed on defendants who have not themselves been held to have violated the express prohibition of the securities statute at issue, but have some relationship with the primary wrongdoer."⁽⁷⁸⁾

Because of the complexity and intricacies associated with most securities fraud cases, there are numerous participants--both primary and secondary persons⁽⁷⁹⁾--to whom some degree of responsibility can be attributed.⁽⁸⁰⁾ Accordingly, courts have been willing to subject primary and secondary persons to liability in order to compensate aggrieved plaintiffs.⁽⁸¹⁾ Too often, the direct perpetrators are left with no resources with which to compensate the victims.⁽⁸²⁾ Perhaps because the investor is considered more innocent than the peripheral secondary person who provided substantial assistance to the fraud, courts have subjected the peripheral defendant to joint and several liability.⁽⁸³⁾ Although it appears inequitable to punish the peripheral actor for the actions of another, this possibility provides the investor with a chance to be made whole.⁽⁸⁴⁾

B.  The Development of Civil Aiding and Abetting Liability in Section 10(b) and Rule 10b-5

1.  Historical Antecedents

The section 10(b) doctrine of civil aiding and abetting has antecedents in both civil and criminal law.⁽⁸⁵⁾ The first known cases of aiding and abetting liability in a securities law context were noted in SEC disciplinary proceedings⁽⁸⁶⁾ and in SEC injunctions.⁽⁸⁷⁾ These early cases were predicated upon criminal notions of aiding and abetting.⁽⁸⁸⁾ Aiding and abetting liability in a private, civil context, however, developed not from its criminally-based judicial precedent.⁽⁸⁹⁾ Rather, courts have analogized from general tort principles and public policy to impose civil liability for aiding and abetting a violation of section 10(b) and Rule 10b-5.⁽⁹⁰⁾

a.  Criminal Origins

In 1908, Congress passed legislation that criminalized the act of aiding and abetting another who criminally violates a federal statute.⁽⁹¹⁾ With the federal statute prohibiting aiding and abetting as its guide, early courts, such as the SEC v. Timetrust, Inc. court,⁽⁹²⁾ believed that the SEC should be equipped with the means to enjoin criminal activity in securities cases.⁽⁹³⁾ In Timetrust, the court granted an injunction against alleged principal violators and certain aiders and abettors.⁽⁹⁴⁾ The court found "no good reason . . . why this same rule should not apply in an injunctive proceeding to restrain a violation of the [section 10(b)] statute."⁽⁹⁵⁾ As for the aiders and abettors, the court found "ample authority to support the validity of a suit to enjoin persons who are aiding and abetting the commission of unlawful acts."⁽⁹⁶⁾

Although courts more recently have recognized the criminal notions of section 10(b) aiding and abetting,⁽⁹⁷⁾ the development of a private civil remedy has largely been independent of its criminal law origins.⁽⁹⁸⁾ In the criminal law context, a defendant aids and abets another's criminal act if the defendant "`in some sort associate[s] himself with the venture, that he participate[s] in it as in something that he wishe[d] to bring about, [and] that he [sought] by his action to make it succeed.'"⁽⁹⁹⁾ With its focus on the intent of the aider and abettor, some courts found these elements too stringent for the basis of a private civil remedy.⁽¹⁰⁰⁾ A civil remedy generally seeks to apportion responsibility for harm, not to impose criminal sanctions for impermissible conduct.⁽¹⁰¹⁾ Moreover, the Supreme Court has expressed its reluctance to infer a private remedy from a criminal statute.⁽¹⁰²⁾

b.  Common Law Tort Origins

The implied private remedy for aiding and abetting under section 10(b) emanates primarily from general tort principals.⁽¹⁰³⁾ Under the umbrella of joint tortfeasor liability,⁽¹⁰⁴⁾ civil aiding and abetting in the securities law context emerged from section 876 of the Restatement of Torts.⁽¹⁰⁵⁾ Section 876 provides the following:

For harm resulting to a third person from the tortious conduct of another, a person is liable if he

(a) orders or induces such conduct, knowing of the conditions under which the act is done or intending the consequences which ensue, or

(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or

(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.⁽¹⁰⁶⁾

i.  Brennan v. Midwestern United Life Insurance Co.: The Seminal Opinion

The first case to recognize an implied private cause of action for aiding and abetting under section 10(b) and Rule 10b-5 was Brennan v. Midwestern United Life Insurance Co.⁽¹⁰⁷⁾ Brennan is considered to be the seminal opinion for section 10(b) and Rule 10b-5 aiding and abetting liability because it best articulates its general tort principle justification.⁽¹⁰⁸⁾

In Brennan, a stockbroker was accused of manipulation and misrepresentation in connection with the sale of defendant Midwestern's publicly traded securities, for which Midwestern was the acting transfer agent.⁽¹⁰⁹⁾ According to the complaint, the broker used the securities for improper purposes and later made fraudulent misrepresentations when he failed to deliver $2,900,000 of defendant's securities.⁽¹¹⁰⁾ The complaint alleged that Midwestern knew of the broker's activities but nonetheless permitted the activities to continue when it failed to report the broker to either the Indiana Securities Commission or to the SEC.⁽¹¹¹⁾ By permitting the activity to continue, it was argued, Midwestern benefited by the artificial mark-up of its stock price.⁽¹¹²⁾

The district court rejected Midwestern's assertion that "nothing in the statute [or legislative history] indicat[ed] a Congressional intent to impose civil liability on persons aiding and abetting violations of Section 10(b) and Rule 10b-5."⁽¹¹³⁾ Instead, the court, relying upon section 876 of the Restatement of Torts,⁽¹¹⁴⁾ and the common law maxim ubi jus ibi remedium--where there is a right there is a remedy--found "general principles of tort law" persuasive.⁽¹¹⁵⁾ Furthermore, aiding and abetting was a "logical and natural complement" to the implied private right under Rule 10b-5 established by Kardon v. National Gypsum Co.⁽¹¹⁶⁾ The court reasoned that the implied private remedy furthered the basic purposes of the 1934 Act and that "[a]ppropriate general principles of law should continue to guide the development of federal common law remedies under Section 10(b) and Rule 10b-5."⁽¹¹⁷⁾ A statute, the Brennan court reasoned,

with a broad and remedial purpose such as the Securities Exchange Act of 1934 should not easily be rendered impotent to deal with new and unique situations within the scope of the evils intended to be eliminated. In the absence of a clear legislative expression to the contrary, the statute must be flexibly applied so as to implement its policies and purposes.⁽¹¹⁸⁾

2.  Pre-Central Bank: Reconciling the Elements

Soon after the Brennan opinion, federal courts began to apply general tort principles to imply an aiding and abetting cause of action under section 10(b) and Rule 10b-5.⁽¹¹⁹⁾ The elements that subsequently emerged from Brennan were as follows: "(1) the existence of a securities law violation by a primary (as opposed to the aiding and abetting) party; (2) `knowledge' of this violation on the part of the aider and abettor; and (3) `substantial assistance' by the aider and abettor in the achievement of the primary violation."⁽¹²⁰⁾ Although the elements set forth the rubric in which aiding and abetting liability has been imposed, courts have differed markedly with respect to the degree of proof needed to sustain the knowledge and substantial assistance requirements.⁽¹²¹⁾ Some courts have subsequently intertwined the second and third elements, thereby creating a sliding scale-type analysis.⁽¹²²⁾ The Seventh Circuit subscribes to a different theory altogether.⁽¹²³⁾ Notwithstanding the various approaches of implying aiding and abetting liability under section 10(b) and Rule 10b-5, lower courts have agreed on the general framework from which to apply the private remedy.

The existence of a primary violation is the lone element consistently applied by all federal circuits.⁽¹²⁴⁾ For an aiding and abetting complaint to proceed, the plaintiff must prove that an independent, illegal act has occurred in violation of section 10(b) and Rule 10b-5.⁽¹²⁵⁾ Some courts have noted that a plaintiff is not obliged to sue or even to know the identity of the primary actor.⁽¹²⁶⁾ Of the three elements necessary for an aiding and abetting cause of action, this first element is the least controversial.⁽¹²⁷⁾

Imposition of civil aiding and abetting liability under section 10(b) and Rule 10b-5 requires knowledge on behalf of the secondary actor.⁽¹²⁸⁾ Generally, courts have interpreted the knowledge requirement to mean "scienter"⁽¹²⁹⁾--the state of mind necessary to impose liability for primary section 10(b) violations established by the Supreme Court in Ernst & Ernst v. Hochfelder.⁽¹³⁰⁾ Moreover, including scienter within the section 10(b) aiding and abetting framework has ensured that an individual sufficiently remote from the fraudulent activity is not swept into the 1934 Act's broad remedial purposes.⁽¹³¹⁾ Accordingly, courts have held that actual knowledge, or at a minimum, knowing assistance, or recklessness in not knowing, was required to sustain an aiding and abetting claim.⁽¹³²⁾

For primary violations of section 10(b), most courts have found that recklessness is sufficient to establish scienter.⁽¹³³⁾ The Supreme Court, however, has yet to address the issue. Without direction and guidance from the Court, the application of recklessness in sustaining scienter as a state of mind has developed incongruently among the circuits.⁽¹³⁴⁾ Some courts have considered recklessness to satisfy the "knowledge" element only if the facts have involved special circumstances, such as a recognized duty to act or disclose.⁽¹³⁵⁾ Courts have also found recklessness to constitute scienter if the aider and abettor reasonably foresaw that the plaintiff would rely upon his or her acts, or if the aider and abettor received a benefit from the fraud.⁽¹³⁶⁾ Not all courts, however, have needed special circumstances in order to sustain recklessness as sufficient scienter. Some courts have applied the recklessness standard irrespective of special circumstances.⁽¹³⁷⁾ Furthermore, some courts have distinguished the level of knowledge required when the aider and abettor's conduct was inaction rather than action.⁽¹³⁸⁾ As a result, varying degrees of scienter have emerged to satisfy the knowledge requirement.

Finally, the third element necessary to impose aiding and abetting liability is to establish that the aider and abettor provided substantial assistance to the primary violation.⁽¹³⁹⁾ It is not enough to simply know of the existence of fraud.⁽¹⁴⁰⁾ Substantial assistance, however, does not have to be so important to the fraudulent activity that it could not be consummated without it.⁽¹⁴¹⁾ Generally, the substantial assistance test is one of proximate cause.⁽¹⁴²⁾ To assist in determining whether the aider and abettor's assistance was substantial, some courts have set forth the following factors: "(1) the amount of assistance given by the defendant, (2) his presence or absence at the time of the tort, (3) his relation to the other person, and (4) his state of mind."⁽¹⁴³⁾ These important considerations diminish the likelihood that ministerial assisters would be found culpable under the "catch-all" Rule.⁽¹⁴⁴⁾ Although not all courts employ the four-part consideration test, all courts agree that the assistance to the fraudulent activity must be substantial in order to bind the aider and abettor for injuries caused by the fraudulent activity.⁽¹⁴⁵⁾

3.  The Misplaced Doctrine: A Supreme Court Preview of Aiding and Abetting Liability and Implied Private Rights

The Supreme Court has followed a different approach with respect to implied private remedies than its subordinate colleagues.⁽¹⁴⁶⁾ In J.I. Case Co. v. Borak,⁽¹⁴⁷⁾ the Court justified an implied private right of action under section 14(a) of the 1934 Act⁽¹⁴⁸⁾ not by general tort principles, but rather as a necessary supplement to SEC enforcement efforts.⁽¹⁴⁹⁾ The Borak Court believed that courts had a "duty . . . to be alert to provide such remedies as are necessary to make effective the congressional purpose."⁽¹⁵⁰⁾ The importance of the Borak rationale was narrowed eleven years later when the Court imposed a general four-part test applicable to implied private remedies in Cort v. Ash.⁽¹⁵¹⁾ Holding that there was no implied private cause of action under the Federal Election Statute, the Court's decision marked a shift in judicial ideology when it abstained from implying the proposed private right of action unlike so many lower courts before it.⁽¹⁵²⁾

Just four years after Cort, the Court narrowed further the criterion for determining when an implied remedy may be imposed.⁽¹⁵³⁾ In Touche Ross & Co. v. Redington,⁽¹⁵⁴⁾ the Court rejected implying a private cause of action under section 17(a) of the 1934 Act.⁽¹⁵⁵⁾ In doing so, Justice Rehnquist wrote that the justification of implied remedies upon general tort principles was "entirely misplaced."⁽¹⁵⁶⁾ Furthermore, any "generalized references to the `remedial purposes' of the 1934 Act will not justify reading a [statutory] provision `more broadly than its language and the statutory scheme reasonably permit.'"⁽¹⁵⁷⁾ For the Court, the appropriate test in deciding whether to imply such a remedy was one of statutory construction.⁽¹⁵⁸⁾ Simply because a "federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person."⁽¹⁵⁹⁾

The Court then recapitulated its textual approach to implied remedies in Transamerica Mortgage Advisors, Inc. v. Lewis.⁽¹⁶⁰⁾ Holding that there exists no implied private remedy under § 206 of the Investment Advisors Act of 1940,⁽¹⁶¹⁾ the Court stated: "what must ultimately be determined is whether Congress intended to create the private remedy asserted. . . . Accordingly, we begin with the language of the statute itself."⁽¹⁶²⁾ Although the Court acknowledged that previous Supreme Court opinions placed "considerable emphasis upon the desirability of implying private rights of action in order to provide remedies thought to effectuate the purposes of a given statute," the Court implied that it would no longer adhere to this posture.⁽¹⁶³⁾

Application of a textual analysis, however, has not been confined solely to implying private rights under the federal securities laws. The ascertainment of the elements of a section 10(b) and Rule 10b-5 cause of action has also been subject to a textual analysis.⁽¹⁶⁴⁾ Some commentators, therefore, have suggested that secondary liability in general, and aiding and abetting liability in particular, has no justifiable basis under section 10(b).⁽¹⁶⁵⁾ Although several courts have subsequently questioned the continued propriety of the implied private right, no court has abolished the implied cause of action.⁽¹⁶⁶⁾ In fact, the Seventh Circuit in Robin v. Arthur Young & Co.,⁽¹⁶⁷⁾ stated that it would uphold the section 10(b) aiding and abetting doctrine because of more than twenty years of judicial precedent.⁽¹⁶⁸⁾ The court of appeals stated that it would continue to recognize the implied private cause of action until the Supreme Court instructed otherwise.⁽¹⁶⁹⁾

  Central Bank of Denver v. First Interstate Bank of Denver

A. Facts

In June 1988, Colorado Springs-Stetson Hills Public Building Authority (the Authority) issued $11 million in bonds to public investors.⁽¹⁷⁰⁾ This 1988 bond offering was subsequent to a $15 million bond offering in 1986.⁽¹⁷¹⁾ Both offerings were issued in order to finance public improvements at Stetson Hills, a planned residential and commercial development in Colorado Springs, Colorado.⁽¹⁷²⁾ Petitioner Central Bank was the indenture trustee for both issues.⁽¹⁷³⁾ In accordance with the bond covenants, the bonds were secured by landowner assessment liens that required the underlying parcel to be worth, at a minimum, 160% of the bonds' outstanding principal and interest.⁽¹⁷⁴⁾ The developer of Stetson Hills was required to demonstrate annually that the 160% test was being met.⁽¹⁷⁵⁾

Prior to the June offering in January 1988, Central Bank received from the developer of Stetson Hills an updated appraisal for the land securing the 1986 bond issue and the land proposed to secure the 1988 bond issue.⁽¹⁷⁶⁾ The 1988 appraisal reported land values essentially unchanged from the earlier 1986 appraisal.⁽¹⁷⁷⁾ The senior underwriter of the 1986 bond issue challenged the appraisal in a letter sent to Central Bank alleging that the developer was not satisfying the covenant's 160% test.⁽¹⁷⁸⁾ The letter explained that Colorado Springs had experienced appreciable declines in property values since 1986 and that Central Bank's appraisal information was sixteen months old.⁽¹⁷⁹⁾

Central Bank initiated its own investigation by appointing an in-house appraiser to review the 1988 appraisal.⁽¹⁸⁰⁾ The Bank's representative found the 1988 appraised land values to be "optimistic," and recommended that Central Bank appoint an outside appraiser to conduct an independent review.⁽¹⁸¹⁾ Central Bank agreed and in March 1988 notified the developer.⁽¹⁸²⁾ The developer, however, contested the Bank's decision, characterizing the underwriters' concerns as "unfounded."⁽¹⁸³⁾ Following several meetings and an exchange of written correspondence, Central Bank agreed to delay the independent review until the end of the 1988 calendar year--six months after the public distribution of the bonds.⁽¹⁸⁴⁾ Once the independent review began in December, the Authority refused to cooperate.⁽¹⁸⁵⁾ When the investors were notified of this technical default, the Authority ceased making principal and interest payments on the 1988 bond issue.⁽¹⁸⁶⁾

Two participants in the 1988 offering, First Interstate Bank of Denver (First Interstate) and Jack Naber (Respondents), purchased $2.1 million of the 1988 bonds.⁽¹⁸⁷⁾ Both parties sued the Authority, a former Director of the Authority, two underwriters, and Central Bank, for violations of section 10(b) of the 1934 Act.⁽¹⁸⁸⁾ Plaintiff's complaint alleged that Central Bank was "secondarily liable under section 10(b) for its conduct in aiding and abetting the fraud."⁽¹⁸⁹⁾

B.  Procedural History

Respondents filed their initial complaint in United States District Court for the District of Colorado.⁽¹⁹⁰⁾ Chief Judge Sherman G. Finesilver granted summary judgment for defendants Central Bank and Roy I. Pring, the former Director of the Authority.⁽¹⁹¹⁾ On appeal, the United States Court of Appeals for the Tenth Circuit reversed and remanded.⁽¹⁹²⁾ Applying the elements set forth in Farlow v. Peat, Marwick, Mitchell & Co.,⁽¹⁹³⁾ the court determined that Central Bank could be found liable for aiding and abetting under section 10(b) and SEC Rule 10b-5.⁽¹⁹⁴⁾ The court held that Central Bank's conduct in delaying the independent review of the appraisal "an extreme departure from the standards of ordinary care, and which present[ed] a danger . . . that [wa]s either known to the defendant or [wa]s so obvious that the actor must have been aware of it."⁽¹⁹⁵⁾ Purporting to rely upon the Ninth Circuit opinion Levine v. Diamanthuset⁽¹⁹⁶⁾ and the Eighth Circuit opinion FDIC v. First Interstate Bank of Des Moines,⁽¹⁹⁷⁾ the Pring court found that when the defendant engaged in an affirmative act, recklessness was sufficient to establish scienter notwithstanding the absence of a legal duty to act.⁽¹⁹⁸⁾

On June 7, 1993, the United States Supreme Court agreed to consider whether reckless conduct could establish scienter despite the absence of a preexisting duty to act or disclose.⁽¹⁹⁹⁾ Not satisfied with the recklessness issue, however, the Court, sua sponte, requested the parties to first brief and argue "whether there is an implied private right of action for aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5."⁽²⁰⁰⁾ The SEC and the United States Department of Justice urged the Court to grant certiorari to reconcile the conflicting views among the circuits.⁽²⁰¹⁾ Their amicus curiae brief urged the Court to find that "recklessness is an appropriate standard of scienter in all aiding and abetting cases in which the defendant has affirmatively acted to assist the primary violation in some way."⁽²⁰²⁾ The parties and amici--assuming the very existence of the judicially implied remedy--were blind-sided by the Court's holding that no such implied remedy exists under section 10(b).

C.  Majority Opinion

In a 5-4 opinion, Justice Kennedy, writing for the majority,⁽²⁰³⁾ found no implied private remedy to sue for aiding and abetting under section 10(b).⁽²⁰⁴⁾ Applying a strict textual analysis and rejecting congressional intent, subsequent legislative history and public policy arguments, the Court reversed the judgment of the Tenth Circuit Court of Appeals and upheld the district court's granting of summary judgment for Central Bank.⁽²⁰⁵⁾

1.  The Controlling Text of Section 10(b)

In section 10(b) cases, Justice Kennedy distinguished the Court's function of determining the elements of the section 10(b) cause of action from determining whether the alleged conduct was prohibited by the scope of section 10(b).⁽²⁰⁶⁾ With respect to the prohibited scope of conduct under section 10(b), the text of the statute controlled the Court's decision.⁽²⁰⁷⁾ Support for its textual disposition, Justice Kennedy noted,⁽²⁰⁸⁾ came from Ernst & Ernst v. Hochfelder,⁽²⁰⁹⁾ Santa Fe Industries, Inc. v. Green⁽²¹⁰⁾ and Chiarella v. United States.⁽²¹¹⁾ Application of a statutory analysis in this case, however, "bode[d] ill for respondents since the language of Section 10(b) does not mention the terms aiding and abetting."⁽²¹²⁾

Justice Kennedy observed that section 10(b) only prohibits manipulative or deceptive acts in connection with the purchase or sale of securities.⁽²¹³⁾ Since aiding and abetting falls short of manipulative or deceptive conduct, he refused to extend the section 10(b) language to prohibit conduct not expressed in the text of the statute.⁽²¹⁴⁾ Expansion of the statute, Justice Kennedy reasoned, would "`add a gloss to the operative language of the statute quite different from its commonly accepted meaning.'"⁽²¹⁵⁾ Kennedy found additional support for a textual analysis from other provisions of the securities acts as well.⁽²¹⁶⁾ The majority, therefore, reached the "uncontroversial conclusion, accepted even by those courts recognizing a Section 10(b) aiding and abetting cause of action, that the text of the 1934 Act does not itself reach those who aid or abet a Section 10(b) violation."⁽²¹⁷⁾ Unlike the federal courts before it, however, the Supreme Court disposed of the case.⁽²¹⁸⁾

The SEC and Respondents urged the Court to adopt the section 10(b) statutory terms "directly or indirectly"⁽²¹⁹⁾ to justify an aiding and abetting civil remedy.⁽²²⁰⁾ Characterizing the argument as "novel," Justice Kennedy observed that federal courts that recognized civil aiding and abetting liability did so without broadly interpreting the term "indirectly."⁽²²¹⁾ Furthermore, the majority believed that aiding and abetting liability would extend beyond persons who indirectly engaged in the proscribed activity.⁽²²²⁾ The majority reasoned that civil aiding and abetting liability would attach not only to those indirectly involved in fraudulent activity, but also to those persons who simply provided a degree of aid to those who actually engaged in the proscribed activity.⁽²²³⁾ In addition, Justice Kennedy noted that the terms "directly and indirectly" were found in other provisions of the 1934 Act, but failed to impose aiding and abetting civil liability in those areas.⁽²²⁴⁾ The majority, therefore, rejected the "novel" arguments of the SEC and Respondents, and maintained its resolution that the text of section 10(b) was controlling and dispositive.⁽²²⁵⁾

2.  Congressional Intent

Even if the statutory text did not resolve the issue, the Court pointed out that a congressional intent analysis would have yielded the same result.⁽²²⁶⁾ When the text of section 10(b) fails to resolve the particular issue, the Court attempts to infer "`how the 1934 Congress would have addressed the issue had the [Rule] 10b-5 action been included as an express provision in the 1934 Act.'"⁽²²⁷⁾ By examining the express causes of action within both the 1933 and 1934 Acts, the Court inferred that the 73rd Congress would have designed a private section 10(b) right of action in a similar manner.⁽²²⁸⁾ A survey of the express causes of action, however, failed to reveal imposition of liability for those who aided or abetted securities violations.⁽²²⁹⁾ The majority reasoned, therefore, that since Congress failed to "attach private aiding and abetting liability to any of the express causes of action in the securities Acts . . . [it could be inferred that Congress] likely would not have attached aiding and abetting liability to § 10(b), had it provided a private § 10(b) cause of action."⁽²³⁰⁾ The majority concluded that a decision to recognize liability for aiding and abetting under section 10(b) would be "anomalous," since the defendant class would then extend beyond the parameters specified for analogous express causes of action.⁽²³¹⁾

Respondents and the SEC urged the Court to recognize the implied private remedy by justifying its existence via a broad-based congressional intent.⁽²³²⁾ Respondents argued that the 73rd Congress legislated with an understanding that the doctrine of aiding and abetting was well established in criminal and civil actions.⁽²³³⁾ Since Congress is presumed to have been aware of the developments in the common law which the federal securities acts were designed to buttress, it is unlikely that Congress would have intended to exclude aiding and abetting from the general anti-fraud provisions of the 1934 Act.⁽²³⁴⁾

The majority, however, rejected the broad-based congressional intent argument.⁽²³⁵⁾ Justice Kennedy initially questioned whether civil aiding and abetting liability was, in fact, well established in the common law by 1934.⁽²³⁶⁾ Additionally, he noted that Congress has not enacted a general civil aiding and abetting statute like its criminal aiding and abetting counterpart.⁽²³⁷⁾ Rather, Justice Kennedy noted, for aiding and abetting in civil suits, Congress has taken a statute-by-statute approach.⁽²³⁸⁾ By referring to the Internal Revenue Code,⁽²³⁹⁾ and the Commodity Exchange Act⁽²⁴⁰⁾--which specifically provide for aiding and abetting liability--the majority reasoned that Congress knew how to impose the private remedy if it so desired.⁽²⁴¹⁾ In addition, the Court noted, there is no presumption that a plaintiff may sue aiders and abettors when Congress enacts a statute under which a person may sue and recover damages from a private defendant for the defendant's violation of a statutory provision.⁽²⁴²⁾ Moreover, the majority pointed to § 20 of the 1934 Act as an example of secondary liability expressly provided for by Congress.⁽²⁴³⁾ The Court noted that an affirmative act of Congress to impose a single form of secondary liability indicated "a deliberate congressional choice with which the courts should not interfere."⁽²⁴⁴⁾ In sum, the majority concluded that it was "not plausible to interpret the statutory silence as tantamount to an implicit congressional intent to impose section 10(b) aiding and abetting liability."⁽²⁴⁵⁾

3.  Subsequent Legislative History

Respondents argued that post-1934 congressional inaction was a manifestation of congressional intent to adopt the judicially imposed private remedy.⁽²⁴⁶⁾ Since 1966, when courts first began to interpret section 10(b) to include civil aiding and abetting, Congress has amended the federal securities laws, but has left the judicially implied private remedy intact.⁽²⁴⁷⁾ For instance, when Congress comprehensively reviewed and thereafter amended the federal securities laws in 1975, it purposely elected not to abolish the implied remedy that had been recognized at that time in ten federal circuits.⁽²⁴⁸⁾ Thus, by its silence, Congress had acquiesced to the judicially implied remedy.⁽²⁴⁹⁾

Although the majority acknowledged that Supreme Court decisions have been inconsistent with respect to this argument, the majority nonetheless rejected it.⁽²⁵⁰⁾ Justice Kennedy observed that silent acquiescence has inherent limitations as an expression of congressional intent.⁽²⁵¹⁾ "`It is "impossible to assert with any degree of assurance that congressional failure to act represents" affirmative congressional approval of the [courts'] statutory interpretation. . . .'"<sup>(252)</sup> The majority concluded that "`[c]ongressional inaction cannot amend a duly enacted statute.'"⁽²⁵³⁾

Central Bank argued that in 1957, 1959, and 1960, legislation was proposed to amend the federal securities laws to prohibit aiding and abetting a violation of the 1934 Act.⁽²⁵⁴⁾ The legislation was never enacted.⁽²⁵⁵⁾ Justice Kennedy, however, noted "that failed legislative proposals [were] `a particularly dangerous ground on which to rest an interpretation of a prior statute.'"⁽²⁵⁶⁾ He noted that congressional inaction may have materialized because of an impression that the existing legislation had already incorporated the changes.⁽²⁵⁷⁾ Consequently, Central Bank's arguments were equally non-persuasive.

As a general matter, Justice Kennedy wrote, congressional inaction "arguments deserve little weight in the interpretive process."⁽²⁵⁸⁾ Furthermore, the judicially created remedy existed without the express recognition of the Supreme Court.⁽²⁵⁹⁾ Accordingly, congressional inaction would not overcome the controlling disposition of the section 10(b) text.⁽²⁶⁰⁾

4.  Public Policy

Public policy arguments advanced by Respondents and the SEC likewise failed to persuade the majority.⁽²⁶¹⁾ The SEC argued that aiding and abetting liability "deter[red] secondary actors from contributing to fraudulent activities and ensur[ed] that defrauded plaintiffs are made whole."⁽²⁶²⁾ In disposing of these policy arguments, the majority stated that "[p]olicy considerations cannot override our interpretation of the text and structure of the Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result `so bizarre' that Congress could not have intended it."⁽²⁶³⁾ The majority pointed out that policy arguments could be made against section 10(b) civil liability for aiding and abetting.⁽²⁶⁴⁾ Justice Kennedy wrote that "[s]econdary liability for aiders and abettors exacts costs that may disserve the goals of fair dealing and efficiency in the securities markets."⁽²⁶⁵⁾ To support this proposition, the majority asserted the following:

[T]he rules for determining aiding and abetting liability [were] unclear, in "an area that demands certainty and predictability." . . . Because of the uncertainty of the governing rules, entities subject to secondary liability as aiders and abettors may find it prudent and necessary, as a business judgment, to abandon substantial defenses and to pay settlements in order to avoid the expense and risk of going to trial.

In addition, "litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general." Litigation under 10b-5 thus requires secondary actors to expend large sums even for pretrial defense and the negotiation of settlements.

This uncertainty and excessive litigation can have ripple effects. For 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. In addition, the increased costs incurred by professionals because of the litigation and settlement costs under 10b-5 may be passed on to their client companies, and in turn incurred by the company's investors, the intended beneficiaries of the statute.⁽²⁶⁶⁾

The point, asserted the majority, was not to exchange competing policy arguments, but to demonstrate that there was insufficient evidence from which to infer that the 1934 Congress had intended the imposition of Section 10(b) civil aiding and abetting liability.⁽²⁶⁷⁾

5.  Criminal Analogy

At oral argument, the SEC urged the Court to adopt civil aiding and abetting liability from the criminal aiding and abetting statutory counterpart.⁽²⁶⁸⁾ An aider and abettor of a criminal violation of any provision of the 1934 Act, including section 10(b), is liable under the criminal aiding and abetting statute.⁽²⁶⁹⁾ Based on this fact, the SEC urged the Court to infer a private right of action from the federal criminal aiding and abetting prohibition.⁽²⁷⁰⁾ Unwilling to infer the private remedy on this basis, the majority reasoned that to do so would imply a private right of action for every provision of the 1934 Act.⁽²⁷¹⁾ Justification on this basis "would work a significant shift in settled interpretive principles regarding implied causes of action."⁽²⁷²⁾ The majority, therefore, declined to rely on the criminal aiding and abetting statute to impose a private civil remedy for aiding and abetting under Section 10(b).⁽²⁷³⁾

D.  Dissent

The dissent, written by Justice Stevens,⁽²⁷⁴⁾ criticized the majority's opinion for giving "short shrift to a long history of aider and abettor liability under § 10(b) and Rule 10b-5."⁽²⁷⁵⁾ Although the dissent found the majority's statutory analysis "unexceptionable," it was not persuasive enough to eliminate the judicially imposed private right.⁽²⁷⁶⁾ Justice Stevens accused the majority of "reach[ing] out to overturn a most considerable body of precedent," since it was the Court that questioned the implied private remedy's existence, not the parties.⁽²⁷⁷⁾ The dissent, therefore, would have recognized the implied private remedy deferring to the judgment of lower courts "closer to the times and climate of the 73d Congress" than the present Supreme Court.⁽²⁷⁸⁾

1.  Disturbing Established Precedent

According to Justice Stevens, because hundreds of judicial and administrative proceedings have taken place in every circuit within the federal system, "`settled construction of an important federal statute should not be disturbed unless and until Congress so decides.'"⁽²⁷⁹⁾ Advocating a policy of respect for consistent judicial and administrative interpretations, the dissent insisted that it is the obligation of "elected representatives to assess settled law and to evaluate the merits and demerits of changing it."⁽²⁸⁰⁾ Regardless of whether the rationale of early aiding and abetting liability is now misplaced, the cause of action "fits comfortably within the statutory scheme, and . . . has become a part of the established system of private enforcement."⁽²⁸¹⁾ The dissent felt that it was inappropriate for the Court to alter this "established system," resting the duty and obligation upon the elected officials of Congress.⁽²⁸²⁾

2.  Application of a Statutory Analysis

The dissent acknowledged that if the private right of action for aiding and abetting were based upon a securities statute enacted more recently, the majority's textual analysis would be persuasive.⁽²⁸³⁾ Justice Stevens argued, however, that there is a risk of "anachronistic error" in applying the current approach to a statute enacted during a period of liberal construction.⁽²⁸⁴⁾ When the 1934 Act was enacted, lower courts were instructed to employ "`a broader and more liberal interpretation than that to be drawn from mere dictionary definitions of the words employed by Congress.'"⁽²⁸⁵⁾ Justice Stevens concluded, therefore, that application of a strict statutory analysis was inconsistent with the enactment and development of the law.⁽²⁸⁶⁾

A liberal interpretation, the dissent argued, would find a private civil aiding and abetting remedy prescribed in the text of section 10(b).⁽²⁸⁷⁾ The language "`any person'" and "`directly or indirectly'"--if read broadly enough--would prescribe liability in light of the acknowledged purpose to strengthen the anti-fraud provisions of the common law.⁽²⁸⁸⁾ Furthermore, Justice Stevens distinguished the section 10(b) cases that the majority had used to support its controlling textual disposition by noting that none of these cases had a settled construction of law.⁽²⁸⁹⁾ Applying the textual analysis to the section 10(b) implied remedy, the dissent reasoned, was inconsistent with judicial precedent.⁽²⁹⁰⁾

3.  Evidence of Congressional Approval and Further Support

For Justice Stevens, there was ample support for a section 10(b) implied private remedy for aiding and abetting.⁽²⁹¹⁾ For instance, the comprehensive 1975 Securities Act Amendments left untouched the body of law recognizing civil aiding and abetting liability under section 10(b) and Rule 10b-5.⁽²⁹²⁾ More recent congressional review of the federal securities laws has also garnered support for the section 10(b) implied private remedy.⁽²⁹³⁾ Justice Stevens noted that there was "an approving reference to `judicial application of the concept of aiding and abetting liability to achieve the remedial purposes of the securities laws'" in a House of Representatives Report "accompanying an aiding and abetting provision of the 1983 Insiders Trading Sanctions Act."<sup>(294)</sup> In addition, § 5 of the Insider Trading and Securities Fraud Enforcement Act of 1988<sup>(295)</sup> "contains an express `acknowledgment' of causes of action implied from . . . this title . . . .'"⁽²⁹⁶⁾

The dissent noted that since Rule 10(b)'s promulgation, the SEC itself has consistently understood civil aiding and abetting liability to exist.⁽²⁹⁷⁾ Because the SEC is entrusted with enforcing the federal securities laws, Justice Stevens inferred that the Court should defer to its judgment.⁽²⁹⁸⁾ After all, the dissent maintained, the SEC had urged the Court to adopt the implied aiding and abetting liability, not to reject it.⁽²⁹⁹⁾

4.  The Result: Sweeping Ramifications

Justice Stevens observed that the reasoning employed by the majority will "sweep[] far beyond" the important issues presented in Central Bank.⁽³⁰⁰⁾ Specifically, the dissent claimed, SEC civil enforcement actions for aiding and abetting under section 10(b) and Rule 10b-5 will be eliminated.⁽³⁰¹⁾ This effect was particularly disheartening since the Court was now tinkering with a congressionally mandated agency.⁽³⁰²⁾ Furthermore, the dissent claimed, the other forms of secondary liability were now cast in doubt.⁽³⁰³⁾ These forms of liability, the dissent pointed out, enjoyed similar judicial recognition justified on a basis other than a textual analysis.⁽³⁰⁴⁾

E.  Summary

First and foremost, in section 10(b) cases interpreting the prohibited scope of conduct, the majority found that the text of section 10(b) was controlling.⁽³⁰⁵⁾ Despite the SEC and Respondent's requests that the Court apply a liberal construction to the terms "directly" and "indirectly," the majority was unwilling to expand the literal meaning of the statutory text.⁽³⁰⁶⁾ Prohibited conduct under section 10(b), according to the Court, is confined to manipulative or deceptive behavior.⁽³⁰⁷⁾ Since aiding and abetting falls short of manipulative or deceptive conduct, and the text itself omits the words "aiding" and "abetting," the Court held that this form of secondary liability does not exist within the confines of section 10(b).⁽³⁰⁸⁾ In addition to relying on a plain meaning analysis of the statute, the majority examined congressional intent, subsequent legislative history, and public policy considerations, and concluded that each would have yielded the same result.⁽³⁰⁹⁾ Consequently, according to the Court, a private civil remedy to sue for aiding and abetting liability does not exist under section 10(b) of the 1934 Act.⁽³¹⁰⁾

Justice Kennedy emphasized that the Court's holding, however, did not exonerate altogether secondary actors in the securities markets.⁽³¹¹⁾ If a purchaser or seller of securities is able to apply the elements of a primary violation of Rule 10b-5 to the conduct of a secondary actor, the secondary actor will be liable as a primary violator.⁽³¹²⁾

Justice Stevens's dissent found the holding set forth by the majority to be inconsistent with well-established SEC and judicial precedent.⁽³¹³⁾ Although the dissent agreed that the creation of new rights ought to be left to legislatures, it noted that the Court should avoid "lop[ping] off rights of action that have been recognized for decades, even if the judicial methodology that gave them birth is now out of favor."⁽³¹⁴⁾ The dissent urged caution in narrowly interpreting the Securities Acts because such an interpretation, it maintained, infringed upon the powers of the agency entrusted to enforce the securities laws.⁽³¹⁵⁾ The dissent, consequently, would find an implied private remedy for aiding and abetting under section 10(b) despite an admitted reluctance to imply a cause of action absent instructions from Congress.⁽³¹⁶⁾

  Analysis

This Comment now turns to an analysis of the Supreme Court's holding in Central Bank of Denver v. First Interstate Bank of Denver in light of previous Supreme Court section 10(b) holdings and the development of section 10(b) aiding and abetting liability in the federal system.⁽³¹⁷⁾ Part A will examine the textual analysis used by the majority to dispose of the private remedy under section 10(b).⁽³¹⁸⁾ Part B will explore congressional intent by examining the legislative and subsequent history of the 1934 Act.⁽³¹⁹⁾ Part C will critique the public policy arguments advanced by the majority with particular emphasis on the Court's most recent articulation of section 10(b) public policy.⁽³²⁰⁾ Part D will examine the June 1993 section 10(b) Supreme Court decision, Musick, Peeler & Garrett v. Employers Insurance of Wausau.⁽³²¹⁾ Finally, Part E will discuss the anticipated effects of the majority's holding and the subsequent reaction in the United States Congress.⁽³²²⁾

A.  Justifying a Statutory Construction

When Congress enacted section 10(b) of the 1934 Act, Congress set forth a regulatory provision that only an SEC rule could implement.⁽³²³⁾ That is, unlike the express liability sections that afford investors immediate relief, section 10(b) depended upon SEC administrative rulemaking before the section's prohibitions would be operative.⁽³²⁴⁾ Crafting a statutory provision in this manner enabled the 1934 Act to prohibit fraudulent means or contrivances not readily foreseeable in 1934.⁽³²⁵⁾ Congress, therefore, deliberately set forth language sufficiently broad to accomplish this goal. As one commentator noted, "[t]he abuses to be regulated by the SEC through such [enabling] provisions included conduct which might not be accompanied by fault, as well as conduct which might threaten the public interest only when accompanied by some degree of fault."⁽³²⁶⁾ It is necessary, therefore, to construe the section 10(b) enabling provision flexibly, to ensure the broad, remedial purposes of the 1934 Act. An attempt to construe the statute narrowly would be antithetical to the very purpose of the statute.

Certainly, the courts of appeal and district courts recognized the remedial purposes of the 1934 Act when it implied a private remedy to sue for aiding and abetting under section 10(b) and Rule 10b-5 thereunder.⁽³²⁷⁾ Within ten years of the Brennan decision to imply such a remedy, ten federal circuits followed suit.⁽³²⁸⁾ The implied private remedy thus became an integral component in the complex securities regulatory scheme. In fact, Justice Stevens in his dissenting opinion noted that the Constitution was implicated when the Court eliminated a body of law that was so well established.⁽³²⁹⁾

Aside from the constitutional dimensions, the Court in Central Bank, at a minimum, abandoned self-prescribed rules of statutory construction in cases with well-established law.⁽³³⁰⁾ In Blue Chip Stamps v. Manor Drug Stores,⁽³³¹⁾ Justice Rehnquist wrote "[t]he longstanding acceptance by the courts, coupled with Congress' failure to reject . . . [a] reasonable interpretation of the wording of § 10(b), . . . argues significantly in favor of acceptance of the . . . rule by this Court."⁽³³²⁾ Although admittedly just a guide, settled existence of the law became the Supreme Court's basis for implying the private remedy for primary violations of section 10(b) and Rule 10b-5.⁽³³³⁾ Furthermore, Justice Kennedy, in Musick, Peeler, found that the Court's decision to find an implied private right of contribution under section 10(b) and Rule 10b-5 was "consistent with the rule adopted by the vast majority of courts of appeals and district courts that have considered the question."⁽³³⁴⁾ Because twenty years had elapsed since a right of contribution was first recognized for Rule 10b-5 defendants, and "neither the Securities and Exchange Commission nor the federal courts have suggested that the contribution right detracts from the effectiveness of the 10b-5 implied action or interferes with the effective operation of the securities laws," the Court recognized the implied private remedy.⁽³³⁵⁾ Consistent jurisprudence would dictate that Justice Kennedy accord similar recognition to the well-established body of law for aiding and abetting liability under section 10(b). His comments are particularly important since the implied aiding and abetting right to sue was unequivocally more recognized than its implied right of contribution counterpart.⁽³³⁶⁾

In Central Bank, Justice Kennedy relied heavily on three cases⁽³³⁷⁾ to decide the threshold question of whether an implied private remedy for civil aiding and abetting existed under section 10(b).⁽³³⁸⁾ Distinguishing those cases in which the Court determined the elements of the Rule 10b-5 cause of action from cases that determined the scope of conduct prohibited by Rule 10b-5, Justice Kennedy found only the latter controlled by a statutory analysis.⁽³³⁹⁾ Support for this distinction, he wrote,⁽³⁴⁰⁾ was noted in Ernst & Ernst v. Hochfelder,⁽³⁴¹⁾ Santa Fe Industries, Inc. v. Green,⁽³⁴²⁾ and Chiarella v. United States.⁽³⁴³⁾ According to Justice Kennedy, these cases stood for the proposition that the text of section 10(b) only prohibits "manipulative and deceptive" conduct within the meaning of the statute.⁽³⁴⁴⁾ According to the Court, since the text of section 10(b) omitted the words "aiding and abetting," aiding and abetting was not within the scope of conduct prohibited under section 10(b).⁽³⁴⁵⁾

Justice Kennedy's distinction, of course, is necessary since the text of the statute provides nothing about private causes of action, much less the elements of an implied one.⁽³⁴⁶⁾ The Court's distinction, however, remains unpersuasive.⁽³⁴⁷⁾ Not a single lower court had found such a distinction.⁽³⁴⁸⁾ Furthermore, the cases used by the majority demonstrate that the language of section 10(b) is not sufficiently clear and thus the Court should not have resolved the threshold question by a textual analysis.

In Chiarella v. United States,⁽³⁴⁹⁾ the issue was whether section 10(b) was violated when a person traded securities without disclosing that he or she possessed "inside" information.⁽³⁵⁰⁾ The Chiarella Court held that, absent an independent duty to disclose, there was no violation of section 10(b).⁽³⁵¹⁾ The text of section 10(b), however, states nothing with respect to independent duties of disclosure.⁽³⁵²⁾ In fact, the Chiarella Court acknowledged that "[a]lthough the starting point of our inquiry is the language of the statute, § 10(b) does not state whether silence may constitute a manipulative or deceptive device. . . . [N]either the legislative history nor the statute itself affords specific guidance for the resolution of this case."⁽³⁵³⁾ Without the guidance of the statutory text, therefore, it necessarily follows that the Chiarella Court did not rely upon a textual analysis to dispose of the case.⁽³⁵⁴⁾

In Ernst & Ernst v. Hochfelder,⁽³⁵⁵⁾ the Court addressed whether the statutory text's "manipulative" or "deceptive" language encompassed negligent conduct.⁽³⁵⁶⁾ Reasoning that these express terms inferred a "knowing" or "intentional" conduct, the Court held that negligence was insufficient to meet the threshold scope of conduct prohibited by section 10(b).⁽³⁵⁷⁾ Likewise, in Santa Fe Industries, Inc. v. Green,⁽³⁵⁸⁾ the Court addressed the issue of whether section 10(b) prohibited breaches of fiduciary duty by majority shareholders absent an allegation of misrepresentation or deception.⁽³⁵⁹⁾ The Court held that since the text of the statute prohibited only manipulative or deceptive conduct, the alleged conduct was not prohibited under section 10(b).⁽³⁶⁰⁾ In both of these cases, the Court scrutinized specific express language to interpret whether the proposed conduct fell within the scope of section 10(b).⁽³⁶¹⁾ The text, however, states nothing with respect to negligence or fiduciary duties.⁽³⁶²⁾ Although the Central Bank majority correctly observed that the act of aiding and abetting may not, in itself, be manipulative or deceptive, there is sufficient language in the text to manifest a reasonable inference that aiding and abetting liability is within the contours of section 10(b).⁽³⁶³⁾ Unlike the express terms examined in Ernst & Ernst and Santa Fe, the terms "any person" and "directly or indirectly" are sufficiently ambiguous to dispel the majority's position that the statutory text was controlling.

Furthermore, implying the private remedy for aiding and abetting would not be inconsistent with the Court's holdings in either Ernst & Ernst or Santa Fe. The Ernst & Ernst Court found the language of section 10(b) to "strongly suggest . . . knowing or intentional misconduct."⁽³⁶⁴⁾ This finding would effectively eliminate negligence culpability, but not necessarily eliminate the conduct of all aiders and abettors. Courts in all federal circuits have been applying scienter in aiding and abetting cases since Ernst & Ernst was first decided.⁽³⁶⁵⁾ In Santa Fe, the Court found that section 10(b) "prohibit[s] any conduct not involving manipulation or deception."⁽³⁶⁶⁾ The Court's finding would certainly eliminate many forms of legitimate behavior in the securities markets, but certainly not the behavior of all aiders and abettors. To be sure, aiders and abettors are involved in manipulation or deception or both when they knowingly assist others who perpetrate the fraud.⁽³⁶⁷⁾ Even the Santa Fe Court conceded that Congress "[n]o doubt . . . meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices."⁽³⁶⁸⁾ Eliminating the implied private remedy encourages the ingenious behavior that Congress sought to prohibit. Moreover, the Santa Fe majority noted that "additional considerations" also played a part in its decision.⁽³⁶⁹⁾ If Justice Kennedy purports to rely on Ernst & Ernst, Santa Fe, and Chiarella to control the Court's decision in Central Bank, he would find these cases consistent with implying a private remedy. None of the aforementioned cases required an interpretation of ambiguous terms within the statute.⁽³⁷⁰⁾

B.  Congressional Intent and Subsequent Legislative History

Despite the majority's conclusion that the statute itself resolved the case, Justice Kennedy examined the statute's legislative history to find compelling evidence of congressional intent to not impose aiding and abetting liability under section 10(b).⁽³⁷¹⁾ A look at the very premise of the enabling provision, the 1934 Act, and subsequent legislative history, however, yields a contrary conclusion.

The majority simply failed to consider in its textual analysis the very premise of the 1934 Act. That is, the 1934 Act was a well-conceived, alternative modus operandi to securities regulation achieved by shifting its approach from one of caveat emptor to one of consumer protection.⁽³⁷²⁾ This shift in doctrinal ideology demonstrates that common law protections in 1934 were inadequate, thus necessitating the need to enact more protective measures for investors.⁽³⁷³⁾ By 1934, civil aiding and abetting liability was an integral component of common law fraud and deceit.⁽³⁷⁴⁾ The absence of aiding and abetting liability under section 10(b), therefore, would afford investors less protection than the common law and thus be contrary to the 1934 Act's broad objective to protect investors.⁽³⁷⁵⁾

Examining the 1934 congressional record in order to ascertain congressional intent, however, is no longer necessary, because in 1975, Congress chose to undertake a comprehensive and sweeping examination of the federal securities laws.⁽³⁷⁶⁾ Referred to as the "`most substantial and significant revision of this country's federal securities laws since the passage of the Securities Exchange Act in 1934,'"⁽³⁷⁷⁾ the 1975 congressional amendments provide a more logical approach to discern congressional intent.

The Supreme Court has acknowledged and expressly recognized that Congress is presumed to know the law as it exists.⁽³⁷⁸⁾ A right, therefore, that was judicially created prior to legislative amendments, is presumed to be accepted by Congress if Congress affirmatively elects not to eliminate the judicially imposed remedy.⁽³⁷⁹⁾ The Court in Herman & MacLean v. Huddleston,⁽³⁸⁰⁾ recognized the comprehensive congressional revisions of the 1975 Securities Acts Amendments in which Congress had failed to eliminate the implied Rule 10b-5 cause of action for primary violations as providing further justification for upholding the judicially implied private remedy under section 10(b).⁽³⁸¹⁾ The Herman & MacLean Court stated that

[w]hen Congress acted [to amend the securities laws in 1975], federal courts had consistently and routinely permitted a plaintiff to proceed under § 10(b) even where express remedies . . . were available. In light of this well-established judicial interpretation, Congress' decision to leave § 10(b) intact suggests that Congress ratified the cumulative nature of the § 10(b) action.⁽³⁸²⁾

The Court in Merrill Lynch, Pierce, Fenner & Smith v. Curran⁽³⁸³⁾ arrived at a similar conclusion when it interpreted implied causes of action following the comprehensive 1974 revisions to the Commodity Exchange Act (CEA).⁽³⁸⁴⁾

In Merrill Lynch, the judicially imposed private remedy to sue for violations of the CEA existing prior to the 1974 amendments was presumed to be adopted by Congress when no action was taken to abolish the implied remedy.⁽³⁸⁵⁾ Justice Stevens, writing for a 5-4 majority, stated the following:

In determining whether a private cause of action is implicit in a federal statutory scheme when the statute by its terms is silent on that issue, the initial focus must be on the state of the law at the time the [amended] legislation was enacted. More precisely, we must examine Congress' perception of the law that it was shaping or reshaping. When Congress enacts new legislation, the question is whether Congress intended to create a private remedy as a supplement to the express enforcement provisions of the statute. When Congress acts in a statutory context in which an implied private remedy has already been recognized by the courts, however, the inquiry logically is different. Congress need not have intended to create a new remedy, since one already existed; the question is whether Congress intended to preserve the pre-existing remedy.⁽³⁸⁶⁾

By 1975, courts in ten federal circuits had recognized civil aiding and abetting liability under section 10(b).⁽³⁸⁷⁾ Under the Huddleston and Merrill Lynch test, therefore, a private right of action for aiding and abetting under Rule 10b-5 was either ratified, or created by Congress's inaction. It is true that "[w]hen Congress intends private litigants to have a cause of action to support their statutory rights, the far better course is for it to specify as much when it creates those rights."⁽³⁸⁸⁾ The Court, however, has long recognized that the failure of Congress to act is not reflective of a congressional intent to not have such a remedy available.⁽³⁸⁹⁾

By failing to adopt the Huddleston and Merrill Lynch analysis, the Court does a great disservice to the underlying purpose of the enabling provision of the statute. Congress intended for the SEC and the courts to flexibly construe the text so that the Rule could keep pace with changes in the marketplace.⁽³⁹⁰⁾ Implying a private right to sue for aiding and abetting under section 10(b) was precisely the intent of Congress if the congressionally mandated agency and the courts felt it was necessary to effectuate the broad, remedial purposes of the securities laws.

C.  Public Policy

For Justice Kennedy, the issue was "not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by the statute."⁽³⁹¹⁾ Nevertheless, the Court fashioned its own public policy arguments against recognizing the private aiding and abetting remedy.⁽³⁹²⁾ As one commentator has noted, however, in claiming that aiding and abetting liability creates vexatious lawsuits, inefficiencies in the marketplace, and inhibits financial service providers, the Court articulated "a judicial mood rather than legal analysis."⁽³⁹³⁾ In fact, testimony before the Senate Banking Securities Subcommittee in 1993 appears to contradict the findings of the Court.⁽³⁹⁴⁾ Of the 17,400 companies that filed with the SEC in 1993, less than one percent was subjected to a federal securities class action.⁽³⁹⁵⁾ Furthermore, forty percent of the class actions filed were dismissed on defendants' motions.⁽³⁹⁶⁾ These data hardly support the presence of vexatious lawsuits and inefficient securities markets.

In Central Bank, Justice Kennedy wrote, "[p]olicy considerations cannot override our interpretation of the text and structure of the [1934] Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result `so bizarre' that Congress could not have intended it."⁽³⁹⁷⁾ Just eleven months earlier, however, in Musick, Peeler & Garrett v. Employers Insurance of Wausau,⁽³⁹⁸⁾ Justice Kennedy had relied upon the SEC and the courts to express public policy concerns for not implying a right of contribution under section 10(b) and Rule 10b-5.⁽³⁹⁹⁾ The Court observed that neither the SEC nor the federal courts had "suggested that the [implied] contribution right detracts from the effectiveness of the [Rule] 10b-5 implied action or interferes with the effective operation of the securities laws."⁽⁴⁰⁰⁾

A "detraction" and "interference" standard appears more appropriate for an aiding and abetting implied remedy than rights of contribution, because lower courts have been virtually unanimous in recognizing the implied private aiding and abetting remedy.⁽⁴⁰¹⁾ In contrast, only five circuits had recognized the implied right to contribution prior to Musick, Peeler.⁽⁴⁰²⁾ Accordingly, the appropriate test for Central Bank should have been whether the aiding and abetting liability detracts from the effectiveness of Rule 10b-5's implied action or interferes with the effective operation of the securities markets. Neither the SEC nor the federal courts had suggested this. Moreover, in recent years, and in response to increased global competition, the SEC has undertaken studies to evaluate, critique, and improve the United States securities markets.⁽⁴⁰³⁾ These studies have failed to demonstrate the market observations upon which Justice Kennedy relied in Central Bank.⁽⁴⁰⁴⁾

Securities experts note that the goal of deterring securities fraud garnered little attention in the majority's opinion.⁽⁴⁰⁵⁾ Theoretically, the private remedy deters service providers from assisting fraudulent conduct and thus raises the level of honest dealing in the marketplace.⁽⁴⁰⁶⁾ In addition, however, absent an incentive to the service provider, there will be no intervening force that might prevent the fraud from entering the marketplace.⁽⁴⁰⁷⁾ Although there are various provisions in the securities laws that enable the SEC to review documents before public dissemination,⁽⁴⁰⁸⁾ diminishing resources and voluminous filings render this process ineffective as a feasible deterrent.⁽⁴⁰⁹⁾ Because of the complexities and intricacies associated with securities fraud cases, it is unlikely that government institutions can uncover the fraud before it reaches the marketplace.⁽⁴¹⁰⁾ It is the service provider--whether legal, accounting, or other--to a party engaging, or about to engage, in fraudulent activity, that would typically be the first party to discover the illegal activity.⁽⁴¹¹⁾ With an aiding and abetting cause of action firmly established, these individuals and others thereafter would refuse to provide the assistance needed to consummate the fraud.⁽⁴¹²⁾ Therefore, without the needed services to consummate the fraud, the fraud would never reach the marketplace.⁽⁴¹³⁾ As a result of Central Bank, the most effective opportunity to discover fraudulent activity before it reaches the marketplace is now expunged. This frightening proposition has thus afforded aggrieved investors the same protection they once enjoyed--the protection of caveat emptor.

To be sure, the Supreme Court is not alone in its frustration over the proliferation of implied private remedies under the federal securities laws. Testimony before the Senate Banking Securities Subcommittee from Stuart Kaswell, Senior Vice-President and General Counsel of the Securities Industry Association hailed the Supreme Court's decisions as "`right . . . both because it correctly interpreted Section 10(b) and also because limiting secondary liability represents the best public policy.'"⁽⁴¹⁴⁾ Too often, in complex securities fraud cases, however, direct violators possess little resources to compensate fraud victims.⁽⁴¹⁵⁾ In these cases, aggrieved plaintiffs are left without a remedy despite being more innocent than participants who acted with scienter and provided substantial assistance to fraud perpetrators.⁽⁴¹⁶⁾ It seems unlikely, therefore, that Congress would have favored the fraud participant in Musick, Peeler over the aggrieved investor in a public policy showdown.

D.  Joint Tortfeasors and Implying a Right of Contribution in Musick, Peeler

Prior to Central Bank, the most recent indication of the Supreme Court's approach to section 10(b) cases was in Musick, Peeler & Garrett v. Employers Insurance of Wausau.⁽⁴¹⁷⁾ In Musick, Peeler, Justice Kennedy, writing for a 6-3 majority,⁽⁴¹⁸⁾ held that there was an implied private right of contribution under section 10(b) and Rule 10b-5.⁽⁴¹⁹⁾ Despite the absence of an express right of contribution in the text of section 10(b), the majority implied the private right by examining analogous express causes of action under the securities acts.⁽⁴²⁰⁾

In Musick, Peeler, investors who purchased stock in an initial public offering by the company Cousins Home Furnishings, Inc., filed a class action lawsuit against Cousins, its parent company, several officers and directors of Cousins, and two lead underwriters.⁽⁴²¹⁾ The insurance company of the named defendants settled with plaintiffs for $13.5 million.⁽⁴²²⁾ Thereafter, the insurance company sought contribution from the attorneys and accountants involved in the initial public offering.⁽⁴²³⁾ The United States Court of Appeals for the Ninth Circuit reversed the district court's granting of a motion to dismiss and reaffirmed the implied private right to seek contribution under section 10(b) and Rule 10b-5.⁽⁴²⁴⁾

While rejecting implied rights of contribution under federal law outside the aegis of securities regulation,⁽⁴²⁵⁾ the Supreme Court found such a right under section 10(b) and Rule 10b-5.⁽⁴²⁶⁾ Support for the implied private remedy, however, was not derived from its statutory text.⁽⁴²⁷⁾ Justice Kennedy found that a textual analysis would "yield [] no answer"⁽⁴²⁸⁾ and that it was "futile to ask whether the 1934 Congress . . . displayed a clear intent to create a contribution right collateral to the remedy."⁽⁴²⁹⁾ Furthermore, he maintained, "[t]he private right of action under Rule 10b-5 was implied by the judiciary on the theory courts should recognize private remedies to supplement federal statutory duties, not on the theory Congress had given an unequivocal direction to the courts to do so."⁽⁴³⁰⁾ He reasoned, therefore, that since the judiciary implied the underlying liability in the first place, "to now disavow any authority to allocate it on the theory that Congress has not addressed the issue would be most unfair to those against whom damages [were] assessed."⁽⁴³¹⁾

This reasoning employed by Justice Kennedy was equally applicable in Central Bank, yet was not considered in its analysis. Not only did Congress fail to provide an express cause of action to sue for violations of section 10(b), it also did not provide an express right of contribution, nor did it provide a right to sue aiders and abettors.⁽⁴³²⁾ In this regard, Justice Kennedy was correct in Musick, Peeler that the text itself would yield no answer.⁽⁴³³⁾ If rights of contribution were recognized on the basis that courts created private remedies to supplement the statutory duties, and that it would be unfair to disavow the implied remedy, then it necessarily follows that the aiding and abetting cause of action would be accorded the same interpretive construction.⁽⁴³⁴⁾ Aiding and abetting liability was designed to buttress the remedies available to aggrieved investors--a right more established and recognized than the right of contribution under section 10(b)⁽⁴³⁵⁾--and thus it would be equally unfair to disavow such liability.⁽⁴³⁶⁾ Central Bank appears to redress the misfortunes of the fraud perpetrator against whom damages were assessed rather than the aggrieved victim--a proposition clearly antithetical to the well-established intent of Congress in 1934.⁽⁴³⁷⁾

Under the common law, rights of contribution and aiding and abetting are doctrinal theories encompassed within the broad, general concept of joint tortfeasor liability.⁽⁴³⁸⁾ For each doctrine to be applicable, there must be a primary violation of section 10(b) and Rule 10b-5.⁽⁴³⁹⁾ Accordingly, both doctrines are ancillary to a Rule 10b-5 violation, yet only the implied right of contribution is recognized under section 10(b). It is true that the doctrines are distinguishable because while tortfeasors in rights of contribution cases are direct violators of Rule 10b-5,⁽⁴⁴⁰⁾ in aider and abettor cases,⁽⁴⁴¹⁾ the tortfeasors are secondarily liable. Liability, however, can still be assessed on the basis of fault.⁽⁴⁴²⁾ Aiders and abettors were required to possess the same mental state, thereby reducing the risk that an insignificant peripheral participant would be liable.⁽⁴⁴³⁾ Because of its attributes which are similar to those of implied rights of contribution, consistent interpretive construction should have compelled an implied remedy for aiding and abetting under section 10(b) and Rule 10b-5.

E.  Ramifications

1.  Practical Effects

Undoubtedly, the full impact of the Supreme Court's decision will take years to appreciate. Initially, however, the Court's decision will have broad repercussions. In addition to the elimination of private section 10(b) aiding and abetting cases,⁽⁴⁴⁴⁾ it is unlikely that the SEC will institute civil aiding and abetting enforcement actions under section 10(b).⁽⁴⁴⁵⁾ The Supreme Court has ruled that the elements of the civil section 10(b) implied cause of action were indistinguishable as between the SEC and private litigants.⁽⁴⁴⁶⁾ Although SEC Chairman Arthur Levitt has insisted that the SEC can proceed with section 10(b) aiding and abetting civil actions, it nevertheless amended twenty-six section 10(b) aiding and abetting complaints in Central Bank's immediate aftermath.⁽⁴⁴⁷⁾

In addition to precluding aiding and abetting under section 10(b), the Court's holding will preclude other judicially recognized forms of secondary liability under that section.⁽⁴⁴⁸⁾ It is expected that defiant plaintiffs will thus attempt to repackage former secondary liability claims into primary violations and attempt to discern the import of "any person" and "directly or indirectly" within the meaning of the statute.⁽⁴⁴⁹⁾ Aiding and abetting liability found in other provisions of the Securities Acts are now equally cast in doubt.⁽⁴⁵⁰⁾ Perhaps most disturbing, is the fact that the textual analysis used by the Court is now expected to permeate all securities cases.⁽⁴⁵¹⁾ Already the Court's textual analysis has impacted other areas of federal law.⁽⁴⁵²⁾

2.  Congressional Response

Prior to the November 1994 elections (after which the controlling political party set forth an agenda to reform the securities markets), congressional response to Central Bank seemed to indicate that Congress would at least amend, or at most overturn, the Central Bank decision.⁽⁴⁵³⁾ Although the momentum to reform the nation's securities markets has carried on, restoring a right to sue for aiding and abetting has not. Notwithstanding a presidential veto⁽⁴⁵⁴⁾ and spirited debate,⁽⁴⁵⁵⁾ Congress has reformed the securities markets, but has left untouched the Court's April 1994 decision to eliminate the implied right to sue for aiding and abetting.⁽⁴⁵⁶⁾ Congress did, however, provide the SEC with an express right to sue for aiding and abetting any primary violation under the 1934 Act.⁽⁴⁵⁷⁾ In this new era of unfunded budgets and appropriation cuts,⁽⁴⁵⁸⁾ providing a cause of action for the SEC seems disingenuous in light of preserving the goals set forth by a Congress which experienced, first-hand, the financial debacle of the 1920s and 1930s.

  Conclusion

Central Bank of Denver v. First Interstate Bank of Denver may well become the most disturbing securities law case of this century. In an area that demands certainty and predictability, it is inconsistent Supreme Court jurisprudence that has fostered the uncertainty. For nearly thirty years, all lower courts in the federal system had recognized an implied private right to sue for aiding and abetting under section 10(b) of the 1934 Act and SEC Rule 10b-5 thereunder.⁽⁴⁵⁹⁾ Relying mostly on general tort principles articulated by the Restatement of Torts § 876(b) and the general tort maxim "where there is a right there is a remedy," lower courts found the implied private remedy necessary to effectuate the broad, remedial purposes of the landmark 1934 Act securities legislation.⁽⁴⁶⁰⁾

To illustrate the degree of acceptance that the implied private remedy enjoyed, one need look no further than Petitioner Central Bank in Central Bank of Denver v. First Interstate Bank of Denver.⁽⁴⁶¹⁾ In its writ of certiorari to the United States Supreme Court, Central Bank never questioned the existence of the implied remedy.⁽⁴⁶²⁾ It assumed its viability like so many courts before it, until the Supreme Court, sua sponte, reached out and overturned a well-established body of law.

The inconsistency and confusion that permeates securities regulation is attributed to the Court's ad hoc approach to the federal securities laws. The Court, obviously frustrated with the proliferation of implied private rights, overlooked the historical and legal development of the aiding and abetting doctrine and chose to legislate rather than adjudicate a dispute between two parties--a dispute that did not include the impropriety of the implied cause of action. Until Congress instructs otherwise, however, aggrieved plaintiffs are left with little recourse against fraudulent conduct. By exercising its power to shape the contours of the section 10(b) liability, the Court has effectively chopped a bough from the section 10(b) and SEC Rule 10b-5 judicial oak.

Scott M. Murray^*

1. Central Bank of Denver v. First Interstate Bank of Denver, 114 S. Ct. 1439, 1456-57 (1994) (Stevens, J., dissenting) (citation omitted).

2. Id. at 1457 (Stevens, J., dissenting).

3. 15 U.S.C. §§ 78a-78kk (1994). Section 10(b) provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--

. . . .

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j (1994).

4. SEC Rule 10b-5 provides the following:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light or circumstances under which they were made, not misleading, or

(c) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (1994).

5. The seminal case addressing civil aiding and abetting liability under section 10(b) and Rule 10b-5 was Brennan v. Midwestern United Life Ins. Co., 259 F. Supp. 673 (N.D. Ind. 1966), aff'd 417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S. 989 (1970); see also infra notes 107-18 and accompanying text.

6. See Farlow v. Peat, Marwick, Mitchell & Co., 956 F.2d 982, 986 (10th Cir. 1992); Schatz v. Rosenberg, 943 F.2d 485, 496 (4th Cir. 1991); K & S Partnership v. Continental Bank, N.A., 952 F.2d 971, 977 (8th Cir. 1991); Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991); Fine v. American Solar King Corp., 919 F.2d 290, 300 (5th Cir. 1990); Schlifke v. Seafirst Corp., 866 F.2d 935, 947 (7th Cir. 1989); Schneberger v. Wheeler, 859 F.2d 1477, 1480 (11th Cir. 1988); Moore v. Fenex, Inc., 809 F.2d 297, 303 (6th Cir.), cert. denied, 483 U.S. 1006 (1987); Cleary v. Perfectune, Inc., 700 F.2d 774, 777 (1st Cir. 1983); IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799-800 (3d Cir. 1978). The District of Columbia is the only circuit not to have explicitly recognized a private cause of action for aiding and abetting under section 10(b) and Rule 10b-5. Central Bank of Denver v. First Interstate Bank of Denver, 114 S. Ct. 1439, 1456 n.1 (1994) (Stevens, J., dissenting). District of Columbia courts have, however, suggested that the private remedy exists. See Zoelsch v. Arthur Anderson & Co., 824 F.2d 27, 35-36 (D.C. Cir. 1987). The D.C. Circuit has recognized the implied private remedy for use by the SEC. See Dirks v. SEC, 681 F.2d 824, 844 (D.C. Cir.), rev'd on other grounds, 463 U.S. 646 (1983). Not all federal circuits adhere to the same methodology for determining aiding and abetting liability under section 10(b) and Rule 10b-5. See infra notes 119-45 and accompanying text.

7. Secondary liability has been broadly defined as "the judicially implied civil liability which has been imposed on defendants who have not themselves been held to have violated the express prohibition of the securities statute at issue, but who have some relationship with the primary wrongdoer." Daniel R. Fischel, Secondary Liability Under Section 10(b) of the Securities Act of 1934, 69 Cal. L. Rev. 80, 80 n.4 (1981); see also infra notes 76-78 and accompanying text.

8. See Akin v. Q-L Investments, Inc., 959 F.2d 521 (5th Cir. 1992); Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 652 (9th Cir. 1988), cert. denied, 439 U.S. 1002 (1989); Rudolph v. Arthur Anderson & Co., 800 F.2d 1040, 1045 (11th Cir. 1986), cert. denied, 480 U.S. 946 (1987); Ades v. Deloitte & Touche, 799 F. Supp. 1493 (S.D.N.Y. 1992); In re American Continental Corp./Lincoln Sav. & Loan Sec., 794 F. Supp. 1424, 1442-43 (D. Ariz. 1992); In re Software Toolworks, Inc. Sec. Litig., 789 F. Supp. 1489 (N.D. Cal. 1992), appeal dismissed sub nom. Dannenberg v. Software Toolworks, Inc., 16 F.3d 1073, aff'd in part and rev'd in part, 38 F.3d 1078, opinion amended and superseded on denial of reh'g, 50 F.3d 615 (9th Cir. 1994); Griffin v. McNiff, 744 F. Supp. 1237 (S.D.N.Y. 1990), aff'd, 996 F.2d 303 (1993).

9. See Camp v. Dema, 948 F.2d 455, 463-64 (8th Cir. 1991); Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991); Moore v. Fenex, Inc., 809 F.2d 297 (6th Cir.), cert. denied, 483 U.S. 1006 (1987); Ahmed v. Trupin, 809 F. Supp. 1100 (S.D.N.Y. 1993); Agapitos v. PCM Inv. Co., 809 F. Supp. 939 (M.D. Ga. 1992).

10. See Smith v. American Nat'l Bank & Trust Co., 982 F.2d 936 (6th Cir. 1992); K & S Partnership v. Continental Bank, 952 F.2d 971 (8th Cir. 1991), cert. denied, 505 U.S. 1205 (1992); In re Comtronix Sec. Litig., 831 F. Supp. 1563 (N.D. Ala. 1993); Gray v. First Winthrop Corp., 776 F. Supp. 504 (N.D. Cal. 1991).

11. See Edward J. Yodowitz, Defending Secondary Actors in 10b-5 Litigation After Central Bank of Denver, in Securities Litigation 1994, at 80 (PLI Litig. & Admin. Practice Course Handbook Series No. H-509, 1994). Among the other ancillary professionals sued for aiding and abetting are stock exchanges, stockbrokers and public companies. See Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); Martin v. Pepsi-Cola Bottling Co., 639 F. Supp. 931, 935 (D. Md. 1986); Cumis Ins. Soc'y, Inc. v. E. F. Hutton & Co., 457 F. Supp. 1380, 1383, 1386-87 (S.D.N.Y. 1978); Pettit v. American Stock Exch., 217 F. Supp. 21 (S.D.N.Y. 1963); see also 2 Thomas L. Hazen, The Law of Securities Regulation § 13.16, at 200 n.1 (2d ed. 1990) ("Claims against these aiders and abettors are most often brought to help assure a solvent defendant, since aiders and abettors are jointly and severally liable to plaintiffs for violations and are often better sources from which to obtain monetary awards.").

12. See Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946); see also infra notes 64-65 and accompanying text.

13. See infra notes 68-71 and accompanying text.

14. See infra notes 65-75 and accompanying text.

15. Brennan v. Midwestern United Life Ins. Co., 259 F. Supp. 673 (N.D. Ind. 1966), aff'd, 417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S. 989 (1970).

16. Id. at 680; see also infra notes 113-18 and accompanying text.

17. See 2 Hazen, supra note 11, § 13.16, at 201; Fischel, supra note 7, at 81. The Supreme Court has followed a different path with respect to implied private rights than its subordinate colleagues. See infra notes 146-63 and accompanying text. Since 1975, the United States Supreme Court has narrowly construed implied private rights under the federal securities laws. See 1 Alan R. Bromberg & Lewis D. Lowenfels, Securities Fraud & Commodities Fraud § 2.2(463) (1988); Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 568 (1978); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). In fact, the Court has characterized the use of general tort principles to justify implied rights as "entirely misplaced." Touche Ross & Co., 442 U.S. at 568; see also infra notes 153-59 and accompanying text. Consequently, several courts have questioned the continued viability of the implied § 10(b) aiding and abetting doctrine. See infra notes 166-69 and accompanying text. In addition, several well-respected commentators have suggested that the implied remedy is no longer viable. See Alan R. Bromberg & Lewis D. Lowenfels, Aiding and Abetting Securities Fraud: A Critical Examination, 52 Alb. L. Rev. 637 (1988); Fischel, supra note 7, at 111. But see William H. Kuehnle, Secondary Liability Under the Federal Securities Laws--Aiding and Abetting, Controlling Person, and Agency: Common-Law Principles and the Statutory Scheme, 14 J. Corp. L. 313 (1989); Elizabeth Sager, Comment, The Recognition of Aiding and Abetting in the Federal Securities Laws, 23 Hous. L. Rev. 821 (1986).

For a comprehensive overview of Supreme Court opinions, see 1 Bromberg & Lowenfels, supra, § 2.2(461)-(530). The authors characterized the landmark opinions under Rule 10b-5, the other securities anti-fraud provisions and implied private rights in a period of either Expansion or Contraction. 1 id. The authors noted that the period of expansion commenced with the legislative enactments in 1934 and lasted until approximately 1975. 1 id. From this point, the authors observed, the Supreme Court narrowed its interpretation of Rule 10b-5 and its various attributes to begin, unofficially, a period of contraction, referred to as "the Contraction Era." See 1 id. § 2.2(463), at 2:41. This period extended until 1982, when two United States Supreme Court decisions swayed from the Court's restrictive trend. See Herman & MacLean v. Huddleston, 459 U.S. 375 (1983) (8-0 decision upholding an implied cause of action under Rule 10b-5 for misrepresentations in a registration statement despite section 11 of the 1933 Act expressly providing for a cause of action); Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353 (1982) (5-4 decision upholding implied cause of action under Commodity Exchange Act).

18. See Herman & MacLean v. Huddleston, 459 U.S. 375, 379 n.5 (1983); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 191-92 n.7 (1976).

19. Central Bank of Denver v. First Interstate Bank of Denver, 114 S. Ct. 1439 (1994).

20. Id. at 1455.

21. Id.

22. See Louis Loss & Joel Seligman, Fundamentals of Securities Regulation 1106 (3d ed. 1995) (calling Central Bank a "shock"); see also infra text accompanying note 414.

23. See infra notes 30-169.

24. See infra notes 30-84 and accompanying text.

25. See infra notes 85-169 and accompanying text.

26. See infra notes 170-316 and accompanying text.

27. See infra notes 203-304 and accompanying text.

28. See infra notes 317-458 and accompanying text.

29. See infra notes 459-62 and accompanying text.

30. 15 U.S.C. §§ 77a-77aa (1994). Generally, the Securities Act of 1933 [hereinafter the 1933 Act] regulates the initial offering of securities to the investing public. H.R. Rep. No. 85, 73d Cong., 1st Sess. 5 (1933); 1 Louis Loss & Joel Seligman, Securities Regulation 227 (3d ed. 1989). The 1933 Act's basic purpose was to ensure that new securities offered to the public are fully and clearly described in a registration statement and prospectus. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976) ("The [1933 Act] was designed to provide investors with full disclosure of material information concerning public offerings of securities in commerce, to protect investors against fraud and, through the imposition of specified civil liabilities, to promote ethical standards of honesty and fair dealing."). See H.R. Rep. No. 85, 73d Cong., 1st Sess. 1-5 (1933). For a comprehensive discussion of the 1933 Act, see 1 Hazen, supra note 11, §§ 2.1-7.10; 1 Loss & Seligman, supra, at 315-1595.

31. 15 U.S.C. §§ 78a-78kk (1994). Long before the enactment of legislation by the federal government, individual states had laws on their books concerning the sale of securities. 1 Loss & Seligman, supra note 30, at 29-30. In 1852, the Commonwealth of Massachusetts regulated the securities issued by common carriers. See 1 id. (citing Mass. Acts & Resolves 1852, ch. 303). In 1911, the State of Kansas passed securities legislation and became the first state to regulate the distribution and sale of securities. 1 id. (citing Kan. L. 1911, ch. 133). Generally referred to as "Blue Sky laws," all states now have legislation with respect to the offering of securities to the public. For an overview of state securities laws, see 1 id. at 29-152.

32. "Caveat Emptor" is the maxim that "summarizes the rule that a purchaser must examine, judge, and test for himself." Black's Law Dictionary 222 (6th ed. 1990). It is more commonly referred to as "[l]et the buyer beware." Id.

33. See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963) (fundamental purpose of the Securities laws is to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry)). President Franklin D. Roosevelt stated the following before the Senate in 1933:

There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public.

This proposal adds to the ancient rule of caveat emptor, the further doctrine `let the seller also beware.' It puts the burden of telling the whole truth on the seller. It should give impetus to honesty dealing in securities and thereby bring back public confidence.

The purpose of the legislation I suggest is to protect the public with the least possible interference to honest business.

This is but one step in our broad purpose of protecting investors and depositors. It should be followed by legislation relating to the better supervision of the purchase and sale of all property dealt in on exchanges, and by legislation to correct unethical and unsafe practices on the part of officers and directors of banks and other corporations.

Sager, Comment, supra note 17, at 832 (quoting S. Rep. No. 47, 73d Cong., 1st Sess. 6-7 (1933)).

34. 78 Cong. Rec. 2827-8 (1934). The president of the New York Stock Exchange stated on February 14, 1934, that "[the 1934 Act] contains sweeping and drastic provisions which affect seriously the business of all members and which may have very disastrous consequences to the stock market resulting in great prejudice to the interests of investors throughout the country." Id. Congressman Wolverton stated the following:

[B]eneath the deluge of inquiries and protests received by every member of Congress there has been an apparent and unmistakable fear that in some way or other the proposed legislation would adversely affect the business enterprise of our nation. . . . I wish to assure the members of the House that the Committee on Interstate and Foreign Commerce has not been insensible to the necessity of taking every precaution to preclude even the possibility of curing one evil by creating another or greater one.

Sager, Comment, supra note 17, at 832 n.58 (alteration in original) (omission in original) (quoting 78 Cong. Rec. 7863 (1934)).

35. Sager, Comment, supra note 17, at 832.

36. See 1 Loss & Seligman, supra note 30, at 228-29 (citations omitted).

37. E.g., 15 U.S.C. §§ 78l, 78m (1994). Section 12 of the 1934 Act requires that certain securities be registered with the SEC. 15 U.S.C. § 78l (1994). Section 13 of the 1934 Act requires every issuer of a security on a stock exchange to continuously file with the SEC reasonably current information and reports that the SEC may proscribe. 15 U.S.C. § 78m (1994); see also Loss & Seligman, supra note 22, 384-431.

38. 15 U.S.C. § 78f (1994). Section 6 of the 1934 Act requires national securities exchanges to register with the SEC. Id.

39. 15 U.S.C. § 78o (1994). Section 15(a)(1) requires registration of broker-dealers. Id. The 1934 Act also requires information processors and clearing agencies to register. 15 U.S.C. § 78k-1(b) (1994).

40. E.g., 15 U.S.C. §§ 78m-78n (1994). There are two areas that fall within the auspices of stock ownership regulation: proxy solicitation for listed securities registered under § 12 of the 1934 Act, and tender offers under §§ 13 and 14 of the 1934 Act. Id.

41. 15 U.S.C. § 78d (1994). Congress granted the SEC power to perform investigations and studies, see 15 U.S.C. § 78u (1994), and to enact and thereafter enforce rules pertaining to the securities markets. See generally 15 U.S.C. §§ 78w, 78u(b), 78u(d) (1994).

42. See, e.g., 15 U.S.C. §§ 78i, 78p, 78r (1994). Section 9 of the 1934 Act prohibits the creation of false or misleading trading activity involving wash sales, matched orders, and other market operations as well as by false or misleading statements. 15 U.S.C. § 78i (1994). Wash sales and matched orders are securities trading techniques employed in stock manipulation to create artificial market activity. Barron's Dictionary of Finance and Investment Terms 468 (2d ed. 1987). Section 16 of the 1934 Act permits, inter alia, a stockholder of a publicly traded company to recapture an insider's short term trading profits. 15 U.S.C. § 78p (1994); see also 9 Loss & Seligman, supra note 30, at 4286-96. Section 18 of the 1934 Act affords relief to an investor who purchased or sold securities in reliance of a document filed with the SEC that contained misleading or false statements. 15 U.S.C. § 78r (1994); see also 9 Loss & Seligman, supra note 30, at 4296-300.

43. The 1975 amendments have been characterized as the "most substantial and significant revision of this country's federal securities laws since the passage of the Securities Exchange Act in 1934." Herman & MacLean v. Huddleston, 459 U.S. 375, 384-85 (1983) (citation omitted); see also infra notes 376-77 and accompanying text.

44. See §§ 11(a), 12(2), 17(a) of the 1933 Act and §§ 9, 10, 15(c)(1) of the 1934 Act. It should be noted that the SEC has promulgated an extensive list of rules under §§ 10 and 15 of the 1934 Act. See Loss & Seligman, supra note 22, at 741-50.

45. See 7 Loss & Seligman, supra note 30, at 3411.

46. 7 id.

47. 2 Hazen, supra note 11, § 12.1, at 8.

48. See supra note 3 for the text of § 10(b) ("[I]n contravention of such rules and regulations as the [SEC] may prescribe . . . .").

49. 4 Bromberg & Lowenfels, supra note 17, § 8.5(600), at 8:502 (noting that section 10(b) is the most litigious component of the 1934 Act); 2 Hazen, supra note 11, § 13.2, at 59-60 ("[P]rimary private remedy for fraud . . . has been the one implied from SEC Rule 10b-5.").

50. Chiarella v. United States, 445 U.S. 222, 234-35 (1980) (stating that section 10(b) is a catch-all provision of the 1934 Act, "but what it catches must be fraud"); see also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 202-03 (1976).

51. 7 Loss & Seligman, supra note 30, at 3485-87.

52. See 7 id. at 3417. As Professor Loss explained, "the 1934 Act did not cover fraud in the purchase of securities by persons other than (1) brokers and dealers acting over the counter or (2) persons buying registered securities for the purpose of inducing their purchase by others." 7 id.

53. 7 id.

54. For the text of section 10(b), see supra note 3. "The [SEC] in May 1942 hit upon a solution to the problem that from hindsight appeared exceedingly simple and obvious. Acting under § 10(b), which had been in the Exchange Act from the beginning, the Commission adopted Rule 10b-5." 7 Loss & Seligman, supra note 30, at 3417.

55. SEC Rule 10b-5 is reproduced at supra note 4. Milton V. Freeman, considered the "father of Rule 10b-5," recounted:

I went to work one day in May, 1942, and I did my normal job as an Assistant Solicitor of the SEC. Somebody called me and said there is something wrong going on in Boston (a company president was buying in shares from his own shareholders without telling them of much improved earnings). He asked what we could do about it. I wasted no time; I got some people in, we drafted a rule, we presented it to the Commission, and, without any hesitation, the Commission tossed the paper on the table saying they were in favor of it. One Commission member said, "Well, we're against fraud, aren't we?" So, before the sun was down, we had the rule that is now Rule 10b-5.

Milton V. Freeman, Colloquium Foreword, 61 Fordham L. Rev. S1, S1-S2 (1993).

The unsuccessful amendments to the 1934 Act were proposed shortly after the bombing of Pearl Harbor which, naturally, occupied Congress and the nation. 7 Loss & Seligman, supra note 30, at 3417. The proposed amendments were a culmination of discussions held between the SEC and the securities industry to adopt language similar to section 17(a) of the 1933 Act in section 10(b). 7 id.; see also 2 Hazen, supra note 11, § 13.2, at 62.

56. 1 Bromberg & Lowenfels, supra note 17, § 2.2(420), at 2:29. See Ernst & Ernst, 425 U.S. at 202 (1976) (citing a passage from Thomas G. Corcoran, a spokesperson for the drafters of section 10(b): "`Of course subsection [10(b)] is a catch-all clause to prevent manipulative devices. I do not think there is any objection to that kind of clause. The Commission should have the authority to deal with new manipulative devices.'" (quoting Hearings on H.R. 8720 and H.R. 7852 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess. 115 (1934))); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975) ("[T]here is no indication that the Commission in adopting Rule 10b-5 considered the question of private civil remedies under this provision." (citing Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (1952); SEC Securities Exchange Act Release No. 3230 (May 21, 1942); 3 Louis Loss, Securities Regulation 1469 n.87 (2d ed. 1961); Ray Garrett, Jr. & W. McNeil Kennedy, Conference on the Codification of the Federal Securities Laws, 22 Bus. Law. 793, 922 (1967))).

57. See infra notes 64-84 and accompanying text.

58. David S. Ruder, The Future of Aiding and Abetting and Rule 10b-5 After Central Bank of Denver, 49 Bus. Law. 1479, 1481 (1994).

59. Id.; Fed. R. Civ. P. 23.

60. See 1 Bromberg & Lowenfels, supra note 17, § 1.1, at 1:5-:6; 7 Loss & Seligman, supra note 30, at 3485-90.

61. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).

62. See supra note 55.

63. Freeman, supra note 55, at S3 (quoting Symposium, Federal and State Roles in Establishing Standards of Conduct for Corporate Management, 31 Bus. Law. 863, 982 n.4 (1976)).

64. Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946).

65. Id. at 513-14. Judge Kirkpatrick stated that the right to recover damages arising out of a violation of a statute is "so fundamental and so deeply ingrained in the law that where it is not expressly denied the intention to withhold it should appear very clearly and plainly." Id. at 514. Moreover, Judge Kirkpatrick wrote: "in view of the general purpose of the Act, the mere omission of an express provision for civil liability is not sufficient to negative what the general law implies." Id.

66. Superintendent of Ins. v. Bankers Life & Casualty, Co., 404 U.S. 6 (1971).

67. Id. at 13 n.9.

68. Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972) (quoting SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195 (1963)).

69. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976).

70. Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983). Chief Justice Rehnquist, however, expressed his dissatisfaction with the implied private right in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975):

Despite the contrast between the provision of Rule 10b-5 and the numerous carefully drawn express civil remedies provided in the Acts of 1933 and 1934, it was held in 1946 . . . that there was an implied private right of action under the Rule. . . . This Court had no occasion to deal with the subject until 25 years later, and at that time we confirmed with virtually no discussion the overwhelming consensus of the District Courts and Courts of Appeals that such cause of action did exist.

Id. at 730 (footnote omitted) (citation omitted). <