St. Mary's Law Journal


In Central Bank v. First Interstate Bank, the United States Supreme Court held that private plaintiffs may not maintain aiding and abetting suits under Securities Exchange Act Section 10(b) and Security and Exchange Commission Rule 10b-5. The Court views Section 10(b) of the 1934 Act as a “catchall antifraud provision” that makes the use of “any manipulative or deceptive device or contrivance” in contravention of the provision a violation of Securities and Exchange Commission (SEC) rules if such acts occur during the purchase or sale of securities. Rule 10b-5 is substantially the same as Section 10(b). However, neither Section 10(b) nor Rule 10b-5 contain language expressly providing for private rights of action against violators. Despite this omission, the Court has consistently held that Section 10(b) implies a private right of action. Aider and abettor liability under the securities laws contains three general prerequisites: (1) a primary party must have violated a securities law; (2) the secondary party must know of the violation; and (3) the secondary party must have provided "substantial assistance" to the party committing the primary violation. The Central Bank decision constitutes a significant departure from the overriding intent of the 1934 Securities Exchange Act. Consequently, the Court embarked on a journey of strict statutory construction of securities laws that disserves defrauded investors. The Court should refrain from imposing its currently narrow standard of interpretation of statutes enacted for remedial purposes in an era of liberal construction. Congress should respond quickly by enacting legislation that specifically provides for aiding and abetting liability under Section 10(b) and Rule 10b-5 in conjunction with some type of litigation reform. Until such action occurs, however, private plaintiffs have lost a major cause of action, and many questions as to the scope of the SEC's enforcement capabilities will remain unresolved.


St. Mary's University School of Law