Broker-Dealer Litigation - Greenberg Traurig LLP

3. Aiding & Abetting
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Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).
Investors filed a private action under Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder against a mutual fund advisor and its parent fund
creator. The investors alleged that the mutual fund advisor and mutual fund parent aided and
abetted violations of Rule 10b-5 for alleged false statements in the mutual fund prospectuses
filed by the mutual fund. At issue was the meaning of the word “make” in Rule 10b-5. In
holding that the “maker” of a statement for Rule 10b-5 purposes is the person or entity with
ultimate authority and control over the statement, the court relied on its previous ruling that a
private right of action under Rule 10b-5 does not include suits against aiders and abettors who
contribute substantial assistance to the making of a statement, but do not actually make it. Thus,
the court held that the mutual fund advisor and the mutual fund parent were not liable for aiding
and abetting a violation of Rule 10b-5 because the mutual fund itself “made” the false statements
in the prospectuses.
MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011).
Plaintiff investors sued defendants, a broker-dealer and its subsidiary bank, alleging
conspiracy to violate RICO. The investors claimed that defendants conspired with Bernard L.
Madoff to perpetuate a Ponzi scheme by failing to freeze Madoff’s accounts after defendants
allegedly become aware of the fraud as a result of a “due diligence” investigation conducted by
defendants. Plaintiffs argued that an exception should be created to Section 1964(c) of the
Private Securities Litigation Reform Act of 1995 (“PSLRA”), which bars civil RICO claims
predicated on allegations of securities fraud, because securities fraud laws do not create private
cause of action for aiding and abetting, thus foreclosing plaintiffs’ avenue for relief. Defendants
moved to dismiss the complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure, arguing that the plaintiffs did not adequately plead the required elements of
their claims. The district court dismissed plaintiffs’ claims in their entirety. The Court of
Appeals affirmed the dismissal of plaintiffs’ claims, but on different grounds for plaintiffs’ civil
RICO claim. The Court of Appeals held that Section 1964(c) of the PSLRA bars civil RICO
claims predicated on acts of securities fraud even where a plaintiff cannot itself pursue a private
cause of action for aiding and abetting securities fraud against a defendant.
SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011).
The Securities and Exchange Commission filed a complaint against defendants, a fund
portfolio manager and a fund advisor’s chief operating officer (“COO”), alleging violations of
the Securities Exchange Act of 1934, Rule 10b-5, the Securities Act of 1933, and the Investment
Advisors Act of 1940. The SEC alleged that a mutual fund’s Registered Investment Advisor
secretly permitted one investor to “market time” the fund in exchange for an investment in a
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