Broker-Dealer Litigation - Greenberg Traurig LLP

noted that plaintiffs’ aiding and abetting claims founded in fraud must also plead the elements of
aiding and abetting with particularity. The court dismissed the aiding and abetting fraud claim as
plaintiffs failed to plead facts reflecting defendant’s actual knowledge of the fraud. The fact that
defendant managed and monitored the companies’ accounts was not enough. The court rejected
plaintiffs’ contention that defendant knew of the alleged fraud based on “know your customer”
rules and other various stock exchange rules and monitoring requirements, as these rules spoke
only to whether defendant should have known of the fraud, they did not reflect actual
knowledge. Plaintiffs’ aiding and abetting breach of fiduciary duty claim was likewise dismissed
as plaintiffs did not sufficiently allege defendant was aware of the companies’ fraudulent
conduct, and asserted no additional facts indicating how defendant knew of the breach of
fiduciary duty. Plaintiffs’ claims for aiding and abetting conversion, premised on fraud, failed to
plead knowledge of fraud with sufficient particularity; thus, the aiding and abetting conversion
claim failed. Further, the court noted that even if it were to assume that a conversion
independent of the fraud was alleged, plaintiffs had not provided facts to support a reasonable
inference that defendant knew of any underlying conversion. The court granted defendant’s
motion to dismiss the complaint and denied leave to amend as plaintiffs had already been
afforded an opportunity to amend and failed to set forth any additional facts indicating how the
pleading deficiencies would be cured.
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011).
The Securities and Exchange Commission brought an action against defendants, a father
and his two sons, allegedly engaged in an insider trading scheme. The SEC alleged that the
father, an employee of a publicly-traded pharmaceutical company, opened a brokerage account
in the names of his sons, and traded the pharmaceutical company’s securities in these accounts
while he possessed non-public, material information about the company. The SEC further
alleged that the sons knew about the trading; however, they did not take any steps to stop the
illegal use of their accounts. The SEC charged the sons with violating Section 20(e) of the
Securities Exchange Act of 1934 by aiding and abetting their father’s trades in the accounts held
under their names. Defendants filed a motion to dismiss. In order to make out a prima facie
case for aiding and abetting, the SEC must prove: (1) the existence of a securities law violation
by the primary 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.
To properly allege “substantial assistance,” the complaint must contain allegations that the aider
and abettor’s conduct was a substantial causal factor in the perpetuation of the underlying
violation. In denying the defendants’ motion to dismiss, the court held that the SEC’s allegation
that the sons did not take any action to prevent the insider trading in their named accounts was
sufficient “substantial assistance” because it was at a minimum “plausible” that the sons’
inaction was designed intentionally to aid the father’s primary violations of the securities laws.
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