Broker-Dealer Litigation - Greenberg Traurig LLP

SEC v. Big Apple Consulting U.S.A., Inc., 2011 U.S. Dist. LEXIS 95292 (M.D. Fla. Aug. 25,
2011).
The Securities and Exchange Commission brought an action alleging violations of the
Securities Act of 1933 and Securities Exchange Act of 1934 against defendant, an investment
consulting firm. The SEC alleged that officers of the investment consulting firm aided and
abetted the consulting firm’s violations of Section 15(a) of the Securities Act and Section 20(e)
of the Exchange Act. Aider and Abettor liability is established: (1) if another party has
committed a securities law violation; (2) if the accused party has general awareness that his role
was part of an overall activity that is improper; and (3) if the accused aider and abettor
knowingly and substantially assisted the violation. In determining whether a defendant has
general awareness, the surrounding circumstances and expectations of the parties are critical.
Knowledge can be shown by circumstantial evidence or by reckless conduct. Defendant argued
that only actual knowledge, not severe recklessness, satisfies the scienter requirement, noting the
trend in recent years for courts to require actual knowledge, not just recklessness. The court, in
denying defendant’s motion to dismiss, held that none of the cases cited by defendant were from
the Eleventh Circuit; thus, defendant provided no authority that would enable the court to
disregard the binding precedent set forth in prior cases which allows severe recklessness to
satisfy the scienter requirement. Furthermore, the court noted that Congress has put an end to
such a trend argued by the defendant, by amending the Exchange Act to specifically include
recklessness.
Fernea v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2011 Tex. App. LEXIS 5286 (Tex. App.
July 12, 2011).
A purchaser of a company sued a broker-dealer asserting various causes of action arising
from its alleged failure to adequately supervise its employee in the sale of a portion of the
employee’s outside business to the purchaser. The broker-dealer moved for summary judgment
which was granted by the trial court. The purchaser appealed. The employee was a licensed
registered representative who also owned two direct marketing corporations that were unrelated
to his employment at the broker-dealer. The underlying action involved the registered
representative soliciting the purchaser to purchase shares in the two direct marketing
corporations. The purchaser filed suit against the registered representative and the broker-dealer
seeking damage and rescission of the transaction, and, among other allegations, filed suit against
the broker-dealer for violation of Section 33 of the Texas Securities Act, the “aider and abettor”
liability provision. Under the Texas Securities Act, to prove aider and abettor liability, the
plaintiff must demonstrate: (1) that a primary violation of the securities law occurred; (2) that
the alleged aider had general awareness of its role in this violation; (3) that the actor rendered
substantial assistance in this violation; and (4) the alleged aider either: (a) intended to deceive
plaintiff; or (b) acted with reckless disregard for the truth of the representations made by the
primary violator. Upon review of the testimony, the court determined that while the evidence
could lead a reasonable fact finder to conclude that the broker-dealer had a general awareness
that the registered representative was trying to sell his companies, it does not create more than a
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