The Specter of Section 20(b) Liability
Last month SEC Chair Mary Jo White discussed the use of Securities Exchange Act Section 20(b) to impose primary liability on a person who, directly or indirectly, does anything “by means of any other person” that would be unlawful for that person to do on his or her own.
The specter of Section 20(b) liability was raised by the Supreme Court three years ago when Justice Clarence Thomas referred to that provision in a footnote to his majority opinion in Janus Capital Group, Inc. v. First Derivative Traders. In Janus, the Court held that only the “maker” of a statement may be liable in a private lawsuit brought under Section 10(b). In doing so, the Court remarked, at footnote 10, “We do not address whether Congress created liability for entities that act through innocent intermediaries in 15 U.S C.A. §78t(b).” As described by Chair White, Section 20(b) “is analogous in the criminal context to 18 U.S.C. Section 2(b), which provides for criminal liability as a principal for anyone who ‘willfully causes an act to be done which if directly performed by him or another would be’ a criminal violation.”
According to Weil, Gotshal & Manges, in the wake of Janus Joseph K. Brenner, the Chief Counsel to the Division of Enforcement, has twice suggested that the SEC would employ Section 20(b). Mr. Brenner’s most recent comments concerning the provision were made at the SEC’s 2014 SEC Speaks conference, where he stated that the agency will rely on that section in an enforcement action this year. View Weil, Gotshal’s law firm memo here.
Shortly after Mr. Brenner made his comments Chair White expanded on the prospect of a Section 20(b) prosecution. Chair White said, “We are focusing on Section 20(b) charges where – as is frequently the case in microcap and other frauds – individuals have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors.” She emphasized that Section 20(b) “is a form of primary liability, rather than secondary liability, which would require proof of a separate violation by someone other than the defendant. So, we can use Section 20(b) where aiding and abetting or controlling person theories may fall short because there is no underlying violation by someone else, such as, for example, when the other person who publicly makes the misleading statements lacks knowledge that they were misleading.” View the full text of Chair White’s speech here.
A Bingham client alert points out that the few cases involving Section 20(b) do not address the potential scope of liability under that provision. However, Wayne State University Law Professor Peter J. Henning, writing for DealBook, has described how Section 20(b) could be used against activist investors. View the Bingham alert here. View Professor Henning’s blogpost here.
Until a Section 20(b) is actually filed, the speculation will continue.