The debate over the scope and limits of liability for secondary actors under Section 10(b) of the Exchange Act of 1934, the most widely-used US anti-fraud statute, rages on. In the September 2009 Global Finance Update, we examined several cases in which courts addressed the question of whether professionals who play a supporting role in preparing an issuer's financial disclosures may be held liable under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder for statements they themselves did not make.

In some cases, courts accepted new theories advanced by the SEC and private claimants that dramatically expanded the reach of Section 10(b) and Rule 10b-5 by broadly redefining what it means to "make" a statement to include "implied" statements inferred by virtue of an actor's role in the securities industry (as opposed to its conduct). In other cases, courts refused to find secondary actors primarily liable by implication, holding instead that Section 10(b) liability is limited to those statements explicitly attributed to a specific actor at the time of public dissemination. Recently, one appellate court that had initially accepted the SEC's "implied statement" theory – the United States Court of Appeals for the First Circuit – reversed course when the issue was presented to a broader panel of its judges, handing a significant victory to defendants.

In SEC v Tambone, the SEC brought an enforcement action against two senior executives of the lead underwriter for a group of mutual funds. The SEC charged that the defendants violated Section 10(b) and Rule 10b-5(b) when they used prospectuses which represented that the funds prohibited 'market timing' while allegedly permitting certain preferred customers to engage in such transactions. Neither defendant drafted the alleged misstatements. Nor did they work for the funds' sponsor, which had "primary responsibility" for the content of the prospectuses. The SEC nonetheless argued that defendants were liable because they both:

Although it did not address the SEC's "adoption" theory, a three judge panel from the First Circuit initially embraced the "implied statement" theory, holding that an underwriter's role and duties are such that it can be viewed as having made a statement "without actually uttering the words in question" (550 F.3d 106 (1st Cir. 2009)). The defendants petitioned for, and the Court granted, a rehearing en banc to allow all of the First Circuit judges to address this important question, which was an issue of first impression. On 10 March 2010, the Court issued its en banc ruling, which rejected both theories (2010 US App. LEXIS 5031 (1st Cir. Mar. 10, 2010)).

The First Circuit refused to accept the "adoption" theory on the ground that Rule 10b-5 prohibits "making" a false or misleading statement, not "using" a statement made by another. The Court further dismissed the SEC's theory as nothing more than an attempt to blur the line between primary and secondary liability by "impos[ing] primary liability on defendants for conduct that constitutes, at most, aiding and abetting" – "pass[ing] along what someone else wrote."

The First Circuit also rejected the SEC's "implied statements" theory, under which the SEC argued that an underwriter's duty to investigate gives rise to a duty to disclose. The Court cautioned against the imposition of such an "unprecedented duty," explaining that "[i]f we were to give credence to this theory, the upshot would be to impose primary liability under Rule 10b-5(b) on these securities professionals whenever they fail to disclose material information not included in a prospectus, regardless of who prepared the prospectus." In addition, the First Circuit warned that the SEC's novel approach effectively would eliminate the well-established requirement that there be "a fiduciary or other similar relation of trust and confidence" between claimants and defendants that justifies imposing on the defendant a duty to disclose. Absent this fundamental limitation, the door would be opened for a flood of private litigation against securities professionals by claimants with whom they had no such relationship.

The First Circuit's en banc opinion undoubtedly is an important victory for underwriters, as well as other securities professionals involved in the sale of securities, including lawyers and accountants. The Court's decision further clarified the line between conduct that is actionable under the federal securities laws and that which is merely aiding and abetting by requiring the SEC and private claimants to plead and prove that a defendant actually made the allegedly false or misleading statements that give rise to a claim.

The Second Circuit is the next appellate court expected to rule on the question of whether a secondary actor may be held liable under Section 10(b) and Rule 10b-5(b) for statements made by others. Material inconsistencies between the Second Circuit's anticipated decision and that of the First Circuit in Tambone could give the US Supreme Court an occasion to review the issue.