April 22, 2010

Honorable Arlen Specter                                                  Honorable Jack Reed
U.S Senate                                                                               U.S. Senate
711 Hart Senate Office Bldg.                                           728 Hart Senate Office Bldg
Washington, DC  20510                                                    Washington, DC 20510

Dear Senators Specter and Reed:

The undersigned organizations write to express our strong support for the amendment you will offer to S. 3217, the “Restoring American Financial Stability Act,” to restore private civil liability for aiders and abettors of securities fraud. We support this amendments because it would once again give investors  the ability to hold accountable those who know they are aiding others commit the type of securities fraud that was exposed by the financial crisis, as well as by earlier corporate scandals.

Those who know they are aiding someone in the commission of a securities fraud – sometimes referred to as secondary actors – are actually highly culpable participants in illegal enterprises.  They are no different and should not be distinguished from one who drives the getaway car in a bank robbery.  Without their knowing, reckless and active participation, many frauds, including those involving Enron and, more recently, those involving misleading balance sheets and taking both sides in a transaction with investors, simply could not have happened.

Remarkably, under current securities laws, investors cannot bring a case against or recover from those   who knowingly or recklessly played a crucial role in aiding a fraudulent scheme.  This protection and immunity for aiders and abettors of fraud leaves investors powerless to recover from those who assist in the securities fraud at a public company.  And, without the deterrent value of such claims, without accountability for facilitating a fraud upon investors, there exists a form of ethical and moral bankruptcy that puts at risk the soundness, trust and confidence in our financial system.  As the Senate addresses the financial crisis that caused the net worth of American households to plummet by trillions of dollars, it is critical that investors be provided with the tools necessary to restore confidence in our markets and safeguard against the very fraud that is directly related to the crisis. Your amendment to restore private aiding and abetting liability for securities fraud is such a tool.

The Supreme Court decisions in Central Bank of Denver N.A. v. First Interstate Bank of Denver N.A., and in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., rejected the private right of action for aiders and abettors because Congress had not explicitly stated its intent to include it in the relevant statute.   In the latter case, the Court stated: “The decision to extend the cause of action is thus for the Congress, not for this Court.”  Accordingly, it is time for Congress to act. .

In addition, private aiding and abetting liability would reinstate an important supplement to regulatory enforcement.  While the Securities and Exchange Commission (SEC) has the authority to bring actions against aiders and abettors of securities violations under the Securities Exchange Act of 1934, the agency alone cannot, and more importantly does not, prosecute every violation of the securities laws.  Further, the SEC rarely recovers on behalf of investors.  When the Commission does recover, recoveries amount to only a small percentage of typical recoveries awarded to when investors successfully bring private actions. Private actions are a critical supplement to those regulatory actions.

Some who oppose this important investor remedy may argue that it will result in a flood of lawsuits.  This simply is not true. First, the average number of securities suits filed each year remains relatively low – under 200 suits per year.  Any substantial increase in securities class actions in the wake of the corporate scandals in the last decade or the current financial crisis can be attributed to the abundance of corporate misconduct, not frivolous lawsuits.  In addition, the Private Securities Litigation Reform Act of 1995 (PSLRA) properly curtailed frivolous lawsuits by among other things, adding a heightened pleading standard and stay on discovery.  Addressing lawsuit abuse, as the PSLRA does, is reasonable.  Providing actual wrongdoers, knowing aiders and abettors, with unprecedented and unwarranted immunity from liability for the harm they have caused is unreasonable and unjust.

We support your amendment to strengthen the private right of action for aiding and abetting securities violations during Senate consideration of the Restoring American Financial Stability Act of 2010.  Congress should not let this opportunity to give investors real and meaningful tools go unrealized.

Sincerely,

Americans for Financial Reform