Accomplice liability law proposed in Congress

U.S. Senator Arlen Specter introduced legislation to let investors sue law firms, accountants and investment banks that helped perpetrate fraud, seeking to overcome recent Supreme Court limits on such cases.

The measure would make individuals or firms that provide “substantial assistance” in a fraud subject to investor lawsuits, Specter, a Pennsylvania Democrat, said on the Senate floor last week. The Supreme Court has decided two cases since 1994 that restrict investors from recouping losses from fraud accomplices. The House isn’t considering similar legislation.

“It would be an appropriate change,” said Donald Langevoort, a securities law professor at Georgetown University. “Secondary actors who play a big enough role in perpetrating a fraud should bear responsibility just like anyone else and shouldn’t be able to hide.”

Shareholders are barred from suing parties that have only an indirect role in a fraud after Supreme Court decisions that limited liability to those directly and publicly involved in the scheme. The Specter measure would upend rulings in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. of 2008 and Central Bank of Denver v. First Interstate Bank of Denver.

Prior to the rulings, investor lawsuits against fraud accomplices were common, Langevoort said. The 1994 Central Bank decision was a “major gift” to individuals and corporations that aided in a fraud, he said.