Last week, the Second Circuit issued a significant decision expanding the power of the SEC to bring “aiding and abetting” cases against secondary actors who contribute to securities fraud. In SEC v. Apuzzo, the Second Circuit held that the SEC is not required to prove an alleged aider and abettor “proximately caused” the fraud, rejecting a contrary decision from the district court and effectively lowering the bar for SEC aiding and abetting claims.

Private litigants cannot bring aiding and abetting claims, but the SEC is expressly permitted to do so. To establish aiding and abetting liability, the SEC must prove: (1) a primary securities violation occurred; (2) the aider and abettor had knowledge of the primary securities violation; and (3) the aider and abettor provided substantial assistance in the securities violation. The Second Circuit’s decision in Apuzzo dealt with the third element, addressing the standard of proof to show “substantial assistance.”

The SEC accused Joseph Apuzzo, the former CFO of Terex, of aiding and abetting the securities fraud of one of Terex’s customers. Specifically, the SEC accused Apuzzo of assisting Terex’s customer URI in misrepresenting its financial results by inflating the profit from the sale of used equipment and in prematurely recognizing the revenue from those sales. Apuzzo allegedly agreed to allow Terex to enter into the inflated transactions because URI secretly agreed to indemnify Terex for any losses and to take over Terex’s resale obligations, and because URI promised to make additional large purchases of new equipment from Terex.

Relying on earlier Second Circuit decisions, the district court dismissed the SEC’s complaint against Apuzzo on the grounds that the SEC had failed to adequately plead the “substantial assistance” prong of the aiding and abetting standard, since Apuzzo’s actions were not the proximate cause of the URI’s accounting violations. The Second Circuit reversed the district court, holding that proximate cause was not the appropriate standard for determining substantial assistance in an SEC enforcement action. The court reasoned that because the SEC does not need to show injury in an enforcement proceeding, it was inappropriate to require the government to show proximate cause (which connects wrongdoing to injury in a private action). The court further found that a proximate cause standard would undermine the SEC’s ability to bring aiding and abetting claims, since “almost by definition, the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud.”

Reaching back to a 1938 decision written by the famous jurist Learned Hand, the Second Circuit held that substantial assistance requires only that the alleged aider associated himself with the venture, participated in it as something that he wished to bring about, and sought by his action to make it succeed. Applying this standard to the facts alleged, the court had little difficulty in determining that Apuzzo’s actions met this standard, particularly in light of the allegations that he had actual knowledge of the fraud.

This case is a significant victory for the SEC, and it follows on the heels of a another change in the law designed to make it easier for the SEC to bring aiding and abetting cases. The Dodd-Frank Act reduced the SEC’s burden of proof required to establish that an aider and abettor acted with “scienter” (i.e., fraudulent intent), lowering the bar from “knowing” to “reckless” misconduct. The Dodd-Frank amendment did not apply to the Apuzzo case, which was filed before the effective date of the amended statute. In future cases, however, the SEC will have two new arrows in its quiver, and it is likely to pursue aiding and abetting cases with increased frequency.