Central Bank v. First Interstate Bank

Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), was a decision by the United States Supreme Court, which held private plaintiff

Plaintiff

A plaintiff , also known as a claimant or complainant, is the term used in some jurisdictions for the party who initiates a lawsuit before a court...

s may not maintain aiding and abetting

Aiding and abetting

Criminal=Aiding and abetting is an additional provision in United States criminal law, for situations where it cannot be shown the party personally carried out the criminal offense, but where another person may have carried out the illegal act as an agent of the charged, working together with or...

suit under Securities Exchange Act § 10(b).

The majority opinion in the case established that liability did not extend to “aiders or abettors” that participate in misstatements or omissions in connection with the sale of securities. The Supreme Court held that "private civil liability under Rule 10b-5

SEC Rule 10b-5

SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, is one of the most important rules promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under § 10 of the Securities Exchange Act of 1934...

does not extend to those who do not engage in a manipulative or deceptive practice but who aid and abet such a violation of 10(b)." This distinguished between the primary liability of violators of Rule 10b-5 and non-primary defendants, who had not directly deceived investors. This was a more literal reading than hitherto of Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission

United States Securities and Exchange Commission

The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...

’s Rule 10b-5, which prohibit fraud or deceit in connection with the purchase or sale of securities.

The Supreme Court's ruling reversed a long history of court decisions and SEC enforcement actions where aiders and abettors, often banks, accountants, trustees, and attorneys, were found liable under Rule 10b-5. The case makes the distinction between primary violators, who directly misstate or omit material facts that are relied upon by investors, and aiders and abettors. According to the court: “A plaintiff must show reliance on the defendant's misstatement or omission to recover under 10b-5. Basic Inc. v. Levinson
Basic Inc. v. Levinson
Basic, Inc. v. Levinson, 485 U.S. 224 , was a case in which the Supreme Court of the United States articulated the "fraud-on-the-market theory" as giving rise to a rebuttable presumption of reliance in securities fraud cases....

, supra, at 243. Were we to allow the aiding and abetting action proposed in this case, the defendant could be liable without any showing that the plaintiff relied upon the aider and abettor's statement or actions. . . .". When investors relied on such statements or actions, the court extends Rule 10b-5 liability to these secondary participants. The Court stated that "any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5. . .."

See also