SEC Chair White Announces New Strategy to Fight Fraud

When President Obama appointed Mary Jo White as the U.S. Securities and Exchange Commission's Chair, he boasted, "You don't want to mess with Mary Jo." Chair White appeared to be trying to make good on the claim when, earlier this week at the 3rd Annual New York City Bar White Collar Crime Institute, she announced that "what is old is new," explaining that the SEC's new intention is to direct the focus of its enforcement of fraud cases on Exchange Act Section 20(b) ("Liability of controlling persons and persons who aid and abet violations"), a section of the statute that commonly has not been used as the centerpiece of enforcement actions.

This section states that "[i]t shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do . . . through or by means of any other person."

Chair White described Section 20(b) as a "very powerful tool," and said that the SEC will begin using the section to impose liability against individuals who "have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors." This includes individuals who have participated in disseminating false or misleading offering or promotional materials but who otherwise cannot be charged under Rule 10b-5 and Section 10(b) of the Act because they are not the makers of the false statements. In the wake of the U.S. Supreme Court's holding in Janus, the only person who may be liable under Rule 10b-5 is the person who "made" the statement, as the Court ruled that the maker of the statement is the one "with ultimate authority over the statement, including its content and whether and how to communicate it." (See Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011).) According to Chair White, Section 20(b) is a way for the SEC to circumvent the Janus setback.

Section 20(b) also can be successfully employed where efforts to charge an individual with aiding and abetting fall short, Chair White explained. An individual making a false or misleading statement who does not know the statement to be untrue often cannot be held liable, but the controlling person behind the statement, who knows that the statement is false, can be charged under Section 20(b).

Chair White's discussion of Section 20(b) at the White Collar Crime Institute arose when she addressed widespread criticism of the SEC's failure to charge individuals. Chair White denied that was the case, citing statistics showing that the SEC charges individuals in upward of 93 percent of all SEC enforcement actions. (The study further reveals that the SEC named CEOs in 56 percent of those cases, CFOs in 58 percent and lower-level executives in 71 percent.) Chair White emphasized that Section 20(b) will be yet another way for the SEC to pursue individuals engaged in wrongdoing.