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U.S. court eases SEC burden to show defendant aided fraud
August 8, 2012 / 5:30 PM / 5 years ago

U.S. court eases SEC burden to show defendant aided fraud

* 2nd Circuit revives case against ex-Terex CFO

* Proximate cause standard rejected

* Decision could make it easier for SEC to charge executives

By Jonathan Stempel

NEW YORK, Aug 8 (Reuters) - A federal appeals court has made it easier for the U.S. Securities and Exchange Commission to allege that a defendant assisted in securities fraud, a decision that could help the regulator bring more enforcement cases against individuals.

The 2nd U.S. Circuit Court of Appeals in New York on Wednesday revived an SEC civil case against Joseph Apuzzo, a former chief financial officer of heavy equipment maker Terex Corp, over his role in an alleged accounting fraud.

In doing so, the court overturned a 2010 decision by a Connecticut federal judge that required the SEC to meet a higher legal standard to bring so-called “aiding and abetting” claims.

Apuzzo had been accused in December 2007 of assisting in two “sale-leaseback” transactions in 2000 and 2001 to help his counterpart at equipment rental company United Rentals Inc , an important Terex customer, inflate profit and recognize revenue sooner.

The former United Rentals CFO, Michael Nolan, was sentenced to three years probation after pleading guilty in 2007 to one criminal count of making a false SEC filing, court records show. He also settled a related SEC civil case.

SEC Enforcement Director Robert Khuzami in a statement said the 2nd Circuit decision “will help us hold responsible those who aid and assist financial frauds.”

Seth Taube, a partner at Baker Botts representing Apuzzo, said: “We are reviewing the opinion and our options given that the decision may set forth some new theories of liability.”

Jordan Thomas, a partner at Labaton Sucharow in New York and former assistant director of the SEC enforcement division, said the decision may “enhance the ability of the SEC to bring aiding and abetting cases, which historically have been difficult to bring, especially against senior executives.”

Thomas said the decision may apply broadly because courts in the 2nd Circuit, which includes New York, handle a majority of SEC enforcement cases, and other circuit courts often give “great weight” to the appeals court’s opinions.

Labaton Sucharow specializes in securities class-action cases, and Thomas is not involved in the Apuzzo case.

“PROXIMATE CAUSE” NOT NEEDED

Writing for a three-judge panel of the appeals court, U.S. District Judge Jed Rakoff said the SEC can show a defendant provided “substantial assistance” to a fraud by demonstrating that the person associated himself with the misconduct and through his action tried to make it succeed.

Rakoff rejected the conclusion by the lower court judge, U.S. District Judge Alvin Thompson in New Haven, Connecticut, that a defendant must be the “proximate” cause of harm to be liable as an aider and abettor.

“Many if not most aiders and abettors would escape all liability if such a proximate cause requirement were imposed, since, almost by definition, the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud, however much they may contribute to the success of the scheme,” Rakoff wrote for the panel, which returned Apuzzo’s case to the Connecticut court.

Rakoff normally sits on the U.S. District Court in Manhattan, where he has been critical of the SEC in other cases, but periodically hears cases on other courts.

United Rentals in 2008 agreed to pay $14 million to settle SEC fraud charges over the suspect transactions. Terex settled the following year for $8 million. Neither company admitted wrongdoing, and both restated financial statements.

Representatives of both companies did not immediately respond to requests for comment. Terex is based in Westport, Connecticut, and United Rentals in Greenwich, Connecticut.

The case is SEC v. Apuzzo, 2nd U.S. Circuit Court of Appeals, No. 11-696.

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