SEC v. National Student Marketing Corp.

Brief Fact Summary.

When new information revealed that National Student Marketing Corporation’s (NSMC) (Defendant) financial statements, which showed a profit, were incorrect, NSMC (Defendant) and Interstate National Corporation (Defendant) were unable to resolicit shareholders for confirmation of a merger, and the SEC (Plaintiff) then brought suit for injunctive sanctions against the attorneys (Defendant) who participated in the merger.

Synopsis of Rule of Law.

The three requirements for aiding and abetting liability are a violation of the securities law by the principal, awareness by the defendant that his role was part of an illegal activity, and significant, deliberate assistance in the violation.

Facts.

National Student Marketing Corp. (NSMC) (Defendant), in acquiring Interstate National Corporation (International) (Defendant), prepared a nine-month interim statement that showed a profit.  The merger required an opinion letter be issued from each corporation’s legal representatives and a “comfort letter†from an independent public accountant.  The accounting firm, Peat Marwick, found that NSMC’s (Defendant) statement had to be adjusted, after which it would show a loss.  NSMC’s (Defendant) comfort letter, showing the adjustment, was unsigned and not even delivered to the closing meeting until shortly before the filing deadline.  However, neither the directors nor the attorneys involved chose to delay the closing to resolicit the shareholders.  An effort was never made to disclose the contents of the comfort letter to Interstate shareholders, the SEC (Plaintiff), or the public.  Following a drastic decrease in the price of NSMC (Defendant) stock, the SEC (Plaintiff) brought an action, seeking injunctive sanctions against NSMC (Defendant) and the representatives (Defendant) of both corporations for securities law violations.

Issue.

Is aiding and abetting established by a violation of the securities law by the principal, awareness by the defendant that his role was part of an illegal activity, and his significant, deliberate assistance in the violation?

 

Held.

(Parker, J.)  Yes.  The three requirements for aiding and abetting liability are a violation of the securities law by the principal, awareness by the defendant that his role was part of an illegal activity, and significant, deliberate assistance in the violation.  The first element is established by the finding that the principals of Interstate and NSMC (Defendant) committed major violations of the securities laws.  The second element is established because the attorneys (Defendant) for both firms knew that information regarding NSMC’s (Defendant) financial status had not been disclosed prior to the merger.  Finally, counsel (Defendant) had a duty to the Interstate shareholders to delay the closing of the merger pending disclosure and resolicitation with corrected financials.  Their failure to take any action to interfere in the consummation of the merger was a beach of that duty and constituted aiding and abetting, a violation of the antifraud provision.  The violations, however, seem unlikely to recur, and are not sufficient for an injunction.

Discussion.

Through their participation in the closing of the merger, the attorneys (Defendant) violated §10(b), Rule 10b-5, and §17(a) of the securities laws.  The court, however, was confident that the attorneys (Defendant) would take appropriate steps to make sure that their future professional conduct would be in accord with the law.  The SEC’s (Plaintiff) appeal from this ruling was dismissed when the district court approved a settlement of related private suits against the attorneys (Defendant).