Brief Fact Summary. Following the failure of a limited partnership, four investors in the partnership are bringing suit against the partnership’s law firm, asserting violations of Section:10b-5 and RICO as well as fraud for the firm’s part in knowingly omitting key facts about the partnership.
Synopsis of Rule of Law. Lawyers may become primary violators in securities cases if they knowingly assisted in the creation of false or misleading documents which they knew would be relied upon by investors.
To rise to the level of effecting the purchase or sale of securities, the attorney must actively assist in offering securities for sale, solicit offers to buy, or actually perform the sale.View Full Point of Law
Issue. May a lawyer be held primarily liable to an investor for his part in knowingly assisting a corporate client to prepare a fraudulent securities document?
Held. Yes. Even though the firm never endorsed or signed the documents in such a way that the investors would have been aware of its part in the fraud, they are liable to the investors for their actions. (The RICO claim is dismissed due to the law firm’s lack of participation in the operation or management of the partnership.) The following test was used:
The violator knew (or was reckless in not knowing) that the statement will be relied upon by investors.
The person was aware (or was reckless in not being aware) of the material misstatement or omission.
The person played a role in creating the document substantial enough that he could fairly be said to be an “author” or “co-author.”
All other requirements of primary liability are met.
Discussion. This test was later adopted by the 10th Circuit to determine primary violators in the Enron litigation.