in the conspiracy complied with his expectations in this regard.
If plaintiffs can put these allegations -- which were so eloquently described by their counsel at oral argument -- into a formal pleading, such a pleading would constitute a valid allegation that Sorkin had knowingly and wilfully engaged in a deliberate conspiracy unlawfully to obtain funds by the deception of investors, in violation of Rule 10b-5.
C. IS THE POSSIBILITY OF RULE 10b-5 CONSPIRACY LIABILITY PRECLUDED BY CENTRAL BANK OF DENVER v. FIRST INTERSTATE BANK (1994) 511 U.S. 164, 128 L. Ed. 2d 119, 114 S. Ct. 1439?
At the outset, we recognize that as far as we can determine, with the exception of one district court which was effectively overruled by the Ninth Circuit Court of Appeals, every court which has considered this question has answered it in the affirmative, ruling that the Supreme Court's decision in Central Bank, which held that no private right of action exists for aiding and abetting a violation of Rule 10b-5, also prohibits actions for conspiracy to violate that rule. Cases so holding include one by the Ninth Circuit Court of Appeals and six by judges of the Southern District of New York. See e.g. In re Glenfed Inc. Securities Litigation (9th Cir. 1995) 60 F.3d 591; Phillips v. Kidder, Peabody & Co. 933 F. Supp. 303, 1996 U.S. Dist. LEXIS 9254, (S.D.N.Y. 1996, Francis, J.) 1996 WL 374174; Kidder Peabody & Co. v. Unigestion Int'l, Ltd., (S.D.N.Y. 1995, Sweet, J.) 903 F. Supp. 479 (with a nationwide analysis of post-Central Bank authority); SEC v. U.S. Envtl., Inc. (S.D.N.Y. 1995, Leisure, J.) 897 F. Supp. 117; In re College Bound Consolidated Litigation (S.D.N.Y. 1995, Mukasey, J.) 1995 WL 450486; In re Faleck & Margolies, Ltd. (S.D.N.Y. 1995, Kram, J.) 1995 WL 33631.
With due respect for these decisions, none of which controls us, we find none of them persuasive in light of the claims before us.
In the first place, the facts in Central Bank do not raise even the shadow of a question related to possible conspiracy liability. The petitioner in that case, Central Bank, served as an indentured trustee for several bond issues which were secured by landowner assessment liens. Bond covenants required that the land subject to the liens be worth at least 160% of the face value of the bonds, and that the developer of the land, AmWest Development (hereinafter "AmWest"), annually report to Central Bank whether or not the 160% test was being met.
In a year when property values in the area were declining, AmWest nevertheless reported that the 160% test was being met. Central Bank's in-house appraiser suggested that AmWest's figures were optimistic, and the underwriter suggested to Central Bank that it get an outside appraiser to conduct an independent review. Despite this, Central Bank, after an exchange of letters with AmWest, delayed independent review of the appraisal. Before such a review was complete, the bond issuer defaulted, resulting in a loss of $ 2.1 million to the respondents.
They sued AmWest, the bond issuer, and the underwriters of the bonds for primary violations of section 10(b). They further alleged that Central Bank, as the indentured trustee for the bond issues, was "secondarily liable" for its conduct in aiding and abetting the fraud.
The Supreme Court noted the Tenth Circuit's understanding that the relevant elements of a section 10(b) aiding and abetting cause of action were: "(1) a primary violation of s 10(b); (2) recklessness by the aider and abettor as to the existence of the primary violation" (114 S. Ct. at 1443); and that it had held that Central Bank's conduct could "support a finding of extreme departure from standards of ordinary care," (id. at 1444), and could therefore be held "secondarily liable" for the fraud. Later in its opinion, the Supreme Court specifically noted that "recklessness, not intentional wrongdoing, is the theory underlying the aiding and abetting allegations in the case before us." Id. at 1455 (emphasis added). This does not seem to us the action of a Court that considered itself to be eliminating the possibility of Rule 10b-5 conspiracy liability for intentional wrongdoers.
As above noted, Judge Sweet's opinion contains a nationwide analysis of relevant post-Central Bank authority. 903 F. Supp. at 496. Perhaps the opinion which most accurately catches the spirit of all these decisions is one that observed "to permit a private plaintiff to maintain an action for conspiracy to violate Rule 10b-5 would make Central Bank of Denver meaningless, since virtually every aiding and abetting claim can be alleged as a conspiracy claim." Id. at 498, citing In re Faleck & Margolies, Ltd. 1995 WL 33631, *12. It seems to us that this is not an apt description of a doctrine that was established by a case in which -- as the deciding Court specifically noted -- the facts would not support any allegation of intentional wrongdoing, which would eliminate the possibility of any allegation of conspiracy.
In addition, most of the cited opinions speak of aider and abettor liability as similar to conspiracy liability. We find no logic in this assumption. How can it be said that two liabilities are "similar" when one requires proof of knowing and wilful participation, while the other can be established by a showing of mere knowledge of someone else's violation and some degree of carelessness in failing to prevent it?
By the same token, the opinions treat aiders and abettors and conspirators as though both were secondary or peripheral actors. In our view, no rational person could characterize Sorkin's claimed conduct as secondary or peripheral to the five year continuation of this $ 400 million fraud.
Accordingly, plaintiffs' motion for leave to replead is granted with the following specifications: any third amended complaint must be served on or before September 2, 1996; and the complaint must confine itself exclusively to claims against this defendant and contain no allegations that are not relevant thereto. If the complaint is so confined, any decision on an expected motion to dismiss could be presented to the Court of Appeals uncluttered by extraneous matters. Should we grant the motion to dismiss, such decision would dispose of the entire controversy alleged in the complaint, and would be appealable as of right. Should we deny the motion, we would undoubtedly certify the matter for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), and it seems inconceivable that the Court of Appeals would not accept it.
New York, New York
August 1, 1996
WHITMAN KNAPP, SENIOR U.S.D.J.