Whether secondary actors who did not prepare or substantially participate in preparing corporate financial misstatements can still be held liable for them under Rule 10b-5 as scheme participants is a hot topic in the courts. In Simpson v. AOL Time Warner, Inc., 2006 WL 1791042 (9th Cir. June 30, 2006), the U.S. Court of Appeals for the Ninth Circuit has issued an opinion in the Homestore securities litigation that addresses the issue.
In Simpson, the court held that “to be liable as a primary violator of Sec. 10(b) for participation in a ‘scheme to defraud,’ the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme.” It is not sufficient, the court concluded, “that a transaction in which a defendant was involved has a deceptive purpose and effect; the defendant’s own conduct contributing to the transaction or overall scheme must have had a deceptive purpose and effect.” The court rejected the defendants’ argument that Sec. 10(b) liability is limited to those who make material misstatements or omissions, but ultimately found that the district court had correctly dismissed the claims against them.
Held: Dismissal affirmed.