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36 Del. J. Corp. L. 463 (2011)
Secondary Liability for Securities Fraud: Gatekeepers in State Court

handle is hein.journals/decor36 and id is 467 raw text is: SECONDARY LIABILITY FOR SECURITIES FRAUD: GATEKEEPERS IN STATE COURT BY JENNIFER J. JOHNSON' ABSTRACT The recent economic meltdown exposed numerous Ponzi schemes. When promoters offraudulent ventures are unable to provide restitution to their victims, plaintiffs seek out other sources of repayment including professionals and other secondary participants in the transactions that precipitated their losses. Although most scholars agree that professionals can perform an important role in deterring securities fraud, scholarly opinions vary widely on the appropriate liability regime, if any, that these gatekeepers should face. While civil liability for secondary participants in securities fraud was once well accepted in the federal courts, in 1994 the Supreme Court invalidated such claims as beyond the purview ofSection 10(b) ofthe 1934 Securities Exchange Act and Rule 10b-5. In contrast, there is a robust tradition of aiding and abetting liability in most state blue sky statutes. Unlike the federal implied Rule JOb-5 cause of action, state blue sky laws contain express secondary liability statutes that do not have strict scienter standards or rigorous pleading requirements. Indeed, some state statutes are negligence based and contain burden-shifting provisions that require non-seller defendants to establish that they were not negligent in failing to discover the seller'sfraud. This Article traces the development ofsecondary liability under state securities laws and contrasts various state regimes and their federal counterparts. It also reviews federal efforts to restrict states from adjudicating securities related claims. Relying on available empirical evidence, the Article ultimately concludes that Congress should reverse its propensity ofthe last decade to preempt state securities actions and should recognize the valuable contribution of such actions in addressing fraud, particularly fraud committed upon retail investors. 463 Erskine Wood Sr. Professor of Law, Lewis and Clark Law School. I would like to thank the members of the Law and Society Association for their helpful comments on this paper after my presentation at the 2010 meeting and Robert S. Scott for his invaluable research assistance.

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