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BULILETTN
OF THE SECTION ON CORPORATION, BANKING & BUSINESS LAW
Vol. 12 October, 1974 No. 1
ABOUT THE BULLETIN
The Information Committee is planning to publish the Bulletin quarterly during the current year.
We hope to make these issues as useful and informative as possible for the entire membership of the
Section. With this in mind we anticipate placing primary emphasis on brief discussion in the Bulletin
of the widest possible range of currently significant topics. More extended analyses of significant
problems and developments which are available elsewhere will be brought to the attention of the
membership by references in the Bulletin to those sources. In order to make the Bulletin as useful as
possible to the membership of the Section we invite every member who has a suggestion or is aware
of developments appropriate for discussion in the Bulletin to let us know about them. If you have
suggestions for topics to be covered in the Bulletin, please transmit them by phone or letter to one of
the officers of the Section or to the Information Committee Chairman at the addresses on the back
page of this issue. Many thanks!
DIRECTORS' LIABILITY UNDER RULE 10b-5
By Robert F. Watson, Fort Worth*
Consumerism is the United States currently seems to be at its zenith. This trend is evidenced in
the ever increasing responsibilities of corporate officers, directors of public companies and their lawyers
and accountants. Many lawmakers, judges, scholars and commentators have warned that a too liberal
standard of liability imposed on those persons will result in an abdication of all responsibility and a
refusal to serve by professionals and corporate principals. Others have argued that those who under-
take to serve the public shareholder in any capacity should be held to the highest standards of diligence
and integrity.
Several recent decisions have emphasized the great disparity in attitudes and points of view on the
part of counsel and the courts when considering directors' liability for fraud under Rule 10b-5. Last
summer the Second Circuit, sitting en banc in Lanza v. Drexel & Co., determined that corporate
directors could only be held liable for damages in an action under Rule 10b-5 by a purchaser of corpo-
rate securities if the director either personally participated in the unlawful act or knowingly aided and
abetted its accomplishment:
We conclude that a director in his capacity as a director [a non-participant in the transaction]
owes no duty to insure that all material, adverse information is conveyed to prospective purchasers
of the stock of the corporation on whose Board he sits.'
In Lanza, the Second Circuit reaffirmed its position that aiding and abetting in a negligent manner
will not provide the basis for 10b-5 liability in a private suit for damages. The court concluded that
a defendant director who did not participate personally in the acts complained of had no duty to
convey to purchasers of corporate securities material, adverse information.2 The court then concluded
that the defendant director before it could not be held liable as an aider and abettor because he had
Mr. Watson is Regional Administrator of the Securities and Exchange Commission in Fort Worth.
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any
private publication or speech by any of its members or employees. The views expressed here are Mr.
Watson's and do not necessarily reflect the views of the Commission.
1 Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973)
2 Id. at 1289.](ViewImageLocal?handle=hein.journals/txjbus12&div=1&collection=&method=preview&ext=.png&size=3)
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