407 F.Supp.3d 264
S.D.N.Y.2019Background
- Cantor Fitzgerald used AE (account executive) codes to allocate and record broker commissions; its WSPs (since 2006) expressly prohibited off-book commission‑splitting and required annual certifications by brokers.
- From ~2002–2013 Adam Mattessich (senior trader) arranged to have certain accounts recorded under junior brokers’ AE codes (notably Joseph Ludovico), with those brokers then issuing personal checks to Mattessich to remit a portion of commissions.
- The scheme caused Cantor’s books and records to show commissions attributable to Ludovico while Mattessich actually received compensation that was not recorded on the firm’s books.
- Neither the defendants nor Cantor recorded or disclosed the off‑book transfers; Cantor later settled administrative proceedings with the SEC for books-and-records violations.
- The SEC sued Mattessich and Ludovico for aiding and abetting Cantor’s violations of Section 17(a) of the Exchange Act and Rule 17a‑3(a)(19)(i). Defendants moved to dismiss under Rule 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Cantor committed primary books‑and‑records violations under Rule 17a‑3(a)(19)(i) | Rule requires broker‑dealers to record compensation "attributable" to each associated person, so off‑book splits that result in unrecorded compensation violate the Rule | Rule only requires recording of compensation paid by the broker‑dealer; private post‑tax splits between brokers fall outside the Rule | Court: The Rule covers compensation "attributable" to a broker regardless of who actually pays it; Cantor’s records were inaccurate and Cantor violated the Rule |
| Whether defendants had knowledge of Cantor’s violation | Defendants knew the AE system and knowingly engaged in an off‑book split that made records inaccurate; they signed WSP certifications | Commission‑sharing is an accepted practice; defendants lacked knowledge of the specific SEC rule | Court: Allegations that defendants knew AE system and secretly rerouted commissions and signed WSP certifications sufficiently plead knowledge |
| Whether defendants provided substantial assistance to Cantor’s violation | Defendants agreed to and implemented the off‑book scheme; payments (checks) and concealment demonstrate active participation | Payments were private arrangements and did not require alleging recklessness in addition to knowledge | Court: Writing checks, accepting funds, and concealment sufficiently allege substantial assistance; alleging knowledge alone is enough under Section 20(e) |
| Whether the complaint plausibly pleads an aiding‑and‑abetting claim at the Rule 12(b)(6) stage | Complaint alleges primary violation, knowledge, and substantial assistance — meeting the three elements | Complaint fails to plead a cognizable primary violation, requisite knowledge, or substantial assistance | Court: Denied motion to dismiss; complaint plausibly alleges all three elements |
Key Cases Cited
- Faber v. Metro. Life Ins. Co., 648 F.3d 98 (2d Cir. 2011) (standards for pleading and drawing inferences on Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for complaints)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (requirements to plead factual matter that makes claim plausible)
- SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (elements of aiding and abetting securities violations)
- SEC v. DiBella, 587 F.3d 553 (2d Cir. 2009) (aiding and abetting standards)
- SEC v. Drexel Burnham Lambert Inc., 837 F. Supp. 587 (S.D.N.Y.) (books‑and‑records aiding and abetting liability where records concealed beneficial interests)
- Falstaff Brewing Corp. v. United States, 629 F.2d 62 (D.C. Cir. 1980) (knowledge of consequences suffices where legality need not be known)
- Holder v. Humanitarian Law Project, 561 U.S. 1 (2010) (principle that clearly proscribed conduct forecloses vagueness challenges)