SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. Joseph F. APUZZO, Defendant-Appellee.
Docket No. 11-696-cv.
United States Court of Appeals, Second Circuit.
August 8, 2012.
689 F.3d 204
Before: WINTER, RAGGI, Circuit Judges, and RAKOFF, District Judge.*
Argued: March 14, 2012.
It thus seems clear that
CONCLUSION
For the foregoing reasons, we hold that, although the language of the special rule is ambiguous, it is clear from the structure, historical context, and purpose of
Accordingly, we AFFIRM the judgment of the United States Tax Court in Exxon‘s favor.
Seth Taube (Aaron M. Street, Mauren P. Reid, on the brief) Baker Botts LLP, for Defendant-Appellee.
RAKOFF, District Judge:
The Securities and Exchange Commission (“SEC“) alleges that defendant Joseph Apuzzo aided and abetted securities laws violations through his role in a fraudulent accounting scheme. In order for a defendant to be liable as an aider and abettor in a civil enforcement action, the SEC must prove: “(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party; (2) ‘knowledge’ of this violation on the part of the aider and abettor; and (3) ‘substantial assistance’ by the aider and abettor in the achievement of the primary violation.” SEC v. DiBella, 587 F.3d 553, 566 (2d Cir.2009) (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d Cir.1985)). After Apuzzo moved to dismiss the Complaint, the district court, Thompson, J., granted Apuzzo‘s motion to dismiss. Although the district court found that the Complaint plausibly alleged that Apuzzo had actual knowledge of the primary violation, it concluded that the Complaint did not adequately allege “substantial assistance.” Specifically, the district court held that the “substantial assistance” component required that the aider and abettor proximately cause the harm on which the primary violation was predicated, and that the Complaint did not plausibly allege such proximate causation.
For the reasons set forth below, we hold that to satisfy the “substantial assistance” component of aiding and abetting, the SEC must show that the defendant “in some sort associate[d] himself with the venture, that he participate[d] in it as in something that he wishe[d] to bring about, [and] that he [sought] by his action to make it succeed.” United States v. Peoni, 100 F.2d 401, 402 (2d Cir.1938). Applying that test,*
FACTUAL ALLEGATIONS
We review de novo a district court‘s dismissal of a complaint under
The following facts are drawn from the allegations in the Complaint, together with those “documents ... incorporated in it by reference” and “matters of which judicial notice may be taken.” Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir.2002) (internal quotation marks omitted).
The Terex Corporation (“Terex“) manufactures equipment primarily for use in the construction, infrastructure, and surface to mining industries. Apuzzo was the Chief Financial Officer of Terex from October 1998 to September 2002. United Rentals, Inc. (“URI“) is one of the largest equipment rental companies in the world. Michael J. Nolan was URI‘s Chief Financial Officer from its inception in September 1997 until December 2002.
In late December 2000, and again in late December 2001, URI and Nolan, with Apuzzo‘s assistance, carried out two fraudulent “sale-leaseback” transactions. These transactions were designed to allow URI to “recognize revenue prematurely and to inflate the profit generated from URI‘s sales.” Compl. ¶ 11.
Briefly stated, the scheme worked as follows: URI sold used equipment to General Electric Credit Corporation (“GECC“), a financing corporation, and leased the equipment back for a short period. In order to obtain GECC‘s participation in these transactions, URI convinced Terex to agree with GECC to resell the equipment for GECC at the end of the lease periods. Terex and URI also agreed that Terex would provide a residual value guarantee (the “Residual Value Guarantee“) to GECC. That guarantee provided that after resale, GECC would receive no less than 96% of the purchase price that GECC had paid URI for the used equipment. However, to secure Terex‘s participation in the transactions, URI secretly agreed to indemnify Terex for any losses Terex incurred from the Residual Value Guarantee. URI also agreed to make substantial purchases of new equipment from Terex to improve Terex‘s year-end sales.
Under Generally Accepted Accounting Principles (“GAAP“), URI could immediately recognize the revenue generated by the sale of equipment to GECC if several criteria were met. These criteria included 1) that the “risks and rewards of ownership” had been fully transferred to GECC and 2) that the sale price was “fixed and determinable,” or, in other words, that there were no unsettled commitments related to the sale. Compl. ¶ 13. Because URI had secretly agreed to indemnify Terex for any losses that Terex would incur, URI had not fully transferred the risks and rewards of ownership and there were
The Complaint also elaborates the scheme in more detail:
The Terex I Transaction. In late 2000, URI was looking for a way to meet its announced earnings expectations for fiscal year 2000. URI, through its CFO Nolan, decided to set up a sale-leaseback transaction (the “Terex I” Transaction) that would allow URI to record an immediate revenue from the sale of used equipment in its year-end financial statements.
On December 29, 2000, URI and GECC entered into a contract for GECC to buy a fleet of used equipment (the “Equipment“) from URI for $25.3 million; GECC would then lease that equipment back to URI for eight months. Before GECC would participate in this deal, it required a third party to agree to resell the Equipment at the end of the lease period and to guarantee GECC a high residual value for the Equipment.2 Nolan discussed the proposed transaction with Apuzzo, and Apuzzo agreed that Terex would participate as the third-party on two conditions: (1) URI would indemnify Terex for all losses that Terex incurred from any residual value guarantee, and (2) URI would make additional new equipment purchases from Terex in the 2000 calendar year in order to improve Terex‘s year-end financial results.
After Terex and URI agreed to Terex‘s role in the transaction, URI and GECC signed a contract to sell and leaseback the Equipment, and GECC and Terex simultaneously entered into a remarketing agreement (the “Terex I Remarketing Agreement“). Pursuant to the Terex I Remarketing Agreement, which Apuzzo signed on behalf of Terex, Terex agreed to resell the Equipment at the end of the eight month lease period. Terex also gave GECC a residual value guarantee (the “Residual Value Guarantee“) that the Equipment would be resold for at least 96% of the price that GECC had paid, and that if it was not, Terex would refund any shortfall between the actual resale price and the Residual Value Guarantee price. Terex also agreed that it would purchase at the Residual Value Guarantee price any Equipment that remained unsold at the end of the remarketing period.
To consummate the URI-Terex portion of the transaction, Apuzzo and Nolan agreed that URI would purchase $20 million of new equipment from Terex before the end of the 2000 calendar year. URI also agreed to pay Terex $5 million immediately to cover the anticipated losses that Terex would suffer from the Residual Value Guarantee. URI and Terex executed a “backup” remarketing agreement (the “Terex I Backup Remarketing Agreement“), which Apuzzo negotiated and signed on behalf of Terex. Under this agreement, URI agreed to indemnify Terex for any
Apuzzo therefore signed a version of the Terex I Backup Remarketing Agreement that did not reference GECC and did not mention that the equipment that Terex was reselling was the same equipment that URI had sold to GECC. The Terex I Backup Remarketing Agreement also did not mention URI‘s agreement to take over Terex‘s remarketing obligations and to indemnify Terex for any losses. Although Apuzzo had inserted references to these side-arrangements in the initial draft of the agreement, after Nolan and others at URI deleted those references, Apuzzo knowingly signed the disguised agreement.
The initial $5 million indemnification payment from URI to Terex was made in conjunction with URI‘s purchase of $20 million of new equipment from Terex. On December 29, 2000, Apuzzo approved two Terex invoices that listed the value of the equipment as $25 million rather than $20 million. Nolan forwarded the inflated invoices to URI‘s accounting department, “knowing that the accounting department would enter the incorrect prices in URI‘s books and records“; in so doing, Nolan hoped to conceal the $5 million indemnification payment from URI to Terex. Compl. ¶¶ 29-30.
Before agreeing to the Residual Value Guarantee, Apuzzo received an internal appraisal of the Equipment that URI was selling to GECC. Based on that appraisal, Apuzzo knew that URI sold the Equipment to GECC at a price above fair market value. Apuzzo also knew that Terex‘s agreement to guarantee GECC at least 96% of the inflated price that GECC paid to URI (i.e., the Residual Value Guarantee) would likely cause Terex to suffer “substantial losses” when the Equipment was resold. Compl. ¶¶ 24-25. Later, Apuzzo was asked to provide URI‘s auditor with a valuation letter stating that URI had assigned fair market value to the equipment. In response to this request, Apuzzo did not reveal the results of Terex‘s appraisal that had concluded that URI had overstated the value of the equipment. Instead, he offered to provide a letter to URI‘s auditor that stated that “nothing has come to [his] attention” to cause him to believe that URI‘s valuations were incorrect. Compl. ¶ 26 (alteration in original). (Although Apuzzo offered to provide this letter, however, he did not in fact ever provide it.)
On December 31, 2002, once it was clear how much money Terex owed GECC for the Terex I transaction, and therefore how much money URI owed to Terex, Apuzzo signed another contract between URI and Terex. Under this contract, URI agreed to make an $8 million “prepayment” on the purchase of additional equipment from Terex in the first six months of 2003. Compl. ¶ 32. Terex would keep this prepayment even if URI did not make any additional equipment purchases. Apuzzo knew that the contract he signed with URI was intended to disguise the real purpose of the prepayment, which was to indemnify Terex for the losses it suffered because of the Residual Value Guarantee.
The Terex II Transaction. In December 2001, Apuzzo caused Terex to participate in a second three-party transaction (“Terex II“). Like Terex I, Terex II was
As with Terex I, Apuzzo knew that URI had inflated the price of the equipment it was selling to GECC in Terex II,3 and he knew that Terex was likely to lose money under the Residual Value Guarantee. Therefore, Apuzzo again insisted that URI indemnify Terex for these anticipated losses. To disguise the indemnification payments for Terex II, URI paid Terex a $4 million “premium” on the purchase of $24 million in new equipment; this premium was designed to conceal the indemnification payment. Compl. ¶ 43. Additionally, Terex, with Apuzzo‘s knowledge, issued invoices inflating the value of the equipment to $28 million in order to avoid disclosure of the $4 million indemnification payment.
Although Terex‘s sales managers negotiated directly with their URI counterparts regarding many of the details of the Terex II transaction, Apuzzo was involved throughout the process; he engaged in discussions and negotiations with Nolan, monitored email communications related to the three-party transaction, and had control over the final terms of the agreements.
PROCEEDINGS BELOW
Apuzzo moved to dismiss the Complaint in the district court. He argued that the Complaint failed to allege adequately the second and third elements of aiding and abetting securities fraud under DiBella, supra, i.e., that the defendant had actual knowledge of the fraud and that he rendered substantial assistance to the primary violator.4
The district court concluded that the SEC had adequately alleged actual knowledge of the violation. The district court found that:
The [C]omplaint contains factual allegations which, taken as true, support a conclusion that Apuzzo knew URI was inflating the profits generated by URI‘s sales of the used equipment to GECC
and also knew the material details as to the true structure of each of Terex I and Terex II; Apuzzo knew that the transactions were being documented in a manner that concealed the interlocking nature of the three-party agreements and thus failed to disclose the true structure of the transactions; Apuzzo knew that the results from the transactions would be inaccurately reflected in URI‘s financial statements if the true structure of the transactions was not known to URI‘s auditor; and Apuzzo knew that URI‘s auditor was being misled.
SEC v. Apuzzo, 758 F.Supp.2d 136, 148 (D.Conn.2010).
But, the district court found that the SEC had not adequately alleged substantial assistance. Specifically, the court held that “the [C]omplaint contains factual allegations which taken as true support a conclusion that there was a ‘but for’ causal relationship between Apuzzo‘s conduct and the primary violation, but do not support a conclusion that Apuzzo‘s conduct proximately caused the primary violation.” Id. at 152.5 Concluding that such proximate causation was required to satisfy the “substantial assistance” component of aider and abettor liability, the district court granted the motion to dismiss. Id. The SEC timely appealed.
DISCUSSION
While Apuzzo argues that substantial assistance should, instead, be defined as proximate cause, his argument ignores the difference between an SEC enforcement action and a private suit for damages. “Proximate cause” is the language of private tort actions; it derives from the need of a private plaintiff, seeking compensation, to show that his injury was proximately caused by the defendants’ actions. But, in an enforcement action, civil or criminal, there is no requirement that the government prove injury, because the purpose of such actions is deterrence, not compensation.
Thus, in Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir.1985), a private securities fraud action that alleged aiding and abetting fraud (and that was decided prior to the Supreme Court‘s outright prohibition of private plaintiff claims for aiding and abetting securities fraud in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994)), we stated that the complaint “must allege that the acts of the aider and abettor proximately caused the harm to the corporation on which the pri-
In fairness to the district court, our case law has not always made this distinction with clarity. In particular, the opinion in DiBella quotes the proximate cause language from Bloor, which may have led the district court to assume that the SEC was required to plead that the aider and abettor proximately caused the primary securities law violation. But Bloor only explained that the private plaintiff in that case had failed to plead that the alleged primary securities law violation proximately caused the plaintiff any harm. Bloor did not require the plaintiff to plead that the alleged aider and abettor had proximately caused the primary violation.
We now clarify that, in enforcement actions brought under
Indeed, because only the SEC may bring aiding and abetting claims for securities law violations, many if not most aiders and abettors would escape all liability if such a proximate cause requirement were imposed, since, almost by definition, the activities of an aider and abettor are rarely the direct cause of the injury brought about by the fraud, however much they may contribute to the success of the scheme. We therefore welcome the opportunity to clarify that the appropriate standard for determining the substantial assistance component of aider and abettor liability in an SEC civil enforcement action is the Judge Hand standard set forth above.11
Apuzzo argues that his participation in the transactions alone is insufficient to demonstrate substantial assistance because, he contends, “there is simply no allegation in the Complaint that these transactions were unusual.” Appellee‘s Br. at 30. This, however, is doubly erroneous, both because Apuzzo‘s substantial assistance extended beyond his agreement to participate in the transactions and because the well-pleaded allegations of the Complaint aver that these transactions were hardly ordinary transactions. Thus, for example, the Complaint alleges that the agreements detailed in the Complaint “were designed to hide URI‘s continuing risks and financial obligations” Compl. ¶ 12 (emphasis added), and that “Apuzzo knew ... that the three-party transaction was designed to inflate the gain that URI would recognize from the sale-leaseback transaction by disguising the indemnification payment to Terex,” Compl. ¶ 45 (emphasis added). At this stage, we must view the SEC‘s plausible allegations as true.
Moreover, when evaluating whether Apuzzo rendered substantial assistance, we must consider his high degree of actual knowledge of the primary violation (the second component of aiding and abetting). As we have repeatedly held, the three components of the aiding and abetting test “cannot be considered in isolation from one another.” DiBella, 587 F.3d at 566 (quoting Cornfeld, 619 F.2d at 922). Where, as here, the SEC plausibly alleges a high degree of actual knowledge, this lessens the burden it must meet in alleging substantial assistance.
Apuzzo argues that while a high degree of substantial assistance lowers the SEC‘s burden to prove scienter, the converse is not true. A close look at our case law, however, reveals that Apuzzo is incorrect. In DiBella, when discussing the knowledge factor of the aiding and abetting test, we stated that “there may be a nexus between the degree of knowledge and the requirement that the alleged aider and abettor render substantial assistance.” Id. at 566 (quoting Cornfeld, 619 F.2d at 922) (brackets omitted). And, in Cornfeld, we explained that we “must consider” the issue of substantial assistance in light of the
It is particularly appropriate to consider the degree of scienter in evaluating substantial assistance in light of the test for substantial assistance that we have laid out above. When determining whether a defendant sought by his actions to make the primary violation succeed, if a jury were convinced that the defendant had a high degree of actual knowledge about the steps he was taking and the role those steps played in the primary violation, they would be well justified in concluding that the defendant‘s actions, which perhaps could be viewed innocently in some contexts, were taken with the goal of helping the fraud succeed.
As quoted above, the district court found that the Complaint here alleges, in detail, a very high degree of knowledge of the fraud on Apuzzo‘s part. Considered in light of those allegations, the allegations of substantial assistance can no longer be viewed, as Apuzzo argues, as “business as usual,” but rather as an effort to purposely assist the fraud and help make it succeed.
It remains only to note that Apuzzo makes several additional arguments in support of his position that the Complaint was properly dismissed, but none is persuasive:
First, as part of his proximate cause argument, Apuzzo argues that Nolan‘s actions were superseding and intervening causes that vitiate Apuzzo‘s liability for the fraud. As we have stated above, the SEC is not required to prove proximate causation in this case. Moreover, Apuzzo‘s argument is without merit for the independent reason that URI‘s acts were entirely foreseeable, indeed the SEC has plausibly pleaded that Apuzzo knew that URI structured the three-party agreements to allow it to make false and misleading statements about its revenue. Of course, “[i]f the intervening act is extraordinary under the circumstances, not foreseeable in the normal course of events, or independent of or far removed from defendant‘s conduct, it may well be a superseding act which breaks the causal nexus.” Stagl v. Delta Airlines, Inc., 52 F.3d 463, 473 (2d Cir.1995) (quoting Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308, 315, 434 N.Y.S.2d 166, 414 N.E.2d 666 (1980)). But here, the primary violator‘s acts were entirely foreseeable. The primary violator will often be the one to take the final actions necessary to consummate the fraud, and a primary violator‘s foreseeable acts are not superseding and intervening causes of the fraud.
Second, Apuzzo argues that “this case is quite unlike typical substantial-assistance cases where an in-house officer or employee oversees fraudulent transactions or accounting entries by his company.” Appellee‘s Br. at 27 (emphasis in original). The standard suggested by Apuzzo would essentially require that the aider and abettor be a staff member of the same company or government entity as the primary violator. Even if it were true that aiders and abettors are typically employees of the same company or government entity as the primary violator, that is certainly not a requirement of our case law. See, e.g., DiBella, 587 F.3d at 567. To create such a requirement would mean ignoring prior precedent, and it would also impose an overly narrow reading of the aiding and abetting test that would unduly hinder the SEC‘s ability to exercise its statutory mandate. See Stoneridge, 552 U.S. at 158.13
Moreover, Edwards & Hanly‘s discussion in dictum of the defendant‘s liability for aiding and abetting focused on whether the defendant‘s agent, Joseph Werba, had a duty to speak and failed to do so.14 Although we discussed Werba‘s other acts, we explicitly stated that the plaintiff‘s aiding and abetting claim was premised on Werba‘s “silence in the face of alleged ‘knowledge‘” of the primary violator‘s actions. Id. at 484. We then noted that Werba likely had no fiduciary duty to speak. Id. Apuzzo correctly conceded at oral argument, however, that cases involving silence in the face of an alleged duty to speak are different from those where affirmative acts are at the core of the aiding and abetting claims. As we stated in Armstrong v. McAlpin, 699 F.2d 79 (2d Cir.1983), mere “[i]naction on the part of the alleged aider and abettor ordinarily should not be treated as substantial assistance, except when it was designed intentionally to aid the primary fraud or it was in conscious and reckless violation of a duty to act.” Id. at 91. If the allegations were merely that Apuzzo failed to report the fraud, that would present an entirely different case, and if Apuzzo lacked a duty to report, he would not be liable. But, the Complaint here is premised on affirmative acts that Apuzzo took in support of the fraudulent scheme.
Fourth, Apuzzo also spent significant time at oral argument and in his briefs arguing that the inflated invoices were not relevant, since, according to Apuzzo, there was no allegation in the Complaint that URI‘s auditors ever saw those invoices.15
Notes
CONCLUSION
In sum, applying the standard we have set forth for evaluating substantial assistance, we conclude that the Complaint should not have been dismissed because it adequately alleged that Apuzzo aided and abetted the primary violator in carrying out his fraudulent scheme. We therefore
er to go forward with the scheme, it is not necessary for the SEC to allege that the invoices that Apuzzo provided were ultimately used to convince another person of the mischaracterizations that were part of the fraudulent scheme. If this were not the case, then there would be a huge loophole in the statute, making liability dependent on proving that auditors looked at a particular document.
reverse the district court‘s Opinion and remand for further proceedings consistent with this opinion.
Mark CURCIO, Barbara Curcio, Amy L. Smith, Samuel H. Smith, Jr., Stephen Mogelefsky, Roberta Mogelefsky, Ronald D. Jelling, Lorie A. Jelling, Petitioners-Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
Docket Nos. 10-3578-ag(L), 10-3585-ag(CON), 10-5004-ag(CON), 10–5072-ag(CON).
United States Court of Appeals, Second Circuit.
Argued: Jan. 5, 2012.
Decided: Aug. 9, 2012.