Tarnished Reputations: Gatekeeper Liability After Janus

Courts have long recognized the role of the securities industry’s accountants, lawyers, securities analysts, and credit-rating agencies as “gatekeepers”—reputational intermediaries who, for a fee, effectively rent their reputations for honesty, accuracy, and integrity to their corporate clients in order to provide confidence to the clients’ investors. Under this reputational model, a gatekeeper’s reputation is its chief capital asset. While it seems that gatekeepers would need very little incentive to avoid risking this asset by helping their clients commit securities fraud, debacles such as Enron, WorldCom, Refco, and the 2008 Financial Crisis demonstrate that this is not true. Notable commentators suggest that if gatekeepers face a low risk of litigation, then the expected value derived from risking their reputations by committing fraud increases. Yet ever since the Supreme Court’s 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver, even when gatekeepers knowingly assist their clients to commit securities fraud, the clients’ investors cannot bring aiding and abetting claims against these gatekeepers in Rule 10b-5 actions. Unsurprisingly, the period after Central Bank is marked by an increase in risky accounting practices and less conservative reporting strategies. Furthermore, in both Stoneridge Investment Partners, LLC v. Scientific-Atlanta (2008) and Janus Capital Group, Inc. v. First Derivative Traders (2011), the Supreme Court further limited theories by which gatekeepers could be held liable as primary violators under Rule 10b-5. Congress had several chances after Central Bank to restore the aiding and abetting private right of action under 10b-5 but declined to do so. As a result, gatekeepers who aid and abet fraud face a substantially reduced risk of litigation and therefore a substantially reduced risk to their reputational capital. To effectively curtail securities fraud committed by gatekeepers, private aiding and abetting liability must be reinstated. This Note will examine the history of gatekeeper liability under the securities laws, particularly the rise and fall of the private right of action for aiding and abetting liability under Rule 10b-5. It will then explore theories from several notable commentators of why gatekeepers would rationally risk their reputational capital by knowingly acquiescing to their clients’ securities frauds. In concluding that the current state of securities law does not provide the market with enough incentive to demand that gatekeepers invest in and maintain their reputations, this Note argues that Congress must restore the right of private plaintiffs to bring aiding and abetting claims under 10b-5