Securities Law Attorney Not Liable for Alleged Fraudulent Sale of Securities

Securities Law Attorney Not Liable for Alleged Fraudulent Sale of Securities

      In a June 28 opinion of the Sixth Circuit Court of Appeals, it affirmed the dismissal of claims asserting that the attorney was personally responsible for alleged fraud in the sale of a series of oil and gas ventures.  Bennett v. Durham, No. 11-5782/5918 (6^th Cir. June 28, 2012). 

      Kentucky’s state securities law, referred to as the “blue sky” law, imposes liability upon persons who offer or sell a security in violation of the blue sky laws, upon each person controlling a seller and each partner, officer and director thereof.  In connection with allegations that interest in certain oil and gas ventures were sold pursuant to material misrepresentations and omissions, certain investors sued the companies at issue and their officers, and also sued the attorney who prepared the documents on behalf of the companies. 

      The attorney in question was not an officer, director or partner in any of the issuers, and it was undisputed that his services extended only to the preparation of documents and availability (utilized in a single instance) to answer questions presented by potential investors.  Importantly, the attorney did not either identify potential investors or solicit their individual investment.

      Carefully scrutinizing the language employed in the statute, the Sixth Circuit, as have a number of other courts that are surveyed in the opinion, determined that the preparation of documents does not constitute either offering or selling securities.  While the underlying securities may in fact have been fraudulent:

His [the attorney’s] clients sold the shares, and we do not attribute the transaction of a client to its attorney.  An attorney may draft an offering memorandum for his client, but that does not mean the attorney, as opposed to the client, offers to sell the securities.  The client and its broker-dealers sell the securities.  Slip op. at 4.

       The United States Supreme Court, in the Central Bank decision, determined that there is not “aiding and abetting” liability for breach of the securities laws.  This decision of the Sixth Circuit continues that philosophy and protects accountants, attorneys and other advisors to an issuer from liability for the actions of the issuer.