Sell v. Gama

• Decision Date: 22 February 2013
• Docket Number: No. CV–12–0211–PR.,CV–12–0211–PR.
• Court: Arizona Supreme Court
• Parties: James C. SELL, Trustee of the Participating Trust established under Debtors' First Amended Joint Plan of Reorganization dated 7–7–06 in U.S. Bankruptcy Case No. 05–27993–PHX–GBN, on behalf of the Trust's Participating Investors, Petitioner, v. The Honorable J. Richard GAMA, Judge of the Superior Court of the State of Arizona, in and for the County of Maricopa, Respondent Judge, Squire & Company, PC, a Utah professional corporation; Lynn G. Hillstead and Jane Doe Hillstead, husband and wife; Dwayne Asay and Jane Doe Asay, husband and wife; Lewis and Roca, LLP, an Arizona limited liability partnership; Keith Beauchamp and Juliet Lim, husband and wife, Real Parties in Interest.

231 Ariz. 323

295 P.3d 421

654 Ariz. Adv. Rep. 7

James C. SELL, Trustee of the Participating Trust established under Debtors' First Amended Joint Plan of Reorganization dated 7–7–06 in U.S. Bankruptcy Case No. 05–27993–PHX–GBN, on behalf of the Trust's Participating Investors, Petitioner,

v. The Honorable J. Richard GAMA, Judge of the Superior Court of the State of Arizona, in and for the County of Maricopa, Respondent Judge,Squire & Company, PC, a Utah professional corporation; Lynn G. Hillstead and Jane Doe Hillstead, husband and wife; Dwayne Asay and Jane Doe Asay, husband and wife; Lewis and Roca, LLP, an Arizona limited liability partnership; Keith Beauchamp and Juliet Lim, husband and wife, Real Parties in Interest.

No. CV–12–0211–PR.

Supreme Court of Arizona, En Banc.

Feb. 22, 2013.

Sherman & Howard LLC By Robert C. Hackett, Thomas M. Quigley, David W. Garbarino, Jamey G. Anderson, Phoenix, Attorneys for James C. Sell.

Perkins Coie LLP By H. Michael Clyde, Todd R. Kerr, Tony Caliendo, Phoenix, Attorneys for Squire & Company, PC, Lynn G. Hillstead, Jane Doe Hillstead, Dwayne Asay, and Jane Doe Asay.

Osborn Maledon PA By William J. Maledon, Geoffrey M.T. Sturr, Thomas L. Hudson, James K. Rogers, Phoenix, Attorneys for Lewis and Roca LLP, Keith Beauchamp, and Juliet Lim.

Arizona Corporation Commission, By Matthew J. Neubert, Julie A. Coleman, Phoenix, Attorneys for Amicus Curiae Arizona Corporation Commission.

Begam & Marks PA By Stanley J. Marks, Phoenix, Attorney for Amicus Curiae Public Justice, PC.

Mitchell & Associates By Sarah K. Deutsch and Tiffany & Bosco PA By Richard G. Himelrick, Phoenix, Attorneys for Amicus Curiae Mortgages Ltd. Investors.

OPINION

PELANDER, Justice.

¶ 1 We granted review to determine whether the Arizona Securities Act (“ASA”), A.R.S. §§ 44–1801 to –2126, authorizes a cause of action for secondary liability based on aiding and abetting others' primary securities fraud. More than three decades ago, based on federal case law that has since changed, we recognized such aiding and abetting claims. State v. Superior Court ( Davis ), 123 Ariz. 324, 599 P.2d 777 (1979), overruled in part on other grounds by State v. Gunnison, 127 Ariz. 110, 618 P.2d 604 (1980). But in light of Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), and finding no compelling reason to depart from that case, we hold that a separate claim for aiding and abetting does not exist under the ASA, overruling Davis's contrary holding.

I.

¶ 2 James C. Sell is the trustee of a trust created to recover losses suffered by investors in an allegedly fraudulent investment scheme known as Mathon Fund, LLC. Sell filed this action under the ASA against various persons and entities that directly participated in the scheme, as well as others who allegedly assisted by rendering professional services. This latter category of defendants included an accounting firm, Squire and Company (“Squire”), the law firm of Lewis and Roca, and several of those firms' employees. Sell's multi-count complaint alleged that those professional defendants were primarily liable for securities fraud under A.R.S. §§ 44–1991 and –2003 (Count One), and secondarily liable for aiding and abetting others' statutory violations (Count Two).¹

¶ 3 In 2008, Superior Court Judge Janet Barton dismissed Count One against the Lewis and Roca defendants and both counts against Squire, finding no legal basis for the Count Two claim because the ASA does not expressly “create aiding and abetting liability” for securities fraud, and because Central Bank overturned the federal case law on which Davis had relied. After Judge Barton rotated off the case and Superior Court Judge Douglas Rayes was assigned, Sell moved for reconsideration. Judge Rayes granted that motion as to Count Two, ruling that our decision in Davis was still controlling law, even if Central Bank called its reasoning into question.

¶ 4 In 2011, Squire, joined by Lewis and Roca, moved for summary judgment on the aiding and abetting claim, arguing that the ASA did not create such secondary liability.² Superior Court Judge Richard Gama, who then presided over the case, granted the motion. The judge acknowledged that Davis had not been overruled, but found “nothing to suggest [that this Court] will deviate from Central Bank when it does confront the issue.”

¶ 5 Without comment, the court of appeals declined jurisdiction over Sell's special action petition. Although the case is in an interlocutory posture, we granted review because whether aiding and abetting liability exists under the ASA is a recurring legal question of statewide importance on which lower courts are divided. We have jurisdiction under Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12–120.24.

II.

¶ 6 Enacted in 1951, the ASA makes it illegal for any person, “directly or indirectly,” to commit any of the following securities-related acts or omissions:

1. Employ any device, scheme or artifice to defraud.

2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

3. Engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit.

A.R.S. § 44–1991(A).

¶ 7 That statute is “almost identical to the antifraud provisions of the 1933 Securities Act [§ 17(a) ], 15 U.S.C. § 77q.” Davis, 123 Ariz. at 331, 599 P.2d at 784. But unlike the 1933 Act, which “contains no express private cause of action,” “the ASA explicitly provides for a private cause of action for violations of § 44–1991 in [A.R.S.] § 44–2001(A).” Grand v. Nacchio, 225 Ariz. 171, 174 ¶ 12, 236 P.3d 398, 401 (2010). And Arizona's private cause of action “may be pursued against ‘any person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase.’ ” Id. ¶ 13 (quoting A.R.S. § 44–2003(A)).³ The federal act contains no such language.

¶ 8 “The legislature intended the ASA ‘as a remedial measure’ for the ‘protection of the public’ and therefore specified that the act be ‘liberally construed.’ ” Id. ¶ 16 (quoting 1951 Ariz. Sess. Laws, ch. 18, § 20 (1st Reg. Sess.)). The ASA's language “confirms a broad intent to sanction wrongdoing in connection with the purchase or sale of securities.” Id.

¶ 9 In Davis, 123 Ariz. at 331–32, 334, 599 P.2d at 784–85, 787, we found actionable the plaintiffs' claims that certain defendants aided and abetted securities fraud under the ASA, § 44–1991.⁴ We relied exclusively on two federal district court decisions that had interpreted § 17(a) of the 1933 Securities Act, 15 U.S.C. § 77q(a), and § 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b), to recognize some form of aiding and abetting liability for securities fraud. Davis, 123 Ariz. at 331–32, 599 P.2d at 784–85 (citing SEC v. Nat'l Student Mktg. Corp., 402 F.Supp. 641 (D.D.C.1975); SEC v. Scott Taylor & Co., 183 F.Supp. 904 (S.D.N.Y.1959)).

¶ 10 Davis neither analyzed the federal cases it cited nor evaluated whether § 44–1991 or any other section of the ASA independently authorized aiding and abetting liability. Rather, because the federal and state statutory schemes were “almost identical,” and federal cases held that “[a] defendant who aids and abets another's violation respecting the use of manipulative or deceptive devices in the sale of stock ... [was] liable as a principal,” we saw “no reason why one who aids and abets another in violating A.R.S. § 44–1991 should not also be held liable as a principal.” Id. at 331, 599 P.2d at 784.

¶ 11 A year later, we revisited and overruled Davis to the extent it required scienter in an action under what is now § 44–1991(A)(2). See Gunnison, 127 Ariz. at 112–13, 618 P.2d at 606–07. We did so because, after Davis, the United States Supreme Court held in Aaron v. SEC, 446 U.S. 680, 701–02, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), that scienter is not an element for an action under § 17(a)(2) of the 1933 Act. Gunnison, 127 Ariz. at 113, 618 P.2d at 607.

¶ 12 In support of our holding in Gunnison, this Court noted that “[u]nless there is a good reason for deviating from the United States Supreme Court's interpretation, we will follow the reasoning of that court in interpreting sections of our statutes which are identical or similar to federal securities statutes.” Id. at 112–13, 618 P.2d at 606–07. Although not required to do so, we nonetheless found it “helpful, for consistency in the application of the law, to be harmonious with the United States Supreme Court.” Id. at 112, 618 P.2d at 606.

¶ 13 Fifteen years after Davis, the United States Supreme Court held in Central Bank that “a private plaintiff may not maintain an aiding and abetting suit under § 10(b)” of the 1934 Act. 511 U.S. at 191, 114 S.Ct. 1439. The Court found no express authorization for such claims in the act itself and no good reason to judicially imply potential liability for aiding and abetting when Congress had not seen fit to do so. Id. at 175–90, 114 S.Ct. 1439. Rejecting the notion that “the phrase ‘directly or indirectly’ in the text of § 10(b) covers aiding and abetting,” the Court pointed out that “aiding and abetting liability extends beyond persons who engage, even indirectly, in a proscribed activity; aiding and abetting liability reaches persons who do not engage in the proscribed activities at all, but who give a degree of aid to those who do.” Id. at 175–76, 114 S.Ct. 1439.

¶ 14 In Central Bank, the Court found its “role limited when the issue is the scope of conduct prohibited by the statute,” and therefore “adhere[d] to the statutory text in resolving it.” Id. at 187–88, 114 S.Ct. 1439. And, the Court noted, the issue “is not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by ...