Bass, Berry & Sims attorney Chris Lazarini analyzed SEC vs. Ackman in which the court declined to dismiss aiding and abetting claims against the general counsel (GC) of a registered investment advisor where the GC had knowledge of the alleged fraud of the firm’s CEO and participated in the firm’s efforts to cover up the fraud. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

SEC vs. Ackman, No. 13-12520 (E.D. Mich., 5/12/15) 

A person having knowledge of wrongdoing or a general awareness that his role is part of an overall activity that is improper may be liable for aiding and abetting fraud under the Investment Advisers Act of 1940. 

This matter comes before the Court on Defendant Alicia M. Diaz’s motion to dismiss the SEC’s claims that she aided and abetted other Defendants’ alleged violations of Section 206(1) and 206(2) of the Investment Advisers Act of 1940. In early 2008, Defendant Mayfieldgentry Realty Advisors, LLC (MGRA), a registered investment advisory firm, acting at the direction of its CEO, secretly removed $3.1 million from the Police and Fire Retirement System of the City of Detroit (“PFRS”) and used it to buy two shopping centers titled in the name of MGRA. At the time, Diaz was the General Counsel, Executive Vice President and Chief Compliance Officer of MGRA.

Between 2008 and early 2011, MGRA’s CEO and another defendant hid the company’s theft from the PFRS and, apparently, from others at MGRA. In May 2011, Diaz and other senior officers at MGRA learned of the matter. Rather than disclose the theft, Diaz and other senior officers continued to conceal the theft from the PFRS, while unsuccessfully trying to sell the shopping centers and otherwise return the stolen funds to the PFRS. Defendants’ efforts to conceal the theft included hiring a broker to sell the properties and participation in investment performance and budget meetings with the PFRS board in 2011 and early 2012, where the theft and efforts to sell the properties were not disclosed, even though all other aspects of MGRA’s advisory activities were discussed. In April 2012, MGRA finally told the PFRS board of the theft of its assets. 

In June 2013, the SEC filed this civil enforcement action, alleging that Defendants MGRA and its CEO violated sections 206(1) and 206(2) of the Advisers Act and that Defendant Diaz and other MGRA senior officers aided and abetted those violations. Diaz moved to dismiss the claims levied against her, arguing that she could not aid and abet the primary violation – the theft of the funds – because it was completed well before she took any action and that the five-year statute of limitations had run. She also argued that her ethical duties as attorney prevented her from disclosing the wrongdoing and that her status as MGRA’s General Counsel shielded her from liability.

The Court rejects each of these arguments. First, it finds that the SEC had properly stated a claim that MGRA and its CEO violated the Advisers Act and breached the fiduciary duty of disclosure, not only by stealing the PFRS’s assets but also by misleading the PFRS about the true value of its investments and failing to disclose the subsequent failed efforts to return the stolen funds. The SEC’s aiding and abetting claims, the Court finds, relate to Diaz’s efforts in 2011 and 2012 to assist MGRA’s ongoing efforts to cover up the original fraud. Those actions took place well within the five-year statute of limitations. Second, the Court finds that Diaz’s attorney-client privilege defense is an affirmative defense, and that her motion can only be granted if the defense clearly appears on the face of the complaint. The Court finds nothing on the face of the complaint suggesting that Diaz was acting in her role as counsel and declines the opportunity to convert Diaz’s motion to dismiss to a motion for summary judgment by considering an expert report that Diaz made a part of her motion. 

According to news reports, MGRA and its CEO (who was separately charged with bribing city officials) settled the SEC’s action, without admitting or denying any wrongdoing, while Diaz and the other defendants accused of aiding and abetting the fraud elected to fight the charges against them.