The Supreme Court’s decision in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994) has had a significant impact on securities litigation since it was handed down. The 1994 decision held that there is no liability for aiding and abetting under Exchange Act Section 10(b), effectively reversing every court of appeals decision which had previously considered the issue. While it prompted a quick legislative fix for the SEC by adding Section 20(e) to the Exchange Act, the decision continues to impact securities litigation as is well illustrated by the recent decision in Janus Capital Group, Inc. v. First Derivative Traders, Inc., No. 09-525 (S.Ct. June 13, 2011) (here).

Despite the legislative fix for the SEC, Central Bank has continued vitality, curtailing the reach not just in private actions but in those brought by the SEC. In a recent ruling applying the decision however the focus was not on secondary liability but on where the SEC and private litigants can venue a securities fraud action. In SEC v. Johnson, No. 09-5399 (D.C. Cir. June 28, 2011) the Court reversed a jury verdict in favor of the Commission and dismissed the case for lack of venue.

The SEC’s claims centered on a financial fraud at PurchasePro.com. It occurred from 2000 to 2001. During that time Christopher Benyo served as Senior Vice President for Marketing and Network Development for the company. PurchasePro made software for online business-to-business sales.

In early 2000 AOL retained the firm to build an online sales platform. In March PurchasePro entered into an agreement with AOL to purchase advertising and for referring new customers. By the end of the year PurchasePro depended heavily on payments and referrals from AOL.

In late 2000 PurchasePro began to document sham transactions with AOL. By the end of the first quarter 2001 two-thirds of the $29.8 million in reported revenue came from either sham referrals or new fraudulent contracts from its dealings with AOL. Eventually the fraud was discovered by the auditors.

In January 2005 Mr. Benyo, three other PurchasePro employees and two AOL executives were indicted in the Eastern District of Virginia. By that time six executives had pleaded guilty and AOL entered into a deferred prosecution agreement, admitting aiding and abetting securities fraud. Mr. Benyo was acquitted of all charges following a jury trial.

The SEC filed a parallel civil enforcement action in the District of Columbia. The complaint alleged that he worked on drafting or caused others to draft the false documents and agreements which resulted in the fictitious revenue. He was alleged to have aided and abetted the fraud of the company. A jury found Mr. Benyo liable. The court imposed a fine of $35,000 and barred him from serving as an officer or director of a public company for five years. The court rejected Mr. Benyo’s objection to venue which argued that all of his actions were in Nevada. In reaching this conclusion the court accepted the SEC’s contention that venue was proper under the co-conspirator venue theory. This was based on the theory that Mr. Benyo aided and abetted the scheme, a material part of which occurred in the District of Columbia because of the filing of a misleading Form 10K for 2000 and Form 10-Q for the first quarter of 2001.

The Circuit Court reversed. Under Section 27 of the Exchange Act venue is proper “in the district wherein the defendant is found or is an inhabitant or transacts business . . . [or] in the district wherein any act or transaction constituting the violation occurred.” The “any act” language of the section permits a plaintiff to bring suit in any district where any person has committed an act that “constitute[s]” the offense for which the defendant is charged the court noted. The co-conspirator theory of venue is “a gloss upon and an extension of . . . ” Section 27, according to the Court.

Mr. Benyo claimed that Central Bank foreclosed adding a gloss to the statute such as the co-conspirator theory. The Commission, on the other hand, argued that Central Bank applied to an implied cause of action and not it and, in any event, the scope of venue does not hinge on the reach of the statute.

Reading the plain language of the statute the Circuit Court concluded forecloses the SEC’s claims. By its terms suit “simply may not be brought in a forum where there is no statutory basis for venue. We cannot countenance any so-called theory that ‘adds[s] a gloss to the operative language of the statute quite different from its commonly accepted meaning” quoting Ernst & Ernst v. HJochfelder, 425 U.S. 185, 199 (1976).

Here the SEC failed to identify in its complaint or evidence any act or transaction of Mr. Benyo occurring in the District of Columbia that constituted the violations charged. The Form 10-Q filing was an act by PurchasePro. The violation is not attributed to Mr. Benyo and the revenue he allegedly falsified was not included in that filing. Since there is no statutory basis for venue in this district the case is reversed and dismissed without prejudice.

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