A divided U.S. Court of Appeals for the Second Circuit affirmed the dismissal of securities law antifraud claims against a “trusted” investor in the pump-and-dump scheme perpetrated by two defunct broker-dealers, A.R. Baron & Co. and Bear Stearns Cos. Inc.  See Fezzani v. Bear Stearns & Co. Inc., 2d Cir. No. 09-4414-cv, 5/7/13,  http://op.bna.com/srlr.nsf/r?Open= jkoo-97hryk. 

The court held that the defendant cannot be held primarily liable under the Securities Exchange Act of 1934 Section 10(b) because, unlike the brokerage firms, he did not communicate directly with the defrauded investors.  This pump-and-dump scheme was furthered, in part, by parking stock with various investors, including the defendant.  The parking involved placing stock in investors’ accounts while A. R. Baron retained the risk of loss by promising to buy back shares, if necessary, at a price guaranteeing a profit for the insider.  Parking by the defendant and others painted a false picture of the shares’ value and liquidity and lured potential investors into investing money based on the “illusion of trading activity.”  Later, the defendants allegedly dumped their holdings before the stock crashed.

The court explained that, since there is no aiding and abetting liability in private actions, the defendant may be held liable only as a primary violator.  In this case, liability was not present because the defendant never had any communications with investors.

In short, the defendant needs to basically communicate with the investor for liability to attach.