Howard v. Securities & Exchange Commission

Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify
the Clerk of any formal errors in order that corrections may be made
before the bound volumes go to press.

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 22, 2004 Decided July 30, 2004

No. 03-1098

NICHOLAS P. HOWARD,
PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT

On Petition for Review of an Order of the
Securities and Exchange Commission

Paul Gonson argued the cause for petitioner. With him on
the briefs were Charles R. Mills, David S. Versfelt, and Mary
T. Ambron.
Randall W. Quinn, Assistant General Counsel, Securities
and Exchange Commission, argued the cause for respondent.
With him on the brief were Giovanni P. Prezioso, General
Counsel, Meyer Eisenberg, Deputy General Counsel, Jacob

Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
 2

H. Stillman, Solicitor, and Rada Lynn Potts, Senior Litiga-
tion Counsel.
Before: HENDERSON, RANDOLPH, and ROGERS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge RANDOLPH.
Opinion concurring in the judgment filed by Circuit Judge
HENDERSON.
RANDOLPH, Circuit Judge: Nicholas P. Howard petitions for
review of a Securities and Exchange Commission order im-
posing sanctions on him for aiding and abetting alleged
securities laws violations committed in the course of closing
two private placement offerings of common stock in 1991 and
1992. The SEC’s opinion holding Howard liable is confused
and confusing. The SEC first held that ‘‘awareness of wrong-
doing’’ is a necessary element of aiding and abetting, but it
marshaled no evidence to show that Howard had any such
awareness. The SEC then stated – inconsistently – that
alleged aiders and abettors who act ‘‘recklessly’’ may be
liable, but it never explained what it thought ‘‘recklessly’’
meant in this context; it disregarded evidence tending to
show that Howard did not act recklessly as this court has
defined the term; and it wound up applying a ‘‘should have
known’’ negligence standard that we have rejected. Under a
correct scienter standard the evidence is insufficient to sus-
tain most of the charges against Howard. The record is
unclear with respect to two others, which we remand to the
SEC for reconsideration.

I.
In the early 1990’s Howard served as a senior vice presi-
dent of James Capel, Inc. (‘‘JCI’’), a registered broker-dealer
based in New York. JCI was a subsidiary of James Capel &
Company, Ltd., a securities brokerage firm in London, which
together with another affiliate, made up the Capel Group.
Howard’s job was to market European equity securities to
American and Canadian institutional investors. In 1990, his
customers became interested in investment opportunities cre-
 3

ated by the fall of communism in Eastern Europe. Howard
believed there would be demand for new hotels in the region,
an idea that ultimately resulted in New Europe Hotels, N.V.,
a Netherlands Antilles corporation incorporated on December
20, 1990, for the purpose of developing hotel properties in
Eastern and Central Europe. Howard became a director of
the new company. Before its formation, he consulted with
IDG Development Corporation, a real estate development
company; executives from the Capel Group and its affiliates;
and JCI’s corporate finance department, headed by Joel
Matcovsky – a former SEC lawyer. JCI accepted the pro-
ject, and its corporate finance department took steps to
initiate a stock offering.
The initial offering of 5,000,000 shares of common stock
occurred in late 1990 and early 1991. JCI was the exclusive
marketer of New Europe Hotels stock in the United States;
its affiliates were the underwriters overseas. The law firm of
Rogers & Wells prepared the offering documents for use in
this country. Rogers & Wells began drafting the documents
in the fall of 1990. Howard was not involved in the drafting
process although he was apprised of developments. Matcov-
sky and the corporate finance department served as the
liaison between JCI and Rogers & Wells.
The final placement documents – which Howard skimmed
through but did not read closely – offered the stock on a ‘‘best
efforts, part or none’’ basis. Under SEC Rule 10b–9, 17
C.F.R. § 240.10b–9, a part-or-none offering requires prompt
refunds to investors if the minimum number of shares set
forth in the offering is not sold, or full payment is not
received, by the date specified. The first offering made clos-
ing contingent on the sale of at least 2,000,000 shares at 20
Deutsche Marks per share by January 2, 1991.
JCI began marketing the United States placement in late
1990. Howard headed the marketing effort here, telephoning
potential investors and arranging road shows. Sales were not
up to expectations. With concern growing that the minimum
might not be met by the deadline, three transactions were
 4

undertaken, each of which eventually led to an alleged viola-
tion of the securities laws.
On December 20, 1990, the Capel Group – at the behest of
its co-chairmen – obtained for itself enough shares to close
the offering. It did this by taking 100,000 shares in lieu of
the fee it would have received for serving as the worldwide
selling agent and by purchasing an additional 55,650 shares.
Howard told the subscribers in this country, and potential
investors, that the Capel Group had purchased these shares,
viewing this as a ‘‘marketing plus.’’ In making this represen-
tation, he did not say whether the shares would count toward
the subscription minimum. Howard did not believe there
were any legal problems with the Capel Group’s purchases
because he understood that Matcovsky had cleared the trans-
actions with Rogers & Wells. Howard was on vacation
during the week of the closing and played no role in deter-
mining which shares would be counted toward the minimum.
The next questioned transaction was a purchase by JCI.
During the offering period Howard received an indication of
interest for 30,000 New Europe Hotels shares from Julius
Baer Securities on behalf of the European Warrant Fund, a
closed-end investment company that Howard participated in
creating. Baer served as the fund’s investment adviser, and
JCI served as a ‘‘subadviser.’’ Howard was aware of these
relationships. In the days before the closing, Howard was
unable to reach Baer for confirmation. Howard checked with
his supervisor, JCI’s president Mark Green, who told him
that JCI should itself purchase the stock. Before the closing,
JCI did this and held the shares in a JCI-controlled account.
JCI’s 30,000 shares were counted toward the minimum. On
January 4, 1991, two days after the closing, JCI sold the
shares to the European Warrant Fund.
The third transaction involved the real estate developer,
IDG Development Corporation. As disclosed in offering doc-
uments, IDG was to receive 75,000 shares free of charge as
‘‘founders shares’’ and had agreed to purchase another 75,000
shares on its own. The offer of free shares was rescinded
after another investor objected. Unhappy with losing the
 5

free shares, IDG asked if New Europe Hotels would advance
IDG’s managerial fees to ease a cash flow burden. Although
a director of New Europe Hotels, Howard was on vacation at
the time and did not participate in these discussions. In his
absence, New Europe Hotels’ board of directors approved a
plan whereby the company would deposit an amount equal to
IDG’s fees in a bank that in turn would use the deposit as
collateral for a loan to IDG. Matcovsky, who was also a
director and participated in the meetings, called Howard, told
him of the board’s resolution, and represented that Rogers &
Wells had been consulted and approved the transaction.
Only then did Howard vote in favor of the plan. New Europe
Hotels thus assisted IDG in obtaining two loans, which IDG
used to buy the shares it was originally supposed to receive
free of charge. These shares were counted toward the
minimum.
Although the closing took place on January 2, 1991, it was
not until several weeks later that full payment was made for
up to a third of the shares, including those sold to IDG
Development Corporation. In part this was due to conflicting
instructions about where to wire payment. Howard learned
of these problems when he returned from vacation on Janu-
ary 4 and assisted JCI’s efforts to account for and collect the
missing funds.
JCI initiated a second private placement offering of NEH
securities in October and November 1991. As with the first
offering, the corporate finance department coordinated the
drafting of documents by Rogers & Wells. Howard relied on
its work product and believed the offering materials contained
all the necessary disclosures. The second offering closed on
November 27, 1991.
The SEC charged Howard with willfully aiding and abet-
ting and causing the securities violations committed by JCI
and New Europe Hotels. In the SEC’s view, the minimum
subscription of 2,000,000 shares in the part-or-none offering
was reached by improperly counting (1) shares the Capel
Group purchased for itself, (2) shares JCI purchased for an
aftermarket sale to the European Warrant Fund, and (3)
 6

shares IDG purchased with bank loans using as collateral the
fees New Europe Hotels advanced. These transactions were
not, according to the SEC, ‘‘bona fide’’ under Rule 10b–9.1 In
addition, the SEC determined that antifraud violations oc-
curred when the first offering closed despite the fact that
payment had not been received for a third of the shares. JCI
and New Europe Hotels thus violated § 10(b) of the Securi-
ties Exchange Act, and Rules 10b–5 and 10b–9 thereunder,
and § 17(a) of the Securities Act.2 The violation of Rule 10b–
9 consisted of improperly closing the initial offering rather
than returning the proceeds of the sales to the investors.
The violations of Rule 10b–5 were the failure to disclose in
the first offering that these purchases would be counted
toward the minimum and the failure to disclose in the second
offering that the first offering had closed improperly. The
SEC also charged that JCI violated § 17(a)(1) of the Invest-
ment Company Act by selling securities to the European
Warrant Fund, which it was advising.3
After an evidentiary hearing an Administrative Law Judge
found that Howard had aided and abetted and caused these
violations. The SEC agreed and suspended Howard from
associating with any broker or dealer for three months,
1 Rule 10b–9 is set forth infra note 12.
2 Section 10(b) of the Securities Exchange Act prohibits the use of

manipulative or deceptive devices in connection with the purchase
or sale of securities. 15 U.S.C. § 78j(b). Rule 10b–5 prohibits,
inter alia, the making of an untrue statement of a material fact in
connection with a securities transaction. 17 C.F.R. § 240.10b–5.
Section 17(a) of the Securities Act prohibits fraudulent conduct
including the omission of material facts necessary to make state-
ments not misleading in connection with the offer or sale of
securities. 15 U.S.C. § 77q(a).
3 Section 17(a)(1) of the Investment Company Act prohibits an
affiliated person of a registered investment company, acting as a
principal, from selling any security to that company. 15 U.S.C.
§ 80a–17(a)(1). Section 2(a)(3)(E) of the Act defines ‘‘affiliated
person’’ of an investment company to include ‘‘any investment
adviser thereof.’’ 15 U.S.C. § 80a–2(a)(3)(E).
 7

ordered him to cease and desist from committing any future
violations, and assessed a civil penalty of $50,000.

II.
Of the three sanctions imposed on Howard, one – the cease
and desist order – stands apart. The SEC’s authority to
issue such orders against secondary actors rests on § 21C(a)
of the Securities Exchange Act, 15 U.S.C. § 78u–3(a). This
section states that if the SEC finds that any person has
violated the Act or any rule or regulation thereunder, it may
issue a cease and desist order against ‘‘any other person that
TTT was TTT a cause of the violation, due to an act or omission
the person knew or should have known would contribute to
such violationTTTT’’ Although we held in KPMG, LLP v.
SEC, 289 F.3d 109, 120 (D.C. Cir. 2002), that the ‘‘knew or
should have known’’ language in § 21C embodied a negli-
gence standard for purposes of that case, it does not neces-
sarily follow that negligence is the standard here. The SEC’s
opinion in KPMG, which we sustained, held that ‘‘negligence
is sufficient to establish ‘causing’ liability under Exchange Act
Section 21C(a), at least in cases in which a person is alleged
to ‘cause’ a primary violation that does not require scienter.’’
In re KPMG Peat Marwick LLP, Exchange Act Release No.
43862, 2001 SEC LEXIS 98, at *82 (Jan. 19, 2001).4 Unlike
KPMG, scienter was an element of the primary violations
that were the subject of the cease and desist order in this
case. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193
(1976).5 This is apparently why the SEC did not cite its
4 For securities violations, the Supreme Court has described
scienter as ‘‘a mental state embracing intent to deceive, manipulate,
or defraud.’’ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976).
5We held in Investors Research Corp. v. SEC, 628 F.2d 168, 177
(D.C. Cir. 1980), that § 17 of the Investment Company Act contains
no scienter requirement. But the SEC did not issue a cease and
desist order against Howard with respect to § 17(a)(1). In re
Nicholas P. Howard, Exchange Act Release No. 47357, 2003 SEC
LEXIS 377, at *23 n.26 (Feb. 12, 2003).
 8

opinion in KPMG or ours, and did not invoke negligence as
the standard to be applied. The SEC proceeded instead on
the basis that because Howard aided and abetted violations of
the securities laws requiring scienter he was ‘‘a cause’’ of the
violations under § 21C. See In re Sharon M. Graham &
Stephen C. Voss, 53 S.E.C. 1072, 1085 n.35 (1998).
The SEC’s authority to impose the other two sanctions –
suspending Howard for three months and ordering him to
pay a penalty of $50,000 – rested on Exchange Act provisions
other than § 21C. Under § 15(b)(6) and § 15(b)(4) the SEC
may suspend for up to twelve months any person associated
with a broker or dealer who ‘‘has willfully aided, [and] abet-
ted’’ any violation of the securities laws. 15 U.S.C.
§§ 78o(b)(6)(A), 78o(b)(4)(E). Under § 21B, the SEC may
impose money penalties against persons who have ‘‘willfully
aided, [and] abetted’’ another’s violation of the securities laws.
15 U.S.C. § 78u–2(a)(2).6
How does one decide whether a person willfully aided and
abetted a securities violation? The ‘‘rules for determining
aiding and abetting [securities violations] are unclear, in an
area that demands certainty and predictability.’’ Central
Bank of Denver, 511 U.S. at 188 (internal quotations and
citation omitted). Rather than bringing clarity to the subject,
the SEC in this case muddied the waters. According to its
opinion, an element ‘‘necessary to find that a respondent
aided and abetted [the primary] violations’’ is ‘‘a general
awareness by the aider and abettor that his role was part of
an activity that was improper.’’ In re Nicholas P. Howard,
Exchange Act Release No. 47357, 2003 SEC LEXIS 377, at
*14 (Feb. 12, 2003) (‘‘Comm’n Op.’’). The ‘‘general aware-
ness’’ language comes from this court’s holding in Investors
6 The Supreme Court held in Central Bank of Denver v. First
Interstate Bank of Denver, 511 U.S. 164, 191 (1994), a private action
for damages, that Congress did not intend to impose aiding and
abetting liability under § 10(b) of the Securities Exchange Act.
Howard’s exposure to a civil money penalty and suspension for
aiding and abetting violations of § 10(b) stems not from § 10(b)
itself, but from § 15(b) and § 21B.
 9

Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir. 1980),7
which the SEC cited in a footnote. Investors Research
explained that the ‘‘awareness of wrong-doing requirement’’
in aiding and abetting disciplinary cases was ‘‘designed to
insure that innocent, incidental participants in transactions
later found to be illegal are not subjected to harsh TTT
administrative penalties.’’ 628 F.2d at 177.
Awareness of wrongdoing means knowledge of wrongdoing.
See id. at 178 & n.61; Central Bank of Denver, 511 U.S. at
181; Halberstam v. Welch, 705 F. 2d 472, 478 & n.8 (D.C. Cir.
1983). Despite its holding that this was a ‘‘necessary’’ ele-
ment of aiding and abetting liability,8 the SEC never men-
tioned any evidence that Howard was aware of wrongdoing.
Its opinion said only that Howard knew the first offering
could not close unless 2,000,000 shares were sold, and that he
knew the Capel Group and JCI engaged in efforts to reach
that number through transactions which, the SEC charged,
violated Rule 10b–9 when they were counted toward the
minimum. Obviously, Howard also knew of the second offer-
ing, but again nothing indicated that he was aware of any
illegalities in the first offering that had to be disclosed to
potential investors in the second. As the SEC recognized,
the ‘‘facts in this matter are largely undisputed,’’ Comm’n
Op., 2003 SEC LEXIS 377, at *3. Among those facts are
these: ‘‘Howard did not know that his role was part of an
overall activity that was improper,’’ he ‘‘believed that the
lawyers had been consulted,’’ and he did not have a ‘‘high
conscious intent.’’ In re Nicholas P. Howard, Initial Deci-
sions Release No. 138, 1999 SEC LEXIS 577, at *48, *19, *29,
*30, *61 (Mar. 24, 1999) (‘‘ALJ Dec.’’).
In short, the evidence showed that Howard was not aware,
generally or otherwise, of any wrongdoing. To the extent the
SEC explained itself, its point was the opposite – Howard’s
fault was in not being aware. In the sentence after it set
7 See also SEC v. Bilzerian, 29 F.3d 689, 694 n.10 (D.C. Cir.

1994).
8The SEC held the same in In re Russo Secs. Inc., 53 S.E.C. 271,
278 (1997), which its opinion in Howard’s case also cited.
 10

forth the elements of aiding and abetting, the SEC added that
‘‘[r]ecklessness is sufficient to satisfy the scienter require-
ment for aiding and abetting liability.’’ Comm’n Op., 2003
SEC LEXIS 377, at *14. The quotation is an accurate
statement of the law of this circuit, but it is inconsistent with
the idea that knowledge of wrongdoing must be proven. A
secondary violator may act recklessly, and thus aid and abet
an offense, even if he is unaware that he is assisting illegal
conduct. Two of our decisions, rendered after Investors
Research, make this point. Graham v. SEC, 222 F.3d 994
(D.C. Cir. 2000); SEC v. Steadman, 967 F.2d 636 (D.C. Cir.
1992). Both hold that ‘‘extreme recklessness’’ may support
aiding and abetting liability. Graham, 222 F.3d at 1004;
Steadman, 967 F.2d at 641. ‘‘Extreme recklessness’’ – or as
many courts of appeals put it, ‘‘severe recklessness’’9 – may
be found if the alleged aider and abettor encountered ‘‘red
flags,’’ or ‘‘suspicious events creating reasons for doubt’’ that
should have alerted him to the improper conduct of the
primary violator, Graham, 222 F.3d at 1006; see also Wons-
over v. SEC, 205 F.3d 408, 411 (D.C. Cir. 2000), or if there
was ‘‘a danger TTT so obvious that the actor must have been
aware of’’ the danger. Steadman, 967 F.2d at 641–42, quot-
ing Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033,
1045 (7th Cir.), cert. denied, 434 U.S. 875 (1977); see also
Wonsover, 205 F.3d at 414. It is not enough that the accused
aider and abettor’s action or omission is ‘‘derived from inex-
cusable neglect.’’ Sundstrand, 553 F.2d at 1047. ‘‘Extreme
recklessness’’ is neither ordinary negligence nor ‘‘merely a
heightened form of ordinary negligence.’’10 Steadman, 967
9 See, e.g., Ottmann v. Hanger Orthopedic Group, Inc., 353 F. 3d

338, 344 (4th Cir. 2003); In re K–tel Intern., Inc. Securities
Litigation, 300 F.3d 881, 893 (8th Cir. 2002); Nathenson v. Zona-
gen, Inc., 267 F.3d 400, 408 (5th Cir. 2001); Platsis v. E.F. Hutton
& Co., Inc., 946 F.2d 38, 40 (6th Cir. 1991); Barker v. Henderson,
Franklin, Starnes & Holt, 797 F.2d 490, 496 (7th Cir. 1986); Woods
v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir.
1985).
10 The SEC has called this form of recklessness ‘‘a state of mind
closer to conscious intent than to gross negligence.’’ Brief for the
 11

F.2d at 641. To put the matter in terms of § 21C, aiding and
abetting liability cannot rest on the proposition that the
person ‘‘should have known’’ he was assisting violations of the
securities laws. See Camp v. Dema, 948 F.2d 455, 459 (8th
Cir. 1991); Graham, 222 F.3d at 1006.
Nothing in the SEC’s confusing opinion suggests that it
had any of this in mind when it found that Howard acted
recklessly. We are willing to assume that the SEC thought –
incorrectly – that reckless conduct amounted to a form of
awareness of wrongdoing. But we are unwilling to assume
that it properly evaluated Howard’s conduct under an ex-
treme recklessness standard.11 Otherwise, there is no ex-
plaining why it found Howard liable on most of the aiding and
abetting charges against him. The heart of the SEC’s case
was the violation of Rule 10b–9 through the counting of
purchases made in the part-or-none offering that were not
‘‘bona fide.’’ The minimum subscription of 2,000,000 shares
was improperly reached when someone – not Howard –
decided to count the purchases by the Capel Group, JCI, and
IDG Development Corporation. What dangers were so obvi-
ous that Howard should have known of them? What red
flags should have alerted him? The SEC’s opinion mentions
none regarding the Rule 10b–9 violations. Instead, it finds
him reckless for not knowing all the legal requirements of a
part-or-none offering and for not disclosing to investors what
he did not know – that Rule 10b–9 would be violated when the
closing took place.
The SEC adopted Rule 10b–9 in 1962. It is quoted in full
in the margin.12 The rule makes it a ‘‘manipulative or

SEC as Amicus Curiae, Central Bank of Denver v. First Interstate
Bank of Denver, 511 U.S. 164 (1994), 1992 U.S. Briefs 854 (LEXIS).
See generally Marrie v. SEC, No. 03–1265, 2004 WL 1585848 (D.C.
Cir. July 16, 2004).
11 In their briefs, Howard and the SEC agreed that the ‘‘extreme

recklessness’’ standard of Steadman, 967 F.2d at 641–42, applied to
aiding and abetting liability.
12 § 240.10b–9 Prohibited representations in connection with cer-
tain offerings.
 12

deception [sic] device or contrivance’’ to represent that ‘‘the
security is being offered or sold on any TTT basis whereby all
or part of the consideration paid for any such security will be
refunded to the purchaser if all or some of the securities are
not sold, unless the security is part of an offering or distribut-
ing being made on the condition that all or a specified part of
the consideration paid for such security will be promptly
refunded to the purchaser unless (i) a specified number of
units of the security are sold at a specified price within a
specified time, and (ii) the total amount due to the seller is
received by him by a specified date.’’ 17 C.F.R. § 240.10b–

(a) It shall constitute a manipulative or deception device or
contrivance, as used in section 10(b) of the Act, for any
person, directly or indirectly, in connection with the offer
or sale of any security, to make any representation:
(1) To the effect that the security is being offered or
sold on an ‘‘all-or-none’’ basis, unless the security is
part of an offering or distribution being made on the
condition that all or a specified amount of the consid-
eration paid for such security will be promptly refund-
ed to the purchaser unless (i) all of the securities
being offered are sold at a specified price within a
specified time, and (ii) the total amount due to the
seller is received by him by a specified date; or
(2) To the effect that the security is being offered or
sold on any other basis whereby all or part of the
consideration paid for any such security will be re-
funded to the purchaser if all or some of the securities
are not sold, unless the security is part of an offering
or distribution being made on the condition that all or
a specified part of the consideration paid for such
security will be promptly refunded to the purchaser
unless (i) a specified number of units of the security
are sold at a specified price within a specified time,
and (ii) the total amount due to the seller is received
by him by a specified date.
(b) This rule shall not apply to any offer or sale of
securities as to which the seller has a firm commitment
from underwriters or others (subject only to customary
 13

9(a)(2). The SEC adopted the rule out of concern ‘‘that some
persons distributing securities have been representing that
securities are being offered on an ‘all-or-none’ basis when,
because of ambiguities in the contractual arrangement, it is
not clear whether the conditions have been met if the under-
writer finds persons who agree to purchase all of the securi-
ties within the specified time, but he is unsuccessful in
collecting payment for all of the securities.’’ Proposal to
Adopt Rule 10b–9 Under the Securities Exchange Act of 1934,
Exchange Act Release No. 6864, 1962 WL 68100, at *1 (July
30, 1962).13
Neither Rule 10b–9, nor the SEC’s contemporaneous expla-
nation of it, mention sales to insiders or persons affiliated
with the offeror or whether – as occurred here – these sales
may be counted toward the minimum. In a 1975 interpreta-
tion of Rule 10b–9, the SEC stated that the rule requires
purchases to be ‘‘bona fide.’’ See Requirements of Rules 10b–
9 and 15c2–4 Under the Securities Exchange Act of 1934
Relating to Issuers, Underwriters and Broker–Dealers En-
gaged in an ‘‘All or None’’ Offering, Exchange Act Release
No. 11532, 7 S.E.C. Docket 403, 1975 WL 163128, at *1 (July
11, 1975). That release, while re-stating the basic purpose of
requiring full payment by the specified date, also expressed
concern that issuers or underwriters of an offering ‘‘have
created the misleading appearance of a successful sale of the
specified minimum number of securities in order to fulfill the
prerequisites to receipt of the proceeds of the offeringTTTT’’
Non-bona fide sales are those which are ‘‘designed to create
the appearance of a successful completion of the offering,
such as purchases by the issuer through nominee accounts or
purchases by persons whom the issuer has agreed to guaran-
tee against loss.’’ Id.

conditions precedent, including ‘‘market outs’’) for the
purchase of all the securities being offered.
13In an all-or-none offering, all of the securities must be sold
within the designated period. In a part-or-none offering, a desig-
nated minimum amount must be sold within the specified time.
Rule 10b–9 deals with both types of transactions.
 14

Counsel for the SEC argues that the bona fide requirement
is simply ‘‘common sense,’’ Brief of the SEC at 29, and the
SEC’s opinion claimed that ‘‘[i]t is well established that
purchases by underwriters or their affiliates arranged for the
undisclosed purpose of closing an unsuccessful part-or-none
offering are fraudulent.’’ Comm’n Op., 2003 SEC LEXIS
377, at *12. In support, the SEC directed our attention to a
practitioners’ guide to Rule 10b–9.14 Far from supporting the
SEC’s position that the meaning of Rule 10b–9 should have
been apparent to Howard, it states the opposite. The ‘‘law
applicable to [10b–9] offerings has never been clear, and has
been based on a partly unwritten body of interpretation
regarding what constitutes a ‘bona fide’ purchase of securities
for purposes of the rules, what advance disclosure may be
required regarding purchases by general partners or broker-
dealers, and even what constitutes a contingency offering.’’
Robert B. Robbins, Structuring Best Efforts Offerings and
Closings Under Rule 10b–9, SH067 ALI–ABA 297, 299 (2003)
(available on Westlaw). Robbins notes that in this environ-
ment of uncertainty, ‘‘[f]or many years, the best available
guidance took the form of a few SEC staff-prepared seminar
outlines, one significant no-action letter and a few published
articles. More recently, certain courts have raced ahead to
set standards that go well beyond prior interpretations and
that create significant new risks for counsel in closing contin-
gency offerings.’’ Id. at 304. One of these new interpreta-
tions is what Robbins terms the ‘‘corroboration’’ theory. See
id. at 305–07 (citing SEC v. Blinder, Robinson & Co., 542 F.
Supp. 468, 476 (D. Colo. 1982)) (‘‘Each investor is comforted
by the knowledge that unless his judgment to take the risk is
shared by enough others to sell out the issue, his money will
be returned.’’); see also, e.g., Svalberg v. SEC, 876 F.2d 181,
183–84 (D.C. Cir. 1989) (per curiam);15 C.E. Carlson, Inc. v.
14 The SEC also cited other authorities, nearly all of which post-

date the transactions at issue here. See Brief of the SEC at 29
n.15.
15In Svalberg we affirmed the National Association of Securities
Dealers’ finding that petitioners violated Article III, § 1 of the
NASD Rules of Fair Practice by purchasing shares in an all-or-none
 15

SEC, 859 F.2d 1429, 1434 (10th Cir. 1988). But according to
Robbins, ‘‘[g]iven the vagueness of the ‘corroboration’ or
‘comfort’ standard, it should not be surprising that in recent
years it has become increasingly difficult for practitioners to
define the circumstances in which Rule[ ] 10b–9 TTT appl[ies].
The difficulties are greatest TTT in the case of purchases, or
undertakings to purchase, by affiliates of the issuer.’’ Rob-
bins, supra, at 311.
While Howard does not question the SEC’s finding that
primary violations of Rule 10b–9 occurred through non-bona
fide transactions, he does dispute the SEC’s claim that there
were danger signals or red flags so obvious that he should
have noticed them. His point is well-taken. As we under-
stand the SEC’s position, the purchases by the Capel Group
and JCI were not in themselves illegal. The illegality arose
in counting these shares toward the 2,000,000 minimum and
closing the offering on that basis without informing the
investors that these shares would be counted toward the
minimum. Nothing on the face of Rule 10b–9 deals with
transactions of this sort. While the SEC’s 1975 release spoke
of the need for ‘‘bona fide’’ sales, the non-bona fide transac-
tions it mentioned – purchases by the issuer through nominee
accounts or purchases by persons whom the issuer guaran-
tees against loss, see 1975 WL 163128, at *1 – do not appear
to be of the sort facing us here. And the Robbins article
states that there are ‘‘many cases in which it is permissible
for the sponsor or affiliates to purchase unsold interests in an
all-or-none offering,’’ as when the sponsor or affiliates buy
‘‘the securities on the same terms as other investors,’’ ‘‘take
the risk of the investment,’’ and the purchases do not ‘‘affect

offering they were underwriting. ‘‘In this case, petitioners acted to
create a false impression that the required minimum number of
shares had been sold to the public; therefore, their purchases of
SanAnCo with a purpose of closing the underwriting simply cannot
be viewed as bona fide investments.’’ 876 F.2d at 183. Although
Svalberg does not specifically address Rule 10b–9, Robbins laments
that this decision ‘‘raises even greater uncertainties and risks’’ for
securities professionals. Robbins, supra, at 309.
 16

the financial condition of the issuer.’’ Robbins, supra, at 312
& n.30.16
In light of the uncertainties about the meaning of Rule
10b–9,17 and the SEC’s contention that Howard acted reck-
lessly because he should have known that JCI and New
Europe Hotels were violating the rule, we asked the SEC at
oral argument how a securities professional should go about
checking the legality under Rule 10b–9 of counting a given
purchase toward the minimum. The SEC attorney agreed
that one would normally expect the individual to consult
counsel, which brings us to Howard’s argument that as ‘‘a
non-lawyer,18 [he] cannot be deemed reckless where he relied
upon competent and experienced inside and outside counsel.’’
Brief of Petitioner at 26.
The ALJ made the following finding: Howard ‘‘believed
that Matcovsky, higher management in the Capel Group, and
outside counsel had approved actions that violated the anti-
fraud provisions and Rule 10b–9.’’ ALJ Dec., 1999 SEC
LEXIS 577, at *49. The SEC accepted this finding and the
16 The SEC has given the green light to such purchases, requiring
that under Rule 10b–9 the issuer or its affiliates ‘‘must disclose the
possibility that [it] may make purchases TTT in order to meet the
specified minimum.’’ See Interpretive Release on Regulation D,
Securities Act Release No. 6455, 1983 WL 409415 (Mar. 3, 1983)
(Question 79); see Peter M. Fass & Derek A. Wittner, BLUE SKY
PRACTICE FOR PUBLIC AND PRIVATE DIRECT PARTICIPATION OFFERINGS
§ 7:54 (2003–04 ed.). In its opinion here the SEC noted that only
‘‘undisclosed’’ purchases by underwriters or their affiliates in a part-
or none offering are fraudulent. Comm’n Op., 2003 SEC LEXIS
377, at *12. This suggests that if JCI had disclosed to investors not
only the Capel Group’s purchase but also that these shares would
be counted toward the minimum, the transaction would not have
violated Rule 10b–9.
17 We do not suggest that the SEC erred in concluding that JCI

and New Europe Hotels violated Rule 10b–9.
18Howard attended law school in England and worked for a
London law firm prior to coming to the United States. He did not
study or practice law in the United States.
 17

record plainly supports it. For instance, when the board of
directors of New Europe Hotels approved the transaction
involving IDG Development Corporation, Howard – a mem-
ber of the board – was on vacation. Matcovsky, who headed
JCI’s corporate finance department and had been a lawyer
with the SEC’s Division of Market Regulation, called Howard
to inform him of the news and to solicit his vote. Matcovsky
was also a member of New Europe’s board, as was the Dean
of the New York University Graduate School of Business.
Only after Matcovsky reported that the board had voted in
favor of the transaction and that Rogers & Wells had ap-
proved it did Howard add his approval. (The partner in
charge at Rogers & Wells specialized in securities law and
had more than 20 years of experience.) Howard remained on
vacation when the closing took place at the offices of Rogers
& Wells. And it was at the closing that the purchases by the
Capel Group, JCI, and IDG Development Corporation were
counted toward the minimum in violation of Rule 10b–9. In
the fall of the next year, Rogers & Wells prepared the second
offering documents, documents the SEC determined should
have disclosed that the first offering closed improperly. As
with the first offering, Howard played no role in drafting
those documents, again relying on the expertise of outside
counsel and JCI’s corporate finance department. The SEC
dismissed this and other such evidence on the ground that
‘‘Howard had an ongoing obligation to familiarize himself with
pertinent legal requirements in order to protect investors
from illegality.’’ Comm’n Op., 2003 SEC LEXIS 377, at *15.
This entirely misses the significance of the evidence. Ex-
treme recklessness, as we have discussed, means that the
alleged aider and abettor – although not knowing that he was
assisting wrongdoing – should have been alerted by ‘‘red
flags’’ signifying obvious problems. In this case, rather than
red flags, Howard encountered green ones, as outside and
inside counsel approved transactions and counted sales that,
the SEC later determined, should not have been counted
under a rule whose language was silent on the subject.
In its brief, the SEC offers two other rationales for disre-
garding this evidence: one, Howard, never claimed the de-
 18

fense of reliance of counsel; and two, even if he had, he failed
to qualify for the defense because he did not make full
disclosure to counsel, did not request counsel’s advice, did not
receive advice, and did not rely in good faith on that advice.
The SEC’s opinion relied on neither rationale, see United
States v. Chenery Corp., 332 U.S. 194, 200 (1947), and it would
have been error for it to do so.
Despite dicta in SEC v. Savoy, 665 F.2d 1310, 1314 n.28
(D.C. Cir. 1981), reliance on the advice of counsel need not be
a formal defense; it is simply evidence of good faith, a
relevant consideration in evaluating a defendant’s scienter.
See Bisno v. United States, 299 F.2d 711, 719 (9th Cir. 1961).
As a former SEC commissioner put it, the ‘‘reliance defense
TTT is not really a defense at all but simply some evidence
tending to support a defense based on due care or good
faith.’’ Bevis Longstreth, Reliance on Advice of Counsel as a
Defense to Securities Law Violations, 37 BUS. LAW. 1185, 1187
(1982).19 The SEC itself recognized as much in In re Charles
C. Carlson, 46 S.E.C. 1125, 1132–33 (1977), when it held that
a broker reasonably relied on a lawyer’s advice (which turned
out to be mistaken) and added that although such a securities
professional should have been familiar with the ‘‘rudiments’’
of securities law, he should not be ‘‘expected to display
finished scholarship in all of the fine points.’’20
19 See also Douglas W. Hawes & Thomas J. Sherrard, Reliance

on Advice of Counsel as a Defense in Corporate and Securities
Cases, 62 VA. L. REV. 1, 7–8 (1976) (‘‘[R]eliance is recognized only as
a factor or circumstance tending to show the defendant’s good faith
or exercise of due care; it is not in itself a complete and absolute
defense.’’); Gregory E. Maggs, Consumer Bankruptcy Fraud and
the ‘‘Reliance on Advice of Counsel’’ Argument, 69 AM. BANKR. L.J.
1, 10 (1995) (‘‘[R]eliance on the advice of counsel is not an affirma-
tive defense. Instead, when a defendant introduces evidence of
reliance on counsel, the defendant is usually trying to negate an
element of a particular crime or tort, such as fraudulent intent.’’).
20An essential means by which securities professionals comply
with the law is through the guidance of counsel. See Hawes &
Sherrard, supra note 19, at 36 (securities laws are ‘‘complex and
often uncertain’’; ‘‘the layman [i.e., a non-lawyer] has no real choice
 19

The facts that Rogers & Wells oversaw the closing of the
first offering at its law offices, that it drafted the documents
for the second offering and that Matcovsky conveyed to
Howard his and the law firm’s approval of the Capel Group’s
purchases and the IDG Development Corporation transaction
constituted powerful evidence that Howard’s actions did not
amount to ‘‘an extreme departure from the standards of
ordinary care’’ ‘‘so obvious that the actor must have been
aware of it.’’ Steadman, 967 F.2d at 641–42, quoting Sundst-
rand, 553 F.2d at 1045.21 The SEC’s response, found in its

but to rely on counsel.’’). Legal counsel plays a critical role in the
functioning of securities transactions. ‘‘Significant public benefits
flow from the effective performance of the securities lawyer’s role.
The exercise of independent, careful and informed legal judgment
on difficult issues is critical to the flow of material information to
the securities markets.’’ In re William R. Carter, Charles J.
Johnson Jr., 47 S.E.C. 471, 504 (1981); see also SEC v. Spectrum,
Ltd., 489 F.2d 535, 541–42 (2d Cir. 1973) (‘‘The legal profession
plays a unique and pivotal role in the effective implementation of
the securities laws. Questions of compliance with the intricate
provisions of these statutes are ever present and the smooth
functioning of the securities markets will be seriously disturbed if
the public cannot rely on the expertise proferred by an attorney
when he renders an opinion on such matters.’’).
21 Steadman held that the directors of a mutual fund had not
acted recklessly in relying on advice from outside counsel that
turned out to be wrong. 967 F.2d at 642. This court’s opinion in
Investors Research, 628 F.2d at 178 n.65, also indicated that an
accused’s belief that the law permitted the transactions is evidence
of a lack of scienter.
Some states protect directors from liability when they reasonably
rely on counsel or other experts. See, e.g., N.Y. BUS. CORP. LAW
§ 717 (McKinney 2004) (‘‘director shall be entitled to rely on
information, opinions, reports or statements TTT prepared or pre-
sented by TTT counsel, public accountants or other persons as to
matters which the director believes to be within such person’s
professional or expert competence’’); DEL. CODE ANN. tit. 8, § 141(e)
(2003) (similar language); MODEL BUS. CORP. ACT § 8.30(e)(2) (2002);
see also Buffalo Forge Co. v. Ogden Corp., 555 F. Supp. 892, 904
 20

brief but not its opinion, is that the evidence does not bear on
Howard’s conduct because Matcovsky, not Howard, served as
the liaison to Rogers & Wells. That cannot be correct.
Suppose a company president communicates directly with
competent outside counsel; makes full disclosure; is ad-
vised – incorrectly – that the proposed transaction is entirely
lawful; tells junior officers in the company of the legal advice;
and instructs them to consummate the transaction. Under
the SEC’s theory, the president could avoid charges of fraud-
ulent conduct by using the attorney’s advice to prove his lack
of scienter while those working under him could not. That is
illogical and makes no sense whatsoever. If the SEC were
right, all corporate employees below the top echelon would
have to consult outside counsel directly in order to receive the
same legal advice given top management. That not only
would run up the legal bills, but it would be impractical and
highly inefficient.22 At any rate, the SEC’s argument is at
best only a partial answer to Howard’s claim because he also
relied on inside counsel – Matcovsky, with whom he communi-
cated directly.
In Graham, what made the defendant’s actions reckless,
and not merely negligent, was an ‘‘abundance’’ of ‘‘red flags
and suggestions of irregularities [that] demand[ed] inquiry as
well as adequate follow-up and review.’’ 222 F.3d at 1006
(internal quotations and citation omitted); see also Wonsover,
205 F.3d at 411 (noting existence of ‘‘several ‘red flags’ ’’).
On this record, the SEC is unable to identify any such
unusual circumstances with regard to the non-bona fide pur-
chases – the focus of the SEC’s attention in this case. All the
SEC can say is that Howard should have known what the

(W.D.N.Y. 1983); Cinerama, Inc. v. Technicolor, Inc., 663 A.2d
1134, 1142 (Del. 1994).
22 Compare Levine v. SEC, 436 F.2d 88, 90 (2d Cir. 1971):
‘‘[A]bsent actual knowledge or warning signals, a broker-dealer
should not be under a duty to retain his own auditor to re-examine
the books of every company, the stock of which he may offer for
sale, even accepting the doubtful hypothesis that such permission
would be granted.’’
 21

legal requirements of Rule 10b–9 were and that he violated
the disclosure laws by failing to reveal what he should have
found out, but did not. At best this amounts to a finding of
negligence; at worst it is liability without fault. Given the
record in this case, there is no substantial evidence that
Howard had the requisite scienter to aid and abet the viola-
tions, caused by JCI’s counting of non-bona fide purchases
towards the minimum of the part-or-none offering, of § 17(a)
of the Securities Act, § 10(b) of the Exchange Act, and Rules
10b–5 and 10b–9 thereunder.
We are left with two loose ends for the SEC to address on
remand. The first deals with the apparent fact that in the
first offering – in the words of Rule 10b–9(a)(2)(ii) – ‘‘the total
amount due to the seller [was not] received by him by a
specified date.’’23 17 C.F.R. § 240.10b–9(a)(2)(ii). Howard
agrees that a third of the shares had not been paid for by the
closing date of January 2, 1991, while he was on vacation. He
learned of the problems when he returned to work two days
later. ‘‘Settlements were not his responsibility, but to assist
TTT important customers Howard tried to help solve the
problemsTTTT’’ ALJ Dec., 1999 SEC LEXIS 577, at *27.24
The SEC determined that Howard aided and abetted the
primary violation of Rule 10b–9(a)(2)(ii) because he ‘‘played a
substantial role in collecting late subscription payments from
23We say ‘‘apparent’’ in light of this factual conclusion of the
ALJ, which seems to contradict not only the SEC’s legal conclusion
but also the ALJ’s:
A second condition [of a part-or-none offering] is that the
total amount due the seller is received by him by a
specified date. Rule 10b–9(a)(2)(B). The Division does
not contend that this aspect of Rule 10b–9 was violated,
and there is insufficient evidence in the record to make a
finding as to the date [New Europe Hotels] received the
funds raised in the first offering.
ALJ Dec., 1999 SEC LEXIS 577, at *34 n.17. The SEC’s brief
devotes hardly any attention to the matter.
24 The problems arose when subscribers received conflicting ad-
vice about where they should send their payments.
 22

those whose failure to make timely payment should have
aborted the offering.’’ Comm’n Op., 2003 SEC LEXIS 377,
at *20. (It is not clear whether Howard relied on the advice
of counsel in taking on this role.) So far as we can tell, the
SEC made no finding that Howard was aware of wrongdoing
or that he acted recklessly with respect to the late payments.
Neither the SEC nor Howard has much to say on the general
subject of the late payments. Given the confusing state of
the record, see supra note 23, the SEC’s failure to make an
essential finding and its erroneous treatment of recklessness
as a mere ‘‘should have known’’ standard, we must send this
charge back to the SEC for reconsideration.
The second matter we are remanding deals with Howard’s
aiding and abetting a violation of the Investment Company
Act. Section 17(a), in conjunction with § 2(a)(3)(E), prohibit-
ed JCI from selling securities to the European Warrant
Fund, an investment company it was advising, after the
closing. 15 U.S.C. §§ 80a–17(a)(1), 80a–2(a)(3)(E). See su-
pra note 3. As the SEC acknowledged, Howard did not know
the transaction was unlawful. We have discovered no evi-
dence to indicate that he received legal advice from either
Matcovsky directly or Rogers & Wells indirectly. He claimed
he relied on JCI’s president, and on JCI’s compliance depart-
ment. While the SEC did not find that Howard had knowl-
edge of wrongdoing, it did find that he acted recklessly in
assisting in this transaction. His recklessness, according to
the SEC, was in not being aware of the requirements of
§ 17(a)(1). As we have discussed, the SEC’s version of
recklessness with respect to the Rule 10b charges was erro-
neous. Nothing persuades us that it applied a different
version to this charge. But unlike the Rule 10b violations, we
cannot determine whether the evidence of Howard’s aiding
and abetting the violation of § 17(a)(1) would be insufficient if
the SEC evaluated it in light of the correct standard of
recklessness.

* * *
The SEC’s order imposing sanctions against Howard is
vacated and the case is remanded for reconsideration only
 23

with respect to the charges that he aided and abetted the
violations of Rule 10b–9(a)(2)(ii) and § 17(a)(1) of the Invest-
ment Company Act.
So ordered.
 1

KAREN LECRAFT HENDERSON, Circuit Judge, concurring in the
judgment:
I agree with my colleagues that the SEC’s order cannot
stand because Howard did not act, or fail to act, with the
requisite scienter of an aider and abettor. I do not agree
with the majority’s formulation of the requisite scienter,
however, and I therefore concur in the judgment.
In the usual aiding and abetting scenario, we ask three
questions: whether ‘‘1) another party has committed a securi-
ties law violation; 2) the accused aider and abetter had a
general awareness that his role was part of an overall activity
that was improper; and 3) the accused aider and abetter
knowingly and substantially assisted the principal violation.’’
Investors Research Corp. v. SEC, 628 F.2d 168, 178 (D.C. Cir.
1980); see also Dirks v. SEC, 681 F.2d 824, 844 (D.C. Cir.
1982), rev’d on other grounds, 463 U.S. 646 (1983). As the
majority opinion notes, Maj. Op. at 9–10, here the SEC found
that Howard’s unawareness that his role was part of improp-
er activity fulfilled the second Investors Research element. I
believe the SEC’s finding in this respect is not supported by
substantial evidence, see 15 U.S.C. § 78y(a)(4), because How-
ard was not ‘‘recklessly’’ ignorant and therefore, under our
precedent, including Graham v. SEC, 222 F.3d 994 (D.C. Cir.
2000), inter alia, we must vacate the SEC’s order. Where I
part company with the majority is in its apparent use of two
distinct lines of authority regarding recklessness – one apply-
ing to a securities violation, whether committed by a primary
actor or by an aider and abettor, the other applying to the
second Investors Research element of ‘‘general awareness of
wrongdoing’’ – to announce a new, and I believe, incorrect,
scienter level to satisfy the latter.
We have held in the securities area that willfulness can
support a primary violation, Wonsover v. SEC, 205 F.3d 408,
416 (D.C. Cir. 2000) (concluding that ‘‘substantial evidence
supports the [SEC]’s determination that Wonsover failed to
conduct reasonable inquiry into the sources of the unregis-
tered shares he sold and that his inadequate inquiry in the
face of several ‘red flags’ justified a finding of willfulness’’
(emphasis added)), as can ‘‘extreme’’ recklessness. SEC v.
Steadman, 967 F.2d 636, 641 (D.C. Cir. 1992). In Steadman,
 2

we considered both primary violations of section 10(b) of the
Securities Exchange Act and Rule 10b–5, inter alia, allegedly
committed by Steadman and others, and Steadman’s separate
liability as an aider and abettor in the defendant corporation’s
violations of certain SEC regulations. Relying on Investors
Research, we stated that an aider and abettor must ‘‘ ‘know-
ingly and substantially assist[ ]’ in the commission of a securi-
ties violation, with at least ‘a general awareness that his role
was part of an overall activity that was improper.’ ’’ Stead-
man, 967 F.2d at 647 (quoting Investors Research, 628 F.2d
at 178 (alteration in original)).1
More recently, in Graham v. SEC, supra, the court articu-
lated the test for aiding and abetting liability as follows:
Although variously formulated, three principal ele-
ments are required to establish liability for aiding
and abetting a violation of section 10(b) and Rule
10b–5: (1) that a principal committed a primary
violation; (2) that the aider and abettor provided
substantial assistance to the primary violator; and
(3) that the aider and abettor had the necessary
‘‘scienter’’—i.e., that she rendered such assistance
knowingly or recklessly. See SEC v. Fehn, 97 F.3d
1276, 1287–88 (9th Cir. 1996); Bloor v. Carro, Span-
1 Earlier in Steadman, we observed that ‘‘we have determined,
along with a number of other circuits, that extreme recklessness
may also satisfy this [Hochfelder] intent requirement.’’ 967 F.2d at
641 (emphasis added). The D.C. circuit precedent it then cited,
however, never spoke of ‘‘extreme’’ recklessness. On the contrary,
it stated repeatedly that ‘‘recklessness satisfies the 10b–5 scienter
requirement.’’ Dirks v. SEC, 681 F.2d at 844; see also id. at 845
n.28. Perhaps the Steadman court equated the Seventh Circuit’s
‘‘extreme departure from the standards of ordinary care’’ language
with extreme recklessness. Sundstrand Corp. v. Sun Chem. Corp.,
553 F.2d 1033, 1045 (7th Cir. 1977) (internal quotation marks
omitted and emphasis added). In any event, to the extent (if any) it
intended to impose a higher degree of recklessness, it did not do so
with respect to the ‘‘general awareness of wrongdoing’’ element of
Steadman’s aiding and abetting liability. That discussion, as noted
above, adopted the Investors Research test.
 3

bock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2d
Cir. 1985); SEC v. Falstaff Brewing Corp., 629 F.2d
62, 72 (D.C. Cir. 1980); Investors Research Corp. v.
SEC, 628 F.2d 168, 178 (D.C. Cir. 1980); see also
SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir.
1992).
222 F.3d at 1000. Graham’s third element ‘‘that [the aider
and abettor] rendered such assistance knowingly or reckless-
ly’’ can only be a reformulation of the Investors Research
‘‘general awareness of wrongdoing’’ element, both because
Graham expressly relies on Investors Research in its articula-
tion and because the other two parts of the Investors Re-
search test are covered in Graham’s first and second ele-
ments. Graham later focuses on the ‘‘third element’’ of
aiding and abetting liability:
The real question here concerns the third element of
aiding and abetting liability: did Graham assist
Broumas with the requisite scienter? We have held
that knowledge or recklessness is sufficient to satis-
fy that requirement. See Kowal v. MCI Communi-
cations Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994);
SEC v. Steadman, 967 F.2d 636, 641 (D.C. Cir.
1992); Zoelsch [v. Arthur Anderson & Co.], 824 F.2d
[27,] 36 [(D.C. Cir. 1987)]; Dirks v. SEC, 681 F.2d
824, 844–45 (D.C. Cir. 1982), rev’d on other grounds,
463 U.S. 646 (1983)TTTT We are satisfied that Gra-
ham acted with at least extreme recklessness in
aiding Broumas’ stock-kiting scheme.
222 F.3d at 1004. Graham’s use of ‘‘extreme’’ recklessness
here and elsewhere, see id. at 1006 (‘‘Given the abundance of
red flags here, it would be very hard to characterize Gra-
ham’s conduct as anything but extremely reckless, regardless
of the approvals she receivedTTTT’’), describes the extent of
Graham’s recklessness; it does not impose a requirement of
extreme recklessness to support the ‘‘third element’’ (Inves-
tors Research’s second element) of aiding and abetting liabili-
ty. This reading is plain, most notably from Graham’s own
 4

recognition that ‘‘recklessness is sufficient’’ as well as its
express reliance on Dirks. See supra n.1.
The majority opinion, however, misreads both Steadman
and Graham to ‘‘hold that ‘extreme recklessness’ may sup-
port [the second Investors Research element of] aiding and
aiding liability.’’ Maj. Op. at 10 (emphasis added). That
‘‘may’’ means ‘‘must’’ in the majority’s view – and that the
majority is in fact addressing the second Investors Research
element – is apparent from its subsequent discussion, particu-
larly the following passage: ‘‘We are willing to assume that
the SEC thought – incorrectly – that reckless conduct
amounted to a form of awareness of wrongdoing. But we are
unwilling to assume that it properly evaluated Howard’s
under an extreme recklessness standard.’’ Maj. Op. at 11. It
ultimately concludes that the SEC improperly evaluated
Howard’s conduct because it used ‘‘recklessness’’ rather than
‘‘extreme recklessness’’ as the requisite level of scienter.
Maj. Op. at 16–17. I believe its application of an ‘‘extreme’’
recklessness standard is wrong.
While I characterized the majority’s error as using two
‘‘distinct’’ lines of authority regarding recklessness, supra at
1, one line is, at least to me, not altogether clear. Although
we said in Steadman that ‘‘extreme’’ recklessness satisfies the
intent requirement, we relied on Circuit precedent that held
that recklessness suffices. Supra n.1.2 Is there a difference?
The majority plainly thinks so. Whether the two terms in
fact impose different standards in satisfying the ‘‘[Hochfelder]
intent requirement,’’ Steadman, 967 F.2d at 641, or are
merely descriptive of the degree of recklessness exhibited,3
we need not decide in this case because the separate stan-
2 See also Kowal, 16 F.3d at 1276 (‘‘To state a claim for securities

fraud under Rule 10b–5, a plaintiff must allege that the defendant
knowingly or recklessly made a false or misleading statement of
material fact in connection with the purchase or sale of a security,
upon which plaintiff reasonably relied, proximately causing his
injury.’’)
3See generally Marrie v. SEC, No. 03–1265 (D.C. Cir. July 16,
2004).
 5

dard – applicable to an element of aiding and abetting, but
not primary, liability – for determining whether Howard’s
lack of awareness of the primary violations of Rule 10b–9 is
sanctionable is recklessness. This line of authority is distinct
and clear. Graham, 222 F.3d at 1000, 1004; Dirks, 681 F.2d
at 844; Steadman, 967 F.2d at 647; Investors Research, 628
F.2d at 178; see also Zoelsch, 824 F.2d at 36. The SEC,
relying on Graham, J.A. 517, 522 n.17, correctly applied the
recklessness standard to Howard’s unawareness of the im-
proper activity; its error lies in its conclusion that Howard’s
ignorance was in fact reckless. For the foregoing reasons, I
concur in the vacatur of the SEC’s order as well as the partial
remand.