Financial institution aiding and abetting liability
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Volume 3 Number 2
Financial institution aiding and abetting liability Jeffrey Barist Milbank, Tweed, Hadley & McCloy LLP, 1 Chase Manhattan Plaza, New York, NY 10005 USA tel: +1 212-530-5000; fax: +1 212-530-5219; e-mail: [email protected]
Jeffrey Barist is a partner with the law firm Milbank, Tweed, Hadley & McCloy, where he is the chair of the National Litigation Group, and specialises in complex domestic and international litigation and arbitration. The paper is based on a paper that Mr Barist presented to the Commercial Bar Association on 20th April, 2001 on Grand Cayman Island. Mr Barist gratefully acknowledges the substantial contributions of Mathew B. West, an associate of Milbank, Tweed, Hadley & McCloy, in the drafting of this paper.
ABSTRACT International financial institutions are vulnerable to third-party fraud. This is due, at least in part, to the role these institutions serve not only as holders of funds, but also as counterparties and market-makers for complex financial instruments. Because financial institutions typically owe no fiduciary duty to borrowers and counterparties, alternative theories of secondary liability for the fraud of others have become potent weapons for plaintiffs seeking to extend liability to financial institutions. This paper examines two such related causes of action, the common law claims of aiding and abetting a breach of fiduciary duty and aiding and abetting fraud. INTRODUCTION This paper provides an introduction to an increasingly significant concern for finan-
cial institutions — common law aiding and abetting liability. Because under American jurisprudence such a common law claim is governed by the laws of the 50 states, there exist variations, some superficial, but others critical, in the substance of these claims. As a 50-state survey is impractical, the scope of this paper is limited to the law of the state of New York and how it is applied in the federal courts in New York.1 International financial institutions are particularly vulnerable to becoming embroiled in the fraud of third parties. This is due, at least in part, to the role these institutions serve not only as holders and conveyors of funds, but also as counterparties and market-makers for an ever-growing array of complex financial instruments. Of course, commercial and investment banks, in their roles as lenders or market-makers, do not stand in the position of fiduciary to their borrowers or counterparties, and therefore claims based on breach of fiduciary duty must fail.2 As a result, alternative theories relating to secondary liability for the fraud of others have become potent weapons for plaintiffs seeking to extend liability of the primary wrongdoer to financial institutions that were somehow involved. This paper examines two such related causes of action, the common law claims of aiding and abetting a breach of fiduciary duty and aiding and abetting fraud. Several matters pending before courts in
Journal of International Banking Regulation, Vol. 3, No. 2, 2001, pp. 155–167 # Henry Stewart P
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