## Facts

- Investors purchased interests in Mercer, L.P., a limited partnership formed to acquire and operate a securities brokerage business.
- The acquisition group retained Drinker Biddle & Reath to structure Mercer, L.P. and prepare transaction and offering materials; a firm partner drafted and assembled the disclosure package provided to prospective investors.
- The offering materials allegedly omitted the principal promoter’s prior fraud, misrepresentations, and securities-law violations.
- Mercer, L.P. later experienced financial distress, and investors sustained losses.
- Investors sued the promoters and the law firm, alleging securities fraud under Exchange Act § 10(b) and Rule 10b-5, and asserted civil RICO claims premised on the alleged fraud.
- The district court granted summary judgment to the law firm; investors appealed.
- The court of appeals panel opinion was later vacated upon rehearing en banc.

## Issues

1. Whether a law firm that drafts and assembles offering materials containing material omissions, with intent or recklessness, may be liable as a primary violator under § 10(b) and Rule 10b-5 rather than as a non-actionable aider and abettor.
2. Whether the record supported a triable showing of materiality, scienter, reliance, and loss causation as to the law firm’s role in the alleged omissions.
3. Whether the alleged conduct could also support civil RICO claims tied to the asserted securities fraud.

## Decision

- The panel reversed the grant of summary judgment for the law firm on the Rule 10b-5 claim and remanded for further proceedings.
- The panel concluded that, on the summary-judgment record, a factfinder could treat the firm’s drafting role as sufficient participation in a deceptive act to support primary liability.
- The panel treated the promoter’s undisclosed disciplinary and fraud history as potentially material to reasonable investors.
- The panel held the evidence permitted an inference of at least recklessness by the firm, satisfying scienter for § 10(b) purposes at the summary-judgment stage.
- The panel viewed reliance and causation as adequately supported because the alleged omissions were contained in the offering materials provided to and relied upon by investors.
- The panel opinion was vacated after rehearing en banc was granted and therefore lacked precedential effect.

## Legal Principles

- Private § 10(b) liability does not extend to aiding and abetting, but secondary actors may face primary liability when their own conduct satisfies Rule 10b-5’s elements.
- A professional may be a primary participant where it substantially drafts or authors offering disclosures that contain material misstatements or omissions, and the disclosures reach investors.
- Materiality may be shown where omitted facts about a key promoter’s prior securities-related misconduct would matter to a reasonable investor deciding whether to invest.
- Scienter under § 10(b) may be established by intent or recklessness; summary judgment is improper where record evidence permits a reasonable inference of such mental state.
- Reliance and loss causation may be supported where investors received and relied on the challenged offering materials in making their investment decision.

## Conclusion

The vacated panel decision held that investors could proceed past summary judgment on a Rule 10b-5 claim against a law firm that allegedly drafted offering materials omitting a promoter’s serious misconduct history, reasoning that substantial drafting involvement combined with material omissions and at least reckless state of mind could support primary securities-fraud liability.


Klein v. Boyd, Fed. Sec. L. Rep. (CCH) ¶ 90,136 (3d Cir. 1998)