WASHINGTON - The Securities and Exchange Commission is facing an unprecedented court challenge to its right to charge market participants with aiding and abetting securities fraud, SEC lawyers and market participants say.

The outcome of the case, which may be decided later this year, could have a major impact on some of the SEC's enforcement actions, they say.

In Securities and Exchange Commission v. Robert Zimmerman, which is before the U.S. Court of Appeals for the 11th Circuit in Atlanta, Zimmerman, an accountant, is claiming that a recent Supreme Court decision prevents the SEC from charging him and other market participants with aiding and abetting securities fraud.

The case is the first of a series of such challenges that have been expected by the SEC ever since the Supreme Court ruled in April that securities laws do not permit investors to bring aiding and abetting charges against market participants in securities fraud cases.

In the current Appeals Court case, Zimmerman is claiming that the Supreme Court's April ruling in Central Bank of Denver v. First Interstate Bank of Denver, should apply to the SEC as well as to investors.

"I think this is one of the most significant cases the SEC has had in a number of years," said John L. Latham, a lawyer with Nelson Mullins Riley & Scarborough in Atlanta which is representing Zimmerman. "It may have a significant impact on SEC enforcement powers."

"It could be quite important," agreed Phillip D. Parker, the SEC's deputy general counsel for legal policy.

William R. McLucas, director of the SEC's enforcement division said the case, "could affect who we could name in enforcement proceedings and on what basis."

The SEC is clearly treating the case as a priority. The commission's top lawyer, Simon M. Lorne, was in Atlanta last Tuesday along with six other commission lawyers to argue the case before the Appeals Court. Lorne is the SEC's general counsel.

The Appeals Court case revolves around aiding and abetting charges the SEC brought against Zimmerman, an accountant in Alpharetta, Ga., in May 1992 in the U.S. District Court for the Northern District of Georgia.

The SEC charged Zimmerman with helping Karen Scherm, a broker with Drexel Burnham Lambert, defraud clients by secretly raiding their accounts for personal gain and to cover up losses.

Zimmerman was accused of, in effect, laundering the money and taking some of it in payment, as he helped make transfers between accounts and to him and Scherm.

Scherm was charged with committing fraud but while the case was pending she agreed to accept a permanent injunction barring her from violating securities laws in the future.

The district court ruled against Zimmerman in September 1993. The court ordered that he be permanently enjoined from violating securities laws and that he disgorge $586,645 in ill-gotten gains.

Zimmerman immediately appealed the decision in the Appeals Court for the 11th Circuit. His appeal was pending when the Supreme Court on April 19 ruled in the Central Bank case that a trustee bank could not be charged with aiding and abetting securities fraud in connection with a municipal bond issue that had defaulted.

The high court took a very narrow reading of securities laws in finding that they do not permit investors to bring such charges in securities fraud cases.

Zimmerman, on April 21, asked the Appeals Court to remand his case to the lower court and to instruct the court to dismiss it in light of the Central Bank ruling.

The SEC filed a counter motion and subsequent brief with the Appeals Court contending the Central Bank ruling does not apply to the commission.

The SEC asked the court, if it cannot find that Zimmerman is an aider and abettor, to remand the case to the lower court and allow the commission to amend its complaint to charge Zimmerman as a "primary violator" of securities laws.

SEC officials say that about 15% of their enforcement cases involve charges of aiding and abetting.

In order to avoid further court disputes like the one involving Zimmerman, the SEC has tried to amend its complaints in some of those cases to charge the accused party of being a primary violator, rather than an aider and abettor, commission officials say.

But SEC lawyers are not sure yet whether this tactic will fly with the courts.

"Deciding how big a change Central Bank will make in the scheme of things depends in part on how courts develop the law of primary liability," said the SEC's Parker.

"There are some who say, this isn't going to change things all that much because courts will find ways to make them primary violators. Other people say, this is not going to be that easy, it's going to knock a lot of cases out," he said.

The SEC has other enforcement options, commission officials say. It can sue someone administratively under its "cease and desist" authority if it determines the person is a "cause" of a securities law violation committed by someone else.

But in these cases, the SEC would not be able to obtain civil penalties or fines against unregistered entities or persons. In addition, the SEC could not ensure, as it would be able to ensure with a court-ordered injunction, that the accused party would be put in jail if it committed further securities law violations.

The SEC could also, in certain cases, charge someone with being a "controlling person" or one who controls someone who commits a securities law violation.

Most of these enforcement alternatives, however, fall short of being able to bring aiding and abetting charges in securities fraud cases, according to SEC officials.

The SEC has asked Congress to consider drafting and enacting legislation that would reaffirm its ability to bring aiding and abetting charges in light of the Central Bank decision.

But prospects for such legislation appear dim at least for now. Members of Congress who would support such a bill, like Reps. John Dingell, D-Mich., and Edward Markey, D-Mass., fear it would become tied to pending litigation reform proposals, which are controversial, congressional aides say.

There is a possibility that the Appeals Court will not address the issue of the SEC's enforcement authority in the Zimmerman case. It could remand the case to the lower court and allow and SEC to change its charges, Parker said.

But Latham, the lawyer for Zimmerman, thinks the court will decide the issue. "I think this panel will address Central Bank head-on," he said.

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