SEC v. Tambone, et al

Filing 920100309

Opinion

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var WPFootnote1 = ' An earlier action, filed in February of 2005, was dismissed\
without prejudice for failure to plead fraud with particularity. \
That action is of no moment here.\
'

var WPFootnote2 = ' This contention was based on the SEC\'s allegations that the\
defendants reviewed and commented on the market timing statements\
before those statements were included in the prospectuses. We do\
not quote these allegations at length, as the SEC has not pursued\
this line of argument on appeal.\
'

var WPFootnote3 = ' In addition, the SEC argued that Tambone had made material\
misrepresentations by signing selling agreements in which he\
vouched for the accuracy of the statements in the prospectuses. \
Because the SEC has not pursued this argument on appeal, we\
disregard it. See United States v. Zannino, 895 F.2d 1, 17 (1st\
Cir. 1990). \
'

var WPFootnote4 = ' The panel parted ways only with respect to the Rule 10b-5(b)\
claims. See Tambone II, 550 F.3d at 149 (Selya, J., concurring in\
part and dissenting in part). \
'

var WPFootnote5 = ' That section provides in pertinent part:\
\
              It shall be unlawful for any person . . ., directly or\
indirectly\
\
              (1) to employ any device, scheme, or artifice to defraud,\
or\
\
              (2) to obtain money or property by means of any untrue\
statement of a material fact or any omission to state a\
material fact necessary in order to make the statements\
made, in light of the circumstances under which they were\
made, not misleading; or\
\
              (3) to engage in any transaction, practice, or course of\
business which operates or would operate as a fraud or\
deceit upon the purchaser.\
\
15 U.S.C. §  77q(a).\
'

var WPFootnote6 = ' The SEC has in fact brought a separate section 17(a)(2)\
claim against the defendants in this case. That claim is not\
before the en banc court.\
'

var WPFootnote7 = ' The SEC also endeavors to prop up its "use" theory of Rule\
10b-5(b) liability by referring to a venerable Fourth Circuit case\
deciding, for venue purposes, whether a defendant violated a\
federal mortgage fraud statute in West Virginia or in Pennsylvania. \
See Reass v. United States, 99 F.2d 752, 755 (4th Cir. 1938). \
              The only reason the opinion has even an epsilon\'s worth of\
relevance to the issue at hand is that the challenged statute\
rendered it unlawful to "make[] any statement, knowing it to be\
false, for the purpose of influencing in any way the action of a\
Federal Home Loan Bank upon any application for loan." Id. at 752. \
But the Reass court did not presume to act as a legal\
lexicographer, chiseling in stone a definition of "make" for all\
time and for every purpose. The result in Reass proceeds from the\
simple proposition that the statute could not be violated until the\
defendant presented the misstatements to the bank "upon . . .\
application for a loan." Id. at 755. \
'

var WPFootnote8 = ' Although the Central Bank Court focused its inquiry on\
section 10(b), its methodology is equally applicable to Rule 10b-5. \
The rule is incorporated into the statutory framework and, thus,\
its scope "is coextensive with the coverage of § 10(b)." Zandford,\
535 U.S. at 816 n.1. Fidelity to the text of section 10(b)\
requires fidelity to the text of Rule 10b-5 and, therefore,\
fidelity to the text of each of the subsections that comprise the\
rule. \
'

var WPFootnote9 = ' For example, the bright-line test cannot be imported\
wholesale into the public enforcement context because its\
attribution prong reflects the need to prove reliance, see Wright,\
152 F.3d at 175 — an element that the SEC need not establish in a\
Rule 10b-5 case. See Schellenbach v. SEC, 989 F.2d 907, 913 (7th\
Cir. 1993); see also SEC v. Wolfson, 539 F.3d 1249, 1260 (10th Cir.\
2008) (declining to impose the attribution requirement in an SEC\
enforcement action). \
'

var WPFootnote10 = ' Although the SEC at one time argued that the defendants\
"made" untrue statements of material fact through some vaguely\
described involvement in drafting the prospectuses, it has not\
pursued that argument on appeal. \
'

var WPFootnote11 = ' That section provides in pertinent part that: "[i]t shall\
be unlawful for any person to make any untrue statement of a\
material fact or omit to state any material fact necessary in order\
to make the statements made, in the light of the circumstances\
under which they are made, not misleading, . . . in connection with\
any tender offer." 15 U.S.C. § 78n(e). \
'

var WPFootnote12 = ' Under the shingle theory, a broker-dealer may be held liable\
under section 17(a) of the Securities Act or section 10(b) of the\
Exchange Act if he sells a security to a customer for a price\
unreasonably in excess of the current market price without\
disclosing the fact of the markup. See Grandon v. Merrill Lynch &\
Co., 147 F.3d 184, 192-93 (2d Cir. 1998); Duker & Duker, 6 S.E.C.\
at 388-89. We have not been able to find any case in which the\
shingle theory has successfully been applied, under Rule 10b-5(b),\
to facts similar to the facts at hand.\
'

var WPFootnote13 = 'Oral or written statements made by underwriters while placing\
securities can be predicates for securities violations. See, e.g.,\
Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 638-40 (D.C. Cir.\
2008); Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977);\
Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp.\
1101, 1120-21 (W.D. Mich. 1996).\
'

var WPFootnote14 = 'Post Central Bank, this implied representation theory has\
been regularly rejected by the circuits, see Lattanzio v. Deloitte\
& Touche LLP, 476 F.3d 147, 155 (2d Cir. 2007) (rejecting an\
"implied assertion" theory because "[p]ublic understanding that an\
accountant is at work . . . does not create an exception to the\
requirement that an actionable misstatement be made by the\
accountant"); Fidel v. Farley, 392 F.3d 220, 235 (6th Cir. 2004);\
Ziemba v. Cascade Int\'l, Inc., 256 F.3d 1194, 1205-06 (11th Cir.\
2001); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226-27 (10th\
Cir. 1996), with the exception of the Ninth Circuit, see Howard v.\
Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000).\
'

var WPFootnote15 = 'See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v.\
Dabit, 547 U.S. 71, 86 (2006); Cent. Bank, 511 U.S. at 189; Va.\
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1105 (1991); Blue Chip\
Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975).\
'

var WPFootnote16 = ' I join the majority\'s decision to reinstate the portions of\
the panel opinion addressing the SEC\'s section 17(a)(2) and aiding\
and abetting claims and the portions of the panel judgment\
reversing those claims.\
'

var WPFootnote17 = ' Tambone and Hussey argue, inter alia, that the Commission\'s\
claims of primary liability should be rejected because of the SEC\'s\
own admission that Columbia Advisors, not defendants, "remained\
primarily responsible for all representations made" in the fund\
prospectuses. However, this quotation from Central Bank\
illustrates the Supreme Court\'s recognition that a securities fraud\
will likely involve multiple violators, thereby suggesting that\
individuals with different responsibilities could be primarily\
liable for the same misstatement. See 511 U.S. at 191. Therefore,\
the primary liability of Columbia Advisors does not preclude the\
primary liability of Tambone and Hussey for their own use of the\
false and misleading statements contained in those prospectuses. \
The Supreme Court recently confirmed this principle in a private\
lawsuit by indicating that defendants Charter Communications,\
Scientific-Atlanta, Inc., and Motorola, Inc., had all engaged in\
the fraudulent conduct at issue. See Stoneridge Inv. Partners, LLC\
v. Scientific-Atlanta, Inc., 552 U.S. 148, 158-61 (2008). Although\
the Court\'s statement in Central Bank referred to Rule 10b-5(b),\
addressing material statements and omissions, and its comment in\
Stoneridge applied to 10b-5(a) or (c), addressing other types of\
deceptive conduct, the scope of primary liability in each\
subsection is governed by the language of section 10(b) of the\
Exchange Act. Therefore, the Supreme Court\'s recent confirmation\
that multiple individuals may be primarily liable under Rule 10b-5(a) or (c) is applicable to its interpretation of Rule 10b-5(b).\
'

var WPFootnote18 = ' Cf. United States v. O\'Hagan, 521 U.S. 642, 664 (1997)\
(noting that Central Bank "concerned only private civil litigation\
under § 10(b) and Rule 10b-5, not criminal liability[,]" and\
therefore that its "reference to purchasers or sellers of\
securities must be read in light of a longstanding limitation on\
private § 10(b) suits"). \
'

var WPFootnote19 = ' The Rule states: \
\
              It shall be unlawful for any person, directly or\
indirectly . . .\
              (a) To employ any device, scheme, or artifice to\
defraud,\
              (b) To make any untrue statement of a material fact or\
to omit to state a material fact necessary in order to\
make the statements made, in the light of the\
circumstances under which they were made, not misleading,\
or\
(c)                To engage in any act, practice, or course of\
business which operates or would operate as a fraud or\
deceit upon any person, in connection with the purchase\
or sale of any security.\
17 C.F.R. § 240.10b-5.\
'

var WPFootnote20 = ' Although deceptive conduct in the sale of securities could\
trigger liability under section 17(a), that provision does not\
cover purchases and therefore would not always offer an alternative\
vehicle for SEC enforcement.\
'

var WPFootnote21 = ' Section 11 of the Securities Act "prohibits false statements\
or omissions of material fact in registration statements" and\
"identifies the various categories of defendants subject to\
liability for a violation," including underwriters. Central Bank,\
511 U.S. at 179; see also 15 U.S.C. § 77k(a)(5).\
'

var WPFootnote22 = ' Section 12 "prohibits the sale of unregistered, nonexempt\
securities as well as the sale of securities by means of a material\
misstatement or omission; and it limits liability to those who\
offer or sell the security." Central Bank, 511 U.S. at 179; see\
also 15 U.S.C. § 77l(a).\
'

var WPFootnote23 = ' The SEC specifically observes in this Release that the\
underwriters\' "obligation to have a reasonable basis for belief in\
the accuracy of statements directly made concerning the offering is\
underscored when a broker-dealer underwrites securities." Id. at\
*21. \
'

var WPFootnote24 = ' The judgment in Sanders was vacated and remanded for further\
consideration in light of the Supreme Court\'s decision in Ernst &\
Ernst v. Hochfelder, 425 U.S. 185 (1976), which held that scienter\
is an element of a private cause of action under section 10(b) and\
Rule 10b-5. See John Nuveen & Co. v. Sanders, 425 U.S. 929 (1976);\
Hochfelder, 425 U.S. at 193. The Seventh Circuit on remand held\
that liability could no longer rest on Rule 10b-5 because the\
defendant\'s conduct had been "mistaken but honest in belief." 554\
F.2d at 792. As the majority points out, when the Seventh Circuit\
subsequently re-heard the case, it referred to explicit statements\
made by the defendant underwriter. See 619 F.2d 1222, 1234 (7th\
Cir. 1980). In its earlier ruling, however, the court had noted\
that "the evidence does not indicate that all members of the class\
relied on express recommendations," 524 F.2d at 1069, and it\
therefore based liability on the underwriter\'s implied statements.\
'

var WPFootnote25 = ' Section 14(e) provides, in relevant part: "It shall be\
unlawful for any person to make any untrue statement of a material\
fact or omit to state any material fact necessary in order to make\
the statements made, in light of the circumstances under which they\
are made, not misleading, . . . in connection with any tender\
offer." 15 U.S.C. § 78n(e). That language is in pertinent respects\
identical to the language in Rule 10b-5(b) that is at issue here. \
\
'

var WPFootnote26 = '  See Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 155\
(2d Cir. 2007) (accountant); Fidel v. Farley, 392 F.3d 220, 235\
(6th Cir. 2004) (auditor), overruled on other grounds by Tellabs,\
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007);\
Ziemba v. Cascade Int\'l, Inc., 256 F.3d 1194, 1205-06 (11th Cir.\
2001) (accounting and law firms); Anixter v. Home-Stake Prod. Co.,\
77 F.3d 1215, 1226-27 (10th Cir. 1996) (accountant). \
'

var WPFootnote27 = ' The majority quotes Fortson v. Winstead, McGuire, Sechrest\
& Minick, 961 F.2d 469 (4th Cir. 1992), for the proposition that\
"\'the duty to disclose material facts arises only when there is\
some basis outside the securities laws, such as state law, for\
finding a fiduciary or other confidential relationship.\'" Id. at\
472. Several circuits have adopted the proposition that federal\
securities law cannot establish the requisite duty. Id. That\
exclusion would be inappropriate for underwriters, whose unique\
duty to investors is deeply embedded in federal law independent of\
section 10(b) and Rule 10b-5. See supra Section B.2. \
'

var WPFootnote28 = ' The allegations in the SEC\'s complaint are described in\
detail in the panel decision, SEC v. Tambone, 550 F.3d 106, 141-143\
(1st Cir. 2008), and need not be repeated here. It suffices to say\
that the SEC meticulously identified the alleged\
misrepresentations, the defendants\' roles in overseeing the\
distribution of fund prospectuses in connection with the sale of\
Columbia Funds, and the basis for their knowledge or recklessness\
in not knowing that prohibited market timing arrangements existed\
(rendering the prospectus statements false). \
'

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