Opposing Judicial Expansion of Primary Liability for Securities Fraud
NELF filed a brief in this case supporting a petition for en banc review of a panel decision which held that primary liability for securities fraud under SEC Rule 10b-5(b) may be based on “implied statements” derived from a defendant’s non-verbal conduct. The case involves an SEC enforcement action against two mutual fund executives who allegedly made knowing use of inaccurate prospectuses to market mutual funds. Reversing the trial court’s dismissal of the Rule 10b-5(b) claims, a three-judge panel of the First Circuit (in a 2-to-1 split) held that the SEC stated a claim under Rule 10b-5(b) for primary liability for “mak[ing an] untrue statement” in connection with the sale of securities because the defendants allegedly had a duty to ensure the accuracy of the prospectuses and therefore, by merely using the prospectuses, had allegedly made untrue “implied statements” that the prospectuses were accurate.
NELF’s brief, filed on behalf of both itself and the Associated Industries of Massachusetts, focused largely on a plain-language approach to the regulation, arguing that the panel majority’s opinion was clearly inconsistent with the language of the rule as well as with Supreme Court precedent. NELF also argued that the opinion dramatically expands the scope of primary liability for securities fraud beyond anything permitted by other circuits and would undermine the distinction between primary liability and liability for aiding and abetting (a highly significant distinction because the SEC’s burden of proof of scienter is lighter in primary liability actions). NELF explained that, if allowed to stand, the panel majority’s novel view of Rule 10b-5(b) would presumably affect any officer, director, or other executive who has a duty to investigate the accuracy of documents used in the purchase or sale of securities.
On June 22, 2009 the full Court withdrew the panel majority opinion and granted en banc review. In response to the Court’s solicitation for supplemental briefs, NELF filed a second brief and developed further its plain-language argument. On March 10, 2010, the Court issued an en banc decision rejecting the SEC’s theory and affirming the dismissal of the claims. As NELF had argued, in its 4-2 decision, the Court decided the issue on the basis of the plain language and structure of the rule, in conjunction with an examination of the statutory framework and Supreme Court precedent.
NELF filed a brief in this case supporting a petition for en banc review of a panel decision which held that primary liability for securities fraud under SEC Rule 10b-5(b) may be based on “implied statements” derived from a defendant’s non-verbal conduct. The case involves an SEC enforcement action against two mutual fund executives who allegedly made knowing use of inaccurate prospectuses to market mutual funds. Reversing the trial court’s dismissal of the Rule 10b-5(b) claims, a three-judge panel of the First Circuit (in a 2-to-1 split) held that the SEC stated a claim under Rule 10b-5(b) for primary liability for “mak[ing an] untrue statement” in connection with the sale of securities because the defendants allegedly had a duty to ensure the accuracy of the prospectuses and therefore, by merely using the prospectuses, had allegedly made untrue “implied statements” that the prospectuses were accurate.
NELF’s brief, filed on behalf of both itself and the Associated Industries of Massachusetts, focused largely on a plain-language approach to the regulation, arguing that the panel majority’s opinion was clearly inconsistent with the language of the rule as well as with Supreme Court precedent. NELF also argued that the opinion dramatically expands the scope of primary liability for securities fraud beyond anything permitted by other circuits and would undermine the distinction between primary liability and liability for aiding and abetting (a highly significant distinction because the SEC’s burden of proof of scienter is lighter in primary liability actions). NELF explained that, if allowed to stand, the panel majority’s novel view of Rule 10b-5(b) would presumably affect any officer, director, or other executive who has a duty to investigate the accuracy of documents used in the purchase or sale of securities.
On June 22, 2009 the full Court withdrew the panel majority opinion and granted en banc review. In response to the Court’s solicitation for supplemental briefs, NELF filed a second brief and developed further its plain-language argument. On March 10, 2010, the Court issued an en banc decision rejecting the SEC’s theory and affirming the dismissal of the claims. As NELF had argued, in its 4-2 decision, the Court decided the issue on the basis of the plain language and structure of the rule, in conjunction with an examination of the statutory framework and Supreme Court precedent.
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