Corporate & Securities Law

By Jim Hamilton

The 1st Circuit vacated a panel finding in favor of the SEC in SEC v. Tambone. The enforcement action concerned misrepresentations made by two senior executives of the primary underwriter of a mutual fund to investors about excessive trading and market timing. As alleged, the funds entered into arrangements allowing certain preferred customers to engage in short-term or excessive trading, while at the same time, the funds' prospectuses represented that such trading was prohibited. Dismissing the claim, the district court (DC Mass) held that the complaint failed to sufficiently attribute the misleading statements to the two executives. The court also found that the executives had no duty to correct the statements because they were not responsible for the misleading disclosures.

On appeal, the SEC asserted that the use of false and misleading prospectuses to sell securities constituted making a statement. The 1st Circuit panel agreed in December 2008, finding that the executives made implied statements to investors that they believed that the prospectuses were accurate and complete. The court emphasized that, "in light of [an underwriter's] duty to review and confirm the accuracy of the material in the documentation that it distributes, an underwriter impliedly makes a statement of its own to potential investors that it has a reasonable basis to believe that the information contained in the prospectus it uses to offer or sell securities is truthful and complete." Because the prospectuses were false, the implied statements were also false, concluded the panel.

A majority of the 1st Circuit judges voted to vacate the 10b-5 holding and to re-consider the issue of whether the individuals made false statements en banc. Circuit Judges Lipez and Torruella dissented from the grant of en banc review.

Full post as published by Jim Hamilton's World of Securities Regulation on July 25, 2009 (boomark / email).