Corporate Governance

: The Race to the Bottom

SEC v. Tambone: Specificity, Scienter, and 10b-5 violations

By Gregg Emmel (index)

In a previous post this blog covered SEC v. Tambone, the case against James R. Tambone and Robert Hussey, executives of Columbia Funds Distributor, Inc..  Neither defendant made false statements, but the SEC alleged that they distributed prospectuses that they knew were misleading.  The court held that the SEC's allegations met the required elements § 10(b), Rule 10(b)-5, § 206 of the Investment Advisors Act, and § 15(c) of the Exchange Act, and reversed and remanded the case for further proceedings. 

Defendants James Tambone and Robert Hussey filed petitions for, and the First Circuit granted, en banc review.  Tambone has filed a supplemental brief focusing on the SEC's "implied representation" theory and requests the dismissal of the SEC's Section 10(b) claim against him.  

Tambone argues that the "brightline/making test" is dispositive of the SEC's 10b-5(b) claims.  In order to support a primary liability claim the SEC must allege that the defendant personally made statements.  The SEC has long held that "to make" means "to create.'  Tambone claims that the court should dismiss the SEC's "implied representation" theory because it fails to rise to the level of creating or making a statement. 

Tambone goes on to argue that the SEC failed to plead any purported wrong doing sufficient to establish primary liability.  Specifically, Tambone asserted that the SEC had not identified the substance of any misleading comments made, proposed or reviewed by him that were then incorporated into any particular prospectuses.  Furthermore, Tambone contended that the SEC had not identified a relationship that would give rise to a duty to investigate or disclose under the SEC's "Shingle Theory."  Tambone also claimed that the SEC's "Entanglement Theory" must fail, asserting in essence that there was not a significant enough relationship between himself and those who distributed the misleading prospectus.  

Finally, Tambone argued that extending 10b-5 liability to an "implied representation" would be an impermissible dilution of the statutory scienter requirement.  To survive dismissal the SEC must allege facts showing that the defendant acted with "the intent to deceive, manipulate or defraud."  Tambone asserts that the SEC's allegations might amount to omissions or even inexcusable negligence, but fail to meet the required scienter of affirmative intent, or "extreme departure from the standards of ordinary care."  

The primary materials for the post are available on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on October 09, 2009 (boomark / email).