Securities & Exchange Commission v. Kelly
817 F. Supp. 2d 340
S.D.N.Y.2011Background
- This is a Securities and Exchange Commission action against John Michael Kelly, Steven E. Rindner, and Mark Wovsaniker in SD NY, focusing on alleged securities-law violations.
- The court granted defendants Rindner's and Wovsaniker's Rule 12(c) motions to dismiss Counts One and Two of the SEC's complaint.
- The SEC asserts Count Two (Rule 10b-5) and Count One (Section 17(a)) against Rindner and Wovsaniker; the court addresses Janus Capital Group v. First Derivative Traders in its reasoning.
- The decision follows the Supreme Court's Janus decision, which narrowed who can be a 'maker' of statements for Rule 10b-5 liability and distinguished primary vs. secondary liability.
- The court previously issued a summary judgment decision on January 7, 2011; this order narrows the remaining claims and sets trial readiness for other claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Janus forecloses misstatement liability under Rule 10b-5 against Rindner and Wovsaniker | SEC argues misstatement liability is not required under Janus for subsection (b) claims brought via Section 17(a). | Rindner and Wovsaniker contend they did not 'make' the misstatements; Janus limits primary liability to makers. | Yes; misstatement claim under Rule 10b-5(b) is foreclosed and dismissed. |
| Whether SEC can pursue scheme liability under Rule 10b-5(a) and (c) against Rindner and Wovsaniker | SEC seeks scheme liability for AOL round-trip transactions based on allegedly deceptive revenue reporting. | Defendants argue no inherent deception in the transactions themselves and that liability would collapse primary/secondary distinctions if allowed. | No; scheme liability claims are dismissed as premised on misstatements rather than inherently deceptive acts. |
| Whether Section 17(a) misstatement claim can survive Janus principles | Janus does not apply to misstatement liability under Section 17(a)(2). | Janus principles align Section 17(a) misstatement elements with Rule 10b-5 misstatement elements. | No; the SEC has not pleaded that Wovsaniker or Rindner 'made' any misstatement, so Count One (17(a)(2)) is dismissed. |
| Whether the remaining 17(a) scheme claims and other subsections survive | Claims under Sections 17(a)(1) and (3) align with Rule 10b-5(a)/(c) scheme liability and may survive. | Since primary misstatement elements and scheme liability are not established, those subsections should be dismissed as well. | Dismissed; Counts under Sections 17(a)(1) and (3) are not pled with viable scheme liability. |
Key Cases Cited
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (maker who has ultimate authority over statements; limits primary liability; Janus decision applied)
- SEC v. Lucent Technologies, Inc., 610 F. Supp. 2d 342 (D.N.J. 2009) (scheme liability cannot bypass misstatement elements; back-door approach rejected)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (scheme liability limitations under Rule 10b-5)
- SEC v. PIMCO Advisors Fund Mgmt. LLC, 341 F. Supp. 2d 454 (S.D.N.Y. 2004) (limits on using scheme liability to impose liability for aiding misstatements)
- In re Parmalat Sec. Litig., 376 F. Supp. 2d 472 (S.D.N.Y. 2005) (preventing scheme liability from subsuming primary misstatement liability)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (elements of liability under Rule 10b-5 for misstatements and scheme liability)