United States Securities & Exchange Commission v. Stoker
865 F. Supp. 2d 457
S.D.N.Y.2012Background
- Stoker allegedly violated Sec. 17(a)(2)&(3) in Class V III, a CDO squared marketed by Citigroup/Credit Suisse.
- Stoker, a Citigroup director in the CDO division (2005–2008), helped structure and market the Fund.
- Fund marketing materials claimed CSAC selected the assets, while Citigroup had a large naked short position on many assets.
- Citigroup’s short position and prop trading were not disclosed in the offering materials or pitch book.
- Complaint alleges investors would not have invested if Citigroup’s role and Citigroup-driven asset selection were disclosed; misstatements/omissions occurred in marketing documents.
- Fund ultimately defaulted nine months after closing; Citigroup earned substantial fees and profits from short positions.
- Stoker’s compensation increased after the alleged fraud, suggesting personal benefit tied to the scheme.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 17(a)(2) requires personal money obtainment by defendant? | Stoker obtained money for employer via fraud | Plaintiff must show personal receipt of funds | Sufficient to show employer-money obtained by Stoker's acts |
| Whether Stoker reasonably “made” or was responsible for misstatements | Stoker drafted/edited pivotal sections; he caused statements | Separation between making statements and copying prior language | Plaintiff plausibly alleged Stoker caused the misstatements |
| 17(a)(3) claim -- duplication/no broader scheme? | There was a broader deceptive scheme beyond misstatements | Statements alone suffice to support 17(a)(3) | Plaintiff alleged a deceptive scheme beyond misstatements; viable under 17(a)(3) |
| Whether Janus applies to 17(a)(2) claim? | Janus should read 17(a)(2) broadly like 10b-5 | Janus concerns 10b-5, not 17(a); broader reading unnecessary | Janus does not constrain 17(a); 17(a)(2) read broadly per Tambone/Janus distinction |
Key Cases Cited
- SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008) (text supports liability when statement used to obtain money, regardless of source)
- Tambone v. United States, 597 F.3d 436 (1st Cir. 2010) (en banc reinstated; clarifies 17(a)(2) liability standard)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (textual analysis; distinguishes 17(a) from 10b-5; broader 17(a) scope)
- SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (similar elements to 10b-5 but under 17(a) with different scope)