VanCook v. Securities & Exchange Commission
653 F.3d 130
| 2d Cir. | 2011Background
- VanCook, a long-time securities professional, helped launch and run Pritchard Capital's New York office to attract mutual-fund-trading hedge funds.
- Pritchard Capital shifted its clearing to Banc of America Securities (BOA), whose system allowed post-4:00 p.m. orders to receive that day's NAV.
- VanCook exploited the BOA Mutual Fund Routing System (MFRS) loophole to submit late-trading orders for Simpson, Goodwin, and Millennium after 4:00 p.m.
- He timed initial proposals as if received at 4:00 p.m. but final instructions came later, concealing post-4:00 p.m. decisions.
- Between 2001 and 2003, VanCook, or his staff, executed nearly 5,000 late-trading orders for the three favored clients, generating substantial profits.
- Despite warnings from Millennium's attorney and others, VanCook continued the practice and reassured others of its legality.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether VanCook violated Section 10(b) and Rule 10b-5 through late trading | VanCook argues no misrepresentation and late trading is not inherently fraud. | The scheme involved deceptive acts and implied misrepresentations by submitting late trades as if 4:00 p.m. trades. | Yes; VanCook violated Rule 10b-5 and Section 10(b) through the late-trading scheme and implied misrepresentation. |
| Whether VanCook aided and abetted or caused Pritchard Capital's recordkeeping violations under Rule 17a-3(a)(6) | Argues that VanCook lacked knowledge of illegality and that recordkeeping was not his job. | There is ample evidence of actual knowledge and substantial assistance by VanCook in the recordkeeping violations. | Yes; VanCook aided and abetted and caused the violations." |
| Whether the disgorgement and civil penalty were appropriate sanctions | Disgorgement should be limited to commissions earned after May 2003; penalty argues excessive. | Sanctions were warranted to deter and reflect seriousness; due process supports broad disgorgement. | Sanctions affirmed; no basis to reduce disgorgement or penalty." |
| Standard of review and scienter underpinning liability | Requests deferential review of SEC findings; argues lack of scienter for some liability theories. | VanCook engineered and knew the scheme violated mutual funds' NAV rules; claims were supported by substantial evidence. | Court upholds SEC findings, including intent and knowledge supporting liability. |
Key Cases Cited
- SEC v. Parklane Hosiery Co., 558 F.2d 1083 (2d Cir. 1977) (standards for antifraud liability under 10b-5; breadth of misrepresentation/omission liability)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (requirements of scienter and deception under 10b-5)
- Chiarella v. United States, 445 U.S. 222 (1980) (framework for 10b-5 liability and deception in securities transactions)
- United States v. Finnerty, 533 F.3d 143 (2d Cir. 2008) (distinguishes between mere communication and deceptive misrepresentation; later reliance on updated rule interpretation)
- SEC v. Pentagon Capital Mgmt. PLC, 612 F. Supp. 2d 241 (S.D.N.Y. 2009) (implied misrepresentation and late trading in mutual funds context)
- SEC v. Simpson Capital Mgmt., Inc., 586 F. Supp. 2d 196 (S.D.N.Y. 2008) (late trading and Rule 10b-5 analysis in mutual fund context)
- In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 845 (D. Md. 2005) (implied misrepresentation theory in mutual fund pricing)