Securities & Exchange Commission v. Tambone

bеars therefore Attorney General and the demonstrating the stat-

the burden test; Hudson

ute satisfies the Central has failed to the State Although

3. justified by substan- Act is

prove that the health quality privacy

tial interests that the

care, to show it met its burden has in con- its interest directly

Act advances drugs and prescription

taining the cost necessary than extensive

is not more objective.

accomplish I the Pre- majority, find

4. Like the sufficiently clear to withstand

scription Act con- challenge when

plaintiffs’ vagueness legisla- with its narrowly, consistent

strued precedent. history applicable

tive contention that plaintiffs’

5.

Act the dormant Commerce violates district be considered

Clause should instance. should

court the first We purpose. the case for

remand and EXCHANGE

SECURITIES

COMMISSION, Plaintiff,

Appellant,

v. TAMBONE; Hussey, Robert

James

Defendants, Appellees.

No. 07-1384. of Appeals,

United States Court

First Circuit. Sept.

Heard 2007.

Decided Dec. 2008.

Rehearing Denied Feb.

LIPEZ, Judge. Circuit brought In this enforcement action Exchange Commission the Securities (“SEC” Commission”), the Com- or “the R. to hold defendants James mission seeks Hussey, and Robert executives Tambone Inc., Distributor, Funds of Columbia underwriter for the Columbia funds, both as family responsible of mutual of the federal securities primary violators of un- aiders and abettors laws and as violations of Columbia charged primary Distributor.1 Advisors Columbia and/or carefully reviewing the relevant stat- After conclude that precedents, utes and we Hussey may primar- be held Tambone and fund ily using misleading liable for false or mutual fund shares prospectuses to sell Litigation Coun- Avery, John W. Senior 17(a)(2)of the Securities Act under Section Commission, sel, Exchange Securities and (“section 17(a)(2)”) and of 1933 Section Vollmer, Deputy Andrew N. with whom (“section Act Exchange of the of 1934 Stillman, Counsel, H. and Jacob General 10(b)”), implementing regulation, and its Solicitor, brief, appellant. on for were Additionally, 10b-5. we conclude Rule Scherker, whom Green- Elliot H. with scope encompassed that the of conduct P.A., Pappalardo, A. John berg Traurig, 17(a)(2)’s prohibition obtaining on section Thomas, D. Sten, Greg John A. David G. “by of’ money property or means LLP, Greenberg Traurig, Blankinship, and may, in untrue statement of material fact brief, Tambone. appellee were on for circumstances, than certain be broader Joralemon, with whom Christopher M. 10b-5(b)’s prohibition against “mak- Feldman, L. Clifford Chance U.S. Warren Here, however, an ing” untrue statement. Jr., LLP, Libby, John J. Com- Frank A. com- we conclude that the SEC’s second P.C., misso, Libby Hoopes, & Kelly, and particularity plaint alleges with sufficient brief, Hussey. appellee were on for prohibitions by of both Tambone violations abetting Hussey, aiding as well as LIPEZ, Circuit Before SELYA therefore reverse the dis- violations. We DELGADO-COLN,* District Judges, and dismissing the judgment trict court’s Judge. * Rico, 206(1) sitting by desig- the Investment Advisers Act Of the District of Puerto 80b-6(l), (2). § U.S.C. nation. are Sec- provisions at issue in this case The dismissal of 2. We review the district court's 15(c) Ex- the Securities tions complaint. The SEC’s first the SEC's second § 78j(b) and change 15 U.S.C. Act of 10b-5, complaint against was dismissed defendants 78o(c), respectively, along § with Rule prejudice had 240.10b-5, without before the Commission promulgated § under 17 C.F.R. 10(b); 17(a) opportunity to amend it additional the Securities Section allegations. related 77q(a); § and Sections Act of 15 U.S.C. complaint against SEC’s Tambone and ries from investing public and other Hussey. entities seeking additional information about of the Columbia Funds. Colum-

I. bia funds, Distributor and the issuer of the Advisors, Columbia a registered invest- A. The Roles Defendants adviser, ment wholly-owned were both following description alleged subsidiaries of Columbia Management conduct, primarily drawn from the SEC’s Group, Inc. and indirect subsidiаries complaint, second presented light FleetBoston Financial Corporation.4 plaintiff. most favorable to the Miss. Pub. Employees’ Sys. Ret. v. Boston sponsor, As issuer and Columbia Scientific Advis- (1st Cir.2008). Corp., 523 F.3d ors primarily responsible was creating for the content of for the

During the period, relevant time defen- Columbia Funds. See 15 U.S.C. 80b- dants Tambone and were senior 2(a)(ll) (defining an investment adviser as Distributor, executives of Columbia Funds who, “any person compensation, for (“Columbia en- Distributor”), Inc. a broker- gages others, advising business of registered dealer with the SEC since 1992. directly either through publications or Between company 1998 and was writings, as to the value of securities or as the principal underwriter and distributor advisability in, of investing purchas- group for a of approximately 140 mutual securities”). (“the Funds”) ing, selling and, Columbia funds Columbia in that (“Columbia Services, Services”), Fund Inc. capacity, primarily responsible was subsidiary also a Management Columbia selling those disseminating securities and Group, responsible funds, was for determining informational materials on in- the timing” whether “market cluding prospectuses, to activities were po- investors and occurring in tential investors.3 the Columbia and re- See U.S.C. 80a- funds 2(a)(40) sponding activity. to such (describing timing the duties of an under- Market practice buying writer to include refers to the of purchasing selling securities resale, selling rapid from issuer for mutual funds in exploit securi- succession to issuer). ties for an pricing Columbia Distributor short-term inefficiencies in the also responsible answering inqui- was for Among specific the funds.5 Columbia Although may prospectuses a mutual fund Liberty sell shares for Funds. broker-dealers, directly typically employs it merged April These entities 2003 with Fleet principal underwriter distribute and mar- Advisors, Investment Inc. into Columbia Ad- ket the fund to broker-dealers and to the 2004, April visors. In Bank of America Cor- investing public. poration became successor to Fleet. previously by 4. Columbia Distributor went timing trading 5.Market is "a mutual fund Distributor, Liberty name Funds Inc. In No- strategy 'exploit[s] discrepancies brief be- 2001, vember Corpora- FleetBoston Financial prices tween the stock used to calculate the purchased Liberty Group Financial day, prices shares’ value once a and the at acquired Liberty groups various fund and in- trading actually which those stocks are in the advisers, including Liberty Advisory vestment Ficken, 45, (1st interim.” SEC v. Corp., Management Services Colonial Associ- Cir.2008) (quoting Kircher v. Putnam Funds ates, Inc., Inc., Stein Roe and Farnham New- Trust, 547 U.S. 637 n. Inc., port Management, Newport Pacific Fund (2006)). discrepancy 165 L.Ed.2d 92 "The Management, Inc. and Columbia Funds Man- agement occurs because the value of the fund is calcu- Company. organ- Fleet retained the only day.” Druffner, management Liberty ization and lated once each SEC v. Distribu- (D.Mass.2007). using Liberty tor and F.Supp.2d continued name on re- defendants compensation the total case were to this pertinent Funds of commissions Newport Tiger year each consisted Group, the ceived Acorn Fund Fund, Fund, Stock fund Grоwth from sales. the Columbia others. and several Tambone, regis-

Beginning Wrongdo- Alleged The Nature of the B. employed was principal,6 tered securities ing Distributor, Liberty as Co-President 2003, various Colum- 1998 and Between Distributor, where he and later Columbia statements adopted Funds disclosure bia for responsible one of the executives

was address- mutual fund prospectuses in their ac- Distributor’s managing all of Columbia engaged timing practices market ing obli- tivities, fulfillment of its including timing prac- The market investors. fund of the Columbia as underwriter gations an investment into shuffling rapidly tice of the sale and included These duties Funds. funds is known targeted of certain and out Funds and marketing of the Columbia “round-trips.” Although engaging as pro- the fund to investors dissemination an individual inves- beneficial to potentially As Co- materials. and other spectuses tor, illegal, round-trips per and not se involved President, at times Tambone was timing practices can adverse- other market prospectuses, revising the process in the because ly mutual fund shareholders allege that he affect does not although the SEC timing from market drafting profits them. obtained responsible for was the value of shares practices dilute President Vice served Senior shareholders. by long-term held fund Liberty Distribu- Group the Alliance at Further, increase a fund’s round-trips 2000, where he was from until tor (which borne all trading costs are to investment responsible for funds selling shareholders), may the mutual cause of their and others the benefit advisers for gains inopportune capital fund to realize Liberty Dis- he became clients. lan- prevent practices, To such times. National Managing tributor’s Director many of the Co- inserted into guage was managed capacity, In that he Accounts. limiting the lumbia Fund the sale of the funds to broker-dealers round-trips specifically, an ex- number of posi- the same Hussey held other entities. — to another and then change from one fund responsibili- tion, substantially with similar in engage shareholder could again- back January ties, from Distributor Columbia —-a timing given period.7 As market during Throughout this until March 2004. prevalent, practices became more Colum- directly to Tam- Hussey period, reported steps prevent to such bia took additional Hussey thus Both Tambone bone. 1999, May certain of the in behavior. roles and direct played substantial securities, and, belonging for the funds to prospectuses ac- and distribution sale representing Group began half the Acorn Fund more than cording complaint, to the RegistrationQualifications/BrokerGuidance who registered principal is one 6. A securities (last ponsibility/Qualifications/p011051 Industry Res by the Financial has been certified 3, 2008). (“FINRA”) “manage visited Dec. Regulatory Authority to entity’s] supervise investment [a or member corporate through example, banking business for from 1998 or securities For securities, programs, and the Acorn participation prospectuses for the within direct funds gen- Group would products/variable con- Fund stated that investоrs company investment up erally permitted make to four round- be Registration Exami- tracts.” See FINRA trips per year. http://www.finra.org/ Requirements, nation ly permit approved Acorn funds do not mar- or knowingly frequent “[t]he allowed adopted policies timing trading particular ket and have in mutual funds in viola- discourage practice.” tion of the Strict Prohibition disclosures in contained their prospectuses. The goal of limiting Consistent with Commission’s second complaint details six behavior, timing Hussey, market arrangements that approved Tambone working group co-led a that recommended knowingly allowed and seven arrange- adopt that all of the Columbia Funds Hussey approved ments or knowingly against practices position consistent such allowed, most, which, but not all of over- complaint in their prospectuses. lapped. alleged arrange- describe the We states, belief, on information and based ments, none of which were disclosed to the in April May Hussey independent investors or the trustees of Tambone each reviewed drafts of the the Columbia Funds. in- timing representations market be prospectuses cluded in the and offered (1) Hussey approved and Tambone comments via e-mail to the in-house coun- arrangement allowing Ilytat, L.P. to en- later, sel for Columbia Months Advisors. gage frequent and trading short-term a number of the Columbia Funds revised Newport Fund, Tiger a Columbia mutual prospectuses their to include a statement fund. According arrangement, to the Ily- (the prohibiting market timing “Strict tat place would million in Newport $20 Prohibition”).8 By spring Fund, Tiger remaining two-thirds remaining belonging Columbia Funds being static and one-third actively traded. Liberty adopted had also Prohi- Strict approved Tambone or became aware of the language prospectuses. bition their arrangement by October when the That language remained these funds’ portfolio manager Newport Tiger for the prospectuses until at least and was Fund, initially who had approved the ar- pre- later added to for funds rangement, communicated both Tam- viously acquisi- owned Fleet before the Hussey Ilytat’s bone and his concern about tion. timing practices potential market and the that, alleges

The SEC concurrent with harm it could have on the fund and its amendments, Hussey’s these defendants affirmative- approval, Ilytat investors.9 With 8. The Strict Prohibition read: and it has become unbearable. There will be fund,” long damage term to the permit set The fund does not short-term or trading guidelines liming excessive in its shares. Excessive forth for such market ar- purchases, redemptions exchanges rangements, including: disrupt portfolio management Fund shares (cid:127) Identify long-term a close asset expenses. and increase Fund In order to quid-pro-quo any a stream as to short- Fund, promote the best interests of the movements; term right reject any pur- Fund reserves to (cid:127) Dictate that short-term movements exchange request particular- chase order or Liberty money option must use market who, ly from market timers investors in gross artificially to ensure sales are not opinion, pattern advisor's have Liberty gener- inflated and to ensure trading short-term excessive or whose trad- income; management ates constant fee ing may disruptive has been or be to the (cid:127) you Bring potential relationship Fund. The funds into which would like to the at- exchange may reject your request. also tention to the relevant investment [sic] management early; team response Newport In 9. to an email from the (cid:127) relationship Monitor the to ensure the in- Tiger portfolio manager Fund’s in October management vestment team’s comfort. discussing Ilytat, manager in which the trading states that "their active has increased tributor, and Hus- approved by Tambone list of Services’ to Columbia was added Frequent Trad- certain of Ritchie’s invest- sey, designating “Authorized Accounts 2002, in reversed Hussey, assets,”12 “sticky long-term ing,”10 ments as by Ilytat’s trading Colum- on stop placed assets, for short- and others as available timing surveillance market bia Services trading. term personnel. (3) 2003, early Edward In late 2002 or total, April 2000 and October In between separate agree- two Stern entered into round-trips seven Ilytat made 350 through ments with Columbia Distributor Funds, including international Columbia arrangement, secured intermediaries. One and the Acorn Tiger Fund Newport on of Stern’s Ca- by Epic Advisors behalf Fund. At least 30 of International firm, nary Management Investment Newport Tiger Fund round-trips in the Tambone, by allowed Stern enti- approved May period from during the were made round-trips per month ties to make three September 2002 when through funds. Each in each of three Columbia the Strict Pro- prospectus fund contained contained the Strict Pro- prospectus fund’s Moreover, de- representation.11 hibition language. agreement hibition The second for the prospectus spite language million in the placement involved the of $5 Sep- Fund between Acorn International Fund, pro- whose High Columbia Yield September prevent- 1998 and tember spectus contained the Strict Prohibi- also engaging in more than ing from investors arrangement, ap- That tion disclosure. year, Ilytat engaged round-trips per four by portfolio manager, the fund’s proved round-trips 1999 and 18 in 27 such round-trip permitted Stern to make one in at Ilytat engaged also least each month. July between round-trips in the fund prospectus the fund and June when Calugar In was allowed Daniel language. included the Strict Prohibition place up million the Columbia $50 Young Investor Fund and the Columbia (2)From January through Sep- Fund, permission to Growth Stock with Capital Management, Ritchie tember round-trip per make one month with the in a frequently Inc. traded number Co- knowing entire amount. In Ca- Funds, Ti- including Newport lumbia exceeding their lugar trading at levels was ger Fund and the Columbia Growth Stock Hussey expressed concern arrangement, 2001, Hussey aware Fund. In late became harming the Calugar’s activities were trading of Ritchie’s short-term activities funds, took no action to limit the trad- but early the two Columbia Funds. ing apprised activities. Tambone was Management, Inc. entered Capital Ritchie activities, but also arrangement Calugar’s Columbia Dis- into disrupt program Hussey’s response, copied the Fund's investment which was to Tam- bone, Ilytat arrangement stated that the fol- transaction costs that are create additional guidelines. lowed these borne all shareholders.” designed protect certain 10. The list was 12.“Sticky assets” are investment assets entities from internal actions taken given place in within a fund for an remain timing practices. prevent market period "sticky A extended of lime. asset” 2001, early 11. In and before it was typically keeping arrangement involves these Prohibition, amended to include the Strict given period “sticky place assets” in for prospectus Newport Tiger Fund for the stated permission actively time in return for to trade "[sjhort engage term ‘market timers’ who frequently. amount of assets more another frequent purchases redemptions can in and Calugar round-trips continued the in the took no action. Growth Stock Fund and until trading short-term activities at least approximately round-trips in Young 2001, August several months after Investor Fund. These included 20 round- adopted the Strict Prohibi- funds issue trips in Young Investor Fund between in their language prospectuses. February August after prospectus fund’s had been amended to approved “sticky Tambone asset” include the language. Strict Prohibition arrangement between Columbia Distribu- tor and broker Sal Giacalone in late 2000. (8)In early Columbia Distributor the arrangement, Per the terms of Giacal- agreed to allow Tandem Financial to make round-trips one was allowed to make four an unlimited number of trades in one or month of to million in per up $15 more of the Columbia During Funds. Newport Tiger long Fund so as he also period April from 2001 through September placed long-term million in the assets of $5 2003, Tandem made round-trips in the Fund. the Acorn Between November 2000 Fund, Columbia Tax Exempt despite the April Giacalone made a total of Strict Prohibition disclosure in the fund round-trips Newport Tiger in the Fund prospectus. Hussey and one of Tambone’s arrangement. to the pursuant subordinates became aware of Tandem’s (6) Hussey approved arrangement early activities in in allowing with D.R. Loeser late 1998 The complaint alleged that Columbia per Loeser to make five month round-trips Advisors, through itself or portfolio man- upof million the Columbia Growth $8 funds, agers separate for the ap- knew or In the Stock Fund. first five months of proved timing of all of the market ar- approximately Loeser made rangements, except arrangement in the round-trips Growth Stock Fund and total, Tandem. In during approxi- round-trips Young another 20 Inves- mately five-year period from 1998 to Despite knowledge by tor Fund. Tambone round-trips hundreds of were executed in Hussey trading practices, Loeser’s approach- Cоlumbia Funds amounts neither took action to halt the trading ing billion. $2.5 activities. Meanwhile, in position his as Managing

(7) Signalert arrange- entered into an Accounts, Hussey Director for National ment with Columbia Distributor also helped lead task force established approved by Hussey, in it agreed which develop procedures detecting for invest million the Growth Stock $7.5 preventing timing market activities in the Fund Young million in the Inves- $7.5 desig- Columbia Funds. was the exchange permission tor Fund in for inquiries nated contact for about market engage round-trips annually in 10 in each actions, timing, including any, what if of the funds. Pursuant to the arrange- ment, if activity should be taken such was de- Signalert required place was also funds, capacity, participated million each of six other tected. he which $5 just quarter. could be traded in the creation of a Ap- once each list of “Accounts 2000-2001, During Signalert proved Frequent Trading.” made over 50 Accord- complaint reports day 13. The describes an email forward- I review 3 different each fitting reflect accounts def- Hussey by timing [the this criteria ed to the market surveil- ac- timers]. inition of market After these manager describing lance the differential located, against counts are I take action given treatment to favored investors: some of them. The accounts that are rec- and companies to mutual fund Hussey 88 letters complaint, both ing to the second firms, found that half brokerage SEC] occasions, [the Tambone, multiple on and more arrangements ... with one or had their subordinates allowed blocked or allowing them to trade in and out investors activity of trading halt the block efforts to occurred arrangements of These shares. customers. preferred compa- fund though half of the even about overseeing the distribu- In addition specifically barring mar- policies nies have Tambone, on behalf prospectuses, tion of said.”). Prior to timing, ket the official Distributor, hundreds signed of Columbia case, complaint in this filing its initial Funds for Columbia selling agreements discovery extensive Commission obtained selling agree- Each during period. Columbia, reviewing hundreds from by which the procedures ment stated tak- in documents and pages thousands of shares of purchase would customer Hussey testimony of Mr. ing the sworn from Columbia Distribu- Funds Columbia over 20 other witnesses.14 express representations tor and contained to the content of and warranties related History C. Procedural Tambone referred prospectuses. complaint against de- The SEC filed prospectuses for purchaser to the fund Febru- fendants Tambone specifically the fund and information on securities fraud based on ary alleging agreement shall “[w]e stated each al- allegations.15 complaint The the above literature and sales furnish primary committed leged defendants request.” upon acts of fraud violation of conduct alleged learned Act, 10b-5, Exchange the Securities and the various Columbia 17(a)(2) of defеndants Act. and section of the Securities investiga- during the course of its entities alleged It also that defendants aided and many timing practices market tion of primary violations committed abetted Morgenson companies. fund See Gretchen Advisors and Columbia Distribu- Columbia Thomas, Jr., Finding S.E.C. 206 of the Advis- & Landon tor violation of section Abuses, Times, Act, Says, N.Y. violations committed primary Fund ers Official (“[A]fter in violation of sec- sending at out Columbia Distributor Oct. Cl (that timing arrangements ket in the Columbia ognized do not have some as timers us) admitting denying the existing relationship with merit Funds. Without kind of findings, placement of ac- SEC’s Columbia Advisor Colum- trade cancellations and agreed pay $70 stops. that are allowed bia Distributor million count The accounts (due relationship) disgorgement penalty $70 mil- are and a civil to trade sales SEC, ignored. lion to the to be distributed to investors Release, by the conduct. Press U.S. harmed 21(a)(1) of the Securities Ex- Commission, Section Exchange Securities and Fleet's change gives au- Act of 1934 the SEC broad Columbia Mutual Fund Adviser and Distribu- thority investigations to “make such as it Pay $140 tor to Million to Settle SEC Fraud necessary deems to determine whether Timing, Charges Market 2005- Undisclosed violated, violating, about to person has or is (Feb. 2005) (available http://www.sec. at Exchange any provision result, Act [the violate gov/news/press/2005-15.htm). aAs regulations the rules or thereunder....” and] targeted claims in this case are SEC's 78u(a)(l). U.S.C. Hussey only, although Tambone and to estab- aiding abetting liability against lish these defendants, required allege February the SEC is also 15. In the SEC settled an en- Advisors, against against Co- Columbia claims Columbia Advisors forcement action and/or Distributor, lumbia Distributor for violations of Columbia and three former Co- the securities laws. lumbia executives related to undisclosed mar- 15(c)(1) Exchange Act. The the fund prospectuses.16 Despite these ad- (1) ditions, a complaint sought three remedies: again the district court dismissed injunction to restrain Tambone permanent the Commission’s claims on December violating, from further either Hussey and this time with prejudice. indirectly, statutory directly provi- or Addressing question lia- (2) case; implicated disgorge- in this sions bility, applied the court an attribution test. interest; pre-judgment ment and and is, That the court stated that to be liable See U.S.C. penalties. unspecified civil under “Section of the Exchange Act 80b-9(e). 78u(d)(3), 77t(d), §§ 17(a) Act, and Section of the Securities a The defendants moved to dismiss the defendant must personally have made ei- complaint plead for failure to fraud with ther an allegedly untrue statement or a by particularity required as Fed.R.Civ.P. material omission.” Despite the SEC’s al- upon and for failure to state a claim legations that participated defendants had granted which relief could be under Rule in working groups and task forces led 12(b)(6). granted The district court to the revision of the market timing state- prejudice January on motions without ments the false and misleading prospec- 2006. tuses, and then used those 16, 2006, On March the SEC for moved funds, sell the mutual the court concluded original complaint. leave to amend the major that “[t]he flaw with the SEC’s com- resolved, Before that motion was the SEC then, be, plaint was and continues to judgment pursuant for relief from moved failure to attribute misleading statements 60(b), having realized Fed.R.Civ.P. Hussey.” to either According Tambone to amend motion leave cannot be court, to the district neither the defen- considered after case has been dis- dants’ in disseminating allegedly roles missed. The district court denied both misleading prospectuses nor their partic- 5,May motions on ipation process in the of revising the dis- 19, 2006, May On the SEC filed a second satisfy provi- closures was sufficient to complaint sought the which same remedies requirement. sions’ attribution aiding but raised an additional and abet- The court also found other deficiencies ting supplemental offense and offered fac- First, complaint. the SEC’s the court allegations support tual all satisfy ruled that the SEC had failed to claimed As characterized violations. pleading particularity requirements court, the district the Commission’s second 9(b), imposed by noting Fed.R.Civ.P. complaint paragraphs nearly contained 110 paragraphs identify new fail “[t]he [] complaint, identical to those in the initial the substance of the comments made paragraphs additional alleging twelve ... ... Hussey either Tambone or fail paragraphs new The additional facts. allege language reviewed generally par- state that both defendants proposed by either defendant ever ticipated oversight was pro- review actually incorporated pro- into the fall 2001 timing cesses related to market issues for Funds, Second, spectus.” rejected court specifically the Columbia al- lege responsible allegation that defendants were for Commission’s that Tambone and misrepresentations on timing duty market owed a to the investors to point opinion, complaint.’' 16. From this forward in the we complaint shall refer to the “the second plain- in favor of the It wrote: reasonable inferences the funds. whom sold Inc., Advest, clarify a duty Corp. a tiff. Fin. Guar. v. individual owes ACA “[A]n (1st Cir.2008). 46, only if that state- are not 512 F.3d 58 We misleading statement reasoning, to the individual.” district court’s ment is attributable limited to the attributable “may statement but affirm an order of dismissal on Without them, could not be held the defendants record.” apparent basis made Rico, omis- misleading statements or liable for Ramos-Pinero v. Puerto 453 F.3d failing (1st Cir.2006). nor for prospectuses, 48, sions 51 prospectuses. correct the false satisfy height- must also Finally, the court dismissed the SEC’s pleading ened standard set Fed. finding abetting allegations, aiding and 9(b) fraud. The allegations R.Civ.P. sufficiently alleged that the “SEC had not applies both where heightened standard consciously threw that the defendants claim, fraud is an essential element of the violators.” their lot with the claims under the Commission’s sec- challenges these conclusions of The SEC 10(b), plаintiff alleges and where the on appeal. the district court though statutory fraud even it is not a offense, of the as in the element SEC’s

II. 17(a)(2). under section v. claims Shaw a grant review the district court’s We 1194, Corp., 82 1223 Digital Equip. F.3d Rodriguez- novo. motion to dismiss de Cir.1996) (“It (1st allegation is the Caribe, Inc., 92, F.3d Margo v. 490 Ortiz fraud, not the ‘title’ of the claim that Cir.2007). (1st Although Fed.R.Civ.P. 95 brings policy [underlying concerns 8(a)(2) requires only plain “a short and 9(b) (quoting Rule ... to the forefront.” ] give the claim” sufficient to statement of Corp., F.Supp. v. Eastland Fin. 755 Haft the claim and the defendant fair notice of 1123, (D.R.I.1991))); see also ACA basis, Gibson, Conley v. its factual see Fin., 512 F.3d at 68. Rule mandates 41, 47, 99, 2 L.Ed.2d U.S. 80 that all averments of fraud or mis- “[i]n (1957), “pos- “plain statement” must take, constituting the circumstances fraud enough plead- heft to that the ‘sho[w] sess particulari- or mistake shall be stated with ” Corp. er is entitled to relief.’ Bell Atl. v. 9(b). “Malice, intent, ty.” Fed.R.Civ.P. Twombly, 550 U.S. S.Ct. knowledge, and other condition of mind of Fed. (quoting 167 L.Ed.2d 929 may person generally.” be averred Id. 8(a)(2)). plaintiffs A task “re- R.Civ.P. element, satisfy particularity we To conclusions, quires more than labels and require complaint the Commission’s and a formulaic recitation of the elements “time, place, include the and content of a cause of action.” Id. at 127 alleged misrepresentation specificity.” 1955; Rodriguez-Ortiz, S.Ct. see also Inc., Software, v. FTP 194 F.3d Greebel F.3d (1st Cir.1999). Further, “[w]here fraud ... reviewing ruling allegations explicitly When on a motion to are 12(b)(6), only all accept implicitly! dismiss under Rule we based on information and ] belief, well-pleaded complaint facts as true and all must set forth the draw complaint, 17. Since the SEC We recite the text of the old filed its version of part general changes styl- “has been amended as "intended rule. The were to be restyling of the Civil Rules to make them only.” advisory istic Fed.R.Civ.P. 9 commit- style easily more understood to make (2007 amendment). tee's notes terminology throughout consistent the rules.”

H9 source of the information and the reasons securities markets and preventing fraud. Shearson, Moreover, for the belief.” Romani v. Leh- above, as noted pos the SEC (1st man, Hutton, Cir. authority sesses the to investigate conduct 1991). prior filing complaint, thereby mini mizing may the concerns that result from a scienter, ordinarily

To establish we re- lengthy discovery and intense process. quire plaintiff allege that a sufficient facts 78u(a)(1); § give “strong rise to a inference that the See 15 U.S.C. Merrill cf. Pierce, Smith, required Lynch, defendant acted the state of Fenner & Inc. v. 4(b)(2); Dabit, mind.” 15 71, 80-81, U.S.C. ‍‌‌‌‌​​‌‌​‌​‌‌​‌​​​‌‌​​‌​‌​‌​‌‌​​‌‌​​​‌​​‌‌‌‌‌‌​​‍see also 547 U.S. 126 S.Ct. 78u— Fin., ACA 512 F.3d at 58-59. We devel- 164 L.Ed.2d 179 (noting that the oped heightened this standard the con- establishing standard for a claim under private text of securities actions “to mini- 10(b) higher is in the context of a mize the chance ‘that a plaintiff with a private suit than in an SEC enforcement largely groundless bring claim will a suit action rightly because courts are con discovery conduct extensive the limiting cerned with the “vexatiousness” settlement, hopes obtaining an increased suits). private associated with Rule 10b-5 hopes process rather than in the that the Therefore, the scrutiny applied additional ” evidence,’ Shaw, will reveal relevant 82 to allegations private of scienter in securi Romani, at (quoting F.3d 1223 929 F.2d at complaints ties fraud is unwarranted in 878), largely by and it was codified Con- See, Techs., this e.g., case. v. SEC Lucent gress the Private Securities Law Re- Inc., (D.N.J.2005) F.Supp.2d 363 717 (“PSLRA”). form Act of 1995 See ACA (“[T]he heightened requirements for plead Fin., 512 at n. 7 (noting F.3d 58 that our ing scienter under ap the PSLRA do not prior application of Fed.R.Civ.P. to ply SEC.”); brought by actions the U.S. allegations private of scienter in securities Pharm., Inc., SEC v. F.Supp.2d ICN 84 fraud actions is consistent with the stan- (C.D.Cal.2000) (“[T]he 1099 ‘more PSLRA); Greebel, dard imposed the rigorous’ pleading requirements under the (“The 194 pleading F.3d PSLRA’s PSLRA, go beyond which the Rule congruent standard is and consistent with requirements only apply private securi circuit.”). the pre-existing standards of this actions; they ties fraud do not a apply to Here, however, evaluating we are a SEC.”). ... brought by case Of SEC, complaint securities filed course, ordinary requirements scienter private Therefore, face, a actor. on its 9(b) apply. only of Rule need SEC requirements of the apply. PSLRA do not allege generally. scienter Fed.R.Civ.P. Additionally, the rationales we set forth for 9(b). a more demanding private standard in se we Although apply decline to curities actions do not apply to this SEC “strong requirement inference” enforcement action. private par Whereas PSLRA, rely we on the method elucidated ties have a financial incentive to initiate recently by Supreme Court to assess drag “strike” suits and deep-pocketed de whether scienter has al adequately been allegations fendants into court on of fraud Tellabs, leged. Inc. v. Makor hopes obtaining a lucrative See Issues & settle ment, Ltd., ,--, statutory Rights, the SEC’s pro task U.S. S.Ct. 308 (2007).18 investing public by 2499, 2509, tect the policing the 168 L.Ed.2d 179 Ac- Tellabs, Supreme private complaint alleged Court was faced securities sufficient question with the "strong of how to assess whether a facts to establish inference” 170-71, 128 L.Ed.2d in its S.Ct. complaint “the evaluate cordingly, we (1994). promote acts Together, all of the “whether entirety” to determine through a collectively” by prohibiting meet the fraud goal alleged, taken facts Further, liability con- Id. we civil and criminal19 scheme of scienter standard. that considers inquiry of full disclo- fact-specific “substituting] philosophy duct allegations of the emptor.” of caveat philosophy the circumstances sure for the case, relying Bureau, on a rather than particular Capital v. Gains Research as evidence of pattern 180, 186, of facts generalized 11 L.Ed.2d 375 U.S. Greebel, (1963). opportunity. motive and Act Although Securities (“The patterns categorization at 196 regula- concerned with the primarily was unacceptable acceptable facts Exchange offerings tion of new fraud has never prove prove or to scienter trading, section post-distribution Act with circuit has taken to approаch been the 17(a) Act meant as a of the Securities “was fraud.”); Sys., re securities Cabletron major scope from the departure” Cir.2002) (“Each (1st Inc., 11, 311 F.3d 32 statute, and was “intended to rest of must be ana- complaint fraud securities any scheme in an offer or cover fraudulent facts; no one- there is lyzed on its own securities, whether the course of sale of template.”). size-fits-all an initial distribution or in the course of 441

ordinary trading.” Naftalin, market III. 2077; 777-78, 99 see also U.S. at S.Ct. Bank, 171, at 114 511 U.S. S.Ct. Central Statutory Background A. 1439. analysis of the SEC’s begin We our their The text of the statutes confirms text, history, purpose claims with the prohibit a wide purpose common swath Ernst & provisions at issue. See Congress be- of fraudulent behavior 197, 185, Hochfelder, 425 96 Ernst v. U.S. impeded lieved the smooth honest (1976) (“[t]he 1375, 47 L.Ed.2d 668 S.Ct. functioning of the securities markets. See every involving con- starting point in case 775-78, Naftalin, 441 at 99 S.Ct. U.S. language it- struction of a statute is 2077; Ernst, 425 96 Ernst & U.S. v. Manor (quoting Chip Stamps self.” Blue 17(a) designed 1375. Section was S.Ct. Stores, 723, 756, 421 95 S.Ct. Drag U.S. egregious the most abuses of secu- address (1975) (Powell, J., 1917, 44 539 L.Ed.2d by authorizing the SEC to rities sellers Act concurring))). The Securities of 1933 through injunctive relief punish violators Act 1934 were enact- Exchange and the of by than means liability or criminal rather economy on the road to ed to “set the See, e.g., private of causes of action. recovery” after the 1929 stock market Co., Sulphur v. 401 F.2d Texas reports widespread crash and of fraud and Gulf Cir.1968) (2d J., (Friendly, concurring) industry. abuse in the securities United 17(a)(2) (“[T]here § unanimity ... 768, 775, Naftalin, States v. U.S. (1979); Act—indeed the whole of of the 1933 60 L.Ed.2d 624 see also S.Ct. Denver, only § a basis 17—was intended to afford Bank N.A. v. First Central of Denver, A, and, injunctive proper relief on a show- Bank N. 511 U.S. for Interstate defendant, 17(a) against required by violated section of the Securities Act. 15 scienter 77x; Naftalin, the PSLRA. see 441 U.S. at U.S.C. (criminal prosecution under may imposed penalties if an Criminal be 17(a)). section willfully entity individual to have or is found ”); liability criminal .... see also that are ing, by for intended to mislead investors Ruder, artificially Liability affecting activity, David S. Civil under market deception being misrepresentation, Legisla- Rule 10b-5: Judicial Revision or non Intent?, disclosure tive 57 Nw.U. L.Rev. intended to deceive.” v. Ganino (1963) Co., (2d (referencing legislative the statute’s Citizens Utils. Cir.2000) 17(a) history). (quotation states: Section marks and citation omitted). By terms, its literal section any person It shall be unlawful for 10(b) applies to conduct in violation of any by the offer or sale of securities ... regulations rules and issued the SEC. or use means instruments prohibitions Its given were effect almost a in in- transportation or communication decade after its enactment with the SEC’s terstate commerce or use of the 10b-5, adoption of among Rule other rules. mails, indirectly directly or largely language mimics the (1) device, scheme, employ any or 17(a) applying while to both the defraud, artifice to or sale purchase any security: money property by to obtain or It shall be unlawful any person, di- of any means untrue statement of a rectly indirectly ... matеrial fact or omission to state a (a) any device, scheme, To employ in necessary material fact order to make defraud, artifice to made, light the statements of the (b) any To make untrue statement of a they circumstances under which were material fact or to omit to state a mate- made, misleading; not or rial necessary fact in order make to transaction, engage any to prac- made, light statements in the tice, or course of which oper- business circumstances under which were operate ates or as a would fraud or made, misleading, or upon purchaser. deceit (c) act, engage To practice, or 10(b) § 15 U.S.C. 77q(a). Section course of business operates which or performs 1934 Act a similar catch-all func- operate upon would as a fraud or deceit beyond tion and coverage also extends se- any person, pur- in connection with the Sulphur, curities sellers. See Texas Gulf any security. chase or sale of 10(b) 401 F.2d at 859-60. Section states: § 17 C.F.R. 240.10b-5. The rule “encom- It shall be for person, unlawful di- passes only already prohibited by conduct rectly indirectly.... or 10(b).” Partners, § Stoneridge Inv. LLC (b) To use or employ, connection with —Inc., U.S.-, v. Scientific-Atlanta, purchase any security or sale of ... 761, 768, (2008); 128 169 S.Ct. L.Ed.2d 627 any manipulative deceptive or device or see O’Hagan, United States v. 521 U.S. contrivance in contravention of such 642, 651, 117 S.Ct. 138 L.Ed.2d 724 rules and regulations as the [Securities (1997). Because of its and its scope broad Exchange] may pre- Commission availability private plaintiffs, Rule 10b-5 necessary appropriate scribe as commonly pri- “is the most used basis for public protection interest or for the charging vate fraud in connection suits investors. purchase with the or sale securities.” § 78j(b). 15 U.S.C. Hazen, See 3 Thomas Lee Treatise on the 10(b) § Exchange Regulation “Section Act Law 12.4[1] Securities (5th Ernst, ed.2005); conduct involving manipulation bars or de see also Ernst & 425 ception, manipulation being practices (“During ... at 96 1375 the 30- U.S. S.Ct. 17(a) contrast, applies section of action because private a cause year period since securities, 10(b) to sell § and Rule both sales and offers implied under was first liability on not base its claim of law SEC need 10b-5, body of case a substantial at all. Blue any completed transaction See developed as to its ele- has commentary 733-34, omitted). Chip Stamps, 421 at 95 S.Ct. ments.”) (footnote U.S. (contrasting the text of section 17(a) is the text of section Although 17(a)); Naftalin, 441 that of section 10b-5, of Rule nearly identical to the text (explaining U.S. at 99 S.Ct. 17(a) guide as the served as indeed section are statutory terms “offer” and “sale” 10b-5, key dis there are several for Rule the entire “expansive enough encompass provisions. gen See tinctions between the seller/agent selling process, including the 12.22; Hazen, § also 15 supra, see erally 3 Hazen, transaction”); supra, see also 3 § § 240.10b-5. 77q; C.F.R. U.S.C. § 12.22. 17(a) First, only to applies whereas selling offering addition, above, brokers and dealers as stated al securities, explicitly Rule 10b-5 covers sell can maintain a though private plaintiffs 10b-5, act “any only who commits fraudulent person” cause of action under Rule purchase or sale of may “in connection with to enforce bring the SEC claim 17(a). Exchange Act Re any security.”20 See prohibitions of section See (May Ernst, Fed.Reg. lease No. Ernst & 425 U.S.

1942) (Rule by “close[ ] 10b-5 was intended (“Although does not its against fraud loophole protections remedy express terms create an civil pro violation, administered Commission no indication its and there is companies from hibiting individuals or Congress, or the Commission when in fraud in buying they engage 10b-5, if contemplated securities such a adopting added); (emphasis see purchase.”) remedy, their a cause private the existence of Moreover, Hazen, supra, § 12.22. also 3 of action for violations of the statute 10(b) established.”) (foot only section and Rule 10b-5 reach the Rule is now well omitted); with a securities Dominguez, conduct that “coincides” note Maldonado v. (1st Cir.1998) Mer purchase, (joining transaction —a sale or see 137 F.3d 6-8 a 85,126 majority rejecting private at S.Ct. 1503— of circuits in a Lynch, rill 547 U.S. 17(a)).22 right alone.21 In of action under section and not a fraudulent offer Procedures, 22 explicitly the lan- Securities Laws: Administrative 20.Rule 10b-5 modified 17(a) guage (1967); create an Chip of section antifraud Bus. Law. see also Blue beyond prohibition expanded the sale Stamps, 421 U.S. at 95 S.Ct. 1917 Freeman, According one context. to Milton L, (Blackmun, dissenting). co-drafters, of the rule’s Rule 10b-5 was hast- ily approved response a drafted Chip Stamps, Supreme 21. In Blue Court company report president of a was that the scope further confined the of Rule 10b-5 in buying up company’s on his stock based false private causes of action. 421 context regarding financial outlook. In statements its 731-34, U.S. at 95 S.Ct. 1917. Based on situation, attempt specific to address this concerns, only policy actu- court held Freeman claims to have combined sections purchasers al or sellers of securities have 10(b) centered on where and 17. Discussion standing bring private cause of action phrase purchase “in with the connection 733-35, under Rule 10b-5. Id. at 95 S.Ct. or sale” should be located. The Commission 1917. quickly approved provision any without except a Commission- discussion statement Maldonado, we our decision not of, "Well, based er Pike to the effect we are Sumner fraud, private right imply of action in section against aren't we?” Milton V. Free- man, 17(a) congressional in- on the Federal on our assessment Conference Codification on, re 446 U.S. at 100 S.Ct. 1945. Finally, degree scienter Nev- ertheless, under Rule to establish violation quired rely the SEC did not on this 17(a)(2) differs. To 17(a)(2) and section 10b-5 distinction in its section claims 17(a)(2), the prove a claim under section against appellees, alleging in the com- to false statements pertaining subsection intеnt, plaint with acted knowl- omissions, only need show the SEC high or a edge, degree of recklessness. negligently. the defendants acted Under has also two addition- SEC invoked 10(b) 10b-5, however, the and Rule statutory provisions against al the defen- acted prove must that defendants Exchange dants. The 1934 Act includes intent, high degree or a knowledge provision targeted an additional antifraud SEC, v. recklessness. See Aaron U.S. specifically operating at brokers or dealers 680, 690-97,100 1945, 64 L.Ed.2d 611 S.Ct. in the over-the-counter market.24 See 15 (1980); Maldonado, at 7. This 78o(c)(l)(A). 15(c)(1)(A) § U.S.C. Section closely the text of distinction follows from of the Act states: Aaron, 446 respective provisions. See 690-97, Deciding at 100 S.Ct. 1945. U.S. No broker or dealer shall make use of requirements for section the state of mind any the mails or means or instrumental- 10(b), forth in the Court set Ernst & ity any of interstate commerce to effect Ernst, Aaron, and confirmed that Con in, attempt transaction or to induce or gress’s “manipu inclusion of the terms of, purchase to induce the or sale lative,” “device,” and “contrivance” in sec (other security than exempted [certain that it limit sought indicated securities]) ... manip- means of liability to acts that involved scienter. ulative, deceptive, or other fraudulent Ernst, at Ernst & 425 U.S. device or contrivance. (“The ‘manipulative decep words Id. conjunction with ‘device or tive’ used Finally, the Investment Advisers Act of strongly suggest that contrivance’ 1940 “was enacted to deal with abuses that knowing or in proscribe was intended to Congress had found to exist the invest- Aaron, misconduct.”); tentional see also industry.” ment Transamerica advisers 690-91, By 100 S.Ct. 1945. U.S. Lewis, Advisors, contrast, Mortgage Inc. v. U.S. the Court has noted that section 17(a)(2) 11, 12-13, 100 S.Ct. 62 L.Ed.2d 146 any suggestion of what “is devoid (1979). of requirement.”23 soever of a scienter Aar- Intended to “benefit clients tent, through upon culpability person responsi- which the ex- of the we ascertained 17(a) Aaron, press language neigh- ble,” section and its 446 U.S at 100 S.Ct. boring provisions, as well as the statute's require ‘showing a deliberate [of] "does not Noting legislative history. 137 F.3d at 6-8. precedent pro- dishonesty a to as condition Congress explicitly provided private for Capital tecting (quoting investors.'" Id. in sections 11 and 12 of the causes action Gains, 275). 375 U.S. at 84 S.Ct. 17(a), Securities Act of 1933 but not section provisions we concluded that these because 24. The over-the-counter market consists of and "address much of the same conduct a securities stocks which do not trade on parties potential a im- benefit the same as Seligman, exchange. Louis Loss & Joel Fun- action, plied private the circum- cause (5th Regulation 753 damentals Securities 17(a)] [relating stances to section militate ed.2004). trading Because such is not cen- against that inference.” Id. at 7-8. tralized, it involves direct transactions be- makers, Likewise, 17(a)(3), potential buyers and market tween because it “fo- security. upon particular particular in a See id. cuses conduct on who deal effect investing public, members of the rather than investors, primary committed vi- advisers,” Funds to id. at S.Ct. investment 17(a)(2) of the olations of section Securities of the Act “establishes Section sell, by offering and selling, Act by enforceable fiduciary standards” federal prospec- securities with false Columbia 17, 24, Id. SEC. such, they alleged are to have tuses. As omitted). and citation (quotation marks money property by or means “obtain[ed] The statute reads: a material untrue statement of [an] any investment for It shall be unlawful § 77q(2)(a) (emphasis fact.” 15 U.S.C. adviser, any mails or by use of the added). instrumentality of interstate means or that Tam- Additionally, alleges the SEC commerce, indirectly— directly or bone and made untrue statements (1) scheme, device, or any employ of material fact and hence also committed prospec- or client artifice defraud of section of the primary violations client; tive Exchange Act and Rule 10b-5. See transaction, prac- engage 240.10b-5(b). § C.F.R. As officers tice, oper- course of business which primary underwriter for the Columbia upon any client ates as a fraud or deceit Funds, duty to re- appellees legal had prospective client.... confirm, degree, view and reasonable 6(1)—(2). 15 U.S.C. 80b— accuracy completeness pro- and they spectus responsible statements were B. The Claims SEC’s that, distributing. argues by for The SEC alleges pri- complaint, its SEC overseeing prospectuses the distribution of of the se- mary secondary violations knew, they which or were reckless in not Hussey. curities laws Tambone knowing, misleading false and contained Primary refer to violations com- violations statements, Hussey adopted Tambone and Hussey them- mitted Tambone and their own. The those statements as SEC violations, selves; known secondary also that, in alleges light also of their duties as violations, refer to aiding abetting primary profes- underwriters —securities by the defendants that actions committed engaged sionals offer sale of other actors who com- aided abetted Hussey impliedly securities —Tambone and securities primary mitted violations of the potential made them own statements to laws.25 investors “had reasonable basis alleges key The that Tambone and representations SEC to believe that the Distributors, Hussey, officers of Columbia were truthful and com- that, responsible plete.” underwriter contends because directing prospectus prohibiting efforts to sell the Columbia statements person provision in a 25. The text of a securities statute defines the another violation of of liability against scope primary of a defendant. chapter, any regulation this or of rule or Primary liability may not attach to conduct chapter, issued under this shall be deemed to statutory explicit lan- that falls short of the provision in violation of such to the be same Bank, 177-78, guage. Central 511 U.S. at person extent as the to whom such assistance Secondary liability S.Ct. 1439. involves provided.”). Although both the SEC and brought against and enti- claims individuals private may pri- raise claims of individuals substantially that contributes ties conduct defendant, mary liability against only a behavior, party’s to another but fraudulent may bring secondary SEC now claims of lia- primary liability. does not rise to the level of id.; bility against a defendant. See see also 78t(e) (”[A]ny person § that See 15 U.S.C. Bank, Central 511 U.S. at 114 S.Ct. 1439. knowingly provides substantial assistance inaccurate, any im- of this offer or sale securities. See 15 timing market were Aaron, § false, 77q; a fact that de- U.S.C. 446 U.S. at statement was plied 1945; Hazen, generally ‍‌‌‌‌​​‌‌​‌​‌‌​‌​​​‌‌​​‌​‌​‌​‌‌​​‌‌​​​‌​​‌‌‌‌‌‌​​‍S.Ct. see supra, in not knew or were reckless fendants elements). (discussing 12.22 they when used the knowing to sell Columbia Funds. agree parties The the SEC has one, four, adequately alleged elements con- allegations

The same of fraudulent statute, five but dispute scope of the of Hussey engaged by Tambone and duct conduct covered under two elements the basis of the SEC’s claims of form three, complaint and also whether the ade- 10(b), secondary liability under section quately alleges these two elements. On 15(c) 10b-5, and section section the question scope of actionable Specifically, the of the securities laws. conduct, the SEC asserts that section avers that the defendants sub- Commission 17(a)(2) liability only extends not to securi- stantially assisted Columbia Advisors and directly ties sellers who have communicat- committing Distributor in acts of Columbia ed personal misleading their false or state- liability under the securities laws. potential ments to investors the course pro- By overseeing the distribution fund them, offering selling or securities to (or spectuses they which knew were reck- but also to sellers who have obtained mon- false, knowing) in not were the defen- less ey property “by or means of’ untrue making entities in dants assisted these ap- statement of material fact drafted or public false statements to the connection proved by Relying another individual. on with the sale of Columbia securities. passive the statute’s formulation and its sellers, focus on the conduct of securities IV. argues scope the Commission that the Liability Scope under A. Sec- 17(a)(2)’s prohibition section is broader 17(a)(2) Act tion Securities than that of section and Rule 10b- 5(b), prohibit a actor which securities from Although complaint the SEC’s any “mak[ing] untrue statement.” general allegations raises of fraud under 17(a)(l)-(3), only appeals the SEC sections reading The defendants contest this regarding 17(a)(2). the district court’s conclusions they Specifically, section assert 17(a)(2), untrue section which addresses language money prop- “obtain or statements. To state a claim under sec erty by any means of untrue statement of 17(a)(2), prohibit which is intended to a material fact” is coterminous with the sellers, 5(b), must language prohibits fraud securities of Rule which 10b— (1) Hussey “makfing] have actor from a state- allege Tambone securities (2) words, money In other to be liable under directly indirectly or obtained or ment.” (3) 17(a)(2), a securities must property means of untrue state seller misleading statement ment of material fact or omission to make false selling offering to necessary a material fact in order to the course of sell state made, light security support to an investor. To make the statements 17(a)(2), interpretation of section Tambone circumstances under which were made, equate misleading, such statement hav cite several cases 17(a) (5) prohibitions of section with those ing negligence26 been made above, 17(a)(2). rely alleges that the defendants we the The SEC 26. As noted SEC does degree knowledge high of requirement acted with or on this diminished state mind alleging claims under section recklessness. when its 126 10(b) See, action, e.g., private 10b-5. 10b-5 in a securities the section and Rule Corp., explained 192 district court order to Funding “[i]n F.3d

SEC v. Monarch (2d 295, Cir.l999)(“Essentially primary the be liable for a violation of Section 308 10(b) required Exchange to show Act and Section same elements those [as 10(b) 17(a) Act, a of section and Rule of the Securities defendant 5] a violation 10b— 17(a)(l)-(3) in required personally alleg- must have made either are under Section edly of a secu- untrue statement or a material omis- connection with the offer sale 28 Sec., Inc., ...”); rity. Jersey Finding sion.” no statement attrib- SEC v. First false Cir.1996). (2d Noting Hussey, to either the 101 F.3d utable Tambone or rejected theory liability language provisions that the is near- court the SEC’s 17(a) 17(a)(2) indeed, identical, ly section under both section and section 10(b). 10b-5, served as the model for Rule the logic defendants assert that it defies assessing scope When the of a stat 17(a) language prohibit- to read section as ute, end, begin, we and often with its text ing range a broader of conduct than Rule See, Ernst, e.g., and structure. & Ernst highlight 10b-5. The defendants also the (‘“[T]he 425 U.S. at 96 S.Ct. 1375 SEC’s own failure to cite case law starting point every involving case con drawing the distinction that the SEC struction of a it language statute is the provi- claims follows from the text of the ” (quoting Chip Stamps, self.’ Blue Accordingly, urge sions. defendants (Powell, J., U.S. at S.Ct. 17(a) 10(b)

us to read section and section Bank, concurring))); Central 511 U.S. at conduct, range of prohibiting the same (“Adherence 174, 114 S.Ct. 1439 to the text thereby that in conclude order for the 10(b) defining by § the conduct covered primary liability a claim of SEC to state interpret is consistent with our decisions 17(a)(2), allege under it section must ing provisions other of the securities have made a defendants false or mis- Acts.”); Aaron, see also at U.S. 695- leading statement.27 (parsing language 100 S.Ct. 1945 explicitly analyzing 17(a)(1)-(3) the text of Without section to determine whether 17(a)(2), adopted section the district court required scienter is establish violation position, concluding context, the defendants’ provision). of each In this we are provisions purposes were identical for guided by Supreme Court’s oft-recited evaluating various claims in SEC’s instruction that courts must construe the “ Accordingly, grouped this case. the court language of the securities ‘not laws tеch 17(a) 10(b) together nically section with section restrictively, flexibly but to ef ” undertaking analysis. Citing when its purposes.’ fectuate remedial [their] Af LLP, Wright Young v. Ernst & Ute Citizens Utah v. United filiated (2d Cir.1998), States, 128, 151, applying a decision 406 U.S. language of section and Rule (quoting Capital L.Ed.2d 741 below, suit, Wright 27. As we private discuss defendants then 28. Because awas 17(a) go argue may brought on to that the SEC has only by failed to section claims be SEC, allege that the defendants made false or the Second Circuit did not have misleading provi- statement in connection with the occasion to address whether the two purchase prohibited sale range of securities. Tambone and sions the same of fraudulent that, Instead, Hussey argue having analy- failed to state a conduct. the court focused its 10b-5(b), 10(b). claim under liability and Rule sis on under section reason, equally Wright length SEC has failed to state a claim For we discuss 17(a)(2). V, under section Part infra. 275). specifically focuses on conduct Gains, language at 84 S.Ct. 375 U.S. engaged by pro- a seller. The statute the text of sec- Additionally, comparing 10(b) 17(a) “obtaining] hibits an individual from mon- section with that of 10b-5, ey property by any has or means of untrue Court itself Supreme the Rule state, however, vari- statement.” It does not small meaningful distinctions found Aaron, at the seller must himself make that 446 U.S. language. ations in See Indeed, 695-97, sug- untrue statement. the text (finding 100 S.Ct. it gests opposite that the is true —that is purpose their common provisions, despite liability texts, purposes levels irrelevant for whether require different and similar or display must the seller uses his own false statement liability). We of scienter by Liability importance of one made another individual. adherence to the the same long attaches so as the statement is used text. money property,” regardless or “to obtain not read the case law cited doWe of its source. foreclosing the Com the defendants 17(a)(2) any “by is In contrast to the means of argument that section mission’s language Rule 10b- untrue statement” of section than section broader 10b-5(b) 5(b). 17(a)(2), ana Rule renders it unlawful previously we have Although 17(a) make of a ma- identically claims untrue statement lyzed “[t]o section pur- fact ... in connection with the and Rule terial made under section those any security.” As the agreed that the chase or sale parties 10b-5 where the intended, same, expands drafters Rule 10b-5 lia- analysis was the see SEC v. Rock (1st Cir.2006), bility segments n. 1 to cover all securi- lage, 470 F.3d drafters, auditors, preclude industry, including our rec ties that treatment does not accountants, and Central scope of actionable distributors. See ognition here Bank, 191, 114 may be 511 U.S. at S.Ct. 1439. As conduct under the two statutes Indeed, below, any we one of these actors necessarily this is so stress different. because, noted, in connec- text of the who makes an untrue statement as we have security purchase with tion with the or sale of a showings mandate different statutes Aaron, liable. See id. may primarily 446 U.S. be found respect to scienter. Sеe However, of cover- 695-97, expansion Rule 10b-5’s at 1945. Nor are S.Ct. beyond the of securities is ac- by Supreme age seller arguments SEC’s foreclosed by a more restrictive statement companied of this cir precedent or decisions Court to establish at 99 of the conduct will suffice Naftalin, cuit. U.S. Cf liability. money proper- The “to (“[U]ndoubtedly[,] ... obtain [Se S.Ct. 2077 ty by untrue statement” Exchange pro means Act] curities Act and the 17(a)(2) replaced by language of section is conduct.... But hibit some of same 10b-5(b) that the requirement may fact that well be some there ‘[the] of a actor “make” an “untrue statement unusual nor unfortu overlap is neither ” Sec., Inc., with the fact ... in connection v. Nat’l material (quoting nate.’ any security.” purchase or sale U.S. (1969))). L.Ed.2d 668 17(a)(2) (that it reading This section to make the defendant respective require does not carefully examining After issue), supported at issue, the false statement we find the Commission’s texts phrase “di- by Congress’s inclusion regarding scope of conduct argument 17(a)(2) statutory indirectly” in the text rectly or persuasive. prohibited 17(a). 17(a)(2) makes it The statute of section was drafted Because section directly ... broker-dealers, any person “unlawful for apply prohibitory its money property process. understanding ... or mutual fund Our indirectly to obtain analysis of this role is central our by any untrue statement of a to both means of may liability of this issue and under That a seller be lia- section material fact.” 10(b). underwriters, Principal also com- obtaining money by indirectly ble for distributors, monly play referred to as means of an untrue statement reinforces industry, essential role in the securities the that the untrue statement conclusion specifically the mutual fund market. by not have been made the issue need 2(a)(40) Section of the Act de- Investment Ballay Legg v. Ma- securities seller.29 Cf. fines an “underwriter” as someone who Walker, Inc., son Wood “purchased has from an issuer with a view (3d Cir.1991) (“These ‘directly or words— to, with, or sells for an issuer in connection indirectly’ convey legislative intent — any security, partici- distribution of or encompass meeting all conduct the other pates partic- or has a direct or indirect 17(a) claim.”). a section elements of ipation any undertaking, such partici- or Therefore, reading based on our pates participation or has a in the direct or 17(a)(2), text of section we conclude that underwriting any indirect such under- may provision this covers conduct 80a-2(a)(40). taking.” 15 U.S.C. Like- prohibited be section and Rule wise, a “principal underwriter” of a mutual liability may Specifically, primary 10b-5. fund is 17(a)(2) attach under section even when [a]ny underwriter who principal pur- not himself defendant has made company, chases from such or pursuant false statement connection with the of- right to contract has the ... from time security.30 fer or sale of a purchase company, to time to from such 17(a)(2) any security distribution, such Applying B. or Section to the agent company who as for such Defendants sells or Conduct of right any has the security sell such Before we assess whether the SEC stat- a dealer or to the public or both. allegations support ed sufficient claims 80a-2(a)(29). §Id. 17(a)(2) liability against under section Hussey, Tambone and we must describe Often affiliated with the mutual fund’s generally adviser, the role of an underwriter investment in this case Columbia 10b-5, phrase 29. The defendants contend that The dissent fails to understand infra. “directly indirectly” "by that, or modifies the although statutory provisions are not 17(a) use of means” clause of section coextensive, they may comfortably overlap. 17(a)(2). not the conduct described in section Supreme recognized, theAs Court has “ " not, however, reading This the most natural 'fact is neither unusual nor unfortunate.’ reading provision. Given the text and Naftalin, (quot- 441 U.S. at 99 S.Ct. 2077 provision, including structure of the Sec., Inc., ing Nat’l 393 U.S. at 89 S.Ct. placement separating “by of a comma Instead, 564). [statutory provi- two "[t]he “directly use of means” clause from the useful, sions] can exist and be side side.” clause, indirectly” “directly or we read the States, 473, 484, Edwards v. United 312 U.S. indirectly” language modify the “to obtain (1941) (discussing 85 L.Ed. 957 money property” clause at the start of sub- the interaction between the mail fraud statute of the statute. 1933). and the Securities Act of In other words, although possible it is to violate sec- agrees "give 30. that we dissent must ef- 17(a)(2) "making” without a statement as “striking divergence” fect” to the between the Ob-5, required by 17(a)(2) Rule 1 if defendants have language of section and Rule 10b-5. However, meaning "made” "glossing false statements within the it also accuses ofus over” 10b-5, always satisfy this distinction in that conduct will our discussion of defen- 17(a)(2) liability "by dants' liability. under section and Rule means of” element of Dealers tional Association Securities Advisors, primarily is thus the underwriter (“NASD”). of Id. the and distribution for sale responsible underwriter enters funds. The specified surprisingly, allegations Not the dealers, brokers, and with agreements into complaint gen are consistent with this the the the sale of intermediaries for other description of the underwriter’s role eral or, alternatively, sells funds fund’s shares process. mutual fund As executives the investing public. See Unit directly to the Distributor, principal the un of Columbia Dealers, Nat’l Assoc. Sec. v. ed States of Funds, for the Tam- derwriter Columbia 694, 698-99, Inc., 422 U.S. primarily responsi and bone were (1975). how Regardless of L.Ed.2d 486 distributing ble for the fund public, the to the the funds are distributed and other potential to investors broker- ensuring responsible underwriter brief, dealers. As the SEC states its investors potential investors or the selling shares of the Columbia “whether See 15 prospectus statements. receive investors, directly indirectly funds 77e(b)(2) pro § that a (requiring U.S.C. broker-dealers, through other Columbia public to the sale provided prior be spectus required was to offer and sell Distributor 240.15c2-8(h) (re shares); § of C.F.R. through the use of the fund those shares provide a broker- quiring a distributor alleges that prospectuses.” The SEC in the distribution participating dealer sales, pro these defendants used make quanti security of a with sufficient trading regarding statements spectuses containing they reach prospectus the to ensure ties of knew, or were timing market which 5(b) of pursuant to section the investors false, knowing, in not were and reckless Act). the Securities potential referred inves specifically even Further, typically re- the underwriter is misleading prospectuses to tors to those tasks, of other for a number sponsible might the investors any questions answer (1) distributing creating and ad- including Further, compen have. both defendants’ disclosure vertising materials and other depended significantly on their sale sation (2) securities; for the traded documents “ Thus, assuming the funds. of Columbia compliance with state and federal ensuring must, correct, as we allegations are (3) identifying po- offering requirements; squarely falls within defendants’ conduct inqui- responding investors and tential by section prohibitions established (4) ries; redemp- and executing purchase 17(a)(2) Act. Tambone Securities transactions; providing other tion and selling securi Hussey, offering fund adminis- provided services ties, money by an[] means obtained] Kleiman & trator. Laurin Blumenthal material fact.” The [ untrue statement of ] Teodoro, Mutual G. The ABCs Carla 17(a)(2) not have claims should section Forming, Organizing and Funds 2007: court.31 by the district been dismissed Legal a Mutual Fund: Operating Considerations, PLI/Corp Practical Y. (2007). The underwriter is re- 31-32 Liability Scope under Rule A. under the quired register with 10b-5(b): Making a Statement the states in Exchange Act of has the SEC Having concluded applica- it sells securities under which liability against laws, a claim of with the Na- stated sky blue ble state 9(b). SEC, issue in We address this allegations Fed.RXiv.P. having raised 31. The defendants, satisfy against also fraud must VI. below. Part requirements pleading particularity 17(a)(2), Cir.1993); Blavin, section we the defendants under SEC v. allegations regarding (6th Cir.1985); turn to the SEC’s Stoneridge, see also Although and Rule 10b-5. (“Reliance plaintiff 128 S.Ct. at 769 general includes complaint the SEC’s alle- ... is an essential element of the gations of fraud in violation of sub-sections action.”) private cause of (emphasis add- (a) (c) 10b-5, provisions that of Rule ed). As with the claim SEC’s under sec- practices, address the use of fraudulent 17(a)(2), parties legal contest the schemes, devices, business, or courses of applicable standard to the first element of pursued appeal the SEC has not on the the claim—that the defendant made a ma- district court’s dismissal of these claims. terially misleading false or statement32'—(cid:127) Therefore, we limit our discussion to Rule as well as whether elements one and three 5(b), prohibits making which the 10b— sufficiently have been alleged the com- false statements or omissions connection plaint. We first address the question of purchase any security. with the sale what it means to “make” a statement for 10b-5(b). purposes the of Rule primary

To establish a claim of 10b~5(b), liability private under Rule a urges The SEC us to conclude that the (1) plaintiff misrep must show a material district court in finding erred that defеn- by resentation or omission made the defen dants, by using misleading false and pro- (2) dant; misrep a connection between the spectus securities, statements to sell did purchase resentation or omission the not “make” a statement that could render (3) scienter, security; specifi sale of a primarily them liable. The Commission cally intent, that the defendant acted with that, argues as senior executives of the or a knowledge, high degree of reckless primary underwriter for the Columbia (4) ness; by plaintiff upon reliance the the Funds, Tambone and duty had a (5) omission; misrepresentation or eco accuracy confirm the and completeness of loss; nomic loss causation. See prospectuses they responsible were Fin., 768; Stoneridge, 128 S.Ct. at ACA distributing to poten- broker-dealers and 512 F.3d at 58. Because this is an SEC tial In light duty, investors. of this enforcement than a private action rather SEC contends that the defendants “made” claim, allege any the Commission need not First, statements in ways. by two using required the elements to establish a misleading prospectuses despite duty direct link misrep between defendant’s review and confirm accuracy of their resentation and an injury investor’s —in contents, the adopted defendants the false cluding reliance the investor on an ex statements made others the fund misstatement, loss, plicit economic and loss prospectuses as their own. The SEC also Fund, causation. Advantage See GFL by using asserts that Colkitt, (3d prospectuses Ltd. v. 272 F.3d 206 n. 6 way, this Cir.2001); Research, Inc., defendants made an implied v. SEC Rana (9th Cir.1993); F.3d statement of their potential 1363-64 Schel own to inves- (7th SEC, lenbach v. they tors that had a reasonable basis to Appellants signifying do not claim that the state- that a reasonable investor would immaterial, ments or they omissions at issue were "significantly believe that altered the to- insisting available,” Basic, instead that did not make them. tal mix of information made element, Levinson, satisfy 224, 232, materiality misrep- To Inc. v. 485 U.S. (1988) (internal “misleading resentations must be quota- to materi- 99 L.Ed.2d 194 Cabletron, degree,” omitted). al In re 311 F.3d at on mar- containing tuses false statements key statements believe timing practices. ket timing regarding market Because cer- complete. accurate were 10(b) 1. Text of Section re- in the prospectuses tain statements statutory As with all matters of inter- timing allegedly market were garding begin analysis our with the pretation, we was false, implied statement defendants’ Rule provisions here, text of the relevant — ways, two false. these also 10b-5(b) Exchange section rose that defendants’ conduct asserts little Although Act. Rule 10b-5 itself offers section liability under level of “make,” how to define we guidance on 5(b). point, On 10b— 10(b), text of must also look to the notes: the Commission Ernst, authorizing statute. Ernst & its (“In anomalous to shield 425 U.S. at 96 S.Ct. 1375 address- would be [I]t ing question proper scienter [the selling securities responsible for person 10(b) and Rule requirement under using or offer- liability for from 10b-5], language of s we turn first the know, they or are that ing materials ‘(t)he 10(b), every in case starting point for and knowing, in are false reckless not of a statute the involving construction is because the false misleading simply ” (quoting Chip Blue language itself.’ ascribed to them.... are not statements Stamps, 421 U.S. at 95 S.Ct. 1917 intermediary as the role is to act Their Dahl, (Powell, J., concurring))); Pinter v. and the issuer of the securities between 622, 653, 108 486 U.S. S.Ct. investors, pro- the to disseminate the (“The of L.Ed.2d 658 ascertainment encourage investors to and to spectus the respect intent with congressional on the basis of the securities purchase liability particular of created a scope necessary They are prospectus. the Act must rest section of the Securities in the chain of distribution. link language the of that sec- primarily on tion.”). statutory language particu- below, the explain agree we As we in this case because larly “[t]he relevant of section that the text Commission the of 10b-5 is coextensive with scope Rule 10b-5(b), statutory duties of Rule the and 10(b),” led § a view which has coverage of underwriters, their role the securities § to refer to “use Supreme the Court market, support and case law the Commis- statutory provision and both to the Hussey that and argument Tambone sion’s n. Zandford, Rule.” 535 U.S. investors, implied statements made (2002); L.Ed.2d 1 see 10b-5(b), that purview of Rule within (“Rule 128 S.Ct. at 768 Stoneridge, also basis believe had reasonable they already encompasses only conduct 10b-5 prospectuses regard- the statements 10(b).”). words, § In other prohibited and com- timing market were accurate ing in Rule 10b- a statement” the term “make Tambone plete. Given this conclusion that conjunction text with the 5 must be read implied statements made 10(b), deems it “unlawful of section which we do prospectuses, own about the their employ, in ... use or any person [t]o for argument reach the Commission’s sale of purchase with the or connection Hussey also made false Tambone ..., deceptive or security any manipulative purview within statements in contravention device or contrivance 10b-5(b) regulations as the Commis- by adopting statements such rules and 78j(b) § 15 U.S.C. may prospec- prescribe.” sion they when distributed others added).33 that a (emphasis general responsibilities defendant’s statutory respect duties with to the allegations against appellants The SEC’s sale and distribution of securities inform precisely statutory are stated in those legal significance specific conduct terms. The SEC avers defendants 10b-5(b). See, e.g., under Rule In re Scho- employed prospectuses used contain- Corp. Litig., lastic Sec. at 77 F.3d market ing prohibiting timing statements (analyzing a corporate liability executive’s practices knew or —statements “making” misleading statements knowing were reckless in not were false— light of his responsibilities); duties and Funds. In using order to sell Columbia LLP, SEC v. 412 F.Supp.2d KPMG way, they in this made (S.D.N.Y.2006) 376-77 (holding that three implied regarding of their own statements engagement partners auditing of an firm completeness accuracy of those possessеd who authority “ultimate implied prospectuses. These statements determine whether an opinion audit should such, they “manipu- were false. As were a primarily be issued” could be liable under lative or deceptive device contrivance the securities laws for misstatements con- contravention” of the Commission’s rules.34 letters, tained in the opinion audit al- (defining C.F.R. 240.15cl-2 “ma- Cf defendant, though a fourth only who acted nipulative, deceptive, other fraudulent 15(c)(1) concurring partner, review could not device or contrivance” in section liable, primarily be held responsibili- as his Exchange “any Act to include untrue fact.”). ties were “not equivalent the of the audit statement of a material im- The engagement partner’s plied responsibilities”). that statements Tambone and Hus- Indeed, in sey Wright, accuracy made about the truth and of one of the “sensible precedents” the from their the derive statuto- dissent accuses us of “rel- ry egat[ing] in ... scrap duties and their central role the to the heap,” and praises securities market. which it interpretation for its of Bank, Central infra, see the court ac- 2. The Duties of an Underwriter knowledged that “silence where there is a duty assessing whether a defendant disclose can constitute a has false or misleading committed a violation of the secu- statement within the meaning laws, rities courts have examined the de- of and Rule 10b-5.” 152 F.3d at added). fendant’s in (emphasis role the securities market in Just as a defen- specific alleged addition to the conduct in particular dant’s in role the securities mar- complaint. the may These decisions indicate ket convert his silence into a state- 33. The Second Circuit has stated that adopted pursuant Rule was to au- —5 10(b) prohibits involving manipu- “conduct thority granted the Commission under s deception,” 10(b). deception lation or and defined as rulemaking power granted The “misrepresentation, or nondisclosure intend- agency charged an administrative with the Ganino, ed to deceive.” 228 F.3d at 161. administration of a federal is not the statute Rather, power power to make law. it is the engaging adopt regulations carry The dissent accuses us of in into effect the "sleight by "us[ing] of Congress expressed by hand” the broad lan- will of the statute. Ernst, 212-14, guage employ’] of the statute ['use to define Ernst & 425 U.S. at (internal obviously language quotation narrower of the rule marks and citations However, above, omitted). 10b-5(b) implements ['to make’].” as we discuss Supreme specificity prohibition Court has stated that some “[t]he this broad of sec- scope 10(b). of Rule 10b-5 is coextensive with the prohibi- It does not narrow the 10(b),” coverage of that: also tion. 10(b), integrity competence, as to so both of section purposes ment for Rep. H.R. No. defendant, role Conf. placed [them].” of his is virtue may a too (1933). duties, 73-152, statutory 1933 WL *26 his market and in the a rea- actual- underwriter to conduct duty without an implied an statement make investigation explained has been question. words sonable uttering the ly by the as follows: SEC noted, play underwriters already As “By associating proposed himself with in the sale and role distribution essential impliedly rep- offering underwriter] [an which investing public, mutual funds to the an inves- he has made such resents that other directly through either occurs professional in accordance with tigation statutory The text and broker-dealers. properly rely on Investors standards. 1933, and Act history of the Securities has a direct protection which this added of un- statute’s treatment specifically the the reliabil- bearing appraisal on their 12,36high- in sections derwriters prospec- ity representations they occupy position unique light who underwriter does tus. The Dis- As the industry. Southern securities investigation dere- make reasonable has observed of New York trict fairly responsibilities in his to deal lict securities evaluating several context investigating public.” with the claims: rec- “Congress enacting section WorldCom, F.Supp.2d [I]n at 662-63 In re occupied a underwriters ognized (insertions (quoting In re the original) them to unique position enabled Act Corp., Exchange Release Richmond of essen- compel disclosure discover 4585, 41 Docket 398 [1961-1964 No. Congress offering. (CCB) facts about tial Rep. L. Sec. Transfer Fed. Binder] subjecting underwriters (Feb. believed 27,- 76,904, at *7 WL provide liability provisions would 1963)); Dis- Municipal also Securities see their care- to ensure necessary incentive 26,100, closure, No. Exchange Act Release offering.” investigation ful 999989, 1131, at Docket 1988 WL 41 SEC 1988) 22, (observing WorldCom, (Sept. *20 Litig., Inc. 346 Sec. In re in (S.D.N.Y.2004) position a vital “occupies 628, (quot- underwriter 662 F.Supp.2d that, participation by its an Offerings, offering” Regulation of Securities ing The securities, the underwriter 7606A, in a sale of 63 Fed. No. Act Release Securities “implies (Dec. 4, 1998), a recommendation 67174, WL makes 1998 Reg. 67230 ba- has a reasonable 833389). are not underwriter Although underwriters com- WorldCom, in the truthfulness and sis for belief In re offerings, insurers made key representations 662, pleteness man- Congress has F.Supp.2d at 346 used documents of a in disclosure diligence “exercise dated & confidence, v. John Nuveen offerings”)37; Sanders with the type commensurate omission; liability to and it limits "prohibits ment the Securities Act 11 of Section security.” fact Central material offer or sell the statements or omissions of those who false 1439; Bank, “identifies the registration statements” and S.Ct. see at 114 511 U.S. subject to categories of 771(a). defendants various § 15 also U.S.C. violation,” ‍‌‌‌‌​​‌‌​‌​‌‌​‌​​​‌‌​​‌​‌​‌​‌‌​​‌‌​​​‌​​‌‌‌‌‌‌​​‍ including liability underwrit- for a Bank, Central 511 U.S. ers. Re- specifically observes 37.The SEC 77k(a)(5). 1439; 15 U.S.C. see also "obligation to the underwriters’ lease that accu- basis for belief have a reasonable unregis- "prohibits the 12 sale 36. Section concerning directly made racy of statements tered, nonexempt as sale securities well misstate- of a means material of securities 134 (7th

Co., Cir.1975) F.2d the issuance of a prospectus was suffi (“[T]he relationship between the under- cient to state a claim primary liability 5); implicitly writer аnd its customers in- under Rule In re Tool 10b— Software works, volves a recommendation of Inc. Litig., favorable Sec. 50 F.3d (9th Cir.1994) security. public (finding disputed issued Because the relies issues of material fact integrity, independence expex-- on the as whether underwriters’ underwriter, participation in drafting allegedly tise of the an underwriter’s mis leading letter to the participation significantly enhances SEC violated section 10(b)); Sanders, (footnote marketability (apply F.2d at 1069 security.” omitted)). ing Rule 10b-5 to underwriter alleged duty have violated its reasonably The case law addressing the duties of investigate the it securities marketed and analy- underwritei's buttresses the SEC’s issuer); Sec., their In re Corp. Enron De beyond sis and extends it the traditional Litig., rivative & ERISA F.Supp.2d context of sections of the Secu- (S.D.Tex.2002) 549, 612 (finding, based on Although rities Act. sections 11 and 12 highlighting case law an underwriter’s specifically concern an underwriter’s obli- duty investigate an issuer and the secu gation to accuracy registra- ensure the investors, rities it offers to that an under prospectuses, statements and under- public writer of a offering could be held among writers are the securities actors to 10(b) liable under section and section 11 of See, whom section has been applied. the Securities Act “for material mis Rauscher, Inc., e.g., SEC v. Dain 254 F.3d statements or omissions in the registration (9th Cir.2001) 852, 858 (finding genuine scienter”). statement made with issue of material fact as to whether under- writer violated Rule 10b-5 comply- precedents These unique po- reflect the ing “duty with its an investigation to make sition of underwriters as securities insiders provide that would him with a reasonable whose role is “that of a trail guide a—not basis key for a belief that the representa- hiking companion,” mere and who are re- tions provided statements upon by lied investors for “reputa- their investors were truthful complete.”); tion, integrity, independence, exper- Hollywood Flecker v. Corp., Entm’t Dolphin 1997 tise.” and Bradbury, Inc. v. (D.Or. Feb.12, 1997) SEC, WL at *9 (D.C.Cir.2008). 640-41 (finding triable issue of section pri- Underwriters have access to information of mary liability against underwriter for al- substantive interest and consequence to legedly investors, false statements that inflated stock and a duty concomitant to inves- prices); In re MTC Elec. Techs. tigate S’holder and confirm the accuracy of the (E.D.N.Y. Litig., 160, 993 F.Supp. 162 prospectuses and other fund that materials 1997) (“MTC ”)(applying II id.; the standard they Sanders, distribute. See see also of primary liability to underwriters the 524 (“Although F.2d at 1071 the underwrit- context of private allegations of Rule 10b- er cannot be a guarantor of the soundness violations); 5 Kidder, Phillips issue, v. Peabody of may he give not it his implied Co., (S.D.N.Y. 6 F.Supp. 315-16 stamp of approval without having a reason- 1996) (same); In re U.S.A. Classic Sec. able basis for concluding that the issue Litig., 6667(JSM), No. 93 Civ. sound.”); SEC, WL v. Walker (S.D.N.Y 1995) (2d Cir.1967) (“The at *5 June jus- Commission is (finding that an participation underwriter’s holding tified in a securities salesman offering

the is underscored when a broker- dealer underwrites securities.” Id. at 21. Authority Building to finance public the knowledge of the contents chargeable literature.”). development in planned at a improvements of sales in a could held liable Springs be Colorado and duty to of this review light 10b-5 of action under Rule private cause in the the material accuracy of the confirm primary violation aiding abetting a distributes, un an it that documentation Bank Although had of the law. Central of makes a statement impliedly derwriter for the that the collateral become aware has a that it potential investors own to its infor likely that the insufficient to bonds had become basis believe reasonable it prospectus uses in the them, undertaking mation contained delayed it an support truthful securities is offer or sell apprais- original independent review that alleges Tambone The SEC complete. could be independent an review al. Before implied statements Hussey made such on done, Building Authority defaulted the in the timing practices about to investors plaintiff the The portion of bonds. knew, they or were Funds when Columbia liability against primary raised claims knowing, represen that the in not reckless Building Authority, the four violators: timing about tations ques- bonds which issued defaulted falsity made This were false. practices bonds, tion, and a two underwriters for such, false. As implied statements their development company in director were violation implied these statements appraisal charge providing 10b-5(b). Rule Building Authority defaulted bonds. The and the claims early litigation Counterarguments De- of The The B. were settled. the underwriters against Dissent fendants and The Denver, N.A Interstate Bank See First Hussey assert Tambone and (10th n. 1 F.2d Bring, v. 10b-5(b) analyzing and cases Rule text of Cir.1992). liability primary under scope of require that and section Court, relying on the text Supreme made they actually allege that Commission 10b-5, and Rule concluded of section at- publicly which is misrepresentation against abetting claims aiding them, im- not have tributable must be dismissed because Bank Central contend They so. pliedly done only bring claims may private plaintiffs disregard the be to otherwise would hold abetting aiding and liability, primary Bank holding in Central Supreme Court’s Neverthe- liability, against defendants. the boundaries effectively eliminate less, com- “[i]n noted that the Court secondary liability. primary and between likely ... there are fraud plex securities well. position as takes The dissent case, violators; for ex- in this multiple be Implications and its 1. Central Bank named four defendants ample, respondents 511 U.S. violators.”38 Bank was whether The issue Central Finally, the Court con- S.Ct. for bonds issued indenture trustee multiple likely viola- will involve reject rities fraud Hussey urge us to the and Tambone 38. tors, with thereby suggesting that individuals primary liability be- of Commission’s claims primarily could be responsibilities Co- different own admission that cause of the SEC’s U.S. at defendants, Advisors, same misstatement. liable for the "remained lumbia Therefore, primary the S.Ct. representations responsible for all primarily pre- However, does not liability of Columbia Advisоrs prospectuses. the made” in fund liability and primary of Tambone the clude Bank quotation Central illustrates this from the false and own for their use recognition that a secu- Supreme the Court’s Bank’s, eluded that it is not identity the of a interpretive prescription in its en- securities actor but his conduct tirety” that deter- “fl[ying] and in the teeth of the may mines whether he be liable a pri- Supreme circumspect Court’s pri- vision of mary violator: mary liability.” agrees The dissent 10(b) holding defendants our is at odds with aiding

The absence of and abet- Central Bank’s careful distinction between ting liability does not mean that second- primary secondary and ary liability. actors the markets securities are always liability free from under the se- There is no conflict between Central Any person entity, curities Acts. or in- Bank and our interpretation of Rule 10b- accountant, bank, cluding lawyer, or 5. The Court in Central Bank addressed employs who a manipulative device or only question private of “whether civil (or makes a material misstatement omis- 10(b) liability under section extends as well sion) purchaser on which a or seller of to those who engage do not in the manipu- may securities pri- relies be liable as a lative or deceptive but practice, who aid mary 10b-5, violator assuming under all and abet the violation.” Stoneridge, 128 requirements primary liability (Stevens, J., S.Ct. at 775 dissentingXquot- under Rule 10b-5 are met. Bank, ing Central 511 U.S. at Id.39 1439).40 such, S.Ct. As the Court did not argue interpret the phrase

Defendants that the “to make” in Commission’s Rule allegations are 10b-5 as it pri- applies primary insufficient to liability— establish mary liability which question under Central Bank. is the Simi- that we address larly, dissent, See, e.g., while above. acknowledging Wolfson, v. (10th Cir.2008) that Central Bank does not foreclose the (“Recognizing possibility “persons in the defendants’ the dichotomy primary liability between positions” may liable, be primarily found aiding and abetting liability created accuses us of “dismantling] Bank, Central Central alleges Commission misleading pro- statements contained in those "liability may under section extend spectuses. Additionally, private in a recent secondary actors in the securities mar- suit, Supreme kets,” prin- confirmed Court and that this is consistent with "the ciple by indicating that defendants primary purpose Charter Exchange the Securities Communications, Scientific-Atlanta, Inc., 1934,” Act namely, protect against "to ma- Motorola, Inc., engaged had all nipulated prices fraudu- by imposing stock strict and lent conduct at Stoneridge, issue. See requirements, extensive irrespec- disclosure S.Ct. Although at 769-70. Supreme type tive of the of actor that disseminates Court’s statement in Central Bank referred to investing public”); information to the Hous- 10b-5(b), addressing Kissel, LLP, material state- ton v. Seward & No. omissions, ments and 07cv6305(HB), its comment 2008 WL at *7 n. 22 10b-5(a) Stoneridge applied (c), (S.D.N.Y.2008) address- (noting that even after Central devices, schemes, artifices, acts, ing Bank, practices, implied right of action "continues business, or courses scopе secondary to cover pri- actors who commit liability governed violations”). each subsection is mary language of section Exchange Therefore, Supreme Act. Court’s recent Bank, 40. See also Central 511 U.S. at multiple confirmation that may individuals be ("The course, problem, S.Ct. 1439 is that primarily (a) (c) liable under Rule 10b-5 aiding abetting liability beyond extends applicable interpretation to its of Rule 10b- persons engage indirectly, who pro- even in a 5(b). activity; aiding scribed abetting liability persons engage reaches do not who Solutions, Inc., 39. See all, also In re Ikon proscribed at give activities but who a Office (3d Cir.2002) 277 F.3d 666-67 (noting do.”). degree of aid to those who

137 This Rule 10b-5.41 of action under of cause primary violators are [defendants] inform our under- that must 10(b). Thus, we confront is the context question the § “interpretive of Central Bank’s standing [committed the acts today is whether that reject to show the sufficient therefore prescription.” are We defendants] mis- material that Central Bank’s [alleged] the ‘made’ assertion dissent’s that ... such and omissions interpretation statements its approach to conservative liable.”); In re primarily they can be held a brought by 10b-5 a case of Rule F.Supp. Litig., ZZZZ Best Sec. be- should be stretched private plaintiff (C.D.Cal.1994) (noting that be- n. 11 interpreta- to invalidate our yond logic its ex- in that counsel case “[plaintiff’s cause action, of an ele- tion, in enforcement an of Bank that the Central conceded pressly was Supreme the Court ment on which manipu- a itself committed had not Denver silent. act[,]” “did the Court deceptive or lative address the the opportunity not have Primary and Line Between Sec- 2. The been found could have [it] issue of whether Liability ondary 10(b)/Rule under Section liable primarily added allegation been had such 10b-5 abetting claims were aiding and Because the of and had issue complaint to the after private actions longer no available con- not been or deceit manipulation Bank, on pressure was more Central there Fault DeLeon, ceded.”); Robert S. the outer bound- clearly delineate courts Liability and Primary Between Lines liability' question the aries of —a Abetting Under Claims Aiding and did not address Central Supreme Court (1997) (“Al- 10b-5, Corp. L. J. crafted two Bank. circuits have sister Our the Bank court used though the Central analyze ques- divergent standards misstatement ‘make a material phrase test, associated “bright-line” tion: analysis ... omission,’ of its the focus Circuit, and closely with the Second most mis- need for a ‘material with the dealt participation” “substantial the broader ‘manipulative or a omission’ statement or We test, by the Ninth Circuit. articulated ‘making’ or the words and not on act’ and ex- approaches these briefly outline ” omitted)). (footnote ‘commission.’ here, con- not relevant they are plain why Bank analyzes Central Additionally, defendants arguments trary to 10(b) in a and Rule 10b-5 scope of section and the dissent. Al- private plaintiff. a brought by suit version prominent the most Under observes, the rightly as the dissent though, liability re- test, primary bright-line respective on the text focused Court first, elements: showing of two quires a emphasized it element provisions, also “actually [made] individual has that an (which in that was not satisfied rebanee statement,” and sec- misleading false or case), policy a set of consider- as well as (or omission) has ond, the statement context exclusively ations arise actor specific been “attributed In this re- litigation. private securities Wright, dissemination.” public the time of man- spect, Central Bank primarily was Thus, incorpo- its at 175. desire limit of the Court’s ifestation elements, the standard these two ration of private judicially-implied scope purchasers "reference to that its S.Ct. therefore O’Hagan, U.S. at 41. Cf. light must be securities read sellers of (noting Bank Central “concerned § private on longstanding limitation litigation only private civil under suits.”). Ob-5, liability!,]" and criminal Rule 1 138

purports “bright-line” to draw a between quirement a corollary is natural of this secondary liability. See Sha- principle, because “[a]n individual who re- (2d piro Cantor, 717, v. 123 720 F.3d Cir. lies on a statement that he believes was 1997) (“[I]f is to Central Bank have person made one cannot then assert a real a meaning, actually must defendant against claim another.” SEC v. Collins & misleading make a false or statement Corp., 477, Aikman F.Supp.2d 524 490 10(b). order to be held under Section liable (S.D.N.Y.2007). Anything merely short of such conduct is The facts of illustrate how Wright aiding abetting, ... enough not bright-line test has applied. been In 10(b).” trigger liability under Section Wright, the court held that the auditing (quoting In re MTC Elec. Techs. S’hold- firm Young Ernst & could not be liable for (E.D.N.Y. Litig., ers F.Supp. a approved misstatement by the firm and 1995) (“MTC ”))).42 I contained its press client’s release be- The first of the bright-line element cause the release noted that the informa- test —that “actually the defendant make” and, therefore, was unaudited Ernst & the statement at the text issue—mimics of Young’s “assurances were never communi- 10b-5, thereby Rule offering little addi- public cated to the directly either or indi- guidance tional precise on the boundaries rectly.” 152 F.3d at 176. The plaintiff of the term “make.” The part second had alleged that Young Ernst & knew that public require- test —the attribution its advice would be passed on to investors ment—follows from directly the element of and that it was understood in the securi- reliance that required private in a Rule ties market press release con- 10b-5 action. To assert a successful claim implicit tained an statement from the audi- 10b-5, under Rule plaintiff a must estab- tors that the financial information in the lish that she has on a false relied release was rejected accurate. The court material statement made the defendant. plaintiffs arguments as insufficient to sup- supra. See requirement This is designed port primary liability under “ Central Bank to ensure that ‘requisite causal con- “because no false or misleading statement nection between a misrepre- defendant’s was attributed to Young Ernst & at the sentation plaintiffs injury’ and a exists as time public dissemination.” Id. at 178. predicate for liability.” Stoneridge, 128 Basic, S.Ct. at 769 contrast, (quoting 485 U.S. at allege a primary violation 978). The attribution re- under the participation test, substantial 42. Several adopted other have also omission, circuits be made a statement fraudulent or test, bright-line or close variations of it. directly or who does engage manipu- See, Int’l, Inc., e.g., Ziemba v. Cascade trading practices, lative securities is at most (11th Cir.2001) F.3d ("Following guilty aiding abetting and cannot be Circuit, the Second conclude that ... we held liable any subpart under or alleged upon misstatement omission which 10b-5.”). Circuit, The Tenth in Anixter plaintiff publicly relied must have been at- Co., v. Home-Stake Prod. 77 F.3d tributable to the at the time defendant that the (10th 1996), Cir. held "in order for ac- plaintiff's made.”); investment decision was liable], primarily countants be they [to must Regents see also Univ. Cal. v. Credit themselves make a misleading false state- (USA), Suisse First Boston 482 F.3d 386- (or omission) ment know or should (5th Cir.2007) (analyzing Central Bank in potential know will reach investors.” It has 10b-5(a)and (c)); the context of Rule In re that, since although clarified "bright this is a Commons, Charter Litig., Inc. Sec. test, public line” required. attribution is not (8th Cir.2006) ("[A]ny defendant Wolfson, 539 F.3d at 1260. who does not affirmatively make or cause to ac- and are explained, Tambone secondary that a only show need plaintiff implied their own state- countable for “substantially participated” has actor ments, partic- “substantial making making in the of the role” significant “a played unnecessary. that he has See In re inquiry and not ipation” statement a fraudulent himself. No. Litig., the statement C07- or created LDK Sec. “made” Solar Inc., 228 F.3d Sys., 05182WHA, at *8 v. Everex Howard 2008 WL See Cir.2000) (“[W]e (9th have 2008) (N.D.Cal. n. 5 (declining to ad- Sept.24, or intri participation that substantial they had not held claim that dress defendants’ of preparation in the involvement cate the making “substantially participated” pri for grounds is statements fraudulent the at because fraudulent statements issue partic though liability even mary they already determined court had the actor’s actual not lead to might ipation actually made to have should “deemed be statements.”); In re making of the statements.”). Soft those (allow Toolworks, n. at 628 50 F.3d ware test, which is Similarly, bright the line for accountants who liability ing potential and the dis- by appellees us urged upon drafting a role” significant “played sent, it means to address does not what misstatements); In re of reviewing and described, statement, as have “make” a we at 970 F.Supp. Litig., Sec. Best ZZZZ requirement imposes and it an attribution accounting firm could (concluding that an which, of the dis- contrary position to the 10(b) § for its undis held liable under be court, enforce- inapplicable trict is in the review participation closed place, plain In the first ment actions. to the released of documents preparation require attri- of statute does not text by company attributable public Indeed, ironic to read it would be bution. Becausе of its company). only to that a cause of private of requirements scope pri interpretation broad attribution) (which into include action participation mary liability, the substantial text when section statutory as inconsistent been has criticized test only to SEC en- initially applied 10b-5 aid private prohibition Bank’s Central See, Stoneridge, e.g., actions. forcement See, liability. e.g., Anix abetting ing and (“Though the text at 768 (“To ter, n. 10 the extent at 1226 provide Act not Exchange does Securities liability attach without cases allow these for of action private a cause be to made requiring representation violations, right has found a the Court defendant, ‘substantial reformulate of the statute in the words implied action abetting aiding element assistance’ regulation.”); see implementing and its not liability, do liability primary into 80-83, at Lynch, U.S. also Merrill Denver.”). Bank comport with Central Court Supreme that the (noting S.Ct. 1503 result, adopted has circuit no other As private on certain limitations placed has liability. to assess test this 10(b) as a action under section causes of merits, nei- their relative Regardless of considerations). policy result of partic- nor substantial bright-line ther attribution, Moreover, public although to this test is relevant case. ipation reliance, necessary pri- in a like direct evaluates test participation substantial action, should public attribution vate have deemed to can be one actor whether action where in a required Commission be made or created a statement made a causal establish such no need to there is actor’s substantial because of another See, Wolfson, 539 F.3d e.g., connection. making creation participation re- attribution that the (observing case, 1259-60 have we statement. quirement directly “stems from the need requirement statement” of Rule 10b- 5(b). for private litigants prove However, reliance on to survive a motion to alleged dismiss, fraud to succeed on a private cause complaint allege must still action,” and, “given unambiguous supporting theory [this] facts liability connection between reliance and attribu- requisite with the particularity. turnWe tion,” declining to “impose an attribution now to the pleading issue. action”);

element in an SEC enforcement VI. Corp., F.Supp.2d Collins & Aikman (“If requirement the attribution is mo- Primary Liability A. reliance, by tivated the need to show which 17(a)(2) 1. Section I find to be the cogent analysis, more then it apply brought by does to actions described, As we have to state a claim SEC.”); KPMG, (in 412 F.Supp.2d at 375 17(a)(2), under section the SEC must al- action, an enforcement “no finding reason (1) lege that Tambone and have impose to a requirement that a misstate- (2) directly or indirectly obtained money or ment publicly attributed [be] to defen- (3) property means of untrue state- attach”). liability dant for ment of fact material or omission state a material necessary fact in order Finally, reject we defendants’ аssertion made, make the statements light that we should require attribution as a they circumstances under which were matter of policy in order to ensure that made, not misleading negligence with primary liability secondary liability (5) in the offer or sale of any securities. are sufficiently delineated one from anoth- supra See Part IV.A. goes The SEC be- er.43 Supreme The Court in Central Bank 17(a)(2)’s yond section relaxed scienter re- established the dichotomy crucial between quirement, instead alleging that the defen- who, those regardless of their role dants acted either knowingly or highly transaction, securities make misleading recklessly. representations themselves, and those who merely culpable assist the without actor The defendants assert the SEC personally using employing any “manip- failed to state its claims of securities fraud ulative or deceptive prohibited device” as particularity. They sufficient argue 10(b). Thus, distinguish be- complaint was deficient in omit- primary secondary tween liability, ting we specific details of statements must focus on specific conduct of de- the fund prospectuses could be in light fendants of their role in the securi- misleading deemed as a result of al- market, ties rather than on whether leged inves- timing arrangements. market Fur- specifically tors relied on their ther, they statements. argue that majority precisely That is what we have done here defendants’ conduct alleged in the com- in deciding that implied defendants’ state- plaint, including their distribution activities ments that had a reasonable basis to and participation preferred investor ar- believe that the market timing rangements, disclosures occurred prior to the adoption were truthful and com- of the language Strict Prohibition plete fall within purview of the “make various prospectuses, and therefore cannot Lucent, 43. But see 363 F.Supp.2d at 724 types give delineates which of behavior will (“Not only bright-line public [the attribu- primary rise liability versus secondary lia- tion] test statutory consistent with the lan- bility.”). guage 10(b), of Section clearly but it more adequately alleges also The Commission violation for a basis provide prospectuses, which the de- that the fund laws. the securities under distributing, responsible were fendants concerning several disclosures contained Allegations a. General trading practices or excessive short-term the SEC’s persuaded areWe misrepre- deemed material that could be pleading standards satisfies complaint disclosures, stated which sentations. 9(b). that Tam- alleges The SEC Funds were that the individual Columbia Dis bone, of Columbia as Co-President short-term permit to and did not hostile Di Managing tributor, Hussey, as shares, could trading of their excessive Accounts for Columbia National of rector at misrepresentations because constitute oversee Distributor, responsible for were made, the were the time the disclosures in prospectuses fund of ing distribution the or had knowl- approved had defendants of Columbia their sale with connection pre- with several arrangements edge of un of the primary As executives Funds. prohibited to allow these ferred entities duty to derwriter, had the defendants Further, that alleges the SEC practices.45 prospec the fund reasonably investigate knew, highly were reckless defendants re disclosure documents and other tuses in these statements knowing, not to confirm investing public to the leased false. were prospectuses the accuracy and truthfulness.44 their also avers the defendants’ complaint The by required Fed. by generally, scienter obligation is confirmed Tambone’s 9(b), alleging that the defendants alleg- R.Civ.P. selling agreements hundreds of the of the various distribution oversaw the Distributor by into Columbia edly entered during 2002 and Tambone, gov- prospectuses fund with terms signed Prohibition they the Strict Funds when contained the distribution Columbia erning Hussey both Concurrently, language. agreement broker-dealers. Each by other cus- preferred aware that the Tambone were role as Distributor’s noted Columbia engaged short-term frequently funds tomers the relevant principal distributor contrary to trading practices or excessive prospec- purchaser the the and referred Although prospectus Each disclosures. information on funds. tuses for typical- were timing arrangements market represented expressly selling agreement (a) the Strict Prohibi- ly entered into before [p]rospectus “the and warranted pro- to the fund was added appli- language all comply ... will with ... issue we distribution defendants’ laws, spectuses, rules and Federal cable state the fraudulent (b) which was prospectuses, and the [p]rospeetus each regulations [and] issue, both before occurred conduct we issue will all literature sales prospectuses to the the amendments misleading....” after be or omission statement prospectus were also mate- disclosures complaint, half of 45. The According over lo the Funds investors. Given the Columbia rial to compensation Tambone and the total trading practices at alleged scope year of commissions consisted each received issue, likelihood that is a substantial “there pursuant their duties. made fund sales for [the would consider state- they investor dispute were reasonable defendants do not making an investment important ments] part on sale compensated in based their Rather, Advisors Fund SEC v. PIMCO decision.” contest the they Funds. Columbia (S.D.N.Y. LLC, F.Supp.2d Mgmt. compensation was their degree to which 231-32, Basic, 2004); U.S. at see alleged conduct to the fraudulent linked S.Ct. 978. timing with market activities. connection and at a time when defendants knew According to the complaint, the defen- timing arrangements the market in dants knowledge Ilytat’s were had arrange- place. By continuing to ment and harmful By distribute these conduct. March revisions, Ilytat had placed, Hussey’s been with without the face approval, on a list of duty of such and a “Authorized Accounts knowledge to confirm Frequent Trading,” which accuracy statements, contained prospectus preferred trading customers whose the defendants could be found to have practices limited, would not be regardless See, knowingly acted highly recklessly. month, their frequency. The same Hus- Scholastic, e.g., In re 252 F.3d at 76 sey alleged Ilytat have allowed (“Where alleges defen- complaint continue its trading practices respect dants knew or had access to facts non- to the Acorn specifical- International Fund public contradicting pub- information their ly, by directing the Columbia Services statements, lic is adequately recklessness manager responsible timing for market pled for defendants who knew or should surveillance prevent from taking others have known were misrepresenting steps practices. 2002, halt such In Hus- ”)(cid:127) material facts.... sey prevented Columbia Services’ market timing surveillance personnel from halting b. Particular Instances Ilytat’s trading practices, thereby allowing The SEC states general these claims the conduct to continue for almost three with particularity. sufficient Its most sub- additional months. stantial allegations from arise the arrange- allegedly Tambone similarly was aware ment between L.P. Ilytat, and Columbia of the timing market practices engaged in Distributor. complaint alleges The that by Ilytat, at least with respect to the New-

Hussey, with Tambone’s knowledge, ap- port Tiger Fund. In October 2000 and proved an arrangement beginning in 2000 2001, March Hussey Tambone and re- that Ilytat allowed engage frequent, in ceived e-mails from Newport the Tiger trading short-term practices in return for portfolio Fund manager informing them of Ilytat’s infusion “sticky million of $20 potential the damage Ilytat’s trading that assets” Newport Tiger into the Fund. As a practices could inflict on the fund. In result of this arrangement, Ilytat allegedly response to an e-mail in October executed a of round-trips number into and Hussey set forth guidelines the for enter- Newport Fund, out of the Tiger Acorn the ing market timing arrangements, which Fund, International and the Inter- Acorn requirement included that the fund ob- national Select Specifically, Fund. the com- tain a long-term asset quid- stream “as a plaint alleges Ilytat executed over 30 pro-quo” short-term movements. round-trips during period the May from copied Tambone was on this response. 2001 through September 2002 in the New- According to the complaint, Tambone was port Tiger Fund, 27 round-trips Sep- from also informed on other occasions the tember 2000 to December 2001 in the Tiger portfolio Fund manager and su- his Fund, Acorn International and at least 20 perior regarding about nega- concerns round-trips during period July from tive impact frequent trading prac- 2000 to June in the Acorn Interna- tices on his fund. Although all of the Fund, tional Select all at times when the dated communications in discussed respective prospectuses contained complaint prior occurred May Strict Prohibition language expressing the when the Newport Trading Fund added fund’s hostility to practices. such the Strict representation, Prohibition Tam- capacity, In notice that the defendants allowed placed on had been bone occurring. prospectuses, which contained state- practices were timing market knew, they ments that or should have alleges similar conduct complaint The known, false, were to be disseminated and respect to Dan- Hussey Tambone funds, earning money used to sell in which he Calugar and the funds iel stated, Simply commission for those sales. an Hussey approved In invested. ... money by means of “obtain[ed] allowing Calugar to make arrangement untrue statement of a material fact.” an[ ] month with his entire round-trip per one to a This conduct amounts viola- Young Inves- in the Columbia investment 17(a)(2). Therefore, tion under section we and the Growth Stock tor Fund Columbia find that has stated claims of May beginning at the Fund. against fraud primary securities Tambone 2001, Hussey re- early again Hussey pursuant to Securities Act was, in Calugar ceived information 17(a)(2) particulari- Section with sufficient fact, frequent round-trips engaging ty requirements to meet of Fed. also and others. Tambone these funds 12(b)(6), conjunction R.Civ.P. with Rule in 2000 from received email 9(b). Defendants’ motions to dismiss the Calugar’s practices. him of apprising 17(a)(2) claims should have been alleges Calugar continued complaint denied. through August least to trade lan- the Strict Prohibition months after 10(b) and Rule 2. Section 10b-5 pro- adopted was these funds’ guage primary liability a claim of un- To state spectuses. 5(b), complaint the der Rule SEC’s 10b— allega- levels additional complaint The (1) made a allege must that the defendants Hussey individually. Accord- against tions misleading materially false or statement Hussey approved an ing complaint, to the (2) purchase in connection with the sale Signalert to arrangement permitted that (3) securities, intent, and acted with Young in Investor invest the Columbia reckless- knowledge high degree or a Fund and Fund and the Growth Columbia Part supra ness. See V.A. round-trips in each to make number annually. Hussey subsequently fund was that the Commis- allegations The same Signalert engag- in was informed in the con- against appellants sion made in practices doing 17(a)(2) and so ing these ap- claims also text of its section 10(b) levels. After agreed-upon excess of the and ply to its claims under 10b-5(b). for February prospectuses asserts, when Rule As the SEC amended to include these two funds were statements to sell using prospectus language, Signalert Prohibition Funds, Strict their defendants “made Columbia round-trips allegedly false, made 20 representations to implied, own but Fund and over 20 Young Investor truthfulness and com- investors as to the Fund. Growth Stock of the statements made pleteness implied These statements prospectuses.” Summary c. an duty their “to make product were a provide [them] that would investigation that Tambone and alleges The SEC key that the un- reasonable basis fоr belief Hussey, primary as executives of the Funds, provid- representations the statements were derwriter of Columbia truthful and com- ed to the investors were responsible overseeing for the distribution about key representations If the potential plete.” investors. of fund 10(b) 5); Peretz, false or mislead- tion and timing practices were SEC v. 10b— (D.Mass.2004) implied ing, alleges, F.Supp.2d (noting SEC statement about the truthfulness and com- pre-Central Bank case law re- made in the pleteness of the statements garding aiding abetting liability and sur- has prospectus was also false. vived the enactment of Section 104 of the defendants, PSLRA). sufficiently alleged that either A defendant’s or inac- silence recklessly, mul- knowingly highly made may satisfy “knowing and substan- Defendants’ tiple false statements. mo- tial assistance” standard if such silence or liability primary tions to dismiss the consciously inaction was intended to fur- 10(b) claims and Rule 10b- under section principal Cleary, ther the violation. 5(b) should have been denied. F.2d at 778. Aiding Abetting Liability

B. and 10(b) Exchange Section of the Act We turn three to the Commission’s and Rule 10b-5 aiding abetting liability claims of and regarding Our conclusions second against Hussey: Tambone ary liability directly analy follow from our aided and abetted Columbia Advisors’ vio- primary liability sis of ‍‌‌‌‌​​‌‌​‌​‌‌​‌​​​‌‌​​‌​‌​‌​‌‌​​‌‌​​​‌​​‌‌‌‌‌‌​​‍the claims. The 206(1) 206(2) lations of Sections sufficiently SEC has alleged uncharged Act, Advisers Section of the Ex- primary violation46 of section 10b-5, change Act and Rule and Section Advisors, Rule 10b-5 Columbia which is 15(c)(1) Exchange Act. primarily responsible writing all state aiding

To a claim of prospectuses.47 establish ments made the fund It abetting liability alleges generally under the securities that Columbia Advisors laws, prove: approved the Commission must a knew and of all but one of the committed; (2) timing into, violation was the market arrangements entered generally defendant specifically was aware his states that Columbia Ad- visors, part role or conduct was of an overall either itself or through various activity that improper; portfolio was and managers charge of the funds knowingly substantially issue, defendant approved and as agreement the initial primary sisted in the Cleary Ilytat, violation. v. with arrangement with Ritchie Inc., (1st Perfectune, 777 F.2d related to the Growth Stock Fund and the Cir.1983). duty Fund, If the defendant has a to Short Term Bond as well as the violations, primary disclose the arrangements Giacalone, reckless with Calugar, Id; Loeser, ness will suffice to establish scienter. D.R. and Signalert. knowl With SEC, see also v. edge arrangements Graham F.3d of these and the subse (D.C.Cir.2000) (indicating quent that reck timing practices market occurring as them, lessness was sufficient to establish a claim a result of Columbia Advisors con aiding abetting liability and under sec- tinued to make prospec- statements above, 46. As noted the SEC reached a settle- bia Advisors and Columbia Be- Distributor. ment with Columbia Distributor, and Advisors Columbia allegations cause we conclude that the could others, among regarding the alle- support finding a that Columbia Advisors gations complaint in this therefore and has primary committed a violation of section brought separate against actions these 10b-5, and Rule we need not address entities. primary liability against the claims of asserted provision. Columbia Distributor under this alleges The SEC that defendants aided and primary abetted the violations of both Colum- Baehler, Metge v. activities these See such prohibiting tuses (8th Cir.1985) (requiring showing support allegations funds. These secondary party proximately “the [has] made the Advisors claim that Columbia citing, ap- caused the violation” and statements misleading prospectus proval, holding plain- another court’s being communicated to they were knew tiff causal connec- must show “substantial investors. culpable tion between the conduct of the of aider and abettor The second element abetter and the harm.” alleged aider and allegations that the liability is satisfied (quoting Capital Mendelsohn v. Under- knew, at least reckless or were defendants writers, Inc., F.Supp. prospectuses fund knowing, in not that the (N.D.Cal.1979))). contained false or distributing were conclusion, reaching we neces- em- misleading As we have statements. sarily reject finding court’s district officers positions defendants’ as phasized, affirmatively the defendants did not imposed upon Distributors of Columbia primary Advisors’ contribute to Columbia accuracy of the duty to review the them The district court based its violations. duty That was disclosures. prospectus conclusion on its determination that Tam- here because particularly relevant duty not under a to dis- “defendants were Hussey knowledge had bone and timing arrangements close the market timing arrangements prac- market However, above, explained investors.” Therefore, Tambone and tices. rejected that determination. As a we have pro- known that the knew or should have as executives of position result of their Co- misleading contained false spectuses Distributor, the defendants had a lumbia regarding timing prac- market statements investigate the fund duty to review and Further, relevant a review of the tices. and other materials prospectus statements would have revealed Co- accuracy truthful- their determine Advisors, by drafting the false lumbia ness, of the fund is- duty independent was also prospectuses, statements produce to draft and responsibility suer’s violations of Rule engaging materials, Cleary, 700 F.2d at 777 such see 10b-5. duty may to disclose arise (stating that a that the SEC has Finally, we conclude imposes special obli- “where the law aiding the third element of satisfied brokers”); for accountants and gations, as failure abetting liability. The defendants’ Indus., Piper Inc. v. Aircraft Chris-Craft misleading disclosures in to correct (2d Cir.1973) Corp., 480 F.2d 370 as un- prospectuses, given their duties liable as an aider (finding an underwriter derwriters, of those as well as their use 14(e), which under section and abettor the funds to inves- prospectuses to sell in misleading or statements prohibits false tors, Ad- substantially assisted Columbia offer, acting a tender for connection with violations. See primary in its own visors regis- whether a recklessly determining in PIMCO, By at 467-68. F.Supp.2d 341 materially contained tration statement statement). written distributing prospectuses duty, light of this false Advisors, com- overseeing the defendants the dis- Columbia defendants’ conduct po- to the in- to municated the false statements of the false tribution amounted to affirmative public, thereby causing Columbia tential investors vesting pri- acts in substantial assistance of Rule 10b-5. primary Advisors’ violation 206(1) mary requires proof violations.48 of fraud- part ulent intent on the 206 of the Investment Advis- Section actor, only allege whereas the SEC need ers Act negligence to state claims under sections 206(2) 17(a)(2) (3). See, e.g., and PIM- alleges also that Tam- CO, F.Supp.2d at 470. Hussey aided and abetted viola bone and Advisors of sections tions Columbia conclude that We the SEC has 206(1) (2) of the Investment Advisers alleged particularity pri with sufficient the Advisers Act Act. Section 206 of makes 206(1) (2) mary violation sections adviser, any it for investment unlawful Advisors, the Advisers Act. Columbia “(1) any among things, employ other investment all adviser to of the Columbia device, scheme, any or artifice to defraud Funds, including those that maintained the client; client prospective or [and] misleading prospectuses, allegedly failed to transaction, engage practice, or satisfy fiduciary obligations by its placing operates course of business which as a its own interests above those the funds fraud client upon prospec or deceit or and their investors. Specifically, the com 80b-6; § tive client.” 15 U.S.C. see SEC plaint alleges that Columbia Advisors Cir.2002). (1st Fife, v. Ac knowingly preferred allowed investors to Act, cording engage to the an “investment advis in short-term and excessive trad who, Funds, ing er” “any person compensation, Columbia and that such others, trading harmed the engages long-term interests of advising the business of Despite shareholders. knowledge of these directly through publications either or or arrangements, Columbia Advisors know writings, as to the value of securities or as ingly intentionally or failed to disclose in, advisability investing purchas practices, and the conflicts of interest ing, selling or securities.” 15 U.S.C. created. These fraudulent disclosures or 80b-2(a)(ll). imposes Section 206 a fi allegedly “device, omissions constituted a duciary duty on to act investment advisers scheme, or artifice to defraud” under sec at all times the best interest of the fund 206(1) and a “practice, or course of investors, and its and includes an obli business which operates as a fraud or de gation provide “full fair disclosure upon any ceit client prospective client” of all material facts” to investors and inde 206(2). PIMCO, under section See pendent trustees of the fund. Capital F.Supp.2d at 470. Gains, 191, 194, 200-01, 375 U.S. at 275 (addressing requirements S.Ct. The second and third elements of sec- pursuant an investment adviser to section ondary liability adequately pled were also Act). 206 of the Advisers An adviser has complaint. Hussey’s Tambone’s “an obligаtion employ affirmative rea mind, conduct and state of discussed sonable misleading care to avoid above, [his establish with equal requi- force the her] clients.” Id. at S.Ct. site elements for the SEC’s claims under omitted). (quotation marks and footnote section 206. allegedly The defendants 206(1) interpreted Courts have knew, sections or were in knowing, reckless not 206(2) and essentially first, to include the same representa- Columbia Advisors’ 17(a) claim, elements as a except section prospectuses regarding tions market conclusion, Having reached this we need a principal “conscious to further the intentf] address, did, not as the district court whether Cleary, violation.” 700 F.2d at 778. the defendants’ inaction was accompanied by

147 (6th false, second, George, that Colum- SEC v. 426 F.3d timing were Cir.2005). disinclined to stem the Advisors was bia practices. In fur- timing market harmful allegations Based on the in the com- activi- deceptive of the Advisors’ therance we conclude that the has ade- plaint, ties, disseminated the mislead- defendants quately primary by stated a violation Co- and allowed the market ing prospectuses 15(c)(1), lumbia Distributor The section timing practices to continue. aiding and abetting by related violations should not against claims defendants Hussey.49 Tambone and Dis- Columbia been dismissed. have tributor, a broker-dealer under the Ex- Act,

change attempted induced or to in- 15(c) Exchange Act 3. Section duce the sale of various Columbia Funds misleading means of a statement that de Finally, alleges the SEC Further, prospectuses. fund it did so with primary and abetted a vio fendants aided scienter, level of requisite ascertained 15(c)(1) Exchange lation of Section through manage- the mental state of its 78o(c)(l), Act, § 15 U.S.C. Columbia PIMCO, ment, namely Tambone. See 15(c)(1) prohibits Distributor. Section 470; Hazen, F.Supp.2d supra, at inducing attempting from broker-dealer § (“[K]nowledge corporate of a offi- 12.8[4] any security by to induce the sale of means agent acting scope cer or within the deceptive, or other “manipulative, of a authority corpora- is attributable to the fraudulent device or contrivance.” (citing Mgmt, tion” In re Atlantic Fin. 78o(c)(l). § The relevant SEC U.S.C. (1st Cir.1986) (applying 31-34 15cl-2, 17 C.F.R. regulation, Rule principles apparent authority the se- 240.15el-2, “manipulative, defines de- context))). curities ceptive, or other fraudulent device or con- allegations need not rehash the con- We trivance” to include liability. stituting the other elements of any untrue statement of a material fact Hussey’s elaborat- Tambone’s and conduct fact omission to state material the remaining ed above satisfies elements necessary in order to make the state- compels our conclusion that the SEC made, light in the of the circum- ments under satisfied its burden Fed.R.Civ.P. made, stances under which are 12(b)(6) respect aiding to its and abet- misleading, which statement or omission 15(c)(1). ting under section claims knowledge or is made with reasonable that it is untrue or grounds believe VII.

misleading. prerogative to af- Reciting this сourt’s firm a court’s decision on inde- required prove elements a viola- district 15(c)(1) pendently ground present sufficient equivalent tion under section are record, Hussey individually raises two ad- required to those under Securities Act sec- 17(a), the court’s affirming the defendant ditional rationales for including Aaron, to dismiss the SEC’s vari- negligently. decision below acted See U.S. First, (Blackmun, J., Due 707-08, ous claims. he asserts that the 100 S.Ct. 1945 con- bars Process of the Constitution curring part dissenting part); Clause alleged adequately only The SEC has the SEC has to broker-dealers. 49. We assess whether violation under section stated Distributor was a broker-deal- that Columbia 15(c)(1) by Distributor rather than Columbia early through August 2003. er from applies Columbia Advisors because the statute eign capacity. though he and other This is so the SEC’s claim because even given were position disgorgement remedy securities actors his seeks as a SEC ....”) regarding prohibited curiam); insufficient notice (per the violation SEC v. Second, he alleged (9th nature activities. Rind, of his 1486, 991 F.2d 1490-91 Cir. are argues that of the claims 1993) most SEC’s conclusion); (reaching see the same the SEC failed to time-barred because Therefore, also 28 U.S.C. those five-year statute of limita- comply with the are not barred. remedies period. Specifically, tions he asserts

many alleged misstatements penalties, On the issue issued as question involved gain equitable tolling, the benefit of Further, he claims that long ago as 1998. (1) SEC must establish there were knowledge had that mar- because SEC put insufficient facts it on in available timing occurring, ket were but practices fraud, quiry possibility notice of the act, it to receive the failed to is not entitled diligence it due in at exercised tolling benefit for its claims. equitable tempting to uncover the factual basis un Hussey’s Neither of claims have merit. derlying alleged fraudulent conduct at The Commission seeks with its action to point when those facts were available. provisions enforce of the securities laws Co., Maggio v. Gerard Freezer & Ice that have been in existence for over half a (1st Cir.1987). 123, Here, F.2d 127-28 century. inception, their it has been Since of the self-concealing50 because nature of using a unlawful to offer or sell a securities conduct, the defendants’ as well as their misleading false or statement. The Due report any alleged failure to pre re- Process Clause of the Constitution ferred arrangements investor to the inde way quires nothing more of notice. pendent Funds, trustees of the Columbia See, Colorado, e.g., Hill v. 530 U.S. the SEC did not become aware of the 732-33, 147 L.Ed.2d 597 S.Ct. activity September until 2003 when the (2000) (holding imper- that statute was not Columbia responded inquiry entities missibly the Due vague under Process Avien, from the Commission. v. See Cook person Clause because it provided Inc., (1st Cir.1978) (not 573 F.2d intelligence reasonable fair notice of what ing that the statute of limitations is tolled prohibited). is “plaintiff until the in the exercise of rea diligence sonable discovered оr should claim, Hussey’s Regarding second fraud,” have discovered the even if there limita applicable five-year statute of part are no “affirmative acts on the period Hussey applies only tions invokes defendants” to conceal SEC, their conduct from penalties sought by the not its re Power, party); the other v. SEC quest injunctive disgorge or the relief (S.D.N.Y.2007). See, F.Supp.2d 425-26 Al ill-gotten gains. e.g., ment of SEC v. though Hussey rightly points out that mar Corporate Group, Consulting Diversified (11th Cir.2004) timing ket widespread activities were (“When throughout industry prior the SEC sues to enforce the secu laws, vindicating rities it therefore the was on public rights notice of such interests, conduct, and furthering public and there the basis of the Commission’s acting fore is in the United States’s sover- claims is not the market timing activities self-concealing legedly occurring 50. The acts were because a the Columbia in several of funds, light prospec- reasonable investor not have would been of the text of the fund timing represented aware that market activities were al- tuses that otherwise. se, legal duty accuracy rather the fraud committed to confirm the and per but completeness prospectuses them about of the fund by misleading upon investors they used in the sale of mutual activities the Co- fund’s presence of such duty, securities. As result of this Tam- complaint, As stated in its lumbia Funds. Hussey implied bone and made statements prior received no information the SEC potential they investors had a rea- any po- it to 2003 that alerted September sonable basis to believe that the state- duty triggered tential fraud or that prospectuses ments in the regarding mar- or the inquire whether the defendants Co- timing practices ket were accurate and engaged in such activ- lumbia entities were complete. Because certain statements ity. Lepone, v. Young See the prospectuses regarding timing market Cir.2002) (1st (discussing “storm warn- false, allegedly were defendants’ implied ings” triggered plaintiffs that would have implied statements were also false. These act). Thus, duty to we conclude purview statements fall within the of sec- a claim that the allegations support here 10(b) 10b-5(b). tion Rule and five-year period of limitations was statute September until 2003 when the SEC tolled 4. The district court requiring erred rightly inquired and learned of the defen- allege SEC to actionable statements dants’ activities. publicly attributed to Tambone and Hus- sey as a distinct element of its claims of

VIII. 17(a), primary liability under section sec- 10(b), We summarize our conclusions: tion and Rule 10b-5. 17(a)(2)

1. covers conduct that Section 5. The SEC’s claims that Tambone and 10(b) may prohibited by Hussey not be section primary committed violations of 10b-5(b). 17(a)(2) Act, Specifically, primary Rule liabil- Section of the Securities Sec- 17(a)(2) Act, ity may Exchange attach under section if the and Rule 10b-5(b), pled particu- defendant has “in the offer or sale of were sufficient satisfy larity requirements ... of Fed. money ... obtained] securities 9(b). R.Civ.P. any untrue of a mаte- means of statement fact,” if rial even he has not himself made 6. The also stated claims of sec- meaning the untrue statement within the ondary liability complaint against in its 10b-5(b). of Rule defendants Tambone and under 15(c) Exchange Sections Hussey, executives of Tambone 206(1) Act, 10b-5, and Sections underwriter, primary a mutual fund’s were 206(2) Act, of the Advisers and stated such primarily responsible distributing fund particularity claims with sufficient to satis- prospectuses potential investors and 9(b). fy requirements of Fed.R.Civ.P. other broker-dealers. To make their sales, they they used which court is judgment district knew, knowing, reversed; or were reckless in not the case is remanded to the dis- representations proceedings contained about market consis- trict court for further timing practices allegedly opinion. which were tent with this so, doing money false. In “obtain[ed] ordered. So property by means of untrue state- an[ ] fact,” SELYA, Judge (concurring ment of material violation [] Circuit 17(a)(2). part). part dissenting months, Hussey, industry the securities 3. Tambone and executives of recent underwriter, by a combi- a mutual had has been wracked treacherous fund’s 150 forces, overly through rulemaking. The optimistic of the statute

nation of market judgment. obliged. in The has lapses SEC risk-taking, and perfect add to this majority proposes to providing The rule clarification in this judicial enlargement scope of the by storm 10b-5(b). provision That instance is liability for violations of the of “any person” “directly or prohibits from of the securities laws. provisions antifraud indirectly any ... makfing] untrue state- path- that this I have come to conclude omit[ting] of a material fact or ... ment guise taken in the of breaking step, though a material fact.” 17 C.F.R. state 10b-5, interpretation an of Rule involves 240.10b-5(b). My disagreement § re- rewriting of that rule. nothing less than a proper interpretation volves around the concept bargain, In the it stretches 10b-5(b) the first element of a Rule viola- I primary liability beyond what believe the tion: a made material misstatement and al- Supreme Court would countenance defendant. any net than lows the SEC to cast wider view, my In the verb choice is critical to possible. thought court has ever understanding of the Yet rule. departure I as an un- view this radical majority casually carefully conflates this legislative and ad- usurpation warranted (“make”) very verb with a chosen different Thus, authority. respectful- ministrative I (“use”) impose primary verb in order to majority ly dissent from Part V of the liability on defendants who have not time, I opinion. agree At the same with but, rather, “made” misstatements are majority’s holding has alleged to have used cognizable stated a claim under section contain misstatements crafted others. 17(a)(2) Act of I of the Securities See ante 131-32. The word “make” is am nonetheless concerned that the lan- infinitely elastic—and I do not think majority couches guage which this that it can or interpreted either should be Thus, I holding overly broad. concur in expansively. so To make а bad situation join- judgment as to that issue without worse, majority’s confusion these majority opinion. ing Part IV of the two distinct verbs flies in the teeth of the Supreme circumspect pri- Court’s vision of My text exegesis begins with the mary liability respect to the antifraud relevant statute and rule. See Cent. Bank provisions of the securities laws. Let me Denver v. First Interstate Bank Den- briefly background sketch the and then ver, 164, 173, 114 511 U.S. S.Ct. explain the basis for these two conclusions. (1994). L.Ed.2d 119 Section action, Exchange Act of it unlawful 1934 renders this civil enforcement the SEC person “directly indirectly for a ... [t]o accuses the defendants of sins of commis- sion, omission; pur- is, use or with the employ, connection not sins of of mak- any security ing chase or sale of ... ma- untrue statements of material fact. then, nipulative deceptive present purposes, device or contri- For pivotal vance contravention of such rules and word in the rule is “make.” Rule 10b-5 word, regulations may prescribe.” as the does not define that and the [SEC] Su- 78j(b). “in preme directly U.S.C. contravention Court has not addressed its Thus, of such rules” clarification language meaning setting.51 invites it seems majority correctly acknowledges 51. The tenant. Ante at 131-32. It then turns this sweep language Rule 10b-5 cannot be read to more axiom inside out and uses the broad broadly appur- obviously than the statute to which it is of the statute to define the narrower logical dictionary consult order to as a primary liable violator. See In re: See, glean the essence of the word. e.g., Commc’ns, Inc., Charter Litig., Sec. States, 37, 42, (8th Perrin v. United 444 U.S. Cir.2006), F.3d sub nom. aff'd (1979). S.Ct. L.Ed.2d 199 Partners, Stoneridge Inv. LLC v. Scienti —Inc., fic-Atlanta, U.S.-, 128 S.Ct. To “make” “act” means to or “cause to 761, 169 (2008). L.Ed.2d 627 occur, exist, or appear,” or “create [or] cause.” Third Webster’s New Internation- Central Bank is of importance central (1993). al Dictionary 1363 The SEC arriving at this conclusion. majority The charges defendants, substance, these downplay labors to significance of Cen- brokers, passing along dealers, with tral by Bank remarking obvious: customers containing false the Court did not the specific address is- statements of material fact created oth- sue with which we are faced. See ante at ers.52 To stretch the word “make” to cov- 136-37. But even though Central Bank’s conduct, er that so that an underwriter’s holding explicitly here, does not control its status as such him per renders se liable for teachings cannot blithely be so dismissed. statements, others’ requires a freewheel- While the decision open there left the pre- ing interpretation that disregards both cise primary boundaries of liability, it re- plain meaning and orthodox definitions. mains the beacon which courts must justification There is no principled for such navigating steer in interpretive chan- an interpretation; analysis, last it that run through nels provi- antifraud amounts to a thinly-disguised attempt sions the securities laws. rewrite the rule. That a step forbidden judges. to us as See Robinson v. Shell Oil Bank, In Central Supreme Court Co., 337, 340, 519 U.S. 136 laid out apрroach its interpreting sec- (1997); L.Ed.2d 808 United States v. 10(b) in private securities actions. Co., Charles George Trucking 823 F.2d 167-90, at U.S. 114 S.Ct. 1439. The (1st Cir.1987). 685, 688 emphasized Court that a interpre- correct major- There is a further problem. The tation must center on the language of the ity’s freewheeling approach blurs the line statute itself. Id. 114 S.Ct. 1439. that the Supreme Court pains has taken to It admonished that expansive readings of draw between secondary lia- statutes, such judicially based on manufac- bility respect provi- to the antifraud rationales, policy tured should be avoided. sions of the securities laws. As Rule 10b- 188-89, Id. at (stating S.Ct. 1439 5(b) itself suggests, line should be “[pjolicy considerations cannot override kept sharp person and clear: a who does interpretation our of the text and structure actually make or affirmatively cause to Act”). be made a materially false may statement (for be held hable a secondary That prescription comprises violator the gold aiding abetting), but he cannot be held standard for courts embroiled in securities language of the rule. Ante at ing prospectuses, 131-32. I do the SEC has focused its sleight not find either primary liability arguments of hand or the under it, majority’s attempt explain 10b-5(b) circular ante and Rule on the defendants’ 34, persuasive. at 132 n. prospectuses. use of the In accordance with praxis, argu- our usual I deem abandoned Although complaint the SEC's developed ap- contains ments that have not been on Zannino, vague some allusions that peal. Tambone and Hus- United States v. sey may (1st Cir.1990). participated somehow have in draft- law, they must themselves the antifraud read, the Fairly Court’s litigation. fraud ju- misleading state- make false superimposing against counsels opinion ...”). unsympathetic majority opinion in this on The ment. policy preferences dicial majori- or rule. in a statute these language effectively relegates sensible case counsel. that wise disregards ty opinion it does scrap heap to the precedents —and support in the any meaningful so without in another informative Bank is Central law.53 case specifically The Court well. respect as main- cannot plaintiff private that a held plain-mean- for a support further I find abetting un- aiding tain an action 10b-5(b) in a ing interpretation Id. at Rule 10b-5. der section with that of section of its text comparison result, line a the 191, 114 S.Ct. 1439. As 17(a) It is Act of 1933. of the Securities secondary violators and between de- Rule 10b-5 was ground common that significant highly has become violators 17(a). light and of section vised after in line has That in securities. those who deal 283, Persky, 520 F.2d States v. See United here. ready application Cir.1975). (2d the part, For the most 287 to reinvent this need for is no me There counterpart mirror the provisions rule’s wheel, for Second Circuit the particular 17(a). in section contained provisions “if exactly right: Central it gotten has 240.10b-5(a) (“to § Compare 17 C.F.R. a any meaning, defen have real is to Bank device”), § id. 240.10b- any employ mis a false or actually make must dant 5(c) (“to act”), 15 any engage held liable in order to be leading statement (“to employ § de- 77q(a)(l) U.S.C. 10(b). short of Anything under Section (“to vice”), engage in 77q(a)(3) § id. aiding and abet merely conduct is such transaction”). a dif- There is notable that matter how substantial ting, and no however, language, between ference be, trigger enough may it is aid 10b-5(b) counterpart provi- Rule its 10(b).” v. Wright Section liability under 17(a)(2). sion, former the The uses section (2d LLP, 169, F.3d 175 Young 152 Ernst & 240.10b-5(b), “make,” § 17 word C.F.R. Cantor, Cir.1998) v. Shapiro (quoting “by phrase the latter the means while uses (2d Cir.1997)); Anix accord F.3d of,” It 77q(a)(2). § would be 15 U.S.C. Co., 77 F.3d ter Home-Stake Prod. v. striking foolhardy gloss over this diver- Cir.1996) (10th (“Reading the lan 1226-27 hap- linguistic as mere gence or to view it the through and 10b-5 guage represents purposeful It Denver, penstance. we con Bank lens of Central and, such, it be must language choice of to ‘use for [defendants] order clude Ah- States v. given under effect.54 See United ‘deception’ actionable employ’ 10b-5(b) cases, sure, scope is "more of Rule restric- cited somewhat earlier 53. To be 17(a)(2). SEC, Id. at 127. cate- tive” than that of section disingenuously by take a less Indus., See, rely majority e.g., I how can gorical fail understand view. Chris-Craft Corp., adjudicating the Piper 480 F.2d distinction dismiss- on this v. Inc. Aircraft claim, 17(a)(2) (2d Cir.1973). preceded gloss over But these cases al the section but in Central adjudicating decision of the Rule Supreme Court’s seminal it in the dismissal thus, and, vitality. continuing 10b-5(b) majority's cursory have no at- Bank claim. inconsistency, tempt explain ante at this 30, simply hold water. Indeed, 128 n. does not Once majority the rela- notes both "im- is construed to mean the word "make” linguistic differences be- tionship and the "use,” 10b-5(b) through any principled plied making” 17(a)(2) tween section "by "make” means 17(a)(2) liability. ante distinction between discussing See There, irretrievably lost. majority of” concedes at 127-28. (1st Cir.2002) (dis levs, F.3d 59-60 tirety.55 SEC enforcement actions have no cussing obligation “presume court’s requirement reliance because are draftsmanship ... differential deliber was meant to protect public generally. See ate”); Nalley Nalley, v. 53 F.3d SEC, v. Schellenbach cf. Cir.1995) (4th (“When wording (7th Cir.1993). That fact does not give the an amended statute differs in substance SEC carte punish blanche to pri- under a wording from the prior statute to mary liability framework those whose con- amendment, only we can conclude that duct proscribed is not by the language of Congress intended the amended statute to the relevant statute or rule. Nor does meaning.”). have a different Doing so absence of a requirement reliance give a bars court from reading open- “make” so court a expand reason to scope endedly and, meaning as to distort its in primary liability for violators of the anti- swoop, the same fell obscure the obvious fraud provisions of the securities laws. distinction “by between “make” and means The majority concludes “making” majority’s ignores of.” The rendition can be “implied.” Ante at 135. This is distinction. exactly judicial the sort of adventurism apparent effort to blunt the force against which the Central Bank Court reasoning, majority places this the warned. I fully agree While that under- weight on the fact that this an is SEC duty writer-executives owe a to their enforcement action rather a private than clients and to purchase those who securi- securities fraud suit. See at 130. I ante ties, a duty, more, breach of that without agree with majority’s the conclusion that does not expose those executives to what- the to absence need show reliance ever the liability SEC to decides impose. in an SEC enforcement action means that attempt SEC’s in this employ case to the is required SEC not to demonstrate 10b-5(b) Rule punish such a breach public attribution. Wolfson, See SEC v. impermissibly equates passive a omis- 1249, 1260(10th Cir.2008) (declin failing correct a false statement sion— ing impose public a require attribution made another —with the affirmative an ment in “given enforcement action misconduct that language the of the rule unambiguous connection reli between targets.56 attribution, ance and and the fact reliance”). SEC need not If prove But more I for were needed—and doubt present purposes, thin it gruel: precedents this is is—-the are telling. Although absence of prove need to reliance does this case one of impression, is first not allow court Central dismantle courts appeals aftermath of Cen- Bank’s interpretive prescription in its en- tral Bank generally have chosen one of respect, In this it is instructive to note that could have done the same in the Rule 10b-5 55. context, began after Central Bank courts to strike it has not done so. but aiding abetting down claims under Rule 10b-5 "[i]t because was difficult to under- suggest I persons do mean to not 56. bring aiding stand how the SEC could positions the defendants' could be never abetting private claim under Rule if a 10b-5 primarily found liable for a section litigant Selig- [could] not.” Louis Loss & Joel violation. As the 10b-5 Central Bank man, Regulation Fundamentals Securities Court recognized, 511 U.S. at (2004). Congress later enacted differ- such a scenario is conceivable. But the case, ent provision bring aiding true, to allow the allegations SEC to in this even if do not abetting align actions. See id. requirements at 1329 n. 37 with primary liabil- 20(f)). (citing Congress easily ity- Sec. Ex. Act majority, see ante by the tests, limned two Petitioner, Appellant, DUTIL, David M. line drawing V.B.2, an aid Part liability. secondary between v. at 173-76 Wright, F.3d e.g., Compare, MURPHY, Respondent, Robert with, test), e.g., attribution (elucidating Appellee. Inc., 228 F.3d Sys., Everex Howard v. Cir.2000) (9th (elucidating No. 06-2292. n. 5 test). agree I participation substantial Appeals, Court of States United this case does majority that First Circuit. be- to choose occasion a suitable present concern, My competing tests. these 2008.

tween Heard Oct. “implied however, majority’s Dec. Decided captures a liability theory of making” than either conduct range of much broader existing tests. longilo- to wax for me is no need

There occasions of those

quent. This is one of a rule and structure language

when Court Supreme teachings

and the In- result. particular signal

coalesce majority heeding signal,

stead achieve a 10b-5 to rewrite Rule

prefers to rewriting beyond That result.

different authority. More- legitimate

the court’s result, fear, I has the

over, majority’s mischief. great deal of to cause

potential least, opinion will majority very

At the in an and cause confusion

garble the law

industry clarity. much in need of complaint fails the SEC’s

Because 10b-5(b) upon under Rule a claim

state these granted against can be

which relief

defendants, the district I would affirm ‍‌‌‌‌​​‌‌​‌​‌‌​‌​​​‌‌​​‌​‌​‌​‌‌​​‌‌​​​‌​​‌‌‌‌‌‌​​‍that count. To dismissal of

court’s the con- majority holds to that the

extent dissent.

trary, respectfully I

Case Details

Case Name: Securities & Exchange Commission v. Tambone

Court Name: Court of Appeals for the First Circuit

Date Published: Dec 3, 2008

Citation: 550 F.3d 106

Docket Number: 07-1384

Court Abbreviation: 1st Cir.