Lead Opinion
OPINION EN BANC
Rule 10b — 5(b), promulgated by the Securities and Exchange Commission (SEC) under the aegis of section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), renders it unlawful “[t]o make any untrue statement of a material fact ... in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(b). The issue before us is one of first impression. It turns on the meaning of the word “make” as used in Rule 10b-5(b). The SEC advocates an expansive definition, contending that one may “make” a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly “make” a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.
We reject the SEC’s expansive interpretation. It is inconsistent with the text of the rule and with the ordinary meanings of the phrase “to make a statement,” inconsistent with the structure of the rule and relevant statutes, and in considerable tension with Supreme Court precedent. Consequently, we affirm the district court’s dismissal of the SEC’s Rule 10b-5(b) claim.
I. BACKGROUND
Because this appeal follows the district court’s granting of a motion to dismiss, we rehearse the facts as well-pleaded in the SEC’s complaint. See Centro Medico del Turabo, Inc. v. Feliciano de Melecio,
At all times material hereto (roughly, 1998-2003), the defendants, James Tam-bone and Robert Hussey, were senior executives of a registered broker-dealer, Columbia Funds Distributor, Inc. (Columbia Distributor), or its predecessor in interest. Columbia Distributor underwrites and markets mutual funds. The SEC alleges that the defendants violated sundry provisions of both the Securities Act of 1933 (Securities Act) and the Exchange Act. Its complaint depicts a tangled web of interlocking entities. We briefly trace the fibers within that web.
Columbia Distributor acted as the principal underwriter and distributor of over 140 mutual funds in the Columbia mutual fund complex (the Columbia Funds). The Columbia Funds included several funds that had been owned by Liberty prior to the take-over by Fleet. In its wonted role, Columbia Distributor sold shares in the Columbia Funds and disseminated their prospectuses to investors.
Direct responsibility for the representations contained in the prospectuses rested with the funds’ sponsor, Columbia Management Advisors, Inc., and its predecessors in interest (collectively, Columbia Advisors). Like Columbia Distributor, Columbia Advisors was a wholly-owned subsidiary of Columbia Management and, thus, an indirect subsidiary of Fleet for much of the relevant period.
The defendants held positions of trust and responsibility in this corporate pyramid. Tambone served as co-president of Columbia Distributor from 2001 to 2004. Prior thereto, he held the same post with Liberty Distributor. Hussey served as managing director (national accounts) of Columbia Distributor from 2002 until 2004. Before that, he occupied a comparable position with Liberty Distributor. The SEC does not allege that either defendant worked for the Columbia Funds’ sponsor, Columbia Advisors, during the relevant time frame.
The short-term trading practice that lies at the epicenter of this case is known in the trade as “market timing.” Market timing is the practice of frequent buying and selling of shares of a single mutual fund in order to exploit inefficiencies in mutual fund pricing. According to the SEC, market timing, though not illegal per se, can harm other fund investors and, therefore, is commonly barred (or at least restricted) by those in charge of mutual funds.
The Columbia Funds’ prospectuses contained representations touching upon the subject of market timing. Starting at least as early as 1998, language was inserted into many Columbia Funds’ prospectuses restricting the number and frequency of round-trips exchanges from one fund to another and back again) in which an investor could indulge. Emblematic of this prophylaxis was language, first appearing in May of 1999, inserted in prospectuses for funds belonging to the Acorn Fund Group, a constituent of the Columbia Funds. That language stated that the funds within the group “do not permit market-timing and have adopted policies to discourage this practice.”
This effort to curb market timing escalated over time. In 2000, Hussey co-chaired an internet working group formed to create procedures designed to detect and deter market timing in the Columbia Funds. The working group ultimately recommended that each of the member funds take a consistent position against market timing in future prospectuses. As a result, a number of funds began to include a “strict prohibition” in every prospectus, expressly barring short-term or excessive trading. By 2003, the strict prohibition language, or a variant of it, appeared in all the Columbia Funds’ prospectuses.
The SEC alleges that, despite the language in the prospectuses expressing hostility toward market timing' — the existence
II. TRAVEL OF THE CASE
On May 19, 2006, the SEC filed a civil complaint in the United States District Court for the District of Massachusetts.
In due season, each defendant moved to dismiss. The SEC opposed the motions. As the parties’ arguments with respect to liability under Rule 10b-5(b) are central to this appeal, we summarize them succinctly.
The defendants premised their challenge on the thesis that the SEC had failed properly to plead any actionable misstatements on their part. In opposition, the SEC countered that the complaint sufficiently alleged that the defendants had made material misrepresentations regarding market timing in the Columbia Funds’ prospectuses. Specifically, the SEC argued that the defendants “made” false statements of material facts within the meaning of Rule 10b — 5(b) by (i) participating in the drafting process that went into the development of the market timing language,
The district court granted the motions to dismiss. SEC v. Tambone (Tambone I),
The SEC appealed from the granting of the motions to dismiss with respect to its section 17(a)(2), Rule 10b — 5(b), and aiding and abetting claims.
With respect to Rule 10b-5(b), the SEC briefed two arguments as to how the defendants “made” the alleged misrepresentations. First, the SEC argued that the defendants “made” the misrepresentations by using the prospectuses to sell the mutual funds. Second, the SEC argued that the defendants impliedly made false representations to investors to the effect that they had a reasonable basis for believing that the key representations in the prospectuses were truthful and complete. This implied statement theory rested on the premise that a securities professional engaged in the offering of securities has a “special duty” to undertake an investigation that would provide him with a reasonable basis for believing that the representations in the prospectus are truthful and complete. Therefore, the theory goes, a securities professional “makes” an implied representation to investors that the prospectus is truthful and complete when he engages in an offering.
What the SEC chose not to argue is also noteworthy. The SEC did not allude to its argument, which at one point had been raised below, that the defendants made the alleged misstatements through their involvement with the preparation of the prospectuses. Similarly, although the SEC had pleaded violations of subparagraphs (a) and (c) of Rule 10b-5, it did not pursue those claims on appeal. In accordance with our usual praxis, we deem abandoned all arguments that have not been briefed and developed on appeal. See United States v. Zannino,
A divided panel of this court reversed the dismissal of the SEC’s section 17(a)(2), Rule 10b—5(b), and aiding and abetting claims. SEC v. Tambone (Tambone II),
The defendants filed petitions for en banc review, Fed. R.App. P. 35, challenging all of the panel’s holdings. The full court withdrew the panel opinion but ordered rehearing en banc only on the Rule 10b-5(b) issues. SEC v. Tambone,
III. STANDARD OF REVIEW
We review de novo a district court’s disposition of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Centro Medico del Turabo,
As a general proposition, a complaint must contain no more than “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R.Civ.P. 8(a)(2). But even though a complaint need not plead “detailed factual allegations,” Bell Atl. Corp. v. Twombly,
Because the complaint in this case contains allegations of fraud, an additional hurdle must be surmounted: the pleader (here, the SEC) must “state with particularity the circumstances constituting [the] fraud.” Fed.R.Civ.P. 9(b). To satisfy this particularity requirement, the pleader must set out the “time, place, and content of the alleged misrepresentation with specificity.” Greebel v. FTP Software, Inc.,
IV. ANALYSIS
This case presents the two-part question of whether a securities professional can be said to “make” a statement, such that liability under Rule 10b-5(b) may attach, either by (i) using statements to sell securities, regardless of whether those statements were crafted entirely by others, or (ii) directing the offering and sale of securities on behalf of an underwriter, thus making an implied statement that he has a reasonable basis to believe that the key representations in the relevant prospectus are truthful and complete. The answer to each part of this two-part question is “no.”
We think it appropriate to commence our analysis with the text of the relevant statute and rule. See Cent. Bank of Denver v. First Interstate Bank of Denver,
In conducting this inquiry, the pivotal word in the rule’s text is “make,” as in “to make a statement.” The rule itself does not define that word, nor does it suggest that the word is imbued with any exotic meaning. In the absence of either a built-in definition or some reliable indicium that the drafters intended a special nuance, accepted canons of construction teach that the word should be given its ordinary meaning. See Smith v. United States,
One reference point for determining the ordinary meaning of a word is its accepted dictionary definition. See, e.g., Smith,
This case does not require us to set forth a comprehensive test for determining when a speaker may be said to have made a statement. It is enough to say that the SEC’s purported reading of the word is inconsistent with each of these definitions. In any event, the question does not turn on dictionary meanings alone. We also look to the structure of section 10(b) and Rule 10b-5, as well as other, related provisions, to interpret the term at issue. Chief among these structural considerations is the relationship between section 10(b) and Rule 10b-5(b). Section 10(b) grants the SEC broad authority to proscribe conduct that “use[s] or employ[s]” any “manipulative or deceptive device or contrivance,” in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b).
In Rule 10b-5(b), the SEC prohibited a specific subset of all “manipulative or deceptive device[s] or contrivance[s],” namely, untrue or misleading statements of material fact. It likewise prohibited a specific subset of all conduct that might be said to “use or employ” such a manipulative device or contrivance: the making of untrue or misleading statements of material fact.
In light of this deliberate word choice (“make”), the SEC’s asseveration that one can “make” a statement when he merely uses a statement created entirely by others cannot follow. That asseveration ignores the obvious distinction between the verbs contained in the statute (“use,” “employ”) and the significantly different (and narrower) verb contained in Rule 10b-5(b) (“make”). Word choices have consequences, and this word choice virtually leaps off the page. There is no principled way that we can treat it as meaningless.
Section 10(b) is helpful to our analysis in another way as well. That provision conferred upon the SEC authority to prohibit the “use or employ[ment]” of any manipulative device or contrivance in connection with the purchase or sale of any security. The SEC knew how to wield this authority and proscribe “use or employ[ment]” of a manipulative device or contrivance: in Rule 10b-5(a), it did just that, rendering it unlawful “to employ” a device, scheme, or artifice to defraud. See 17 C.F.R. § 240.10b-5(a). That the SEC wrote this prohibition in a different sub-paragraph of the rule and selected a more inclusive verb is a telling combination. The Supreme Court remarked on this phenomenon in Affiliated Ute v. United States,
[T]he second subparagraph of the rule specifies the making of an untrue statement of a material fact and the omission to state a material fact. The first and third subparagraphs are not so restricted.
In an effort to blunt the force of this reasoning, the SEC suggests that the broad language of the statute (“use or employ”) requires an equally broad construction of the wording contained in Rule 10b-5(b). To support this suggestion, it touts the Supreme Court’s statement that “[t]he scope of Rule 10b-5 is coextensive with the coverage of § 10(b).” SEC v. Zandford,
This argument comprises more cry than wool. Most notably, it fails to account for an abecedarian point: even if Rule 10b-5 is coextensive with the coverage of section 10(b), that supposed verity does not mean that each of the subparagraphs of Rule 10b-5, taken singly, is itself coextensive with the coverage of section 10(b). That cannot be so. If it was, then each subparagraph would proscribe exactly the same conduct. They do not. See, e.g., Finkel v. Docutel/Olivetti Corp.,
Our view of the meaning of Rule 10b-5(b) is reinforced when we contrast the language of the rule with that of section 17(a) of the Securities Act. By way of background, the phrasing of Rule 10b-5 largely mirrors the language of section 17(a) of the Securities Act.
In short, the drafters of Rule 10b-5 had before them language that would have covered the “use” of an untrue statement of material fact (regardless of who created or composed the statement). The drafters easily could have copied that language. They declined to do so. Instead, the drafters — who faithfully tracked section 17(a) in other respects — deliberately eschewed the expansive language of section 17(a)(2).
The import of this eschewal is clear: although section 17(a)(2) may fairly be read to cover the “use” of an untrue statement to obtain money or property, see, e.g., Edward J. Mawod & Co. v. SEC,
The SEC’s other arguments for defining “make” to encompass “use” with respect to Rule 10b-5(b) liability are unavailing. One of the SEC’s main arguments appears to be that “[i]t seems self-evident that any statute or rule that prohibits making a false statement in connection with the sale of property would cover a seller who knowingly uses misleading sales materials.” This type of abstract, decontextualized approach to the interpretation of a statute or regulation is ill-suited to the construction of a rule laden with over sixty years of interpretation in literally hundreds of opinions. This is especially so because the rule in question is an integral part of an extensive regulatory framework forged by Congress, the SEC, and the federal courts.
At any rate, what the SEC now calls “self-evident” is not self-evident at all. What does seem self-evident is that if the SEC intended to prohibit more than just the actual making of a false statement in Rule 10b-5(b), then it would not have employed the solitary verb “make” in the text of the rule.
There is another reason to reject the SEC’s interpretation; it is in tension with Supreme Court precedent. Under modern Supreme Court precedent dealing with Rule 10b-5, much turns on the distinction between primary and secondary violators. See Cent. Bank,
The Exchange Act does not explicitly confer a private right of action for section 10(b) violations. The Supreme Court nevertheless has found a private right of action to be implicit in the statute and the implementing rule (Rule 10b-5). Sup’t of Ins. of N.Y. v. Bankers Life & Cas. Co.,
In the wake of Central Bank, Congress amended section 20 of the Exchange Act to clarify that the SEC may bring suit against aiders and abetters, that is, persons who knowingly provide substantial assistance to primary violators of the secu
The SEC’s position poses a threat to the integrity of this dichotomy. Refined to bare essence, the SEC, through the instrumentality of Rule 10b — 5(b), seeks to impose primary liability on the defendants for conduct that constitutes, at most, aiding and abetting (a secondary violation). Allowing the SEC to blur the line between primary and secondary violations in this manner would be unfaithful to the taxonomy of Central Bank.
Of course, the Central Bank Court did not purpose to decide the precise issue before us. Withal, the Court’s methodology for determining the scope of the private right of action (and, thus, the scope of primary liability) is a beacon by which we must steer. That methodology emphasizes fidelity to the text of section 10(b) and Rule 10b-5. See Cent. Bank,
There is more. Reading “make” to include the use of a false statement by one other than the maker would extend primary liability beyond the scope of conduct prohibited by the text of Rule 10b-5(b). See id. Furthermore, doing so would “add a gloss to the operative language of the [rule] quite different from its commonly accepted meaning.” Id. at 174,
As an aside, blurring the line between primary and secondary violations also would create unacceptable tension with the substantial body of ease law that has evolved post -Central Bank — case law that maps the outer boundaries of primary liability under Rule 10b-5. This case law, though not directly on point, does not fit comfortably with the view that the SEC espouses here. Let us explain.
While these tests are designed for private litigation, and, thus, are poorly suited to public enforcement actions,
There is yet another problem with the SEC’s implied statement theory: that theory effectively imposes upon securities professionals who work for underwriters an unprecedented duty. We elaborate on this mischief below.
The SEC notes, correctly, that securities professionals working for underwriters have a duty to investigate the nature and circumstances of an offering. See, e.g., SEC v. Dain Rauscher, Inc.,
The key precedent is Chiarella v. United States,
The SEC labors to depict its implied statement theory as firmly rooted in both case law and longstanding administrative interpretation. This depiction is inaccurate.
As to case law, the SEC relies principally on three decisions. See Dolphin & Bradbury, Inc. v. SEC,
That assertion is incorrect. To begin, neither Dolphin nor Sanders holds that an underwriter may be found liable as a primary violator under Rule 10b-5(b) for “making” an implied representation that proves to be false. Those cases did not present any issue as to whether the underwriter had “made” a statement. In fact, in both cases the underwriter personally made the misrepresentations. See Dolphin,
Chris-Craft also fails to breathe life into the SEC’s argument. The case holds that an underwriter’s constructive representation that the statements made in registration materials are truthful and complete constitutes the making of a statement under section 14(e) of the Exchange Act.
In all events, nothing turned on the distinction between primary and secondary violations at that time, so the Chris-Craft panel had no reason to distinguish between them. In retrospect, it is reasonable to read Chris-Craft as holding that the underwriters were liable only as secondary violators. See In re MTC Elec. Techs. S’holder Litig.,
We turn next to the array of administrative pronouncements. We freely accept the principle that the existence of a longstanding pattern of administrative interpretation might well call for Chevron deference. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
The SEC has cobbled together a bricolage of agency decisions and statements all of which antedate Central Bank. Without exception, nothing in this carefully culled collection says that an implied representation of an underwriter can constitute a basis for primary liability under Rule 10b-5(b). The fact that the SEC has never before articulated the implied statement theory as a basis for Rule 10b~5(b) liability dooms its quest for Chevron deference. After all, there is no occasion for Chevron deference when there is nothing to which a court may defer.
Before leaving this topic, we wish to comment briefly on the dissent’s metronomic reliance on the special role and duties of underwriters. We agree that underwriters have a special niche in the marketing of securities and, thus, have a special set of responsibilities. But the duty that the dissent seeks to impose is unprecedented — and far exceeds the scope of Rule 10b-5(b). While that rule could have been drafted to cut a wider swath, it was not. The SEC has other, more appropriate tools that it may use to police the parade of horribilis that the dissent envisions, and it is neither necessary nor wise to attempt to expand the rule by judicial fiat. Most importantly, doing so would, as a matter of law, be wrong.
There is one loose end, which relates to waiver. The SEC argues to the en banc court that the defendants can be held primarily liable for violating Rule 10b-5(b) under an entanglement test. See, e.g., In re Cabletron Sys., Inc.,
This argument has not been preserved and, thus, need not concern us. The SEC did not advance it before the district court in connection with the dispositive motions to dismiss. To make a bad situation worse, the SEC did not coherently present this argument before the panel during the first stage of this appeal. To the con
A party cannot switch horses midstream, changing its theory of liability at a later stage of the litigation in hopes of securing a swifter steed. So it is here: because the SEC unfurled its “entanglement” argument for the first time in the en banc proceedings, we have no occasion to address that argument. See United States v. Slade,
This is not the only waiver that has transpired. The SEC unveiled for the first time in its reply brief regarding rehearing en banc a contention that its implied statement theory of Rule 10b-5(b) liability could be upheld under the so-called shingle theory. See, e.g., Duker & Duker, 6 S.E.C. 386, 388-89,
y. CONCLUSION
We need go no further. This is one of those happy occasions when the language and structure of a rule, the statutory framework that it implements, and the teachings of the Supreme Court coalesce to provide a well-lit decisional path. Following that path, we affirm the district court’s dismissal of the SEC’s Rule 10b-5(b) claim. Because en banc review is limited to this claim, we reinstate those portions of the vacated panel judgment that reversed the dismissal of the SEC’s section 17(a)(2) and aiding and abetting claims. To that end, we also reinstate those portions of the withdrawn panel opinion, and concurrence thereto, addressing those claims (which, when reinstated, will have the force ordinarily associated with panel opinions). We remand the case to the district court for further proceedings on the SEC’s section 17(a)(2) and aiding and abetting claims consistent, of course, with this en banc opinion.
So Ordered.
Notes
. An earlier action, filed in February of 2005, was dismissed without prejudice for failure to plead fraud with particularity. That action is of no moment here.
. This contention was based on the SEC's allegations that the defendants reviewed and commented on the market timing statements before those statements were included in the prospectuses. We do not quote these allegations at length, as the SEC has not pursued this line of argument on appeal.
.In addition, the SEC argued that Tambone had made material misrepresentations by signing selling agreements in which he vouched for the accuracy of the statements in the prospectuses. Because the SEC has not pursued this argument on appeal, we disregard it. See United States v. Zannino,
. The panel parted ways only with respect to the Rule 10b-5(b) claims. See Tambone II,
. That section provides in pertinent part:
It shall be unlawful for any person ..., directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3)to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a).
. The SEC has in fact brought a separate section 17(a)(2) claim against the defendants
. The SEC also endeavors to prop up its "use” theory of Rule 10b — 5(b) liability by referring to a venerable Fourth Circuit case deciding, for venue purposes, whether a defendant violated a federal mortgage fraud statute in West Virginia or in Pennsylvania. See Reass v. United States,
The only reason the opinion has even an epsilon’s worth of relevance to the issue at hand is that the challenged statute rendered it unlawful to "make[] any statement, knowing it to be false, for the purpose of influencing in any way the action of a Federal Home Loan Bank upon any application for loan.” Id. at 752. But the Reass court did not presume to act as a legal lexicographer, chiseling in stone a definition of "make” for all time and for every purpose. The result in Reass proceeds from the simple proposition that the statute could not be violated until the defendant presented the misstatements to the bank "upon ... application for a loan.” Id. at 755.
. Although the Central Bank Court focused its inquiry on section 10(b), its methodology is equally applicable to Rule 10b-5. The rule is incorporated into the statutory framework and, thus, its scope "is coextensive with the coverage of § 10(b).” Zandford,
. For example, the bright-line test cannot be imported wholesale into the public enforcement context because its attribution prong reflects the need to prove reliance, see Wright,
. Although the SEC at one time argued that the defendants "made” untrue statements of material fact through some vaguely described involvement in drafting the prospectuses, it has not pursued that argument on appeal.
. That section provides in pertinent part that: "[i]t shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they
. Under the shingle theory, a broker-dealer may be held liable under section 17(a) of the Securities Act or section 10(b) of the Exchange Act if he sells a security to a customer for a price unreasonably in excess of the current market price without disclosing the fact of the markup. See Grandon v. Merrill Lynch & Co.,
Concurrence Opinion
concurring.
A “plain language” approach to statutory construction has well-known adherents, and — in construing the SEC’s rule at issue (“make any untrue statement of a material fact”) — bare wording forcefully supports Judge Selya’s thorough and persuasive decision. Yet even a more elastic “all things considered” reading of the rule’s language would not justify the alarmingly ambitious use of it that the agency seeks to deploy in this case.
The word “make,” in reference to a statement, ordinarily refers to one authoring the statement or repeating it as his
Here, the SEC propounds a far more expansive view: it asks the courts to treat securities professionals as a matter of course as impliedly representing the entire contents of prospectuses whenever they sell securities or assist those who do. The argument against so sweeping a position begins with language, but it does not end there: congressional policy, Supreme Court precedent, practical consequences and the nearly uniform view of circuit courts that have spoken all argue against the SEC’s proposed interpretation. It helps focus the issue, and underscores the reach of the SEC’s position, to recite briefly the SEC’s allegations — both those rejected and not appealed, and those on appeal — as to Tambone and Hussey’s relationship to and use of the Columbia Funds prospectuses.
Tambone and Hussey were officers of Columbia Funds Distributor, Inc. (“Columbia Distributor”), which served as principal underwriter for Columbia mutual funds. As underwriters, they were required by law to furnish prospectuses to broker-dealers selling Columbia funds and to investors to whom they sold directly. See 15 U.S.C. § 77e(b) (2006); 17 C.F.R. § 240.15c2-8(b) (2009). The prospectuses, however, were drafted by a separate entity, Columbia Management Advisors, Inc. (“Columbia Advisors”), and the SEC admits in its complaint that Columbia Advisors rather than Columbia Distributor (and hence the defendants) “remained primarily responsible for all representations made in the prospectuses for those funds.”
The SEC’s more specific allegations concern the creation of the prospectuses and, separately, their use. The SEC complaint charged that the defendants were “involved in the process of revising the prospectuses,” “reviewed the market timing representations before they were included in the prospectuses” and “eomment[ed] on these representations to in-house counsel for Columbia Advisors.” The district court found that these allegations failed to plead fraud with requisite particularity, SEC v. Tambone,
As to the use of the prospectuses, the SEC initially argued that Tambone and Columbia Distributor “signed hundreds of [selling] agreements” with broker-dealers that expressly represented and warranted that “each Prospectus and all sales literature ... [would] not by statement or omission be misleading.” The district court again found that these allegations “flatly fail[ed]” to meet the particularity requirements. Tambone,
The SEC’s remaining allegations regarding the defendants’ use of the prospectuses, which are before us, are simply that the defendants, as required, dissemi
Following Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,
While the defendants in this case held significant positions, there is no obvious stopping point: virtually anyone involved in the underwriting process might under the SEC’s “making a statement” theory be charged and subject to liability in a suit under section 10(b). The SEC may select its defendants sensibly; but private litigants have their own incentives, and the SEC concedes that its definition of “make,” if adopted, would apply to private party actions as well. The Supreme Court has repeatedly acknowledged the unique risk of “vexatious” securities litigation,
Nothing justifies the adventure proposed by the agency. The conduct charged is already covered by an aiding and abetting remedy available to the SEC itself. 15 U.S.C. § 78t(e). Sections 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k, 771, allow private suits — but with important limitations — against underwriters who fail to make reasonable investigations into the prospectuses they distribute. And private litigants are free to sue the actual authors of misstatements in the prospectus under section 10(b) itself. See note 13, above.
More than enough is too much. No one sophisticated about markets believes that multiplying liability is free of cost. And
. Oral or written statements made by underwriters while placing securities can be predicates for securities violations. See, e.g., Dolphin & Bradbury, Inc. v. SEC,
. Post Central Bank, this implied representation theory has been regularly rejected by the circuits, see Lattanzio v. Deloitte & Touche LLP,
. See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,
Dissenting Opinion
dissenting in part.
The majority acknowledges that the Supreme Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,
I.
The important issue before the en banc court is whether the defendants’ use of false and misleading prospectus statements can constitute the making of statements that render the defendants primarily liable under Rule 10b-5(b). The Commission asserts that, as senior executives of the primary underwriter for the Columbia Funds, Tambone and Hussey had a duty to confirm the accuracy and completeness of the prospectuses they were responsible for distributing to broker-dealers and potential investors. It further contends that, by using the prospectuses as required to perform their duties to potential investors, defendants made implied statements asserting that they had a reasonable basis to believe that the key statements in the prospectuses regarding market timing were accurate and complete. Because the defendants allegedly knew that those statements were false, or were reckless in not knowing, their implied statements were also false. The SEC argues that these direct representations of Tambone and Hussey, albeit implied, subject the defendants to primary liability under section 10(b) and Rule 10b-5(b).
The majority dismisses the SEC’s position as untenable on the basis of “the language and structure of [the] rule, the statutory framework that it implements, and the teachings of the Supreme Court.” It is the majority’s view that is untenable. It construes the Rule to exclude the long accepted understanding that underwriters “make” implied statements to investors about the accuracy and completeness of
As I shall explain, the language of the statute and the Rule, viewed in the context of the unique role of underwriters in selling securities, supports the Commission’s allegation that Tambone and Hussey made implied statements to investors that are actionable as primary violations of Rule 10b-5(b). I begin, however, by addressing the premise at the heart of the majority’s position — its unfounded assumption that Central Bank’s “carefully drawn circumscription of the private right of action” substantially changed the landscape for securities claims under Rule 10b-5 in the very different context of an SEC enforcement action against underwriters.
A. Central Bank and Rule 10b-5
The majority argues that reading Rule 10b — 5(b) to reach the making of implied statements would be to disregard the Supreme Court’s holding in Central Bank and to effectively eliminate the boundaries between primary and secondary liability required by that decision. This contention overstates the substance of the case and, consequently, its reach.
1. What the Court Decided
The issue in Central Bank was whether the bank, the indenture trustee for bonds issued by the public Building Authority to finance improvements at a planned development in Colorado Springs, could be held liable in a private cause of action under Rule 10b-5 for aiding and abetting a primary violation of the law. Although Central Bank had become aware that the collateral for the bonds had likely become insufficient to support them, it delayed undertaking an independent review of the original appraisal. Before an independent review could be done, the Building Authority defaulted on a portion of the bonds.
The plaintiff raised claims of primary liability against four violators: the Building Authority, which issued the defaulted bonds in question, two underwriters for the bonds, and a director of the development company in charge of providing an appraisal of the bonds. The Building Authority defaulted early in the litigation and the claims against the underwriters were settled. See First Interstate Bank of Denver, N.A. v. Pring,
The Supreme Court, relying on the text of section 10(b) and Rule 10b-5, concluded that the aiding and abetting claims against Central Bank had to be dismissed because private plaintiffs may only bring claims of primary liability, not aiding and abetting liability. Nevertheless, the Court noted that “[i]n any complex securities fraud ... there are likely to be multiple violators; in this case, for example, respondents named four defendants as primary violators.”
The absence of § 10(b) aiding and abetting liability does not mean that secondary actors in the securities markets are always free from liability under the securities Acts. Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met.
Id. (emphasis omitted).
2. What the Court Did Not Decide
The Court in Central Bank addressed only the question of “whether private civil liability under § 10(b) extends as well to those who do not engage in the manipulative or deceptive practice, but who aid and abet the violation.”
Moreover, it is critical to recognize that Central Bank analyzes the scope of section 10(b) and Rule 10b-5 in a suit brought by a private plaintiff. Although the Court focused on the text of the provisions, it also emphasized the element of reliance (which was not satisfied in that case), as well as a set of policy considerations that arise exclusively in the context of private securities litigation. See
Thus, as the SEC argues, “[p]olicy considerations concerning private litigation can have no relevance in defining the scope of primary liability under Section 10(b) in a Commission enforcement action.” The Court’s restrictive application of Rule 10b-5 in Central Bank — a case brought by a private plaintiff — cannot sensibly be stretched beyond its logic to invalidate, in an SEC enforcement action, an interpretation of an element of Rule 10b — 5(b) on which the Supreme Court was silent.
3. Distinguishing between Primary and Secondary Violations
Although the private action context limits Central Bank’s significance for the SEC enforcement action at issue here, the Court did effect an important change in securities law by holding that aiding and abetting claims were no longer available in private actions. In its aftermath, lower courts sought to delineate the outer boundaries of primary liability, an issue the Supreme Court had not addressed. As the majority notes, our sister circuits have crafted two divergent standards to analyze the question: the “bright-line” test, associated most closely with the Second Circuit, and the broader “substantial participation” test, articulated by the Ninth Circuit. The majority observes that it is unnecessary to choose one of these paths in this case because the conduct at issue — “the use and dissemination of prospectuses created by others” — does not satisfy either test. I agree that there is no need to choose between these standards, but for a different reason: neither the bright-line nor substantial participation test is relevant here.
The substantial participation test evaluates whether one actor can be deemed to have made a statement made or created by another because of the actor’s “substantial participation” in the making or creation of that statement. In this case, the SEC alleges that Tambone and Hussey are accountable for their own implied statements, making the “substantial participation” inquiry unnecessary. See In re LDK Solar Sec. Litig., No. C0705182WHA,
Whether or not these tests are useful in distinguishing primary from secondary conduct, they shed no light on the issue that is before us: determining whether the defendants have “made” a statement, which unquestionably would subject them to primary liability.
The Supreme Court in Central Bank focused on the crucial dichotomy between those who, regardless of their role in a securities transaction, make misleading representations themselves, and those who assist the culpable actor without personally using or employing any “manipulative or deceptive device” as prohibited by section 10(b). In this SEC enforcement action, primary liability is premised on the defendants’ having themselves impliedly stated that they had a reasonable basis to believe that the market timing disclosures in the prospectuses were truthful and complete.
Central Bank does not address the important issue in this case — whether the defendants “made” statements within the meaning of Rule 10b-5(b) — and we must look elsewhere for guidance. As I describe below, both the language of the Rule and substantial precedent on the role and status of underwriters in the distribution of securities support the SEC’s argument that Tambone’s and Hussey’s alleged actions fall within the purview of the “make a statement” requirement of Rule 10b — 5(b).
B. The Scope of Liability under Rule 10b-5(b): Making a Statement
1. Text of Section 10(b)
Although Rule 10b-5 itself offers little guidance on how to define “make,” the text of section 10(b), its authorizing statute, also must be examined. Ernst & Ernst v. Hochfelder,
In other words, the term “make a statement” in Rule 10b-5
The majority counters that one cannot “ ‘make’ a statement when he merely uses a statement created entirely by others.” It asserts that subsection (b) of Rule 10b-5 applies to only a subset of the conduct that falls within the statute’s proscription — i.e., only the literal “making” of statements and not all “uses” of them. Id. The majority reinforces this pronouncement by pointing out that another section of the Rule, 10b-5(a), does prohibit the “employ[ment]” of any “device, scheme or artifice to defraud,” and it concludes that this difference in language proves that subsection (b) of the Rule was deliberately framed as a narrower prohibition against “making,” but not “using,” statements.
The question before us is not whether the words “use” and “make” are interchangeable, however — I agree they are not — but whether the conduct that occurred here could constitute “making” a statement within the meaning of Rule 10b-5(b). The majority’s position is that one cannot make a statement without explicitly speaking or writing the words at issue. The statutory language, however — prohibiting the “use,” inter alia, of “deceptive device[s]” — is broad enough to encompass less literal forms of “making” a statement. Indeed, it defies ordinary experience to say that a statement can only be “made” by “the physical or manual act of writing or transcribing [a] report” or speaking words. State v. O’Neil,
Unsurprisingly, a broader reading of “make” also is consistent with the dictionary definitions, which are more inclusive than the majority acknowledges and include “deliver, utter, or put forth.” See The Random House Dictionary of the English Language 1161 (2d ed.1987). Those meanings embrace the SEC’s argument that, by using the prospectuses as they did, the defendants “deliver[ed]” or “put forth” implied statements of their own attesting to the accuracy and completeness of the prospectuses. In ease law, as well as common parlance, this is not an unprecedented interpretation of the word “make.” In Reass v. United States,
To be sure, Rule 10b-5(b) contemplates some range of conduct narrower than the statute’s all-encompassing “use or employ.” But that fact does not mean that particular uses of statements by particular players in the sale of securities cannot constitute the “making” of implied statements. The Rule thus does not require Tambone and Hussey to have explicitly spoken or written the false statement at issue here, i.e., that “I have a reasonable basis for believing that the market timing disclosures in the prospectuses are truthful and complete.” Rather, given the statutory duties imposed upon them as under
As the SEC explains in its en banc brief, this understanding of what it means to “make” a statement is necessary to fulfill the objective of Congress and the Commission to punish “any untrue statement of a material fact” made with knowledge or reckless disregard for its truth. See Rule 10b-5(b). An underwriter could well know that representations in a prospectus are false even when the individual who actually wrote the words was unaware of the inaccuracies. In those circumstances, an underwriter who knowingly gives investors a prospectus containing falsehoods could not be held liable in an SEC enforcement action for aiding and abetting the unwitting drafter, who did not himself commit fraud. If such an underwriter could not be held responsible as a primary offender, the underwriter would, in the SEC’s words, “be free from any liability under Section 10(b) whatsoever.”
2. The Duties of an Underwriter
In assessing whether a defendant has committed a primary violation of the securities laws, courts have examined the defendant’s role in the securities market in addition to the specific conduct alleged in the complaint. These decisions indicate that a defendant’s general responsibilities and statutory duties with respect to the sale and distribution of securities inform the legal significance of specific conduct under Rule 10b-5(b). See, e.g., In re Scholastic Corp. Sec. Litig.,
Underwriters play an essential role in the sale and distribution of mutual funds to the investing public, which occurs either directly or through other broker-dealers. The text and statutory history of the Securities Act of 1933, and specifically the statute’s treatment of underwriters in sections
[I]n enacting Section 11, “Congress recognized that underwriters occupied a unique position that enabled them to discover and compel disclosure of essential facts about the offering. Congress believed that subjecting underwriters to the liability provisions would provide the necessary incentive to ensure their careful investigation of the offering.”
In re WorldCom, Inc. Sec. Litig.,
“By associating himself with a proposed offering [an underwriter] impliedly represents that he has made such an investigation in accordance with professional standards. Investors properly rely on this added protection which has a direct bearing on their appraisal of the reliability of the representations in the prospectus. The underwriter who does not make a reasonable investigation is derelict in his responsibilities to deal fairly with the investigating public.”
In re WorldCom,
The case law addressing the duties of underwriters buttresses the SEC’s analysis and extends it beyond the traditional context of sections 11 and 12 of the Securities Act, which specifically concern an underwriter’s obligation to ensure the accuracy of registration statements and prospectuses. Courts have repeatedly applied section 10(b) to underwriters. See, e.g., SEC v. Dain Rauscher, Inc.,
These precedents reflect the unique position of underwriters as securities insiders whose role is “that of a trail guide — not a mere hiking companion,” and who are relied upon by investors for their “reputation, integrity, independence, and expertise.” Dolphin and Bradbury, Inc. v. SEC,
The underwriter’s statutory duty to review and confirm the accuracy of the material in the documentation that it distributes generates the implied statement to investors that the underwriter has a reasonable basis to believe that the information contained in the prospectus it uses to offer or sell securities is truthful and complete. See Sanders,
The majority attempts to discredit some of this inconvenient precedent because it pre-dates Central Bank. The majority’s treatment of Chris-Craft, which strongly supports the SEC’s position, is illustrative. The Second Circuit held that an underwriter “makes” a statement under section 14(e) of the Exchange Act when constructively representing that registration materials are accurate and complete.
Hence, Chris-Craft and similar cases may not be cast aside as no longer relevant. The majority errs in its dismissal of precedent, fully consistent with Central Bank, indicating that implied statements made by underwriters — a unique class of securities professionals — may fall within the scope of Rule 10b-5.
II.
My colleagues fear that including implied statements within the purview of Rule 10b-5(b) would trigger a flood of vexatious private lawsuits against a wide spectrum of participants in the securities industry. I cannot deny that private plaintiffs would try to push the SEC’s implied statement position beyond its context in this case. That is a predictable and familiar phenomenon in our legal system. It then becomes the responsibility of courts to de
In addition, the majority’s fears discount too readily the particular context of this case. As I have described, underwriters play a unique role in the securities industry, and they have responsibilities and a statutory duty not shared by every securities professional. Indeed, the cases cited in the concurrence for the proposition that the implied representation theory “has been regularly rejected by the circuits” all involve secondary players, such as accountants, auditors and lawyers, who typically lack the “trail guide” relationship with the investing public that is the hallmark of the underwriter’s role.
Tambone’s and Hussey’s implied statements about their belief in the accuracy of the prospectuses arise from their special status, enforced by statute, which is both widely acknowledged and of long duration. The majority, quoting Chiarella v. United States,
Moreover, private litigants face multiple burdens in pleading securities claims. Not only must they meet the standard requirement that allegations of fraud be pleaded with particularity, see Fed.R.Civ.P. 9(b), but — unlike the SEC — they also must prove reliance on the alleged misrepresentations, economic loss, and loss causation, see, e.g., Stoneridge,
III.
The underwriter’s special duty to investors is anchored in statutes and administrative guidance and confirmed by case law whose relevant wisdom was unaffected by the Supreme Court’s decision in Central Bank. In light of that duty, an underwriter who uses a prospectus in a securities transaction in the manner alleged here impliedly states that he has reason to believe the contents of the prospectus are accurate. If the underwriter knows, or is reckless in not knowing, that the statements contained within the prospectus are in fact false, the underwriter’s implied statement is likewise false. An underwriter who makes such a statement has violated Rule 10b-5(b).
The SEC in this case alleges that Tarn-bone and Hussey made such statements to investors when they used the prospectuses containing false statements about timing practices to sell the Columbia Funds. They allegedly knew, or were reckless in not knowing, that those statements were false. These allegations were stated with sufficient particularity to meet the requirements of Fed.R.Civ.P. 12(b)(6), in eonjunction with Rule 9(b).
Hence, I would reverse the dismissal of the SEC’s claims under section 10(b) and Rule 10b-5(b) and remand to the district court for further proceedings on those claims, as well as on the section 17(a)(2) and aiding and abetting claims.
. I join the majority’s decision to reinstate the portions of the panel opinion addressing the SEC’s section 17(a)(2) and aiding and abetting claims and the portions of the panel judgment reversing those claims.
. Tambone and Hussey argue, inter alia, that the Commission’s claims of primary liability should be rejected because of the SEC's own admission that Columbia Advisors, not defendants, "remained primarily responsible for all representations made” in the fund prospectuses. However, this quotation from Central Bank illustrates the Supreme Court's recognition that a securities fraud will likely involve multiple violators, thereby suggesting that individuals with different responsibilities could be primarily liable for the same misstatement. See
. Cf. United States v. O'Hagan,
. The Rule states:
It shall be unlawful for any person, directly or indirectly ...
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c)To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
. Although deceptive conduct in the sale of securities could trigger liability under section 17(a), that provision does not cover purchases and therefore would not always offer an alternative vehicle for SEC enforcement.
. Section 11 of the Securities Act “prohibits false statements or omissions of material fact in registration statements” and “identifies the various categories of defendants subject to liability for a violation,” including underwriters. Central Bank,
. Section 12 “prohibits the sale of unregistered, nonexempt securities as well as the sale of securities by means of a material misstatement or omission; and it limits liability to those who offer or sell the security.” Central Bank,
.The SEC specifically observes in this Release that the underwriters' "obligation to have a reasonable basis for belief in the accuracy of statements directly made concerning the offering is underscored when a broker-dealer underwrites securities.” Id. at *21.
. The judgment in Sanders was vacated and remanded for further consideration in light of the Supreme Court’s decision in Ernst & Ernst v. Hochfelder, 425 U.S. 185,
. Section 14(e) provides, in relevant part: "It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, ... in connection with any tender offer.” 15 U.S.C. § 78n(e). That language is in pertinent respects identical to the language in Rule 10b — 5 (b) that is at issue here.
. See Lattanzio v. Deloitte & Touche LLP,
. The majority quotes Fortson v. Winstead, McGuire, Sechrest & Minick,
. The allegations in the SEC's complaint are described in detail in the panel decision, SEC v. Tambone,