SEC v. Tambone: Specificity, Scienter, and 10b-5 violations; Part 2

In a previous post this blog covered the First Circuit’s decision in SEC v. Tambone, the case against James R. Tambone and Robert Hussey, executives of Columbia Funds Distributor, Inc., for violations of federal securities laws.  Neither defendant made false statements, but the SEC alleged that they distributed prospectuses that they knew were misleading.  The court held that the SEC's allegations met the elements § 10(b), Rule 10(b)-5, § 206 of the Investment Advisors Act, and § 15(c) of the Exchange Act, reversed and remanded the case for further proceedings.

This blog also covered the en blanc rehearing pending in front of the full First Circuit.  Tambone’s supplemental brief, focused on the SEC's "implied representation" theory.  The “implied representation” theory is that underwriters make an implied representation as to the truthfulness and completeness of disclosure documents.

In the SEC’s supplemental brief, the Commission noted that the Supreme Court has repeatedly and expressly made clear that § 10(b) should be construed flexibly to effectuate its remedial purpose, and that a strict or technical reading would unduly hamper the Commission and run contrary to Congress’ goals.  The Court has limited only private actions, and when doing so, explicitly stated that such limitations were inapplicable to Government enforcement actions.

The SEC asserted that, within the properly construed meaning of Rule 10b-5(b), defendant’s use of misleading statements was unlawful.  The Supreme Court has noted that the language of 10b-5(b) is broad and “obviously meant to be inclusive.”  Affiliated Ute Citizens of Utah v. United States, 406 U.S. at 151.  The SEC contrasted this to Tambone’s assertion that the scope of “making statements” is limited to those who draft the statement, and not to those who direct the drafter, or those who endorse or distribute the drafting in a prospectus.  The SEC also noted that , the Supreme Court and the Fourth Circuit have included dissemination as a critical part of “making” statements.

The SEC also argued that the implied representation theory is central to the SEC’s mandate to regulate securities professionals, noting that courts have historically endorsed this theory in numerous cases and contexts.  Furthermore, the Commission’s interpretation is entitled to “substantial deference” unless it is plainly erroneous or inconsistent with the regulation.

While Tambone asserted that the earlier aiding and abetting decision depends on the implied representation theory, the SEC argued that this argument is without merit.  The SEC referred to the First Circuit judicial panel’s finding that did not rely on the implied representation theory, and that it did find that Tambone had a duty to correct misleading statements.  

The primary materials for the post are available on the DU Corporate Governance website.