Stoneridge Without Stoneridge: SEC v. Wolfsen

The first Stoneridge opinion of the day doesn't even cite Stoneridge.  The Tenth Circuit recently issued an opinion (SEC v. Wolfsen) finding that a non-employee consultant was primarily liable under Rule 10b-5.   The case illustrates the gaps left by the Supreme Court in Stoneridge.  

The consultant was deemed primarily liable because of his involvement in drafting SEC filings.  This was true even though he was not an employee and did not actually make the false statements.  Instead, the false statements were included in filings by the issuer.  As the opinion noted:

• Defendants appeal that decision, principally arguing that they cannot beheld liable under the securities anti fraud statutes because the Commission failed to show that Marple, rather than the public company itself, made the material misstatements and omissions. We disagree and hold that when a non-employee consultant causes misstatements or omissions within periodic financial reports submitted to the Commission, knowing that those misstatements or omissions will reach investors, he can be held primarily liable under the antifraud provisions of the federal securities laws.

There are several things curious about the case.  First, the consultant was charged as a primary violator and not for aiding and abetting liability.  While private parties cannot bring actions for secondary liability under Rule 10b-5, the SEC can.  This failure is unexplained in the opinion.

Second, although involving a tertiary actor, the case nowhere addressed Stoneridge.  Stoneridge arose in an effort to delineate boundaries between primary and secondary liability.  Defendants in that case argued that, in order to be primarily liable, they had to have actually made false statements.  The Court ducked the main issue entirely and instead held that vendors who committed a deceptive act in connection with another company's false disclosure could only be liable if the market actually relied on their behavior.   

The Commission need not establish reliance.  As a result, the Tenth Circuit could determine whether the consultant fell within the definition of primary liability unencumbered by the Supreme Court's analysis in Stoneridge.  The court concluded that it was enough to participate in the drafting of the false statement.     

• Like the defendants in KPMG and McConville, Marple played an integral role in preparing those filings that contained the misstatements and omissions at issue here. Not only did he prepare the drafts of both the 10-QSB and 10-KSB, the draft of the 10-QSB (the more misleading of the two filings) was not modified by either F10’s CEO or CFO, at least insofar as the Sukumo arrangement was portrayed. It was filed as Marple drafted it. Additionally, F10 hired Marple for the very purpose of preparing the relevant SEC filings, based on his prior financial reporting experience, and he well knew that those documents would be distributed to the public and available to investors. That the filings were issued in F10’s name, and that Marple himself did not sign, certify, or physically file the documents, is not dispositive. The relevant question is only whether he can fairly be said to have caused F10 to make the relevant statements, and whether he knew or should have known that the statements would reach investors.

The case, therefore, stands for the proposition that primary liability will arise where the third party had significant involvement in the drafting process.  Nor did the false statement have to be attributed to the participant.   Involvement was enough. 

The facts in Wolfsen are arguably not far from those in Stoneridge.  One can imagine circumstances where a vendor engages in a sham transaction and knows that the transaction will be reported verbatim in the issuer's filings.  In  other words, the vendor caused the issuer "to make the relevant statements, and whether he knew or should have known that the statements would reach investors."

Of course, Wolfsen was an SEC enforcement action.  As a result, the agency did not have to establish reliance.  Private actors will, under Stoneridge, have to plead the element.  But where the sham transaction is disclosed in the filing and the vendor is identified, this may not be a difficult element to meet.