January 9, 2015

Even More on “EDGAR Dissemination: Still Favoring Subscribers?”

Go figure. In November, a study came out that found that paying subscribers appear to gain access to SEC filings ahead of the rest of us. A week after I blogged about the study, I blogged again about how the WSJ was reporting that the SEC seemed to be well on its way to fixing the problem and evening the playing field. Maybe that report came too soon as this new WSJ article notes how the SEC is planning to fix the problem in the 1st quarter in 2015.

SEC Distances Itself From Janus & Adopts Expansive View of Rule 10b-5

Here’s a blog by Stinson Leonard Street’s Steve Quinlivan:

The SEC recently rendered an opinion in an enforcement action against two persons, John P. Flannery and James D. Hopkins, associated with an investment adviser. In so doing, it sought to limit the Supreme Court’s holding in Janus and offered an expansive view of Rule 10b-5(a) and (c). Commissioners Gallagher and Piwowar dissented from the Commission action.

In Janus, the Supreme Court interpreted Rule 10b-5(b)’s prohibition against “mak[ing] any untrue statement of a material fact.” After concluding that liability could extend only to those with “ultimate authority” over an alleged false statement, the Court held that an investment adviser who drafted misstatements that were later included in a separate mutual fund’s prospectus could not be held liable under Rule 10b-5(b).

According to the SEC, Rule 10b-5(a) and (c) are different. Those provisions do not address only fraudulent misstatements. Rule 10b-5(a) prohibits the use of “any device, scheme, or artifice to defraud,” while Rule 10b-5(c) prohibits “engag[ing] in any act, practice, or course of business which operates or would operate as a fraud or deceit.” The SEC noted the very terms of the provisions “provide a broad linguistic frame within which a large number of practices may fit.” Accordingly, the SEC concluded that primary liability under Rule 10b-5(a) and (c) extends to one who (with scienter, and in connection with the purchase or sale of securities) employs any manipulative or deceptive device or engages in any manipulative or deceptive act. Per the SEC, as various courts have recognized, that standard certainly would encompass the falsification of financial records to misstate a company’s performance, as well as the orchestration of sham transactions designed to give the false appearance of business operations.

It is the SEC’s view that Rule 10b-5(a) and (c) extend even further than many courts have suggested. In particular, the SEC concluded that primary liability under Rule 10b-5(a) and (c) also encompasses the “making” of a fraudulent misstatement to investors, as well as the drafting or devising of such a misstatement. Such conduct, in the SEC’s view, plainly constitutes employment of a deceptive “device” or “act.”

The SEC does not believe Janus requires a different result. In Janus, the Court construed only the term “make” in Rule 10b-5(b), which does not appear in subsections (a) and (c); the decision did not even mention, let alone construe, the broader text of those provisions. And the Court never suggested that because the “maker” of a false statement is primarily liable under subsection (b), he cannot also be liable under subsections (a) and (c).

The SEC did not suggest that the outcome in Janus itself might have been different if only the plaintiffs’ claims had arisen under Rule 10b-5(a) or (c). As Janus recognizes, those plaintiffs may not have been able to show reliance on the drafters’ conduct, regardless of the subsection of Rule 10b-5 alleged to have been violated. Thus, the SEC interpretation would not expand the “narrow scope” the Supreme Court “give[s to] the implied private right of action.” The SEC also noted that in contrast to private parties, the Commission need not show reliance as an element of its claims. Thus, even if Janus precludes private actions against those who commit “undisclosed” deceptive acts, it does not preclude Commission enforcement actions under Rule 10b-5(a) and (c) against those same individuals.

Insider Trading: SEC Condemns Lawyer’s Breach Of Client Confidences While Offering Whistleblower Bounties for Breaches

Here’s an excerpt from this blog by Keith Bishop about this recent SEC enforcement action charging a California-based attorney and his wife with insider trading on confidential information obtained from a corporate client:

I certainly don’t take any issue with the SEC’s assertion that a California attorney owes a duty “To maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” Cal. Bus. & Prof. Code § 6068(e)(1). However, I do find it richly ironic that the SEC would make this claim in light of its explicit invitation to attorneys to violate client confidences in Rule 205.3(d)(2) and the possibility that an attorney who does so may be financially rewarded under the SEC’s whistleblower program.

– Broc Romanek