Law360 Guest Article: 4th Circ. Decision May Expand SEC’s List Of Defendants


Since the 2011 U.S. Supreme Court decision in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the U.S. Securities Exchange Commission’s Enforcement Division operated under the assumption that only the “maker” of a statement could be charged in an enforcement action for false or misleading statements under Section 10(b) of the Exchange Act.

Last month, the Fourth Circuit held that the Janus decision, which was in the context of private securities litigation, did not apply in the context of a criminal prosecution for a violation of Rule 10b-5. See Prousalis v. Moore, No. 13-6814, 2014 U.S. App. LEXIS 8584 (May 7, 2014). Thus, under the Fourth Circuit’s interpretation of Janus, persons who are not the “maker” of a statement for purposes of private liability under Rule 10b-5 may nonetheless be subject to criminal prosecution for violations of Rule 10b-5. As a result, the SEC is poised to argue that it is similarly not subject to Janus and to expand its enforcement efforts as to certain individuals.

Rule 10b-5(b) prohibits “mak[ing] any untrue statement of a material fact ... in connection with the purchase or sale of a security.” In Janus, the Supreme Court adopted a narrow definition of who may qualify as the “maker” of an untrue statement of material fact. Specifically, in private suits, the court held that the maker of an untrue statement is limited to “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Under that definition, those who contribute to an untrue statement but do not ultimately control the statement are not subject to private 10b-5 liability.

Excerpted from Law360, June 26, 2014. To view full article, click here (subscription required).

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