Business Crimes Perspectives

SEC v. Tambone: The First Circuit Broadly Interprets Primary Liability Under the Federal Securities Laws – and Adds to an Existing Circuit Split

February 24, 2009

In this Issue:

  • Reversing the district court’s dismissal, the First Circuit reinstated the SEC’s civil enforcement action against two mutual fund underwriters
  • The First Circuit held that, under Section 17(a), a person may be held liable for “using” another person’s material false statement to obtain money in the offer or sale of securities
  • The First Circuit held that, under Section 10(b) and Rule 10b-5, a person may be held liable for “impliedly making” a material false statement in connection with the purchase or sale of securities
  • Ultimately, the Supreme Court may have to resolve the growing circuit split regarding the scope of liability under the federal securities laws

Excerpt:

Given the widely anticipated increase in regulatory enforcement activity as a result of the current financial crisis (Business Crimes Alert – January 5) and the change in administration, participants in the securities industry—and particularly underwriters—should pay careful attention to the First Circuit’s recent decision in Securities & Exchange Commission v. Tambone, No. 07-1384 (Dec. 3, 2008). This decision addressed the scope of conduct for which a person may be held liable, in a SEC civil enforcement action, as a “primary violator” of Section 17(a) of the 1933 Securities Act, Section 10(b) of the 1934 Exchange Act, and Rule 10b-5.

Background

The Tambone decision is the latest development in a SEC civil enforcement action that dates back to 2005, when the SEC announced a $140,000,000 settlement with Columbia Management Advisors, Columbia Funds Distributors, and three former employees. That settlement was the third largest in Massachusetts for 2005, but it did not end the case.

James Tambone and Robert Hussey, former executives of Columbia Funds Distributors, did not settle with the SEC, but rather moved to dismiss the Commission’s complaint against them. The two defendants argued that the SEC had failed to plead adequately its claims under Section 17(a), Section 10(b), and Rule 10b-5. Judge Gorton, of the District of Massachusetts, agreed. In fact, he twice granted the defendants’ motions, dismissing the SEC’s original complaint in January 2006 and its amended complaint almost one year later in December 2006...

Download the Foley Hoag Business Crimes Perspectives - February 2009 Issue (.pdf)