The Fourth Circuit Court of Appeals this week rejected the bid of a securities lawyer to vacate his guilty plea on the ground that the conduct to which he pled guilty was no longer criminal under the U.S. Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011). The Fourth Circuit’s decision strengthens the DOJ’s and the SEC’s position that Janus is limited to private litigants.
In Janus, the U.S. Supreme Court held that in a private action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder—which make it unlawful, among other things, for any person to “make any untrue statement of a material fact” in connection with the purchase or sale of securities—the “maker” is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. On that basis, the Court concluded that a mutual fund adviser could not be held liable in a private action under Section 10(b) for false statements included in the mutual fund’s prospectuses because the adviser did not “make” the statements within the meaning of Section 10(b) and Rule 10b-5. The Court likened the relationship to that of a speechwriter and a speaker. Although the speechwriter drafts the speech, the delivery of the message is ultimately within the control of the speaker.
In Prousalis v. Moore, __ F.3d __, 2014 WL 1799803 (4th Cir. May 7, 2014), the court ruled that Janus did not apply to criminal convictions under Section 10(b). Attorney Thomas Prousalis represented Busybox.com in connection with its IPO pursuant to a retainer agreement that provided that Prousalis would be compensated the greater of $375,000 or 7.5% of the gross proceeds of the IPO. In preparing the registration materials, Prousalis reported his fee, but failed to disclose that it was contingent, which was illegal. In addition to misrepresenting the contingent nature of his fee, Prousalis also engaged in a scheme to recycle IPO proceeds to compensate him and company officers.
In 2004, the U.S. Attorney’s Office for the Southern District of New York indicted Prousalis on multiple federal offenses, including securities fraud. Prousalis pleaded guilty to all counts and was sentenced to 57 months’ imprisonment and three years’ supervised release. The SEC also filed civil charges and obtained summary judgment against Prousalis based on his guilty plea. In connection with the SEC case, the court ordered Prousalis to pay $1.25 million in disgorgement, prejudgment interest of $406,131, and a civil penalty of $1.25 million. Subsequent to Prousalis’s guilty plea, the Janus decision was handed down and Prousalis filed a habeas petition claiming that the conduct to which he pleaded guilty was no longer criminal.
The district court rejected Prousalis’s argument and the Fourth Circuit affirmed. The Circuit Court reasoned that there was no indication in Janus that it was meant to apply to criminal convictions. The Circuit Court stressed that “Janus concerned the ability of a private plaintiff invoking [Section 10(b)’s] … implied right to sue a mutual investment adviser” and that “[a]ny textual conclusion announced in this particular area of law would not be casually generalizable to the criminal context.” Finally, the Circuit Court found that “[t]he majority in Janus gave not the slightest indication that its holding applied beyond the implied civil context: the four dissenters resisted taking the law even that far.”
Prousalis did not seek to vacate the related SEC judgment entered against him after his guilty plea, so the Fourth Circuit did not directly address whether Janus would apply in an SEC civil action. The SEC, however, is likely to find the Fourth Circuit’s opinion encouraging. For the last several years, the SEC has struggled to ensure that its charging decisions do not run afoul of Janus and has often added aiding-and-abetting charges and fraudulent-scheme liability, just in case the primary violation is dismissed. While the Fourth Circuit noted that the absence of any precedent supporting the argument that Janus applied to criminal actions, only one district court has affirmatively held that Janus is not applicable to SEC enforcement actions. See SEC v. Pentagon, 844 F. Supp. 2d 377, 420-21(S.D.N.Y. 2012) (“There is no indication that the Court or Congress intended for actions brought by the SEC to be … limited by the Janus ruling”). Several other district courts have raised the issue, but rather than addressing it, they have concluded that the SEC satisfied the requirements of Janus. See SEC v. Levin, 2013 WL 5588224, at *14 (S.D. Fla. Oct. 10, 2013) (acknowledging that Janus may not even apply to SEC enforcement actions but concluding that even if Janus applies, the SEC adequately alleged that defendant was a “maker”); SEC v. Garber, 959 F. Supp. 2d 374, 380-81 (S.D.N.Y. 2013) (acknowledging that Janus may not be applicable to SEC charges but noting that the SEC cannot bypass the Janus requirements for misstatement liability by labeling the misconduct a “scheme”); SEC v. Landberg, 836 F. Supp. 2d 148, (S.D.N.Y. 2011) (pointing out that it is not clear whether Janus applies to SEC enforcement actions since Janus involved private rights of action).
In fact, most courts appear to just accept that Janus does apply to SEC enforcement actions. See SEC v. Monterosso, 2014 WL 815403, at *5 (11th Cir. Mar. 3, 2014) (finding that the SEC’s case did not rely on defendants “making” false statements and therefore concluding that Janus did not apply); SEC v. Pentagon Cap. Mgmt. PLC, 725 F.3d 279, 286 (2d Cir. 2013) (finding that defendants were “makers”); SEC v. Stratocomm Corp., 11 cv 1188, 2014 WL 689116, at *11 (N.D.N.Y. Feb. 19, 2014) (concluding defendant was a “maker” under Janus); SEC v. Subaye, Inc., 2014 WL 448414, at * (S.D.N.Y. Feb. 4, 2014) (noting that SEC sufficiently pleaded that defendants were “makers”). Courts have also dismissed cases on the basis that the SEC did not sufficiently allege that defendants had “made” misrepresentations. See, e.g., SEC v. Kelly, 817 F. Supp. 2d 340, 344-45 (S.D.N.Y. 2011) (dismissing SEC enforcement action because neither defendant “made” a misstatement and extending Janus to claims asserted under Section 17(a) of the Securities Act); SEC v. Perry, 2012 WL 1959566, at *8 (C.D. Cal. 2012) (dismissing SEC action on the basis that the SEC did not allege sufficient facts to establish that defendants were “makers”).
The SEC has also been forced to litigate whether Janus applies to claims that it brings under Section 17(a) of the Securities Act in 1933, which mirrors Section 10(b), but applies to the offer and sale of securities, rather than to the purchase and sale of securities. The SEC has been fairly successful in limiting Janus to Section 10(b). See, e.g., SEC v. Geswein, 2014 WL 861317, at *4 (N.D. Ohio March 5, 2014) (holding that Janus does not extend to violations under Section 17(a) of the Securities Act); SEC v. Tourre, 2014 WL 61864, at *6 (S.D.N.Y. Jan. 7, 2014) (finding that Janus instruction with respect to 10(b) misrepresentation claims were sufficient and concluding Janus instruction with respect to 17(a) and 10(b) scheme liability claims were not required); SEC v. Mercury Interactive LLC, 5871020, at *3 (N.D. Cal. Nov. 22, 2011) (refusing to extend Janus to Section 17(a) and Section 14(a) claims because the statutory language is different). But see Kelly, 2011 WL 4431161, at *5 (applying Janus to § 17(a) claim on the basis of the conclusion that “[a]lthough the language of subsection (2) of Section 17(a) is not identical to that of subsection (b) of Rule 10b-5, both provisions have the same functional meaning where it comes to creating primary liability”).
Given the Fourth Circuit’s reliance on the lack of any indication that the U.S. Supreme Court intended for Janus to extend beyond private actions, Prousalis may signal a victory not only for criminal prosecutors, but also for the SEC.