It Matters Who’s the Plaintiff: Janus and Stoneridge May Not Help Against The SEC, but Monterosso Shouldn’t Apply as Civil-Litigation Precedent

by Burr & Forman
Contact

The SEC recently made the unusual move of asking the Eleventh Circuit to publish its previously-unpublished per curiam decision in SEC v. Monterosso, 2014 WL 2922670 (11th Cir. June 30, 2014).  The decision was not merely a win for the Staff, who presumably sought publication due to the Court’s unwarranted language purporting to limit the Supreme Court’s Janus precedent only to cases explicitly charged solely under Rule 10b-5(b).

In Monterosso, the Commission’s Enforcement Staff pursued civil prosecution of three individuals who – in their roles as the issuer’s COOs and officers of an issuer’s affiliate – willfully participated in providing fabricated invoices to support an “off-net” revenue program, showing over $100 million in fictitious revenue accounting for a low of 58% of GlobeTel’s reported revenue for 2004 and as much as 92% for the first quarter of 2006.

The trial court granted summary judgment for the SEC on Rule 10b-5 and ’33 Act § 17(a) claims, among others.  On appeal, the Eleventh Circuit rejected a Janus argument that the subsidiary’s officers had not “made” the revenue misrepresentations in GlobeTel’s financial statements. In Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Supreme Court held that a Rule 10b-5 private action does not lie against a defendant not having “made” the misrepresentation (i.e. having had “ultimate authority and control” over it).  That decision rested largely upon the Court’s prior decisions – also in civil litigation under Rule 10b-5  ?  precluding aider-and-abettor liability (Central Bank) or scheme-liability for non-speaking participants (Stoneridge).  Here, however, the Eleventh Circuit rejected the argument as simply irrelevant to the SEC’s claims under:

•  Rule 10b-5(a)(“device, scheme or artifice to defraud”),

•  Rule 10b-5(c)(fraudulent or deceitful “act, practice, or course of business”), or

•  Section 17(a) (a broader, negligence-based “cousin” of Rule 10b-5)

The Court concluded:  “The case against [them] did not rely on their ‘making’ false statements, but instead concerned their commission of deceptive acts as part of a scheme to generate fictitious revenue for GlobeTel.  Therefore, Janus has no bearing on this case.”

The Eleventh Circuit, however, wrongly wrote that Janus “did not concern … Rule 10b-5(a) or (c)” which “are not so restricted’ as subsection (b), because they are not limited to ‘the making of an untrue statement of a material fact.’”  In its Janus decision, the Supreme Court quoted Rule 10b-5(b), but did not limit its holding only to that subsection; in fact, the Court did not dissect the subsections of the Rule at all.  Instead, the animating spark of the Supreme Court’s decision rests on the distinction between civil-liability under the implied private right of action (limited by Central Bank and Stoneridge) on the one hand, and the more expansive reach of SEC’s prosecutorial ability (civil or criminal) which is unrestrained by Central Bank [after the PSLRA amendment of 15 U.S.C. § 78t(e)] or by the reliance requirement undergirding Stoneridge’s disallowance of scheme-liability for non-speaking actors.  The Eleventh Circuit was wrong to purport to limit Janus to a non-existent textual limitation while ignoring the contextual differences between an SEC prosecution and limitations on the private civil right of action that would have supported the same result more appropriately.

Three other aspects of the Monterosso opinion worth noting are:

First, the trial court rejected the SEC’s request for a blanket adverse inference from defendants’ assertion of the 5th Amendment privilege during depositions, but reserved the issue for consideration question-by-question as necessary.  The Eleventh Circuit cited the adverse inference as additional evidence of scienter.

Second, the Court affirmed third-tier civil penalties [see ’33 Act § 20(d); ’34 Act § 21(d)(3)] based upon clear evidence of fraud and findings of substantial risk of loss — notwithstanding no direct evidence of any actual loss.

Third, several arguments were deemed waived by not having been raised in trial court: (a) Distinctions among sub-sections of Rule 10b-5; and (b) One defendant’s financial condition as a basis for lower civil penalties.

SEC v. Monterosso, Nos. 13-10341, 13-10342, 13-10464, 2014 WL 2922670 (11th Cir. June 30, 2014).  The opinion is here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Burr & Forman | Attorney Advertising

Written by:

Burr & Forman
Contact
more
less

Burr & Forman on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.