SEC v. Tambone

1st Circuit Decision in SEC v. Tambone


This decision allows SEC to proceed with its fraud action against James Tambone and Robert Hussey, former executives of Columbia Funds Distributor, Inc., the principal underwriter and distributor for a group of approximately 140 mutual funds in the Columbia mutual fund complex.

The SEC had alleged that Tambone and Hussey participated in a fraudulent scheme with Columbia, by secretly approving arrangements with preferred customers allowing them to engage in frequent short-term trading in certain Columbia Funds in contravention of the prospectuses that represented that the funds did not permit or were otherwise hostile to market timing or other short-term or excessive trading.

The First Circuit ruling reversed a decision by DMass. that had dismissed the case on the ground that Tambone and Hussey could not be held primarily liable for false statements in the prospectuses because they did not make those statements. The First Circuit held that Tambone and Hussey could be held liable. In its decision, the First Circuit emphasized the unique role that underwriters play in the sale and distribution of mutual funds to the investing public and the reliance that the investing public places on them as a result. The Court explained that Tambone and Hussey, as executives of Columbia Distributor, had a legal duty to confirm the accuracy and completeness of the prospectuses and other fund material that they distributed. By distributing the misleading prospectuses, the First Circuit reasoned, Tambone and Hussey made implied statements to potential investors that they had a reasonable basis for believing that the key statements in the prospectuses regarding market timing were accurate and complete.

This appears to be an expansion of the scope of Rule 10-5(b). It has long been true that a 10b-5 defendant who does not “make” an unlawful statement can be secondarily liable for it, if he has sufficiently “aided and abetted” the misconduct.

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Reference Info:Decision | Federal, 1st Circuit, Massachusetts | United States

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.

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