Bass, Berry & Sims attorney Chris Lazarini discussed a case brought by the SEC against an individual broker accused of violations of Section 17(A) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, alleging various fraudulent omissions and misrepresentations in his communications with clients. In a rare move, the court granted summary judgment to the SEC on the issue of scienter since the SEC proved the defendant acted with conscious intent and with a high degree of recklessness.
Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication.
SEC vs. Ramirez, No. 15-2365 (D. P.R., 4/30/18)
Although it is unusual, a court may grant summary judgment on the issue of scienter where the moving party has presented evidence sufficient to show intent or recklessness and the non-moving party has failed to present probative evidence creating a genuine issue of material fact.
Defendant was a top-performing UBS-Puerto Rico ("UBS-PR") representative whose clients, acting on Defendant's recommendations, borrowed approximately $50 million in non-purpose lines of credit ("LOC") from a UBS-PR banking affiliate to purchase UBS-PR closed-end funds ("CEF"). Such recommendations violated UBS-PR's internal policies and the terms of the LOC, but Defendant avoided detection for several years by having clients take the LOC funds into their personal checking accounts before depositing them into their UBS-PR brokerage accounts and by submitting false paperwork to UBS. When UBS-PR discovered Defendant's actions, it terminated him. The SEC charged Defendant with violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, alleging various fraudulent omissions and misrepresentations in his communications with clients. The SEC moved for partial summary judgment on liability. Defendant opposed the motion, but primarily relied on his Fifth Amendment privilege against self-incrimination and on claims that the SEC failed to rely on admissible evidence to support its motion.
In awarding summary judgment to the SEC, the Court notes that the elements of a Section 17(a) claim and Section 10(b) claim are virtually identical, except that scienter is not necessary to show a violation of Sections 17(a)(2) and 17(a)(3). One may establish liability under the latter two sections by showing negligence, whereas conscious intent or a high degree of recklessness must be shown under Sections 17(a)(1) and 10(b). The Court has no trouble finding that Defendant engaged in a fraudulent scheme to have clients invest in CEFs with money drawn from their LOCs, while concealing from clients that the practice violated UBS-PR’s internal policies. The Court also has no trouble finding that Defendant misrepresented and omitted material facts about the strategy when recommending it to clients, and his scheme was undertaken "in the offer or sale of any securities" (for the Securities Act) and "in connection with the purchase of sale of any securities" (for the Exchange Act).
Recognizing that it is unusual to grant summary judgment on the issue of scienter, the Court nevertheless finds that the SEC meets its burden. First, Defendant knew that his actions violated UBS-PR's policies and the terms of the LOCs. Second, Defendant was at least reckless in failing to explain the risks of the CEFs, misrepresenting that the CEFs "were guaranteed by the Constitution of Puerto Rico" and failing to disclose to clients the possibility that their LOCs might be called if the value of their collateral fell. Third, the Court points to the significant commissions Defendant earned on his LOC production and sale of CEFs as demonstrating a financial motive.
Turning to Defendant's arguments, the Court points out that the Fifth Amendment is not a substitute for evidence and, as it is allowed to do in civil cases, it draws adverse inferences against Defendant, concluding that Defendant submitted no evidence creating a genuine issue of material fact. The Court similarly rejects Defendant's arguments against the admissibility of the SEC's evidence, finding this evidence acceptable at the summary judgment stage, either because it will be admissible at trial or because the content of the proferred evidence may be supported at trial by other admissible evidence.