Eighth Circuit Applies Negligence Standard to SEC Enforcement Claims for Violations of Section 14(a) and Rules 14a-9, 13b2-1 and 13b2-2

by Sheppard Mullin Richter & Hampton LLP

In SEC v. Das, No. 12-2780, 2013 U.S. App. LEXIS 15327 (8th Cir. July 29, 2013), the United States Court of Appeals for the Eighth Circuit affirmed the district court’s delivery of jury instructions applying a negligence standard to alleged violations of Section 14(a) of the Securities Exchange Act of 1934 (“1934 Act”) and Securities & Exchange Commission (“SEC”) Rules 14a-9, 13b2-1 and 13b2-2. This decision indicates that it is becoming easier for corporate officers to be held liable for violations of Section 14(a), Rule 14a-9, Rule 13b2-1 and Rule 13b2-2.

The SEC brought a civil enforcement action against Stormy Dean (“Dean”), a former chief financial officer of infoUSA, alleging that he had violated certain provisions of the 1934 Act. The SEC investigated Dean in connection with allegations of related-party transactions and misuse of corporate assets. The SEC asserted seven claims including solicitation of false proxy statements in violation of Section 14(a) and Rule 14a-9, falsification of records or accounts in violation of Rule 13b2-1 and deception of auditors in violation of Rule 13b2-2.

Dean’s trial was consolidated with the trial of Rajnish Das, another former CFO of infoUSA, and was tried before a jury. The United States District Court for the District of Nebraska instructed the jury that it must find Dean had violated Section 14(a) and Rule 14a-9 if the SEC had proven Dean had “solicited proxies by means of false or misleading proxy statements by negligently approving or signing publicly filed proxy statements.” It also instructed the jury that it must find Dean had violated Rules 13b2-1 and 13b2-2 if he had not acted “reasonably” in connection with those allegations. After a few hours of deliberation, the jury found for the SEC on every claim.

Dean appealed, challenging the jury instructions. Dean argued that the SEC was required to prove scienter, or intent, for its Section 14(a) and Rule 14a-9 claims, and that it was required to prove he had “knowingly” violated Rules 13b2-1 and 13b2-2. The Eighth Circuit affirmed the district court’s instruction on all four claims.

In affirming the instruction on the Section 14(a) and Rule 14a-9 claims, the Eighth Circuit held that scienter is not a requirement and that negligence is the proper standard to apply. The Court declined to extend its earlier opinion in SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011), which held scienter a requirement for a Rule 14a-9 claim against an outside director or accountant, noting that there is a difference between a corporate officer who directly benefits from proxy votes and is in privity with shareholders, and an outside director. Because Dean was an officer of infoUSA, not an outside director or accountant, the SEC was not required to prove scienter.

In affirming the instruction on the Rule 13b2-1 claim, the Court held that Dean need not have acted “knowingly” to be liable for violation of the Rule. In so holding, the Court looked to the opinions of sister circuits, and agreed with the Seventh Circuit’s decision in McConville v. SEC, 465 F.3d 780, 789 (7th Cir. 2006), and the Second Circuit’s decision in SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998). McConville applied Chevron deference — i.e., deference to an agency’s interpretation of a statute it is tasked with administering — to its interpretation of Rule 13b2-1. Accordingly, the Court deferred to the SEC’s interpretation that the regulation does not have a scienter requirement because the 1934 Act does not contain words indicating an intent to impose such a requirement. McNulty similarly held that Congress’ decision to amend Section 13(b) of the 1934 Act to require knowing falsification for criminal liability “plainly” implies that falsification need not be “knowing” to lead to civil liability.

In affirming the instruction on the Rule 13b2-2 claim, the Court similarly held that Dean need not have acted “knowingly” to be liable. Dean argued that the “knowing” requirement for criminal liability in Section 13(b)(5) also applied to civil liability under Rule 13b2-2, relying upon the Ninth Circuit’s opinion in SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011). The Eighth Circuit rejected that argument, and declined to adopt the Ninth Circuit’s reasoning in Todd, holding that the plain language of Section 13(b) indicates that “knowledge” is only required for criminal liability under Section 13(b)(4) and (5), and not for civil liability under Section 13(b)(2) or Rule 13b2-2. The Court also noted that its conclusion is supported by the SEC’s own interpretation of Rule 13b2-2.

The Eighth Circuit’s decision in Das makes it easier for the SEC to prove officers have violated Section 14(a), Rule 14a-9, Rule 13b2-1 and Rule 13b2-2. Corporate officers seeking to comply with the Rules and avoid SEC enforcement must not only avoid intentionally violating the rules, but must take care to ensure that they do not negligently violate them either.


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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