The First Circuit Court of Appeals affirmed the entry of summary judgment against a broker for violating Section 10(b) of the Securities and Exchange Act and Rule 10b-5 by intentionally concealing his identity and the identities of his clients in order to mislead mutual fund companies so that they would process trades that they otherwise would not have allowed.
The Securities and Exchange Commission claimed that the broker engaged in “market timing” by taking advantage of the time zone differences between the daily closings of the foreign and U.S. markets, i.e., by making trades based on foreign market closing prices that utilize information becoming available after the foreign market close. Although market timing is not illegal, mutual fund companies often prohibit it in order to protect their long-term shareholders and prevent stock dilution and other adverse effects. Because defendant was suspected of engaging in market timing, various mutual funds blocked him from executing trades under his financial advisor (FA) number and his customer accounts numbers. In response, defendant began using new FA and customer numbers to evade the “block” and continue to execute trades.
The district court granted the SEC’s summary judgment motion based on evidence that defendant was aware of the mutual funds’ policies prohibiting market timing, defendant’s e-mail communications with customers discussing his market timing strategies and evidencing intent to mislead the mutual funds into processing prohibited trades, and defendant’s invocation of the Fifth Amendment privilege when the SEC sought to depose him. On appeal, defendant argued that testimony he had given in SEC and National Association of Securities Dealers (NASD) investigations that preceded the SEC’s civil action against him raised a genuine issue of material fact concerning his scienter. The First Circuit rejected defendant’s argument for multiple reasons. For example, the court ruled that the defendant failed to refer to any specific testimony from the earlier SEC investigation that raised a genuine issue of material fact. Further, the court found that defendant could not rely on his NASD testimony because he had refused to answer questions about blocked account numbers in his NASD testimony and, thus, prevented the NASD from obtaining his testimony on matters that were “pertinent to [the] scienter [issue].” (SEC v. Ficken, 2008 WL 4615797 (1st Cir. Oct. 20, 2008))