The SEC recently made the unusual move of asking the Eleventh Circuit to publish its previously-unpublished per curiam decision in SEC v. Monterosso, 2014 WL 2922670 (11th Cir. June 30, 2014).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 Janusargument 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, Janushas 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 Janusdecision, 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 (11thCir. June 30, 2014).  The opinion is here.