The Securities and Exchange Commission won a jury verdict in a civil enforcement action that it brought against Conrad Seghers, who, through a company he controlled, was the general partner of three hedge funds (Integral Funds). The SEC asserted claims in the action under, among other things, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

In 2000, the Integral Funds hired Olympia Capital Associates, L.P. (Olympia) as the fund administrator. Seghers sent to Olympia monthly valuations of the Integral Funds’ assets, which included values for the Galileo Fund L.P., a fund in which the majority of Integral Funds’ assets were invested. Significantly, despite having received a letter from the clearing broker stating that the statement values for the Galileo Fund had been incorrect since February, 2001, Seghers never reported this acknowledged problem to investors. Nor did Seghers disclose that (i) the Galileo fund manager had advised that he could not value the Galileo fund for a four-month period due to the clearing broker’s errors, or (ii) Seghers had written to the broker that its errors had “materially damage[d]” the Integral Funds and its investors. The SEC alleged that Seghers committed fraud by, among other things, not disclosing errors by the clearing broker that adversely affected the valuation of the Integral Funds.

On appeal, the Fifth Circuit held, among other things, that the SEC presented sufficient evidence that Seghers made material representations to support the jury verdict. The court ruled that a “misrepresentation” occurs if the information disclosed, understood as a whole, would mislead a reasonable investor and ruled further that the misrepresentation is “material” if there is a substantial likelihood that a reasonable investor would consider the information important in making a decision to invest. The court then found that the SEC’s evidence that Seghers’ failures to disclose and misrepresentations of the existence and impact of the clearing broker’s errors supported the jury’s verdict. In addition to finding that Seghers caused account statements that he knew contained values in excess of market value to be sent to investors, the court found that Seghers’ statement to the clearing broker that its errors “materially damage[d]” Integral Funds’ investors confirmed the materiality of his misrepresentations. (SEC v. Seghers, 2008 WL 4726248 (5th Cir. Oct. 28, 2008))