The U.S. District Court for the Southern District of New York recently ruled in favor of the SEC on a motion to dismiss in the case of SEC v. O’Meally, et al., finding that the agency sufficiently pled securities fraud claims against four securities brokers involving allegedly fraudulent market timing practices. The SEC alleged, among other things, that the defendant brokers used fraudulent and deceptive trading practices to conceal their and their clients’ identities in connection with the market timing of purchases and sales of mutual fund shares after being directed by the funds to cease from trading shares in their funds.
One of the defendant brokers sought to dismiss the action on the basis that the complaint failed to sufficiently plead the existence of a duty to disclose their true identities to the mutual funds. The broker argued that mutual funds do not require buyers or sellers to reveal their identities. The Court, however, found that “it is at least plausible that, after the mutual funds explicitly notified [the] [d]efendants that … [they] no longer wanted … [them] to trade shares in their … funds and actively sought to block their trading activities, there was a duty on the part of [the] [d]efendants to disclose their identities should they choose to use different account names or [broker identification] numbers in the future.” The Court further found that failing to reveal their true identities would have rendered misleading their subsequent representations as to their identities and affiliations in connection with new trades.