On March 10, 2010, the First Circuit, in its en banc ruling in SEC v Tambone, rejected the SEC’s expansive interpretation of Rule 10b-5(b), vacating part of a prior ruling by a three-judge panel. The ruling related to actions stemming from a 2005 settlement that the SEC reached with Columbia Management Advisors, Columbia Funds Distributors and three former employees relating to alleged undisclosed market timing arrangements in the Columbia funds. As principal underwriter and distributor of the Columbia funds, Columbia Funds Distributors sold shares in the funds and disseminated fund prospectuses to investors. Columbia Management Advisors drafted the prospectuses, which included representations that the funds prohibited market timing. On May 19, 2006, the SEC filed a civil complaint in the District of Massachusetts against James Tambone and Robert Hussey, who were officers of Columbia Funds Distributors. The defendants were not alleged to have spoken or written direct misstatements. Rather, the SEC brought suit based on the “implied representation” theory, alleging that, despite the defendants’ awareness of the market timing prohibitions contained in the prospectuses, the defendants distributed the prospectuses while allowing certain preferred customers to engage in market timing in the Columbia funds.

In its complaint, the SEC alleged that the defendants violated Section 17(a) of the 1933 Act and Section 10(b) of the 1934 Act and Rule 10b-5 thereunder. In addition, the SEC alleged that the defendants had aided and abetted primary violations of Section 10(b) and Rule 10b-5 by the adviser and the distributor, primary violations of Section 15(c) of the 1934 Act by the distributor and primary violations of Section 206 of the Advisers Act by the adviser. The defendants moved to dismiss the complaint, and in 2006, the district court dismissed all of the SEC’s claims holding that the SEC did not allege that the defendants made untrue statements or material omissions to investors and therefore did not plead fraud with particularity.

The SEC appealed the dismissal of its Rule 10b-5(b), Section 17(a)(2) and aiding and abetting claims. In late 2008, a divided panel of the First Circuit reversed and reinstated all of the SEC’s primary and aiding and abetting claims. After the First Circuit’s initial opinion, upon petition by the defendants, the court ordered the case to be reheard en banc to determine whether primary liability under Rule 10b-5(b) could extend to defendants under the theories advanced by the SEC. In the en banc rehearing, a fourjudge majority rejected the panel’s reasoning and affirmed the district court’s decision to dismiss the SEC’s primary violator claims under Section 10(b) and Rule 10b-5(b). The court held that the SEC’s interpretation is inconsistent with the text and structure of the rule and U.S. Supreme Court precedent.

In rejecting the SEC’s interpretation of Rule 10b-5(b), the court examined what it means to “make a statement” under Rule 10b-5(b). Based on the ordinary meaning of the word “make” and the absence of evidence that the drafters intended to attach any “exotic meaning” to the word, the court concluded that the SEC’s proposed reading was inconsistent with the text of both the statute and the rule. The court further supported its conclusion with a contextual analysis of other statutory provisions of the federal securities laws, highlighting that the drafters specifically and deliberately used the narrower verb “make” in Rule 10b-5(b) in comparison to other provisions of the federal securities laws.

Finally, in reaching its decision, the court analyzed Supreme Court precedent and stated that “[u]nder modern Supreme Court precedent dealing with Rule 10b-5, much turns on the distinction between primary and secondary violators. . . . If . . . the private right of action is not to be hollowed—and we do not think that it should be—courts must be vigilant to ensure that secondary violations are not shoehorned into the category reserved for primary violations.”