The Eighth Court held that a person who pleads guilty to a criminal violation of Section 10(b) and Rule 10b-5 is entitled at sentencing to invoke the “no knowledge” provision of Exchange Act Section 32(a) to try and avoid a term of imprisonment. U.S. v. Behrens, No. 10-3505 (8th Cir. Filed July 13, 2011). The defendant has the burden to establish the defense.
Bryan Behrens was indicted on one count of securities fraud, six counts of mail fraud, five counts of wire fraud and nine counts of money laundering. Eventually he pleaded guilty to a singe count of securities fraud alleging violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder. At sentencing he attempted to invoke the “no knowledge” provision in Section 32(a) to avoid a prison sentence. The district court held that this defense does not apply because the defendant pleaded guilty to a statutory offense and the provision does not apply to persons “convicted of violating criminal securities laws.”
The Eight Circuit reversed. Section 32(a) provides in pertinent part that “no person shall be subject to imprisonment under this section [which provides for criminal liability for willful violations of the Act] for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” Here Mr. Behrens pleaded guilty to a violation of Section 10(b) which by its plain terms includes a violation of a Commission rule or regulation: “It shall be unlawful . . . To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . .” Based on this language the Court concluded that Section 10(b) “makes the violation of a Securities and Exchange Commission . . rule or regulation an element of the offense.”
The Court bolstered its conclusion by citing the Supreme Court’s decision in U.S. v. O’Hagan, 521 U.S. 642 (1997). There the Court held that in criminal securities “there are two sturdy safeguards . . regarding scienter.” One is the requirement that to establish a violation of Section 10(b) and Rule 10b-5 the government must prove the person acted “willfully.” The other it that “a defendant many not be imprisoned for violating Rule 10b-5 if he proves that he had no knowledge of the rule.”
Here the district court incorrectly concluded that the “no knowledge” defense did not apply. Accordingly the case was remanded for resentencing.