(CN) – Underwriters who refer clients to false or misleading materials about investments are not violating securities law, the 1st Circuit said in upholding a ruling that dismisses two U.S. Securities and Exchange Commission claims against a pair of former Bank of America executives.
The Boston-based appeals court ruled that the SEC could not use its “implied statement” theory to enforce securities law.
The ruling stems from a 2005 case in which the SEC accused former Columbia Funds Distributor co-President James Tambone and former sales executive Robert Hussey of committing securities fraud by telling clients that the firm’s mutual funds did not engage in market timing when they knew otherwise.
The SEC claimed the two pointed investors to company materials stating that short-term trading was prohibited, while still selling market timing agreements.
The SEC said these implied false representations violated securities law, but the appeals court disagreed, upholding a district court ruling dismissing the claims.
The circuit court ruled that the SEC’s “expansive interpretation” of securities regulations that make it illegal “to make any untrue statement of a material fact … in connection with the purchase or sale of any security” goes against “the ordinary meanings of the phrase ‘to make a statement.”
If the SEC wanted to include implied statements in its regulations, it could have used the words “use” or “employ” to refer to statements made by others, the ruling states.
The appeals court ruling limits the SEC to going after only securities execs who actually make misstatement as opposed to giving their clients documents prepared by third parties.
Dissenting Judges Kermit Lipez and Juan Torruella said underwriters should face liability for using misleading documents under the implied statement theory because they are closely involved with investors.
The appeals court remanded the case to the district court to consider other securities law claims.