597 F.3d 436 (1st Cir. 2010), 07-1384, S.E.C. v. Tambone

Docket Nº:07-1384.
Citation:597 F.3d 436
Opinion Judge:SELYA, Circuit Judge.
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. James TAMBONE and Robert Hussey, Defendants, Appellees.
Attorney:John W. Avery, Senior Litigation Counsel, with whom David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, and Jacob H. Stillman, Solicitor, were on supplemental brief, for appellant. Arthur R. Miller, William B. Scoville, Jr., Peter G.A. Safirstein, Milberg LLP, New York City, K...
Judge Panel:BOUDIN, Circuit Judge, with whom LYNCH, Chief Judge, joins, concurring. LIPEZ, Circuit Judge, with whom TORRUELLA, Circuit Judge, joins, dissenting in part.
Case Date:March 10, 2010
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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597 F.3d 436 (1st Cir. 2010)



James TAMBONE and Robert Hussey, Defendants, Appellees.

No. 07-1384.

United States Court of Appeals, First Circuit.

March 10, 2010

Heard Oct. 6, 2009.

Page 437

John W. Avery, Senior Litigation Counsel, with whom David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, and Jacob H. Stillman, Solicitor, were on supplemental brief, for appellant.

Arthur R. Miller, William B. Scoville, Jr., Peter G.A. Safirstein, Milberg LLP, New York City, Kevin P. Roddy, Wilentz, Goldman & Spitzer, P.A., Woodbridge, NJ, Salvatore J. Graziano, Ann M. Lipton, and Bernstein Litowitz Berger & Grossmann LLP, New York City, on supplemental brief for National Association of Shareholder and Consumer Attorneys (NASCAT), amicus curiae.

Paula J. DeGiacomo, with whom Elliot H. Scherker, Greenberg Traurig LLP, A. John Pappalardo, John A. Sten, and Greenberg Traurig, P.A., Boston, MA, were on supplemental brief, for appellee Tambone.

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Clifford M. Sloan, with whom Christopher M. Joralemon, Gibson, Dunn & Crutcher LLP, New York City, Warren L. Feldman, Skadden, Arps, Slate, Meagher & Flom LLP, New York City, Frank A. Libby, Jr., John J. Commisso, and LibbyHoopes, P.C., Boston, MA, were on supplemental brief, for appellee Hussey.

Douglas R. Cox, Michael J. Scanlon, Jason J. Mendro, Gibson, Dunn & Crutcher LLP, Washington, DC, on supplemental brief for Center for Audit Quality, amicus curiae.

Carter G. Phillips, Jonathan F. Cohn, Daniel A. McLaughlin, Eric D. McArthur, Sidley Austin LLP, Washington, DC, Ira D. Hammerman, Kevin M. Carroll, on supplemental brief for Securities Industry and Financial Markets Association, amicus curiae.

Richard D. Bernstein, Barry P. Barbash, Frank M. Scaduto, Willkie Farr & Gallagher LLP, Robin S. Conrad, and Amar D. Sarwal, Washington, DC, on supplemental brief for United States Chamber of Commerce, amicus curiae.

John Pagliaro, Staff Attorney, and Martin J. Newhouse, Boston, MA, on supplemental brief for New England Legal Foundation and Associated Industries of Massachusetts, amici curiae.


SELYA, Circuit Judge.

Rule 10b-5(b), promulgated by the Securities and Exchange Commission (SEC) under the aegis of section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), renders it unlawful " [t]o make any untrue statement of a material fact ... in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). The issue before us is one of first impression. It turns on the meaning of the word " make" as used in Rule 10b-5(b). The SEC advocates an expansive definition, contending that one may " make" a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly " make" a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.

We reject the SEC's expansive interpretation. It is inconsistent with the text of the rule and with the ordinary meanings of the phrase " to make a statement," inconsistent with the structure of the rule and relevant statutes, and in considerable tension with Supreme Court precedent. Consequently, we affirm the district court's dismissal of the SEC's Rule 10b-5(b) claim.


Because this appeal follows the district court's granting of a motion to dismiss, we rehearse the facts as well-pleaded in the SEC's complaint. See Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir.2005).

At all times material hereto (roughly, 1998-2003), the defendants, James Tambone and Robert Hussey, were senior executives of a registered broker-dealer, Columbia Funds Distributor, Inc. (Columbia Distributor), or its predecessor in interest. Columbia Distributor underwrites and markets mutual funds. The SEC alleges that the defendants violated sundry provisions of both the Securities Act of 1933 (Securities Act) and the Exchange Act. Its complaint depicts a tangled web of interlocking entities. We briefly trace the fibers within that web.

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During the relevant period, Columbia Distributor was a wholly-owned subsidiary of Columbia Management Group, Inc. (Columbia Management) and an indirect subsidiary of FleetBoston Financial Corporation (Fleet). Columbia Distributor was known as Liberty Funds Distributor, Inc. (Liberty Distributor) until 2001, when Fleet purchased its parent corporation, Liberty Financial Group (Liberty).

Columbia Distributor acted as the principal underwriter and distributor of over 140 mutual funds in the Columbia mutual fund complex (the Columbia Funds). The Columbia Funds included several funds that had been owned by Liberty prior to the take-over by Fleet. In its wonted role, Columbia Distributor sold shares in the Columbia Funds and disseminated their prospectuses to investors.

Direct responsibility for the representations contained in the prospectuses rested with the funds' sponsor, Columbia Management Advisors, Inc., and its predecessors in interest (collectively, Columbia Advisors). Like Columbia Distributor, Columbia Advisors was a wholly-owned subsidiary of Columbia Management and, thus, an indirect subsidiary of Fleet for much of the relevant period.

The defendants held positions of trust and responsibility in this corporate pyramid. Tambone served as co-president of Columbia Distributor from 2001 to 2004. Prior thereto, he held the same post with Liberty Distributor. Hussey served as managing director (national accounts) of Columbia Distributor from 2002 until 2004. Before that, he occupied a comparable position with Liberty Distributor. The SEC does not allege that either defendant worked for the Columbia Funds' sponsor, Columbia Advisors, during the relevant time frame.

The short-term trading practice that lies at the epicenter of this case is known in the trade as " market timing." Market timing is the practice of frequent buying and selling of shares of a single mutual fund in order to exploit inefficiencies in mutual fund pricing. According to the SEC, market timing, though not illegal per se, can harm other fund investors and, therefore, is commonly barred (or at least restricted) by those in charge of mutual funds.

The Columbia Funds' prospectuses contained representations touching upon the subject of market timing. Starting at least as early as 1998, language was inserted into many Columbia Funds' prospectuses restricting the number and frequency of round-trips ( i.e., exchanges from one fund to another and back again) in which an investor could indulge. Emblematic of this prophylaxis was language, first appearing in May of 1999, inserted in prospectuses for funds belonging to the Acorn Fund Group, a constituent of the Columbia Funds. That language stated that the funds within the group " do not permit market-timing and have adopted policies to discourage this practice."

This effort to curb market timing escalated over time. In 2000, Hussey co-chaired an internet working group formed to create procedures designed to detect and deter market timing in the Columbia Funds. The working group ultimately recommended that each of the member funds take a consistent position against market timing in future prospectuses. As a result, a number of funds began to include a " strict prohibition" in every prospectus, expressly barring short-term or excessive trading. By 2003, the strict prohibition language, or a variant of it, appeared in all the Columbia Funds' prospectuses.

The SEC alleges that, despite the language in the prospectuses expressing hostility toward market timing-the existence

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of which Tambone and Hussey allegedly either knew or recklessly ignored-the defendants jointly and severally entered into, approved, and/or knowingly permitted arrangements allowing certain preferred customers to engage in market timing forays in at least sixteen different Columbia Funds during the relevant period. The SEC also alleges that the defendants used the prospectuses in their sales efforts by allowing them to be disseminated and referring potential clients to them.


On May 19, 2006, the SEC filed a civil complaint in the United States District Court for the District of Massachusetts.1 In its complaint, the SEC alleged that Tambone and Hussey had violated section 17(a) of the Securities Act, section 10(b) of the Exchange 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 Columbia Advisors and Columbia Distributor, primary violations of section 15(c) of the Exchange Act by Columbia Distributor, and primary violations of section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, by Columbia Advisors.

In due season, each defendant moved to dismiss. The SEC opposed the motions. As the parties' arguments with respect to liability under Rule 10b-5(b) are central to this appeal, we summarize them succinctly.

The defendants premised their challenge on the thesis that the SEC had failed properly to plead any actionable misstatements on their part. In opposition, the SEC countered that the complaint sufficiently alleged that the defendants had made material misrepresentations regarding market timing in the Columbia Funds' prospectuses. Specifically, the SEC argued that the defendants " made" false statements of material facts within the meaning of Rule 10b-5(b) by (i) participating in the...

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