An opinion from the U.S. Court of Appeals for the District of Columbia from earlier this year has an interesting holding for securities fraud defendants. In Howard v. S.E.C., 376 F.3d 1136 (D.C.Cir. 2004), the court examined a charge against the director of a broker-dealer for aiding and abetting a Rule 10b-9 violation (prohibited representations in connection with certain offerings). An element of a Rule 10b-9 claim is scienter (i.e., fraudulent intent). The court found that in the absence of red flags warning the director of the illegality in question, the director was entitled to rely on the advice of counsel and this reliance was evidence that he had not acted with scienter.
Holding: SEC order imposing sanctions vacated with respect to certain charges.
Quote of note: “[R]eliance on the advice of counsel need not be a formal defense; it is simply evidence of good faith, a relevant consideration in evaluating a defendant’s scienter.”
Quote on note II: “All the SEC can say is that Howard should have known what the legal requirements of Rule 10b-9 were and that he violated the disclosure laws by failing to reveal what he should have found out, but did not. At best this amounts to a finding of negligence; at worst it is liability without fault.”
The 10b-5 Daily 