(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Broker Sanctions Vacated, Wrong Scienter Standard Used

A court vacated and partially remanded an order imposing sanctions against a broker for aiding and abetting alleged securities law violations committed in connection with two private placement offerings. Judge Randolph of the U.S. Court of Appeals for the District of Columbia Circuit wrote that the SEC's order imposing sanctions on the broker was "confused and confusing. " The Commission imposed a cease and desist order pursuant to its powers under Exchange Act Section 21C, finding that the broker aided and abetted violations of Rules 10b-9 and 10b-5 under the Exchange Act.

The SEC's order correctly found that "awareness of wrongdoing" was a necessary element of aiding and abetting, but failed to present evidence that the broker was aware of the violations. "A secondary violator may act recklessly, and thus aid and abet and offense, even if he is unaware that he is assisting illegal conduct," the court noted. The appellate court wrote that the SEC's essentially implemented an erroneous standard that the broker "should have known" he was assisting violations of the securities laws. The court said that the broker's lack of knowledge of Rule 10b-9 cannot be deemed reckless where he relied on advice of outside and inside counsel in the relevant transactions. His consultation with attorneys, according to the court, was powerful evidence that the broker's actions did not amount to " an extreme departure from the standards of ordinary care" that was "so obvious that the actor must have been aware of it."

¨ Howard v. SEC (DCCir) is reported at ¶92,891 .