Federal Securities Law Reporter

Janus does not apply in the criminal context. A Fourth Circuit panel has rejected a defendant’s argument that his conduct was no longer criminal after an intervening decision by the Supreme Court. Thomas Prousalis, Jr. was convicted of securities fraud in connection with a fraudulent IPO and argued that his conduct was no longer criminal in light of the Court’s decision on securities liability in Janus Capital Group, Inc. v. First Derivative Traders. The panel found Janus to be inapplicable outside the context of the Rule 10b-5 implied private right of action.

Prousalis, a former securities lawyer, represented BusyBox.com, Inc. during its IPO in 2000. Prousalis, who prepared the offering documents, was charged with concealing, among other items, the fact that a portion of the IPO proceeds would be recycled to purchase shares that would be used both to compensate him and to pay salaries and bonuses to Busybox officers. Prousalis admitted in an earlier proceeding that he knew that he was violating the law and that he acted with intent to deceive and defraud Busybox’s investors.

As a result, Prousalis was indicted on counts of conspiracy to commit securities fraud, wire fraud, and mail fraud; securities fraud; and failure to disclose interest of counsel. He pleaded guilty pursuant to a plea agreement and was sentenced to 57 months imprisonment, three years of supervised release, and to pay $12.8 million in restitution. A petition for collateral review alleging ineffective assistance of counsel and violations of the Fifth and Sixth Amendments was denied and the dismissal affirmed on appeal. The decision in Janus was handed down subsequent to Prousalis’ appeal.

Prousalis then filed a habeas petition under 28 U.S.C. Sec. 2241, through which he would only be eligible for collateral relief if the conduct for which he was originally convicted is no longer criminal. The district court denied this motion, finding that Janus has no application in the criminal context. The court also concluded that Prousalis pleaded guilty to charges that fell outside of the scope of Janus, such as aiding and abetting.

On appeal, Prousalis argued that, under Janus, he was not the "maker" of the false statements contained in Busybox’s offering documents. Busybox, he maintained, had the ultimate legal authority over the SEC filings at issue. The panel disagreed, finding that Janus was inapplicable, Prousalis’ convictions were proper, and that his petition under Sec. 2241 failed.

Writing for the court, Circuit Judge Wilkinson explained that the holding in Janus was limited to cases invoking the implied private right of action and did not extend to the criminal convictions at issue in this case. The judge emphasized that in the Supreme Court’s cases involving the scope of the Rule 10b-5 private action (specifically, Central Bank, Stoneridge, and Janus), "context is everything," and that Janus, in particular "evinces a general desire to circumscribe implied causes of action." The panel declined "to disfigure the Court’s analysis of civil actions by wrenching its conclusion from the distinctive contextual considerations that gave it birth," Judge Wilkinson wrote.

Continuing, the panel’s interpretation of Janus was supported by considerations of judicial restraint and legislative primacy. The Janus court, Judge Wilkinson said, gave no indication that it intended to curtail the government’s criminal enforcement, or that the holding applied beyond the implied civil context. And, all of the statutes to which Prousalis pled guilty fell within the acknowledged powers of Congress.

In sum, Judge Wilkinson said, to apply Janus’s holding beyond the domain of implied rights "would represent a stark assertion of judicial will." There was no clear textual or precedential mandate to apply Janus in the criminal context, the judge concluded, and without "more affirmative indications from either Congress or the Supreme Court, we decline to work such an avulsive change in law on our own." Prousalis v. Moore (4thCir) is reported at ¶97,952.

Appeals court upholds dismissal of Flash Crash suit against SEC. An appellate panel upheld the dismissal of a complaint against the SEC in which the investor alleged breaches of contract and fiduciary duty relating to the Flash Crash of May 2010. The panel held that the trial court’s dismissal for lack of subject matter jurisdiction was appropriate.

On May 6, 2010, the Dow Jones Industrial Average dropped nearly 1000 points, which became known as the “Flash Crash.” Although the market eventually regained much of the value lost that day, because of stop loss orders, which automatically sold stocks when they fell below a certain price, investors lost over $2 billion due to the Flash Crash. One investor, Clyde C. Grady, lost $107,000 on the day of the Flash Crash. He sued the SEC, alleging that the Commission breached an implied contract with him arising out of the Exchange Act. He also alleged that the SEC breached a fiduciary duty owed to him. The U.S. Court of Federal Claims dismissed Grady’s case for lack of subject matter jurisdiction. Grady appealed.

Grady brought his complaint under the Tucker Act, which authorizes a trial court to “render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States.” Grady argued that under the Tucker Act the court has jurisdiction over the “implied-in-fact” contract between himself and the SEC for the SEC’s duty to maintain fair and orderly markets for the protection of investors. A panel of the U.S. Court of Appeals for the Federal Circuit agreed with the trial court, however, that Grady’s characterization of the alleged contract as not implied-in-fact, but implied-in-law because Grady failed to make any of the required allegations of a specific contract between himself and the SEC. As the trial court does not have jurisdiction over implied-in-law contracts, dismissal was proper, the panel held.

The panel also rejected Grady’s argument that the SEC breached its fiduciary duty to him. The Tucker Act provides for jurisdiction over claims founded on a fiduciary duty the government owes to an individual or group of citizens when the statute in question mandates the payment of money when the duty is violated. Grady argued that a money-mandating requirement can be inferred from a relationship of trust with the SEC because the SEC had “essentially assumed control of his investments.” Grady supported his contention with cases that involved the government’s management of property held in trust for American Indian tribes but, as the panel pointed out, in those cases, the government exercised direct control of tribal property. Grady was in control of his own money and did not allege that the SEC ever controlled his investments. As such, the trial court was correct to dismiss Grady’s fiduciary claim for lack of jurisdiction, the panel held. Grady v. U.S. (FedCir) is reported at ¶97,951.

Morrison bar applies to cross-listed securities. In a matter of first impression, the Second Circuit U.S. Court of Appeals decided that the bright-line transactional test established in Morrison v National Australia Bank also applies to securities purchased on a foreign exchange even if the securities are cross-listed on a U.S. exchange. The court said that Morrison emphasized that the Exchange Act is focused on purchases and sales of securities in the U.S., so the location of the transaction, and not the location of the exchange, is the key question. A buy order for foreign-issued securities placed inside the U.S. and executed on a foreign exchange was also found to be insufficient to incur “irrevocable liability” in the U.S., and therefore could not escape the Morrison bar on extraterritorial application of U.S. securities laws.

The class consisted of institutional investors that purchased UBS shares between August 13, 2003 and February 23, 2009. The investors alleged that the bank made fraudulent statements regarding its residential mortgage-backed securities (RMBS) portfolio, and compliance with U.S. tax and securities laws by its Swiss-based global cross-border private banking business. UBS accumulated and overvalued $100 billion in RMBS without disclosing it to shareholders, investors claimed, and the RMBS holdings contravened the bank’s risk management policies.

The class alleged that the bank also made materially misleading statements about a tax fraud scheme in which members of the bank’s Wealth Management International & Switzerland division traveled in and out of the U.S. to illegally advise affluent clients on the purchase of investments. In a February 19, 2009 deferred prosecution agreement with the Department of Justice, UBS admitted that it participated in a conspiracy to defraud the IRS and paid a $780 million fine.

Judge Sullivan of the Southern District of New York first dismissed claims brought by plaintiffs who purchased UBS shares of foreign exchanges in September 2011, and a year later dismissed the remaining claims because of pleading failures.

The court first addressed claims brought by foreign institutional investors who purchased shares on a foreign exchange, referred to as “foreign-cubed” claims. These claims involve a foreign plaintiff suing a foreign issuer in the U.S. for violations of U.S. securities laws based on transactions in foreign countries.
The court rejected the investors’ arg
ument that the Morrison bar did not apply because it is limited to claims arising out of securities “[not] listed on a domestic exchange.” Under this “listing theory,” the investors asserted, the fact that the UBS shares were also cross-listed on the New York Stock Exchange brings them within the purview of U.S. securities laws. The court wrote that if taken in isolation, the language of Morrison appears to support this argument, but the listing theory was irreconcilable with Morrison read as a whole.

“Morrison’s emphasis on ‘transactions in securities listed on domestic exchanges,’ makes clear that the focus of both prongs was domestic transactions of any kind, with the domestic listing acting as a proxy for a domestic transaction,” wrote Judge Cabranes. The Supreme Court rejected the idea that transactions on a foreign exchange implicate U.S. national interests, and the fact that the securities at issue in Morrison were also available on the NYSE as ADRs did not alter the Court’s analysis. “Most telling,” said the court, was the Supreme Court’s clear rejection of the Second Circuit’s “conduct and effects” test, which held that the Exchange Act applies to transactions regarding stocks trading in the U.S. which are effected outside the U.S.

The court next turned to claims asserted by a U.S. entity that purchased UBS shares on a foreign exchange after placing a buy order in the U.S. that was later executed on a Swiss exchange. The court held in Absolute Activist Value Master Fund Ltd. v. Ficeto that a securities transaction is domestic if the parties incur irrevocable liability to carry out the transaction within the U.S. This raised another issue—whether the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange is sufficient to allege that a purchaser incurred irrevocable liability in the United States. The court ruled that it did not, saying that the nationality of the entity was a non-factor, as was the fact that the entity placed the order in the U.S.

The court went on to uphold the Southern District’s dismissal of allegations that UBS’s offering materials were materially misleading because they did not disclose the DOJ investigation and falsely stated that UBS’s wealth management division did not provide services to U.S. clients. Allegations regarding statements made by UBS that its employees were held to high ethical standards were properly dismissed because the statements were immaterial puffery, said the court. The bank did disclose the existence of an investigation, the court pointed out, but it was also not required to disclose that it was involved in a tax evasion scheme. Companies have no duty to disclose “uncharged, unadjudicated” wrongdoing, the court said.

Dismissal of Exchange Act claims relating to the level of risk in the bank’s RMBS portfolio was also proper because the investors did not sufficiently allege that UBS’s representations regarding asset concentrations were materially misleading or that the bank was consciously reckless in making the representations. Allegations of fraud stemming from the bank’s valuation of its RMBS assets were also insufficient. City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG (2ndCir) is reported at ¶97,950.

SEC failed to introduce evidence on appropriate standard of care. A Second Circuit panel has reversed a district court’s judgment that a broker negligently engaged in market timing. A jury found that broker Frederick O’Meally’s misconduct was not intentional, but he nonetheless violated Securities Act Sec. 17(a). The panel concluded that the evidence was insufficient to support a verdict against O’Meally under a theory of negligence.

The Commission alleged that O’Meally failed to follow the directives of his employer and sixty mutual funds to cease his market timing. O’Meally was also alleged to have deceptively used different financial advisor numbers when his numbers were blocked from trading by the funds. In late 2011, a jury found O’Meally liable for negligently violating Securities Act Section 17(a) with respect to transactions in shares of mutual funds sponsored by six of the mutual fund companies.

The Commission argued at trial that O’Meally knew that the funds and his employer had clearly directed him to cease market timing, but he intentionally ignored these directives and concealed his trading. O’Meally countered that the funds’ policies were inconsistently applied and thus not at all clear. In a motion under Rule 50, O’Meally argued further that the court should dismiss any claim by the Commission based on negligence because all of its evidence undertook to show intentional conduct.

The jury found that O’Meally did not violate the antifraud provisions of the Exchange Act, but that he had negligently violated Securities Act Sec. 17(a)(2) and (a)(3) by negligent conduct. O’Meally again challenged the sufficiency of the evidence regarding negligence, but the court sustained the verdict, finding that O’Meally was negligent in “reading and heeding emails from a supervisor.” O’Meally was then ordered to pay penalties and disgorge the fees he earned.

On appeal, O’Meally challenged the denial of his Rule 50 motion. The panel concluded that  the evidence was insufficient to support either of the Commission’s two theories of negligence: (1) that O’Meally unreasonable made false or misleading statements to the mutual fund; and (2) that O’Meally unreasonable failed to follow his supervisors’ instructions. The court noted that while the funds’ prospectuses and block notices were clear in forbidding market timing, the Commission failed to acknowledge that these policies were inconsistently applied.

According to the court, the Commission’s own witnesses testified that exceptions were made to allow market timing. No exception was made specifically for O’Meally, but, the panel said, “if the funds were making exceptions for others, it was not unreasonable for O’Meally to believe he could engage in market timing as well.” The panel noted further that O’Meally’s employer’s legal and compliance departments approved his practices on more than one occasion.

The panel found that no reasonable juror could have found that O’Meally either acted negligently towards the funds in his market timing or that he unreasonably failed to obey his employer’s instructions. The panel characterized the SEC’s position that O’Meally negligently failed to obey the funds’ prohibitions as a “gross simplification” that showed “how little is left by way of a theory of liability.” In light of conflicting positions taken by the funds, and knowing that his employer approved of his practices, the jury could only speculate as to how O’Meally breached any standard of care.

Summing up, the panel said that the Commission succumbed to “its strategic choice at trial to pursue a theory of scienter or nothing.” The Commission’s theories of intent and recklessness were rejected by the jury, and it never introduced any evidence as to the appropriate standard of care against which the jury could measure O’Meally’s conduct. In this case, the panel concluded, the jury could not find negligence without evidence as to an appropriate standard of care. The panel accordingly reversed and remanded for the district court to dismiss the complaint. SEC v. O’Meally (2ndCir) is reported at ¶97,965.

 

Blue Sky Law Reporter  

Washington adopts NASD name change to FINRA. The Washington Department of Financial Institutions replaced NASD references with FINRA to reflect that organization’s current name. ¶61,616A, ¶61,616B, ¶61,616E, ¶61,617F, ¶61,617M, ¶61,618C, ¶61,618H, ¶61,619B, ¶61,622D, ¶61,644.

Washington Proposes Investment Adviser Rule Changes. The Washington Securities Division proposed for public comment new investment adviser rules, along with amendments to existing investment adviser, investment adviser representative and federal covered adviser rules. The proposals would affect application requirements, books and records provisions, brochure disclosures, compliance procedures, contracts, custody, financial reporting, private fund advisers, performance-based compensation, proxy voting, venture capital fund advisers, and unethical practices.

The Division announced that a public hearing on the proposals, many of which are intended to make Washington rules consistent with current federal law and NASAA model rules, will be held on June 5, 2014, at 10:00 a.m. at the Department of Financial Institutions Office, 150 Israel Road SW, Tumwater, Washington. Interested persons may submit questions or comments about the proposals to Jill Vallely at jill.vallely@dfi.wa.gov or by fax to (360) 704-7035. Comments must be received by June 4, 2014. ¶61,620, et seq.

Sellers Failed to Carry Burden to Establish Limited Offering Exemption.Affirming the decision of the Commissioner of Commerce, the Minnesota Court of Appeals held that the relators failed to carry their burden of proving that the securities they offered and sold were exempt from registration under the Minnesota Securities Act (Act). Although the relators claimed that the transactions at issue qualified for the Act’s limited offering exemption, they largely failed to present any evidence on the required five factors concerning: (1) the number of purchasers; (2) the use of any general solicitation or advertising; (3) whether any commissions or other remuneration were paid; (4) their reasonable belief that the purchasers were purchasing for investment; and (5) whether notice of the transaction was provided to the Commissioner. While the record was not inconsistent with the possibility that the exemption might have applied, the evidence was insufficient to reverse the Commissioner’s decision that they engaged in violative sales. In re Geckler is reported at ¶75,064.

 

Aspen Federal Securities Publications  

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes. The new Fifth Edition of Volumes II and XI (Finding Devices) of the cornerstone Securities Regulation treatise is now available online. This Fifth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Fourth Edition was published.

Corporate Financial Disclosure Answer Book, by Steven Mark Levy. The 2014 Supplement is now available online. Federal law requires public companies to disclose financial and other information in accordance with strict standards, including thousands of SEC, FASB, PCAOB, and stock exchange pronouncements. Disclosure must be in a prospectus, as well as in annual and quarterly reports and proxy statements filed with the SEC. Corporate Financial Disclosure Answer Book is your guide to this vital subject. The convenient Q&A format is ideal for beginners seeking a general understanding of a topic, as well as seasoned professionals grappling with critical issues. The 2014 Supplement features a completely rewritten Chapter 1, “Regulatory Framework,” presenting an improved overview of financial disclosure, its objectives, and its regulation by the government and private sector, and reforms introduced by two landmark pieces of legislation—the Dodd-Frank Act and the JOBS Act. The 2014 Supplement also updates and expands coverage of a wide range of other timely topics. Highlights include: How did the Dodd-Frank Act enlarge corporate financial disclosure (Q 1:11)? Has financial disclosure gotten to be too much, leading to information overload (Q 1:7)? How does the auditor’s seemingly bland representation in the audit report that he followed PCAOB standards become the rope that hangs him in the event of enforcement action or litigation (Q 3:15)? Does the International Integrated Reporting Framework—a proposed global corporate reporting model—offer needed reforms or more red tape and unnecessary cost (Q 4:28)? How has mandatory data tagging made possible SEC use of data analytics to detect indicia of accounting fraud (Q 5:66)? What are the requirements of the revised COSO Framework, issued in 2013, for an effective system of internal control, and why do they require 500 pages of explanation (Q 11:38.5)? How can a high score on the SEC’s Accounting Quality Model (AQM) automated surveillance tool result in an SEC inquiry regarding a company’s financial statements even before the company itself is aware of a problem (Q 19:41.5)? What is the recent trend in the level of SEC enforcement cases related to financial reporting (Q 19:42.10)? What more rigorous NYSE and Nasdaq listing requirements apply to companies that become public through a reverse merger (Q 22:6.5 and Q 23:4.5)? What is the rate of significant audit performance deficiencies identified by PCAOB inspectors, and what are the root causes of such deficiencies (Q 26:22.5 and Q 26:22.10)? How does the PCAOB use cooperative agreements to open the door to inspections in non-U.S. jurisdictions (Q 26:47.5)? What effect does the JOBS Act have on PCAOB standard setting relating to the potential economic impact of rulemaking on emerging growth companies (Q 27:7.5)? Does the PCAOB’s new “extraordinary cooperation” initiative provide a genuine incentive to audit firms or associated persons to provide a level of cooperation in PCAOB investigations exceeding that required by legal and regulatory obligations (Q 28:41)?

Securities Litigation Under the PSLRA by Michael A. Perino. Release #26 will soon be available online. This publication analyzes litigation under the Private Securities Litigation Reform Act (Reform Act or PSLRA). Since passage of the Act, courts have struggled to interpret its various provisions and have attempted to reconcile legislative history that often seems internally inconsistent or at odds with the statutory text. The story of litigation under the PSLRA is also the story of how attorneys have adapted their litigation strategies in innovative and surprising ways to deal with the statute’s procedural changes. Indeed, one of those adaptations—a shift of litigation from federal to state courts as a means of evading the PSLRA—prompted Congress to pass the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Release #26, prepared by John F. Buckley, provides essential new information about the latest legal developments, including: a recent Supreme Court decision, Chadbourne & Parke LLP v. Troice, in which the Court held that SLUSA did not apply to certificates of deposit that were not traded on any national exchange thus allowing victims of this type of fraud to recover damages in state court (see Chapter 11); discussion of oral argument and the decision in two other Supreme Court cases related to the “in connection with” requirement under SLUSA for preemption of state law based securities claims (see Chapter 11); recent decisions from several circuits on the strong inference standard (see Chapter 3); and discussion of recent amendments to the PSLRA (see Chapters 1 and 3).

 

IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

To see how an IPO Vital Sign works click on the Vital Sign title below:

	#320 – Industry Sectors Use IPO Vital Sign #320 to… Review the number and percentage of companies going public from different industries Compare aggregate offering amounts and percentage of the market total for each sector Analyze trends over time  Identify characteristics of IPOs in different industry sectors

Tip! Click on blue numbers to drill down for more information. Once in the drill down, click column headings to sort the data in an order more useful for answering your questions.

RBsource

A new research tool powered by the Securities Redbook (Securities Act Handbook), RBsource offers you securities laws, rules, regulations and forms together with related SEC guidance and interpretations. With RBsource, you will have SEC guidance related to a specific law, regulation or rule at your fingertips without the need of further searching or browsing. RBsource uniquely associates related content, going beyond the limits of standard searching making research more streamlined and productive. This intuitive research tool will drastically reduce your research time and provide the unparalleled confidence expected from the trusted Securities Act Handbook.

SEC Rulemaking Activity

• 34-72079—In the Matter of Exchange Act Rule 13p-1 and Form SD (May 2, 2014).

The SEC issued this order to partially stay public companies’ reporting duties under the Commission’s conflict minerals rule. The order also clarifies earlier guidance issued by the SEC’s Division of Corporation Finance.

The Road Ahead

Upcoming rulemaking activity will continue to reshape the securities regulation landscape. The items below are a selection of expected near-term regulatory actions. The SEC’s schedule is subject to change at any time. RBsource includes daily updates to securities regulations affected by final Commission action.

The U.S. Court of Appeals for District of Columbia, sitting en banc, heard oral arguments last week in a case involving country-of-origin labeling requirements that raises First Amendment issues similar to those raised by industry groups who challenged the SEC’s conflict minerals rule. In American Meat v. USDA, industry groups urged the court to apply heightened scrutiny to invalidate the labeling requirements, while the government urged a lower standard based on the Supreme Court’s Zauderer opinion, which typically applies in the consumer deception setting.

In April, a three-judge panel of the D.C. Circuit upheld much of the SEC’s conflict minerals rule, while also finding that a requirement in the rule, and in Exchange Act Sec. 13(p)(1)(A)(ii) and (E), failed to satisfy the narrow tailoring required by the First Amendment. As a result, the circuit court partially reversed the prior district court opinion upholding the SEC’s conflict minerals rule (National Association of Manufacturers v. SEC, April 14, 2014, Randolph, A.; National Association of Manufacturers v. SEC, July 23, 2013, Wilkins, R.).

The circuit court reached this conclusion after it rejected the SEC’s argument, based on Zauderer, that the rational basis test should apply to what the agency said were factual disclosures. But the court also did not formally decide that strict scrutiny or the Supreme Court’s Central Hudson test applied. As a result, the provision at issue was constitutionally infirm to the extent the law and the SEC’s rule require a company to report to the SEC and state on its website that any of its products have “not been found to be ‘DRC conflict free.’”

Companies subject to the SEC’s conflict minerals rule should monitor the D.C. Circuit for any new developments in both the conflict minerals case and American Meat that could impact their first reports due to be filed with the SEC by June 2, 2014. Although some companies have already filed these reports, the SEC said in both its May order partially staying the conflict minerals rule in accordance with the D.C. Circuit’s opinion, and in prior guidance issued by the SEC’s Division of Corporation Finance, that it could issue additional guidance on how to comply with the conflict minerals rule.

Hot Topic of the Month

This month's Hot Topic is Exchange Act Rule 10b-5 trading plans. Rule 10b5-1 provides that, for purposes of insider trading liability, a person trades on the basis of material nonpublic information if a trader is aware of the material nonpublic information when making the purchase or sale. As in all Rule 10b-5 fraud cases, insider trading liability under Rule 10b-5 requires a showing of scienter. Rule 10b5-1 was adopted to clarify the "use requirement" employed by some courts before the adoption of the rule.

Prior to the rule's passage, the 11th Circuit held that an insider could rebut charges of insider trading by introducing evidence that inside information was not actually utilized when making the trades at issue. This standard was referred to as the "use" test. The 9th Circuit endorsed this approach in a criminal case, holding that  a use requirement is consistent with the language of Rule 10b-5, which emphasizes manipulation, deception and fraud, and disagreed with the SEC's contention that the requisite intent to defraud is inherent in the act of trading while in possession of insider information. Noting that scienter is a necessary element of an insider trading violation, the court reasoned that the knowing possession standard advocated at the time by the SEC could not be strictly limited to those situations actually involving intentional fraud. In the release adopting Rule 10b5-1 concerning the use of inside information, the SEC confirmed that the rule did not alter the scienter requirement.

The rule also sets forth several affirmative defenses or exceptions to liability. These exceptions permit persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith. Rule 10b5-1(c)(1), for example, allows persons to plan securities transactions in advance, at a time when they are not aware of material, nonpublic information, and then complete those pre-planned transactions at a later time, even if they subsequently learn of material, nonpublic information.

To raise the Rule 10b5-1(c) defense successfully, a person must establish three elements. First, he or she must demonstrate the existence of a prior contract, instruction, or plan concerning the securities in question. Second, the person must show that the preexisting contract, instruction, or plan meets certain conditions. Finally, the person must show that the trade occurred "pursuant to" the preexisting contract, instruction, or plan. The person raising an affirmative defense must also satisfy a separate good faith requirement.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

• Federal Securities Law Reporter

• Exchange Act Rule 10b5-1, at ¶22,725D
• CCH Explanations (e.g., ¶22,778.020)
• U.S. v. Smith (9th Cir 1998), at 1998 CCH Dec. ¶90,274
• SEC v. Adler (11th Cir 1998), 1998 CCH Dec. ¶90,177

• Insights – Amy L. Goodman (e.g., “The spotlight shines on Rule 10b5-1 plans" (Jan. 31, 2013))
• SEC Today (e.g., "PLI briefing highlights concerns with insider trading and Rule 10b5-1 plans" (Jan. 25. 2013))
• Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 9.B.4)
• Regulation of Securities: SEC Answer Book – Levy (e.g., Q18:22)
• SEC Compliance and Disclosure Interpretations, at ¶8660, et seq.

• Jim Hamilton’s World of Securities Regulation