01-147 SEC v. Zandford

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Assuming that the complaint’s allegations are true, respondent’s conduct was “in connection with the purchase or sale of any security.” Among Congress’ objectives in passing the Act was to ensure honest securities markets and thereby promote investor confidence after the 1929 market crash. Congress sought “‘to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.'” Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151. To effectuate its remedial purposes, the Act should be construed flexibly, not technically and restrictively. The SEC has consistently adopted a broad reading of “in connection with the purchase or sale of any security,” maintaining that a broker who accepts payment for securities that he never intends to deliver, or who sells securities with intent to misappropriate the proceeds, violates sec.10(b) and Rule 10(b)-5. This interpretation of the statute’s ambiguous text in the context of formal adjudication is entitled to deference. See United States v. Mead, 533 U.S. 218, 229-230. Neither the SEC nor this Court has ever held that there must be a misrepresentation about a particular security’s value in order to run afoul of the Act. This Court disagrees with respondent’s claim that his misappropriation of the proceeds, though fraudulent, does not have the requisite connection with the sales, which were perfectly lawful. The securities sales and respondent’s practices were not independent events. Taking the complaint’s allegations as true, each sale was made to further his fraudulent scheme; and each was deceptive because it was neither authorized by, nor disclosed to, the Woods. In the aggregate, the sales are properly viewed as a course of business that operated as a fraud or deceit on a stockbroker’s customer. As in Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U.S. 6; Wharf (Holdings) Ltd. v. United Int’l Holdings, Inc., 532 U.S. 588; and United States v. O’Hagan, 521 U.S. 642, all cases in which this Court found a sec.10(b) violation, the SEC complaint here describes a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide. Those breaches were therefore “in connection with” securities sales within sec.10(b)’s meaning.

238 F.3d 559, reversed and remanded.

Local effect:

The issue has not been directly considered by the Seventh Circuit, but is consistent with Seventh Circuit jurisprudence interpreting sec. 10(b) very broadly.

Stevens, J.