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From Securities Regulation Daily, May 8, 2014

 “Janus” does not apply in the criminal context

By Rodney F. Tonkovic, J.D.

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 (US Sup Ct 2011). The panel found Janus to be inapplicable outside the context of the 10b-5 implied private right of action (Prousalis v. Moore, May 7, 2014, Wilkinson, J.)

Background. Prousalis, a former securities lawyer, represented, Inc. through 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 was 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. § 2241, 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.

Making a statement. 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 § 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 10b-5 private action (specifically, Central BankStoneridge, 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."

The case is No. 13-6814.

Attorneys: Scott Martin (Gibson, Dunn & Crutcher, LLP) for Thomas T. Prousalis, Jr. Dana James Boente, Office Of The U.S. Attorney for Charles E. Moore, Senior U.S. Probation Officer.

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