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From Securities Regulation Daily, July 3, 2013

SEC Amicus Brief contends that satisfaction of Rule 10b-5 deception element not linked to duty to disclose

By Jim Hamilton, J.D., LL.M

A material misrepresentation would be sufficient to satisfy the deception requirement of Rule 10b-5, whether or not there is also a breach of a duty to disclose, argued the SEC in an amicus brief filed in the Eleventh Circuit. The SEC also said that a company has a duty to correct and update its prior statements when a failure to do so would render those statements materially misleading. Finnerty v. Stiefel Laboratories, Inc., et al., CA-11, 12-13947-DD, 12-15060-DD, 12-15642-DD, June 5, 2013.

Antifraud Rule. The SEC has a specific interest in the proper construction of Section 10(b) and Rule 10b-5 in this private action. The Commission has a pending enforcement action against the same defendants in the district court giving rise to Finnerty alleging that the defendants violated in a similar manner the identical antifraud provisions. See SEC v. Stiefel Laboratories Inc., et al., No. 11-cv-24438 (S.D. Fl. Miami Division). Among other things, the Commission’s complaint alleges that Stiefel Laboratories, Inc., a privately held corporation, and Charles W. Stiefel, Stiefel Lab’s chairman, CEO and majority shareholder, violated the antifraud provisions by making material misstatements and omissions as part of a scheme to accelerate buybacks of stock under Stiefel Lab’s employee stock ownership plan from its current and former employees at severely undervalued prices, and then to sell Stiefel Lab at a substantial premium.

Duty to Disclose. It is an important principle of federal securities law, said the SEC, that if a person makes material misrepresentations, the deception requirement of Section 10(b) is satisfied without regard to whether that person has an independent duty to disclose. Rule 10b-5, which was promulgated pursuant to Section 10(b), broadly prohibits “any” artifice to defraud, “any” untrue misstatement or omission and “any” deceit. These antifraud provisions are broad and, by repeated use of the word “any,” are obviously meant to be inclusive. Further, an affirmative misrepresentation is a distinct species of fraud that is sufficient to violate Rule 10b-5 even if a person does not have a fiduciary duty to disclose.

Omissions. In addition to misrepresentations, omissions or silence can also be deceptive under Section 10(b) where the failure to speak breaches a duty to disclose, said the SEC, citing Chiarella v. United States, 445 U.S. 222, 226-30, 100 S.Ct. 1108, 1113-16 (1980). Although the defendants argued that they had no such duty, the SEC observed that the case implicates two distinct duties of disclosure: (a) Stiefel Lab and Charles Stiefel both had a duty to correct and update their prior statements where their failure to do so would render those statements materially misleading; and (b) Stiefel Lab had a duty to disclose or abstain when purchasing its shares from its stockholder employees on the basis of material, non-public information.

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