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SEC v. Glt Dain Rauscher, Inc. - 254 F.3d 852 (9th Cir. 2001)

Rule:

In a securities law enforcement action, the standard of care for an underwriter of municipal offerings is one of reasonable prudence, for which the industry standard is one factor to be considered, but it is not the determinative factor.

Section 17(a) of the Securities Act, 15 U.S.C.S. § 77q(a), and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, prohibit fraudulent conduct or practices in connection with the offer or sale of securities. These antifraud provisions forbid making a material misstatement or omission in connection with the offer or sale of a security by means of interstate commerce. Mun. Sec. Rulemaking Bd. R. G-17 requires that brokers and dealers deal fairly with others and not engage in deceptive, dishonest or unfair practices.

Facts:

The United States Securities and Exchange Commission (SEC) sought a permanent injunction and civil penalties against an underwriter of municipal offerings. The SEC alleged that by failing to conduct a proper investigation and by omitting material information from offering statements, the underwriter violated § 17(a) of the Securities Act, 15 U.S.C.S. § 77q(a); §§ 10(b) and 15B(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C.S. §§ 78j(b) and 780-4(c)(1), respectively; S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5; and Mun. Sec. Rulemaking Bd. R. G-17. The district court held that because the underwriter's conduct satisfied the industry standard, he was entitled to summary judgment. The SEC appealed.

Issue:

Was summary judgment in favor the underwriter proper?

Answer:

No.

Conclusion:

The court held that the industry standard was only one factor to consider in applying the broader standard of reasonable prudence. That latter standard, the court held, was the appropriate standard for evaluating the underwriter's conduct. Material fact disputes existed about (1) exactly what a reasonably prudent professional in the underwriter's circumstances would have done, (2) whether the underwriter's conduct satisfied that standard, and (3) whether his failure, if any, to satisfy the applicable standard was so extreme as to satisfy the scienter element of the securities antifraud statutes and regulations. Thus, the court reversed the district court's grant of summary judgment to the underwriter and remanded the case for further proceedings.

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