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Law School Case Brief

SEC v. Zandford - 535 U.S. 813, 122 S. Ct. 1899 (2002)

Rule:

Section 10(b) of the Securities Exchange Act of 1934 (15 USCS 78j(b)), which makes it unlawful to use any deceptive device in connection with the purchase or sale of securities in contravention of Securities and Exchange Commission rules, should be construed not technically and restrictively, but flexibly to effectuate 10(b)'s remedial purposes of: (1) Insuring honest securities markets and thereby promoting investor confidence and; (2) More generally, substituting a philosophy of full disclosure for the philosophy of caveat emptor and, thus, achieving a high standard of business ethics in the securities industry.

Facts:

The SEC sued a stockbroker alleging securities fraud and that the stockbroker violated both § 10(b) of the Securities Exchange Act of 1934 (§ 10(b)), codified at 15 U.S.C.S. § 78j(b), and the SEC's Rule 10b-517 C.F.R. § 240.10b-5 (2000), by selling his customer's securities and using the proceeds for his own benefit without the customer's knowledge or consent. The stockbroker argued that his fraud lacked the requisite connection with the purchase or sale of a security. Summary judgment was granted to the SEC but on appeal, the United States Court of Appeals for the Fourth Circuit reversed the grant and directed the complaint to be dismissed. The United States Supreme Court granted the SEC's petition for a writ of certiorari.

Issue:

Was the dismissal of the complaint proper?

Answer:

No.

Conclusion:

The Supreme Court determined that the allegations of the complaint, if true, entitled the SEC to relief and that the appellate court should not have directed that the complaint be dismissed. The breaches of fiduciary duty were "in connection with" securities sales within the meaning of § 10(b) because the securities transactions and breaches of fiduciary duty coincided. The securities sales and the stockbroker's fraudulent practices were not independent events. The stockbroker's fraud coincided with the sales themselves, and each sale was made to further respondent's fraudulent scheme. The judgment of the appellate court was reversed and the case was remanded.

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