SEC v. Tambone — The Question of Primary Liability

SEC v. Tambone — The Question of Primary Liability

The distinction between primary and secondary liability in securities fraud suits has been a key issue since the Supreme Court handed down its decision in Central Bank of Denver v. First Interstate, 511 U.S. 164 (1994). Although the SEC had its authority to bring Section 10(b) fraud actions based on an aiding and abetting theory restored the next year with the passage of Exchange Act Section 20(e) as part of the PSLRA, Congress has declined requests to extend such liability to private damage actions.

Despite the legislative fix, the distinction between primary and secondary liability remains critical to the SEC. The circuits are split over the appropriate standard with some following a version of the "bright line" test, while others opt for an approach based on the notion of "substantial participation.". While these tests have largely been developed in private damage actions, the dispute is impacting SEC enforcement cases.

Many observers hoped the First Circuit's en banc decision in SEC v. Tambone, No. 07-1384 (March 10, 2010) would bring clarity to the area. In its opinion, however, the court declined the opportunity to consider the issue. At the same time, it did comment on the question, if only in dicta.

The facts to Tambone are straightforward. James Tambone and Robert Hussey were senior executives of a registered broker dealer, Columbia Funds Distributor, Inc. The SEC's complaint against the executives contains allegations based on Securities Act Section 17(a), Exchange Act Section 10(b) and aiding and abetting. In essence, the Commission alleges that the two men engaged in fraud in connection with the sale of mutual fund shares tied to market timing claims. The prospectuses for the funds told investors that market timing was not permitted. A number of customers were, however, permitted to market time. According to the SEC, the two defendants were responsible for the false statements in the prospectuses, having commented on the market timing passages prior to their inclusion in the documents.

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