Commercial Litigation and Arbitration

Securities — What Does It Mean to “Make” a Statement within 10b-5? — First Circuit En Banc — Good Quotes on Statutory Construction

From SEC v. Tambone, 2010 U.S. App. LEXIS 5031 (1st Cir. March 10, 2010):

Rule 10b-5(b), promulgated by the Securities and Exchange Commission (SEC) under the aegis of section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), renders it unlawful "[t]o make any untrue statement of a material fact . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). The issue before us is one of first impression. It turns on the meaning of the word "make" as used in Rule 10b-5(b). The SEC advocates an expansive definition, contending that one may "make" a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly "make" a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.

We reject the SEC's expansive interpretation. It is inconsistent with the text of the rule and with the ordinary meanings of the phrase "to make a statement," inconsistent with the structure of the rule and relevant statutes, and in considerable tension with Supreme Court precedent. Consequently, we affirm the district court's dismissal of the SEC's Rule 10b-5(b) claim. ***

This case presents the two-part question of whether a securities professional can be said to "make" a statement, such that liability under Rule 10b-5(b) may attach, either by (i) using statements to sell securities, regardless of whether those statements were crafted entirely by others, or (ii) directing the offering and sale of securities on behalf of an underwriter, thus making an implied statement that he has a reasonable basis to believe that the key representations in the relevant prospectus are truthful and complete. The answer to each part of this two-part question is "no."

***Section 10(b) of the Exchange Act renders it unlawful for a person "[t]o use or employ . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b). Pursuant to its rulemaking authority under section 10(b), the SEC adopted Rule 10b-5(b), which provides, in pertinent part, that "[i]t shall be unlawful for any person, directly or indirectly, . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). ***

In conducting this inquiry, the pivotal word in the rule's text is "make," as in "to make a statement." The rule itself does not define that word, nor does it suggest that the word is imbued with any exotic meaning. In the absence of either a built-in definition or some reliable indicium that the drafters intended a special nuance, accepted canons of construction teach that the word should be given its ordinary meaning. See Smith v. United States, 508 U.S. 223, 228 (1993) ("When a word is not defined by statute, we normally construe it in accord with its ordinary or natural meaning."); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 472 (1977) (interpreting Rule 10b-5 according to the "commonly accepted meaning" of its words)***.

One reference point for determining the ordinary meaning of a word is its accepted dictionary definition. See, e.g., Smith, 508 U.S. at 228-29 (consulting various dictionaries to discern the plain meaning of the word "use" in the relevant statute). For purposes of this analysis, we refer to several common and representative dictionary definitions of "make," which include "create [or] cause," Webster's Third New Int'l Dict. 1363 (2002); "compose," id.; and "cause (something) to exist," Black's Law Dict. 1041 (9th ed. 2009).

This case does not require us to set forth a comprehensive test for determining when a speaker may be said to have made a statement. It is enough to say that the SEC's purported reading of the word is inconsistent with each of these definitions. In any event, the question does not turn on dictionary meanings alone. We also look to the structure of section 10(b) and Rule 10b-5, as well as other, related provisions, to interpret the term at issue. Chief among these structural considerations is the relationship between section 10(b) and Rule 10b-5(b). Section 10(b) grants the SEC broad authority to proscribe conduct that "use[s] or employ[s]" any "manipulative or deceptive device or contrivance," in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b).

In Rule 10b-5(b), the SEC prohibited a specific subset of all "manipulative or deceptive device[s] or contrivance[s]," namely, untrue or misleading statements of material fact. It likewise prohibited a specific subset of all conduct that might be said to "use or employ" such a manipulative device or contrivance: the making of untrue or misleading statements of material fact.

In light of this deliberate word choice ("make"), the SEC's asseveration that one can "make" a statement when he merely uses a statement created entirely by others cannot follow. That asseveration ignores the obvious distinction between the verbs contained in the statute ("use," "employ") and the significantly different (and narrower) verb contained in Rule 10b-5(b) ("make"). Word choices have consequences, and this word choice virtually leaps off the page. There is no principled way that we can treat it as meaningless.

*** It is not the judiciary's proper province to rewrite an administrative rule to sweep more broadly than its language permits. Thus, we must honor the limitation that the drafters deliberately built into Rule 10b-5(b).

In an effort to blunt the force of this reasoning, the SEC suggests that the broad language of the statute ("use or employ") requires an equally broad construction of the wording contained in Rule 10b-5(b). To support this suggestion, it touts the Supreme Court's statement that "[t]he scope of Rule 10b-5 is coextensive with the coverage of § 10(b)." SEC v. Zandford, 535 U.S. 813, 816 n.1 (2002). On that basis, the SEC posits that "make" must include "use" because the statute prohibits "use" and the rule perforce must prohibit all that the statute prohibits.

This argument comprises more cry than wool. Most notably, it fails to account for an abecedarian point: even if Rule 10b-5 is coextensive with the coverage of section 10(b), that supposed verity does not mean that each of the subparagraphs of Rule 10b-5, taken singly, is itself coextensive with the coverage of section 10(b). That cannot be so. If it was, then each subparagraph would proscribe exactly the same conduct. They do not. See, e.g., Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 359-60 (5th Cir. 1987).***

[T]he drafters of Rule 10b-5 had before them language [in § 17(a)] that would have covered the "use" of an untrue statement of material fact (regardless of who created or composed the statement). The drafters easily could have copied that language. They declined to do so. Instead, the drafters -- who faithfully tracked section 17(a) in other respects -- deliberately eschewed the expansive language of section 17(a)(2). ***

The SEC's other arguments for defining "make" to encompass "use" with respect to Rule 10b-5(b) liability are unavailing. One of the SEC's main arguments appears to be that "[i]t seems self-evident that any statute or rule that prohibits making a false statement in connection with the sale of property would cover a seller who knowingly uses misleading sales materials." This type of abstract, decontextualized approach to the interpretation of a statute or regulation is ill-suited to the construction of a rule laden with over sixty years of interpretation in literally hundreds of opinions. This is especially so because the rule in question is an integral part of an extensive regulatory framework forged by Congress, the SEC, and the federal courts.

At any rate, what the SEC now calls "self-evident" is not self-evident at all. What does seem self-evident is that if the SEC intended to prohibit more than just the actual making of a false statement in Rule 10b-5(b), then it would not have employed the solitary verb "make" in the text of the rule.***

There is another reason to reject the SEC's interpretation; it is in tension with Supreme Court precedent. Under modern Supreme Court precedent dealing with Rule 10b-5, much turns on the distinction between primary and secondary violators. See Cent. Bank, 511 U.S. at 191. Although Central Bank did not address the precise issue with which we are concerned, the definition of "make" that we propose is compatible with Central Bank as it holds the line between primary and secondary liability in a manner faithful to Central Bank.

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