SW Legal studies in Business

Consultants to Firms Involved in Securities Fraud May Be Liable
Description

Appeals court held that a consultant to a firm that sold securities based on SEC filings that contained material misstatements and omissions, as did later financial reports filed with the SEC, could be liable for violating the securities law the same as if he had been an employee of the firm that engaged in the fraud.

Topic

Securities Law

Key Words

Misstatements; Filings; Consultant; Liability

C A S E   S U M M A R Y
Facts

Marple was a member of Grateful Internet Associates, a limited liability company that consulted with firms making SEC filings. He did work for F10, a public company that was issuing new stock. F10 was giving 70 percent of the revenues raised by the stock sale to Sukumo, a broker selling the stock in other countries through its “boiler room” operation. Another 17.5 percent of the revenue was pocketed by Wolfson, who brokered the deal between F10 and Sukumo. Only 12.5 percent of the revenue went to fund F10 operations. The reports Marple wrote on behalf of F10 for SEC filing failed to properly disclose the nature of the agreements with Sukumo and Wolfson. When the SEC learned of Sukumo’s dealings, it brought suit against F10 principles as well as Marple and Grateful Internet for securities fraud. Marple moved for summary judgment on his behalf, claiming that the SEC could not bring charges against a consultant to the firm that issued the stock and filed the SEC statements. The trial court issued summary judgment in favor of the SEC on all counts against all parties. Marple and others appealed.

Decision

Affirmed. A consultant can be held primarily liable for misstatements and omissions in a public company’s filings under the antifraud provisions of the securities law. The fact that Marple was not an employee of F10 does not limit his liability for the role he played in the transactions or the improper reporting to the SEC. He helped prepare the SEC filings, he caused the misstatements or omissions to be made, and he knew that the statements were calculated to reach investors. The misstatements and omissions were made “in connection with” the purchase or sale of securities, so fell under various parts of both the 1933 and 1934 securities statutes.

Citation SEC v. Wolfson, 539 F.3d 1249 (10th Cir., 2008)

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