Eleventh Circuit Reverses In Part Securities Fraud Judgment Against Clearing Broker In An Action Brought By The SEC

Author:Mr John Stigi and Taraneh Fard
Profession:Sheppard Mullin Richter & Hampton
 
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In Securities & Exchange Commission v. Goble, 2012 WL 1918819 (11th Cir. May 29, 2012), the United States Court of Appeals for the Eleventh Circuit held that the recording of a sham transaction in the corporate books did not constitute "securities fraud" in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Securities & Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, because "a misrepresentation that would only influence an individual's choice of broker-dealers cannot form the basis for § 10(b) securities fraud liability." In so holding, the Eleventh Circuit declined "the SEC's invitation to expand [the] definition of materiality" to capture the misrepresentation.

Richard Goble founded and controlled North American Clearing, Inc. ("North American"), a clearing broker for about forty small brokerage firms which cleared transactions for more than 10,000 customer accounts valued at more than $500 million. During late 2007 and early 2008, North American faced declining revenues, and allegedly struggled to meet its operating expenses and make required contributions to its cash reserve account as required by SEC regulations. Finally, in May 2008, Goble directed the CFO of North American to record a sham transaction — a $5 million money market purchase — to make it appear that North American could withdraw $3.4 million from its cash reserve account. Financial Industry Regulatory Authority, Inc. examiners discovered a discrepancy created by the sham money market purchase and demanded an explanation. An SEC enforcement action followed, charging that North American violated the Customer Protection Rule under Section 15(c)(3) of the Exchange Act, 15 U.S.C. § 78o(c)(3), codified in SEC Rule 15c3-3, 17 C.F.R. § 240.15c3-3, and the Exchange Act's books and records requirements under Section 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), codified in SEC Rule 17a-3, 17 C.F.R. § 240.17a-3. The SEC also charged Goble with violating Rule 10b-5 (in addition to aiding and abetting the firm's alleged securities law violations).

The SEC settled with North American, but not Goble personally. After trial, the United States District Court for the Middle District of Florida held that Goble's actions concerning the sham money market transaction violated Section 10(b) and Rule 10b-5 (in addition to aiding and abetting the firm's violations)....

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