A federal judge denied a Motion to Dismiss fraud charges brought by the SEC against a former trader. The SEC alleged that the trader misled customers in connection with the amount that his firm paid to acquire residential mortgage-backed securities ("RMBS") that were then resold to customers. The trader was acquitted in June 2017 of criminal charges for the same underlying misconduct.
In denying the motion, the U.S. District Court for the Southern District of New York ("S.D.N.Y.") reviewed the standard for demonstrating a violation of Securities Act Section 17(a). Consistent with the 2013 ruling in SEC v. Stoker, the court ruled that it is not necessary for a defendant to obtain direct personal benefits from misconduct in order to violate Section 17(a); rather, obtaining money for an employer and/or indirectly obtaining personal benefit are/is sufficient to constitute a violation. This stands in contrast to a 2013 S.D.N.Y. ruling in SEC v. Syron in which the Court held that the requirement that a "defendant personally gains money or property from a fraud is essential."
In the current case, the Court held that the SEC sufficiently pled materiality. The defendant argued that his misstatements – overstating to prospective buyers the price his brokerage had paid to acquire the securities, or falsely asserting that the broker was making arrangements with an outside buyer when, in fact, it was selling securities it already held – were immaterial to buyers' investment decisions. The Court accepted the SEC's argument that "price is a factor in virtually every investment decision." The Court further held that the SEC sufficiently alleged defendant's misstatements and intent to commit fraud.
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