US Securities & Exch v. Tambone, No. 07-1384. This is a close case. On the one hand, the government is bringing an enforcement action regarding misleading prospectuses to sell mutual funds. On the other hand, the defendants are represented by a large firm. The government wins. I wonder what mistakes the large firm made in representing their clients. I have been told that large firms are very detail-oriented and win all the time.
But, because these are rich defendants, the First pours a lot of type into it. However, I am just going to copy and paste from the SEC’s public domain press release, so you can get the gist of what happened.
The First Circuit ruling reversed a decision by the District of Massachusetts that had dismissed the case in December 2006 on the ground that Tambone and Hussey could not be held primarily liable for false statements in the prospectuses because they did not make those statements. The First Circuit held that Tambone and Hussey could be held liable. In its decision, the First Circuit emphasized the unique role that underwriters play in the sale and distribution of mutual funds to the investing public and the reliance that the investing public places on them as a result. The First Circuit explained that Tambone and Hussey, as executives of Columbia Distributor, had a legal duty to confirm the accuracy and completeness of the prospectuses and other fund material that they distributed. By distributing the misleading prospectuses, the First Circuit reasoned, Tambone and Hussey made implied statements to potential investors that they had a reasonable basis for believing that the key statements in the prospectuses regarding market timing were accurate and complete.
The SEC first bought action against Tambone and Hussey on Feb. 9, 2005. The District Court dismissed that action without prejudice on Jan. 27, 2006. Thereafter, on May 19, 2006, the SEC filed a new complaint concerning the same conduct. The SEC's complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided and abetted Columbia Distributor's violations of Section 15(c)(1) of the Exchange Act, Columbia Advisors' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and the Columbia entities' violations of Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC is seeking an order permanently enjoining Tambone and Hussey from violating the antifraud and other provisions of the federal securities laws, requiring them to disgorge funds received through their violations of the securities laws, and imposing civil monetary penalties. Although the District Court dismissed this complaint on Dec. 29, 2006, the First Circuit, in its decision, remanded the case to the District Court for further proceedings.
In related proceedings, the SEC filed a civil injunctive action against Columbia Management Advisors, Inc. and Columbia Funds Distributor, Inc., in federal court in Massachusetts on Feb. 24, 2004. That action was later dismissed when the two Columbia entities agreed to settle charges through administrative proceedings that resulted in an Order issued by the SEC on Feb. 9, 2005 requiring, among other things, $140 million in disgorgement and penalties to be distributed to investors harmed by market timing activity at Columbia. The SEC is in the process of distributing those funds to investors. [SEC v. James Tambone and Robert Hussey (United States Court of Appeals (1st Cir.), No. 07-1384)] (LR-20822)
Here is the SEC’s complaint