Securities & Exchange Commission v. Tambone

United States Court of Appeals
For the First Circuit

No. 07-1384

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, Appellant,

v.

JAMES TAMBONE; ROBERT HUSSEY,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Selya and Lipez, Circuit Judges,
and Delgado-Colón,* District Judge.

John W. Avery, Senior Litigation Counsel, Securities and
Exchange Commission, with whom Andrew N. Vollmer, Deputy General
Counsel, and Jacob H. Stillman, Solicitor, were on brief, for
appellant.
Elliot H. Scherker, with whom Greenberg Traurig, P.A., A. John
Pappalardo, John A. Sten, David G. Thomas, D. Greg Blankinship, and
Greenberg Traurig, LLP, were on brief, for appellee Tambone.
Christopher M. Joralemon, with whom Warren L. Feldman,
Clifford Chance US LLP, Frank A. Libby, Jr., John J. Commisso, and
Kelly, Libby & Hoopes, P.C., were on brief, for appellee Hussey.

December 3, 2008

*
Of the District of Puerto Rico, sitting by designation.
 LIPEZ, Circuit Judge. In this enforcement action brought

by the Securities and Exchange Commission ("SEC" or "the

Commission"), the Commission seeks to hold defendants James R.

Tambone and Robert Hussey, executives of Columbia Funds

Distributor, Inc., the primary underwriter for the Columbia family

of mutual funds, responsible both as primary violators of the

federal securities laws and as aiders and abettors of uncharged

primary violations of Columbia Advisors and/or Columbia

Distributor.1 After carefully reviewing the relevant statutes and

precedents, we conclude that Tambone and Hussey may be held

primarily liable for using false or misleading fund prospectuses to

sell mutual fund shares under Section 17(a)(2) of the Securities

Act of 1933 ("section 17(a)(2)") and Section 10(b) of the Exchange

Act of 1934 ("section 10(b)"), and its implementing regulation,

Rule 10b-5. Additionally, we conclude that the scope of conduct

encompassed by section 17(a)(2)'s prohibition on obtaining money or

property "by means of" any untrue statement of material fact may,

in certain circumstances, be broader than Rule 10b-5(b)'s

prohibition against "making" an untrue statement. Here, however,

1
The provisions at issue in this case are Sections 10(b) and
15(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)
and § 78o(c), respectively, along with Rule 10b-5, 17 C.F.R. §
240.10b-5, promulgated under section 10(b); Section 17(a) of the
Securities Act of 1933, 15 U.S.C. § 77q(a); and Sections 206(1) and
(2) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(1),
(2).

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we conclude that the SEC's second complaint2 alleges with

sufficient particularity violations of both prohibitions by Tambone

and Hussey, as well as aiding and abetting violations. We

therefore reverse the district court's judgment dismissing the

SEC's complaint against Tambone and Hussey.

I.

A. The Roles of the Defendants

The following description of the alleged conduct, drawn

primarily from the SEC's second complaint, is presented in the

light most favorable to the plaintiff. Miss. Pub. Employees' Ret.

Sys. v. Boston Scientific Corp., 523 F.3d 75, 85 (1st Cir. 2008).

During the relevant time period, defendants Tambone and

Hussey were senior executives of Columbia Funds Distributor, Inc.

("Columbia Distributor"), a broker-dealer registered with the SEC

since 1992. Between 1998 and 2003, the company was the principal

underwriter and distributor for a group of approximately 140 mutual

funds ("the Columbia Funds") and, in that capacity, was primarily

responsible for selling those securities and disseminating

informational materials on the funds, including prospectuses, to

investors and potential investors.3 See 15 U.S.C. § 80a-

2
We review the district court's dismissal of the SEC's second
complaint. The SEC's first complaint against defendants was
dismissed without prejudice before the Commission had an
opportunity to amend it with additional related allegations.
3
Although a mutual fund may sell shares directly to broker-
dealers, it typically employs a principal underwriter to distribute

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2(a)(40) (describing the duties of an underwriter to include

purchasing securities from an issuer for resale, or selling

securities for an issuer). Columbia Distributor was also

responsible for answering inquiries from the investing public and

other entities seeking additional information about any of the

Columbia Funds. Columbia Distributor and the issuer of the funds,

Columbia Advisors, a registered investment adviser, were both

wholly-owned subsidiaries of Columbia Management Group, Inc. and

indirect subsidiaries of FleetBoston Financial Corporation.4

As issuer and sponsor, Columbia Advisors was primarily

responsible for creating the content of the prospectuses for the

Columbia Funds. See 15 U.S.C. § 80b-2(a)(11) (defining an

investment adviser as "any person who, for compensation, engages in

the business of advising others, either directly or through

publications or writings, as to the value of securities or as to

the advisability of investing in, purchasing, or selling

and market the fund to broker-dealers and to the investing public.
4
Columbia Distributor previously went by the name Liberty
Funds Distributor, Inc. In November 2001, FleetBoston Financial
Corporation purchased Liberty Financial Group and acquired various
Liberty fund groups and investment advisers, including Liberty
Advisory Services Corp., Colonial Management Associates, Inc.,
Stein Roe and Farnham Inc., Newport Pacific Management, Inc.,
Newport Fund Management, Inc. and Columbia Funds Management
Company. Fleet retained the organization and management of Liberty
Distributor and continued using the Liberty name on the
prospectuses for the Liberty Funds. These entities merged in April
2003 with Fleet Investment Advisors, Inc. into Columbia Advisors.
In April 2004, Bank of America Corporation became the successor to
Fleet.

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securities"). Columbia Fund Services, Inc. ("Columbia Services"),

also a subsidiary of Columbia Management Group, was responsible for

determining whether "market timing" activities were occurring in

the Columbia funds and responding to such activity. Market timing

refers to the practice of buying and selling mutual funds in rapid

succession to exploit short-term inefficiencies in the pricing of

the funds.5 Among the specific Columbia Funds pertinent to this

case were the Acorn Fund Group, the Newport Tiger Fund, the

Columbia Growth Stock Fund, and several others.

Beginning in 1997, Tambone, a registered securities

principal,6 was employed as Co-President of Liberty Distributor,

and later Columbia Distributor, where he was one of the executives

responsible for managing all of Columbia Distributor's activities,

including the fulfillment of its obligations as underwriter of the

5
Market timing is "a mutual fund trading strategy that
'exploit[s] brief discrepancies between the stock prices used to
calculate the shares' value once a day, and the prices at which
those stocks are actually trading in the interim." SEC v. Ficken,
2008 WL 4615797, at *1 (1st Cir. Oct. 20, 2008) (quoting Kircher v.
Putnam Funds Trust, 547 U.S. 633, 637 n.4 (2006)). "The
discrepancy occurs because the value of the fund is calculated only
once each day." SEC v. Druffner, 517 F. Supp. 2d 502, 506 (D.
Mass. 2007).
6
A registered securities principal is one who has been
certified by the Financial Industry Regulatory Authority ("FINRA")
to "manage or supervise [a member entity's] investment banking or
securities business for corporate securities, direct participation
programs, and investment company products/variable contracts." See
FINRA Registration and Examination Requirements,
http://www.finra.org/RegistrationQualifications/BrokerGuidanceRes
ponsibility/Qualifications/p011051 (last visited Dec. 3, 2008).

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Columbia Funds. These duties included the sale and marketing of

the Columbia Funds and the dissemination to investors of the fund

prospectuses and other materials. As Co-President, Tambone was at

times involved in the process of revising the prospectuses,

although the SEC does not allege that he was responsible for

drafting them.

Hussey served as Senior Vice President of the Alliance

Group at Liberty Distributor from 1998 until 2000, where he was

responsible for selling funds to investment advisers and others for

the benefit of their clients. In 2000, he became Liberty

Distributor's Managing Director for National Accounts. In that

capacity, he managed the sale of the funds to broker-dealers and

other entities. Hussey held the same position, with substantially

similar responsibilities, at Columbia Distributor from January 2002

until March 2004. Throughout this period, Hussey reported directly

to Tambone. Both Tambone and Hussey thus played substantial and

direct roles in the sale and distribution of securities, and,

according to the complaint, more than half of the total

compensation that defendants received each year consisted of

commissions from fund sales.

B. The Nature of the Alleged Wrongdoing

Between 1998 and 2003, various Columbia Funds adopted

disclosure statements in their mutual fund prospectuses addressing

market timing practices engaged in by fund investors. The market

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timing practice of rapidly shuffling an investment into and out of

certain targeted funds is known as engaging in "round-trips."

Although potentially beneficial to an individual investor, and not

per se illegal, round-trips and other market timing practices can

adversely affect mutual fund shareholders because the profits

obtained from market timing practices dilute the value of shares in

the fund held by long-term shareholders. Further, round-trips

increase a fund's trading costs (which are borne by all

shareholders), and may cause the mutual fund to realize capital

gains at inopportune times. To prevent such practices, language

was inserted into many of the Columbia Fund prospectuses limiting

the number of round-trips -- specifically, an exchange from one

fund to another and then back again -- a shareholder could engage

in during a given period.7 As market timing practices became more

prevalent, Columbia took additional steps to prevent such behavior.

In May 1999, certain of the prospectuses for the funds belonging to

the Acorn Fund Group began representing that "[t]he Acorn funds do

not permit market timing and have adopted policies to discourage

this practice."

Consistent with the goal of limiting market timing

behavior, Hussey, in 2000, co-led a working group that recommended

that all of the Columbia Funds adopt a consistent position against

7
For example, from 1998 through 2000, the prospectuses for
the funds within the Acorn Fund Group stated that investors would
generally be permitted to make up to four round-trips per year.

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such practices in their prospectuses. The complaint states, based

on information and belief, that in April and May 2000, Hussey and

Tambone each reviewed drafts of the market timing representations

to be included in the prospectuses and offered comments via e-mail

to the in-house counsel for Columbia Advisors. Months later, a

number of the Columbia Funds revised their prospectuses to include

a statement prohibiting market timing (the "Strict Prohibition").8

By the spring of 2001, the remaining Columbia Funds belonging to

Liberty had also adopted the Strict Prohibition language in their

prospectuses. That language remained in these funds' prospectuses

until at least 2003, and was later added to prospectuses for funds

previously owned by Fleet before the acquisition.

The SEC alleges that, concurrent with these amendments,

defendants affirmatively approved or knowingly allowed frequent

trading in particular mutual funds in violation of the Strict

Prohibition disclosures contained in their prospectuses. The

Commission's second complaint details six arrangements that Tambone

8
The Strict Prohibition read:

The fund does not permit short-term or excessive trading
in its shares. Excessive purchases, redemptions or
exchanges of Fund shares disrupt portfolio management and
increase Fund expenses. In order to promote the best
interests of the Fund, the Fund reserves the right to
reject any purchase order or exchange request
particularly from market timers or investors who, in the
advisor's opinion, have a pattern of short-term excessive
trading or whose trading has been or may be disruptive to
the Fund. The funds into which you would like to
exchange may also reject your request.

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approved or knowingly allowed and seven arrangements that Hussey

approved or knowingly allowed, most, but not all of which,

overlapped. We describe the alleged arrangements, none of which

were disclosed to the investors or the independent trustees of the

Columbia Funds.

(1) Hussey and Tambone approved an arrangement allowing

Ilytat, L.P. to engage in frequent and short-term trading in

Newport Tiger Fund, a Columbia mutual fund. According to the

arrangement, Ilytat would place $20 million in the Newport Tiger

Fund, with two-thirds remaining static and one-third being actively

traded. Tambone approved or became aware of the arrangement by

October 2000, when the portfolio manager for the Newport Tiger

Fund, who had initially approved the arrangement, communicated to

both Tambone and Hussey his concern about Ilytat's market timing

practices and the potential harm it could have on the fund and its

investors.9 With Hussey's approval, Ilytat was added to Columbia

9
In response to an email from the Newport Tiger Fund's
portfolio manager in October 2000 discussing Ilytat, in which the
manager states that "their active trading has increased and it has
become unbearable. There will be long term damage to the fund,"
Hussey set forth guidelines for such market timing arrangements,
including:

• Identify and close a long-term asset stream as a
quid-pro-quo to any short-term movements;
• Dictate that any short-term movements must use a
Liberty money market option to ensure gross sales
are not artificially inflated and to ensure that
Liberty generates constant management fee income;
• Bring the potential relationship to the attention
to [sic] the relevant investment management team

-9-
Services' list of "Authorized Accounts for Frequent Trading,"10 and

Hussey, in 2002, reversed a stop placed on Ilytat's trading by

Columbia Services market timing surveillance personnel.

In total, between April 2000 and October 2002, Ilytat

made 350 round-trips in seven international Columbia Funds,

including the Newport Tiger Fund and the Acorn International Fund.

At least 30 of the round-trips in the Newport Tiger Fund were made

during the period from May 2001 through September 2002 when the

fund prospectus contained the Strict Prohibition representation.11

Moreover, despite language in the prospectus for the Acorn

International Fund between September 1998 and September 2000

preventing investors from engaging in more than four round-trips

per year, Ilytat engaged in 27 such round-trips in 1999 and 18 in

2000. Ilytat also engaged in at least 20 round-trips in the fund

between July 2000 and June 2001, when the fund prospectus included

the Strict Prohibition language.

early; and
• Monitor the relationship to ensure the investment
management team's comfort.

Hussey's response, which was copied to Tambone, stated that
the Ilytat arrangement followed these guidelines.
10
The list was designed to protect certain entities from any
internal actions taken to prevent market timing practices.
11
In 2000 and early 2001, before it was amended to include the
Strict Prohibition, the prospectus for the Newport Tiger Fund
stated that "[s]hort term 'market timers' who engage in frequent
purchases and redemptions can disrupt the Fund's investment program
and create additional transaction costs that are borne by all
shareholders."

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 (2) From January 2000 through September 2003, Ritchie

Capital Management, Inc. traded frequently in a number of Columbia

Funds, including the Newport Tiger Fund and the Columbia Growth

Stock Fund. In late 2001, Hussey became aware of Ritchie's short-

term trading activities in the two Columbia Funds. In early 2003,

Ritchie Capital Management, Inc. entered into an arrangement with

Columbia Distributor, approved by Tambone and Hussey, designating

certain of Ritchie's investments as "sticky assets,"12 or long-term

assets, and others as available for short-term trading.

(3) In late 2002 or early 2003, Edward Stern entered into

two separate agreements with Columbia Distributor through

intermediaries. One arrangement, secured by Epic Advisors on

behalf of Stern's Canary Investment Management firm, and approved

by Tambone, allowed Stern entities to make three round-trips per

month in each of three Columbia funds. Each fund's prospectus

contained the Strict Prohibition language. The second agreement

involved the placement of $5 million in the Columbia High Yield

Fund, whose prospectus also contained the Strict Prohibition

disclosure. That arrangement, approved by the fund's portfolio

manager, permitted Stern to make one round-trip each month.

12
"Sticky assets" are investment assets that remain in place
within a given fund for an extended period of time. A "sticky
asset" arrangement typically involves keeping these "sticky assets"
in place for a given period of time in return for permission to
actively trade another amount of assets more frequently.

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 (4) In 1999, Daniel Calugar was allowed to place up to

$50 million in the Columbia Young Investor Fund and the Columbia

Growth Stock Fund, with permission to make one round-trip per month

with the entire amount. In 2000, knowing that Calugar was trading

at levels exceeding their arrangement, Hussey expressed concern

that Calugar's activities were harming the funds, but took no

action to limit the trading activities. Tambone was apprised by

Hussey of Calugar's activities, but also took no action. Calugar

continued the short-term trading activities until at least August

2001, several months after the funds at issue adopted the Strict

Prohibition language in their prospectuses.

(5) Tambone approved a "sticky asset" arrangement

between Columbia Distributor and broker Sal Giacalone in late 2000.

Per the terms of the arrangement, Giacalone was allowed to make

four round-trips per month of up to $15 million in the Newport

Tiger Fund so long as he also placed $5 million in the long-term

assets of the Acorn Fund. Between November 2000 and April 2001,

Giacalone made a total of 43 round-trips in the Newport Tiger Fund

pursuant to the arrangement.

(6) Hussey approved an arrangement with D.R. Loeser in

late 1998 allowing Loeser to make five round-trips per month of up

to $8 million in the Columbia Growth Stock Fund. In the first five

months of 2000, Loeser made approximately 20 round-trips in the

Growth Stock Fund and another 20 round-trips in the Young Investor

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Fund. Despite knowledge by Tambone and Hussey of Loeser's trading

practices, neither took action to halt the trading activities.

(7) Signalert entered into an arrangement with Columbia

Distributor in 1999, approved by Hussey, in which it agreed to

invest $7.5 million in the Growth Stock Fund and $7.5 million in

the Young Investor Fund in exchange for permission to engage in 10

round-trips annually in each of the funds. Pursuant to the

arrangement, Signalert was also required to place $5 million in

each of six other funds, which could be traded just once each

quarter. During 2000-2001, Signalert made over 50 round-trips in

the Growth Stock Fund and approximately 50 round-trips in the Young

Investor Fund. These included 20 round-trips in the Young Investor

Fund between February and August 2001, after the fund's prospectus

had been amended to include the Strict Prohibition language.

(8) In early 2000, Columbia Distributor agreed to allow

Tandem Financial to make an unlimited number of trades in one or

more of the Columbia Funds. During the period from April 2001

through September 2003, Tandem made 106 round-trips in the Columbia

Tax Exempt Fund, despite the Strict Prohibition disclosure in the

fund prospectus. Hussey and one of Tambone's subordinates became

aware of Tandem's activities in early 2003.

The complaint alleged that Columbia Advisors, itself or

through portfolio managers for the separate funds, knew or approved

of all of the market timing arrangements, except the arrangement

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with Tandem. In total, during the approximately five-year period

from 1998 to 2003, hundreds of round-trips were executed in the

Columbia Funds in amounts approaching $2.5 billion.

Meanwhile, in his position as Managing Director for

National Accounts, Hussey also helped lead a task force established

to develop procedures for detecting and preventing market timing

activities in the Columbia Funds. Hussey was the designated

contact for inquiries about market timing, including what actions,

if any, should be taken if such activity was detected. In this

capacity, he participated in the creation of a list of "Accounts

Approved for Frequent Trading."13 According to the second

complaint, both Hussey and Tambone, on multiple occasions, blocked

or allowed their subordinates to block efforts to halt the trading

activity of preferred customers.

In addition to overseeing the distribution of

prospectuses, Tambone, on behalf of Columbia Distributor, signed

hundreds of selling agreements for Columbia Funds during this

13
The complaint describes an email forwarded to Hussey by the
market timing surveillance manager describing the differential
treatment given to favored investors:

I review 3 different reports each day that reflect
accounts fitting this criteria [the definition of market
timers]. After these accounts are located, I take action
against some of them. The accounts that are recognized
as timers (that do not have some kind of existing
relationship with us) merit trade cancellations and
placement of account stops. The accounts that are
allowed to trade (due to a sales relationship) are
ignored.

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period. Each selling agreement stated the procedures by which the

customer would purchase shares of the Columbia Funds from Columbia

Distributor and contained express representations and warranties

related to the content of the prospectuses. Tambone referred the

purchaser to the fund prospectuses for information on the fund and

specifically stated in each agreement that "[w]e shall furnish

prospectuses and sales literature upon request."

The SEC learned of the alleged conduct of defendants and

the various Columbia entities during the course of its

investigation of market timing practices of many fund companies.

See Gretchen Morgenson & Landon Thomas, Jr., S.E.C. Finding Fund

Abuses, Official Says, N.Y. Times, Oct. 25, 2003, at C1 ("[A]fter

sending out 88 letters to mutual fund companies and brokerage

firms, [the SEC] found that half . . . had arrangements with one or

more investors allowing them to trade in and out of shares. These

arrangements occurred even though about half of the fund companies

have policies specifically barring market timing, the official

said."). Prior to filing its initial complaint in this case, the

Commission obtained extensive discovery from Columbia, reviewing

hundreds of thousands of pages in documents and taking the sworn

testimony of Mr. Hussey and over 20 other witnesses.14

14
Section 21 (a)(1) of the Securities Exchange Act of 1934
gives the SEC broad authority to "make such investigations as it
deems necessary to determine whether any person has violated, is
violating, or is about to violate any provision of [the Exchange
Act and] the rules or regulations thereunder . . . ." 15 U.S.C. §

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C. Procedural History

The SEC filed a complaint against defendants Tambone and

Hussey in February 2005 alleging securities fraud based on the

above allegations.15 The complaint alleged that defendants

committed primary acts of fraud in violation of section 10(b) of

the Securities Exchange Act, Rule 10b-5, and section 17(a)(2) of

the Securities Act. It also alleged that defendants aided and

abetted primary violations committed by Columbia Advisors and

Columbia Distributor in violation of section 206 of the Advisers

Act, and primary violations committed by Columbia Distributor in

violation of section 15(c)(1) of the Exchange Act. The complaint

sought three remedies: (1) a permanent injunction to restrain

Tambone and Hussey from further violating, either directly or

indirectly, the statutory provisions implicated in this case; (2)

78u(a)(1).
15
In February 2005, the SEC settled an enforcement action
against Columbia Advisors, Columbia Distributor, and three former
Columbia executives related to undisclosed market timing
arrangements in the Columbia Funds. Without admitting or denying
the SEC's findings, Columbia Advisor and Columbia Distributor
agreed to pay $70 million in disgorgement and a civil penalty of
$70 million to the SEC, to be distributed to investors harmed by
the conduct. Press Release, U.S. Securities and Exchange
Commission, Fleet's Columbia Mutual Fund Adviser and Distributor to
Pay $140 Million to Settle SEC Fraud Charges for Undisclosed Market
Timing, 2005-15 (Feb. 9, 2005) (available at
http://www.sec.gov/news/press/2005-15.htm). As a result, the SEC's
claims in this case are targeted at Tambone and Hussey only,
although to establish aiding and abetting liability against these
defendants, the SEC is also required to allege claims against
Columbia Advisors and/or Columbia Distributor for primary
violations of the securities laws.

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disgorgement and pre-judgment interest; and (3) unspecified civil

penalties. See 15 U.S.C. §§ 77t(d), 78u(d)(3), and 80b-9(e).

The defendants moved to dismiss the complaint for failure

to plead fraud with particularity as required by Fed. R. Civ. P.

9(b) and for failure to state a claim upon which relief could be

granted under Rule 12(b)(6). The district court granted the

motions without prejudice on January 27, 2006.

On March 16, 2006, the SEC moved for leave to amend the

original complaint. Before that motion was resolved, the SEC moved

for relief from judgment pursuant to Fed. R. Civ. P. 60(b), having

realized that a motion for leave to amend cannot be considered

after a case has been dismissed. The district court denied both

motions on May 5, 2006.

On May 19, 2006, the SEC filed a second complaint which

sought the same remedies but raised an additional aiding and

abetting offense and offered supplemental factual allegations to

support all of the claimed violations. As characterized by the

district court, the Commission's second complaint contained 110

paragraphs nearly identical to those in the initial complaint, and

twelve additional paragraphs alleging new facts. The additional

paragraphs state generally that both defendants participated in the

review and oversight processes related to market timing issues for

the Columbia Funds, and specifically allege that defendants were

responsible for misrepresentations on market timing in the fund

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prospectuses.16 Despite these additions, the district court again

dismissed the Commission’s claims on December 29, 2006, this time

with prejudice.

Addressing the question of primary liability, the court

applied an attribution test. That is, the court stated that to be

liable under "Section 10(b) of the Exchange Act and Section 17(a)

of the Securities Act, a defendant must have personally made either

an allegedly untrue statement or a material omission." Despite the

SEC's allegations that defendants had participated in working

groups and task forces that led to the revision of the market

timing statements in the false and misleading prospectuses, and

then used those prospectuses to sell the mutual funds, the court

concluded that "[t]he major flaw with the SEC's complaint was then,

and continues to be, a failure to attribute misleading statements

to either Tambone or Hussey." According to the district court,

neither the defendants' roles in disseminating the allegedly

misleading prospectuses nor their participation in the process of

revising the disclosures was sufficient to satisfy the provisions'

attribution requirement.

The court also found other deficiencies in the SEC's

complaint. First, the court ruled that the SEC had failed to

satisfy the pleading particularity requirements imposed by Fed. R.

16
From this point forward in the opinion, we shall refer to
the second complaint as "the complaint."

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Civ. P. 9(b), noting that "[t]he new paragraphs fail [] to identify

the substance of the comments made by either Tambone or Hussey . .

. and . . . fail to allege that any of the language reviewed or

proposed by either defendant was ever actually incorporated into

the fall 2001 prospectus." Second, the court rejected the

Commission's allegation that Tambone and Hussey owed a duty to the

investors to whom they sold the funds. It wrote: "[A]n individual

owes a duty to clarify a misleading statement only if that

statement is attributable to the individual." Without any

statement attributable to them, the defendants could not be held

liable for misleading statements or omissions in the prospectuses,

nor for failing to correct the false prospectuses.

Finally, the court dismissed the SEC's aiding and

abetting allegations, finding that the "SEC had not sufficiently

alleged that the defendants consciously threw in their lot with the

primary violators."

The SEC challenges these conclusions of the district

court on appeal.

II.

We review the district court's grant of a motion to

dismiss de novo. Rodríguez-Ortiz v. Margo Caribe, Inc., 490 F.3d

92, 95 (1st Cir. 2007). Although Fed. R. Civ. P. 8(a)(2) requires

only "a short and plain statement of the claim" sufficient to give

the defendant fair notice of the claim and its factual basis, see

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Conley v. Gibson, 355 U.S. 41, 47 (1957), the "plain statement"

must "possess enough heft to 'sho[w] that the pleader is entitled

to relief.'" Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1966

(2007) (quoting Fed. R. Civ. P. 8(a)(2)). A plaintiff's task

"requires more than labels and conclusions, and a formulaic

recitation of the elements of a cause of action." Id. at 1965; see

also Rodríguez-Ortiz, 490 F.3d at 95.

When reviewing a ruling on a motion to dismiss under Rule

12(b)(6), we accept all well-pleaded facts as true and draw all

reasonable inferences in favor of the plaintiff. ACA Fin. Guar.

Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008). We are not

limited to the district court's reasoning, but "may affirm an order

of dismissal on any basis made apparent by the record." Ramos-

Pinero v. Puerto Rico, 453 F.3d 48, 51 (1st Cir. 2006).

The SEC must also satisfy the heightened pleading

standard set by Fed. R. Civ. P. 9(b) for allegations of fraud. The

heightened standard applies both where fraud is an essential

element of the claim, as in the Commission's claims under section

10(b), and where the plaintiff alleges fraud even though it is not

a statutory element of the offense, as in the SEC's claims under

section 17(a)(2). Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1223

(1st Cir. 1996) ("It is the allegation of fraud, not the ‘title’ of

the claim that brings the policy concerns [underlying Rule 9(b)] .

. . to the forefront." (quoting Haft v. Eastland Fin. Corp., 755 F.

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Supp. 1123, 1133 (D.R.I. 1991))); see also ACA Fin., 512 F.3d at

68. Rule 9(b) mandates that "[i]n all averments of fraud or

mistake, the circumstances constituting fraud or mistake shall be

stated with particularity."17 Fed. R. Civ. P. 9(b). "Malice,

intent, knowledge, and other condition of mind of a person may be

averred generally." Id. To satisfy the particularity element, we

require that the Commission's complaint include the "time, place,

and content of the alleged misrepresentation with specificity."

Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999).

Further, "[w]here allegations of fraud are explicitly or . . .

implicitly[] based only on information and belief, the complaint

must set forth the source of the information and the reasons for

the belief." Romani v. Shearson, Lehman, Hutton, 929 F.2d 875, 878

(1st Cir. 1991).

To establish scienter, we ordinarily require that a

plaintiff allege sufficient facts to give rise to a "strong

inference that the defendant acted with the required state of

mind." 15 U.S.C. § 78u-4(b)(2); see also ACA Fin., 512 F.3d at 58-

59. We developed this heightened standard in the context of

private securities actions "to minimize the chance 'that a

17
Since the SEC filed its complaint, Rule 9(b) "has been
amended as part of the general restyling of the Civil Rules to make
them more easily understood and to make style and terminology
consistent throughout the rules." We recite the text of the old
version of the rule. The changes were "intended to be stylistic
only." Fed. R. Civ. P. 9 advisory committee's notes (2007
amendment).

-21-
plaintiff with a largely groundless claim will bring a suit and

conduct extensive discovery in the hopes of obtaining an increased

settlement, rather than in the hopes that the process will reveal

relevant evidence,'" Shaw, 82 F.3d at 1223 (quoting Romani, 929

F.2d at 878), and it was largely codified by Congress in the

Private Securities Law Reform Act of 1995 ("PSLRA"). See ACA Fin.,

512 F.3d at 58 n.7 (noting that our prior application of Fed. R.

Civ. P. 9(b) to allegations of scienter in private securities fraud

actions is consistent with the standard imposed by the PSLRA);

Greebel, 194 F.3d at 193 ("The PSLRA's pleading standard is

congruent and consistent with the pre-existing standards of this

circuit.").

Here, however, we are evaluating a securities complaint

filed by the SEC, not a private actor. Therefore, on its face,

the requirements of the PSLRA do not apply. Additionally, the

rationales we set forth for a more demanding standard in private

securities actions do not apply to this SEC enforcement action.

Whereas private parties have a financial incentive to initiate

"strike" suits and drag deep-pocketed defendants into court on

allegations of fraud in hopes of obtaining a lucrative settlement,

the SEC's statutory task is to protect the investing public by

policing the securities markets and preventing fraud. Moreover,

as noted above, the SEC possesses the authority to investigate

conduct prior to filing a complaint, thereby minimizing the

-22-
concerns that may result from a lengthy and intense discovery

process. See 15 U.S.C. § 78u(a)(1); cf. Merrill Lynch, Pierce,

Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 80-81 (2006) (noting

that the standard for establishing a claim under section 10(b) is

higher in the context of a private suit than in an SEC enforcement

action because courts are rightly concerned with limiting the

"vexatiousness" associated with private Rule 10b-5 suits).

Therefore, the additional scrutiny applied to allegations of

scienter in private securities fraud complaints is unwarranted in

this case. See, e.g., SEC v. Lucent Techs., Inc., 363 F. Supp. 2d

708, 717 (D.N.J. 2005) ("[T]he heightened requirements for

pleading scienter under the PSLRA do not apply to actions brought

by the SEC."); SEC v. ICN Pharm., Inc., 84 F. Supp. 2d 1097, 1099

(C.D. Cal. 2000) ("[T]he 'more rigorous' pleading requirements

under the PSLRA, which go beyond the Rule 9(b) requirements only

apply to private securities fraud actions; they do not apply to a

case . . . brought by the SEC."). Of course, the ordinary

scienter requirements of Rule 9(b) apply. The SEC need only

allege scienter generally. Fed. R. Civ. P. 9(b).

Although we decline to apply the "strong inference"

requirement of the PSLRA, we rely on the method elucidated

recently by the Supreme Court to assess whether scienter has been

adequately alleged. See Tellabs, Inc. v. Makor Issues & Rights,

-23-
Ltd., 127 S.Ct. 2499, 2509 (2007).18 Accordingly, we evaluate "the

complaint in its entirety" to determine "whether all of the facts

alleged, taken collectively" meet the scienter standard. Id.

Further, we conduct a fact-specific inquiry that considers the

circumstances and allegations of the particular case, rather than

relying on a generalized pattern of facts as evidence of motive

and opportunity. Greebel, 194 F.3d at 196 ("The categorization of

patterns of facts as acceptable or unacceptable to prove scienter

or to prove fraud has never been the approach this circuit has

taken to securities fraud."); In re Cabletron Sys., Inc., 311 F.3d

11, 32 (1st Cir. 2002) ("Each securities fraud complaint must be

analyzed on its own facts; there is no one-size-fits-all

template.").

III.

A. Statutory Background

We begin our analysis of the SEC's claims with the text,

history, and purpose of the provisions at issue. See Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 197 (1976) ("[t]he starting

point in every case involving construction of a statute is the

language itself." (quoting Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 756 (1975) (Powell, J., concurring))). The

18
In Tellabs, the Supreme Court was faced with the question
of how to assess whether a private securities complaint alleged
sufficient facts to establish a "strong inference" of scienter
against the defendant, as required by the PSLRA.

-24-
Securities Act of 1933 and the Exchange Act of 1934 were enacted

to "set the economy on the road to recovery" after the 1929 stock

market crash and reports of widespread fraud and abuse in the

securities industry. United States v. Naftalin, 441 U.S. 768, 775

(1979); see also Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, N.A., 511 U.S. 164, 170-71 (1994). Together, the

acts promote this goal by prohibiting fraud through a scheme of

civil and criminal19 liability and "substitut[ing] a philosophy of

full disclosure for the philosophy of caveat emptor." SEC v.

Capital Gains Research Bureau, 375 U.S. 180, 186 (1963). Although

the Securities Act was primarily concerned with the regulation of

new offerings and the Exchange Act with post-distribution trading,

section 17(a) of the Securities Act "was meant as a major

departure" from the scope of the rest of that statute, and was

"intended to cover any fraudulent scheme in an offer or sale of

securities, whether in the course of an initial distribution or in

the course of ordinary market trading." Naftalin, 441 U.S. at

777-78; see also Central Bank, 511 U.S. at 171.

The text of the statutes confirms their common purpose

to prohibit a wide swath of fraudulent behavior that Congress

believed impeded the smooth and honest functioning of the

19
Criminal penalties may be imposed if an individual or entity
is found to have willfully violated section 17(a) of the Securities
Act. 15 U.S.C. § 77x; see Naftalin, 441 U.S. at 778 (criminal
prosecution under section 17(a)).

-25-
securities markets. See Naftalin, 441 U.S. at 775-78; Ernst &

Ernst, 425 U.S. at 194. Section 17(a) was designed to address the

most egregious abuses of securities sellers by authorizing the SEC

to punish violators through injunctive relief or criminal

liability rather than by means of private causes of action. See,

e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867 (2d Cir.

1968) (Friendly, J., concurring) ("[T]here is unanimity . . . that

§ 17(a)(2) of the 1933 Act -- indeed the whole of § 17 -- was

intended only to afford a basis for injunctive relief and, on a

proper showing, for criminal liability . . . ."); see also David

S. Ruder, Civil Liability under Rule 10b-5: Judicial Revision of

Legislative Intent?, 57 Nw.U. L. Rev. 627, 656 (1963) (referencing

the statute's legislative history). Section 17(a) states:

It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or by use of the mails, directly or
indirectly
(1) to employ any device, scheme, or artifice to
defraud, or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in light of the circumstances under which they were
made, not misleading; or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.

15 U.S.C. § 77q(a). Section 10(b) of the 1934 Act performs a

similar catch-all function and also extends coverage beyond

-26-
securities sellers. See Texas Gulf Sulphur, 401 F.2d at 859-60.

Section 10(b) states:

It shall be unlawful for any person, directly or
indirectly . . . .
(b) To use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations as the [Securities and Exchange] Commission
may prescribe as necessary or appropriate in the public
interest or for the protection of investors.

15 U.S.C. § 78j(b).

"Section 10(b) of the Exchange Act bars conduct

involving manipulation or deception, manipulation being practices

. . . that are intended to mislead investors by artificially

affecting market activity, and deception being misrepresentation,

or nondisclosure intended to deceive." Ganino v. Citizens Utils.

Co., 228 F.3d 154, 161 (2d Cir. 2000) (quotation marks and

citation omitted). By its literal terms, section 10(b) applies to

conduct in violation of rules and regulations issued by the SEC.

Its prohibitions were given effect almost a decade after its

enactment with the SEC's adoption of Rule 10b-5, among other

rules. The Rule largely mimics the language of section 17(a)

while applying to both the sale and purchase of any security:

It shall be unlawful for any person, directly or
indirectly . . .
(a) To employ any device, scheme, or artifice to
defraud,
(b) To 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, or

-27-
 (c) To engage in any act, practice, or course of
business which operates or would operate as a fraud or
deceit upon any person, in connection with the purchase
or sale of any security.

17 C.F.R. § 240.10b-5. The rule "encompasses only conduct already

prohibited by § 10(b)." Stoneridge Inv. Partners, LLC v.

Scientific-Atlanta, Inc., 128 S. Ct. 761, 768 (2008); see United

States v. O'Hagan, 521 U.S. 642, 651 (1997). Because of its broad

scope and its availability to private plaintiffs, Rule 10b-5 "is

the most commonly used basis for private suits charging fraud in

connection with the purchase or sale of securities." See 3 Thomas

Lee Hazen, Treatise on the Law of Securities Regulation

§ 12.4[1] (5th ed. 2005); see also Ernst & Ernst, 425 U.S. at 196

("During the 30-year period since a private cause of action was

first implied under § 10(b) and Rule 10b-5, a substantial body of

case law and commentary has developed as to its elements.")

(footnote omitted).

Although the text of section 17(a) is nearly identical

to the text of Rule 10b-5, as indeed section 17(a) served as the

guide for Rule 10b-5, there are several key distinctions between

the provisions. See generally 3 Hazen, supra, § 12.22; see also

15 U.S.C. § 77q; 17 C.F.R. § 240.10b-5. First, whereas section

17(a) applies only to brokers and dealers selling or offering to

sell securities, Rule 10b-5 explicitly covers "any person" who

commits a fraudulent act "in connection with the purchase or sale

-28-
of any security."20 See Exchange Act Release No. 3230, 7 Fed. Reg.

3804 (May 21, 1942) (Rule 10b-5 was intended to "close[] a

loophole in the protections against fraud administered by the

Commission by prohibiting individuals or companies from buying

securities if they engage in fraud in their purchase.") (emphasis

added); see also 3 Hazen, supra, § 12.22. Moreover, section 10(b)

and Rule 10b-5 reach only conduct that "coincides" with a

securities transaction –- a sale or purchase, see Merrill Lynch,

547 U.S. at 85 -- and not a fraudulent offer alone.21 In contrast,

because section 17(a) applies to both sales and offers to sell

securities, the SEC need not base its claim of liability on any

completed transaction at all. See Blue Chip Stamps, 421 U.S. at

20
Rule 10b-5 explicitly modified the language of section 17(a)
to create an antifraud prohibition that expanded beyond the sale
context. According to Milton Freeman, one of the rule's co-
drafters, Rule 10b-5 was hastily drafted and approved in response
to a report that the president of a company was buying up his
company's stock based on false statements regarding its financial
outlook. In an attempt to address this specific situation, Freeman
claims to have combined sections 10(b) and 17. Discussion centered
on where the phrase "in connection with the purchase or sale"
should be located. The Commission quickly approved the provision
without any discussion except a statement by Commissioner Sumner
Pike to the effect of, "Well, we are against fraud, aren't we?"
Milton V. Freeman, Conference on Codification of the Federal
Securities Laws: Administrative Procedures, 22 Bus. Law. 891, 922
(1967); see also Blue Chip Stamps, 421 U.S. at 767 (Blackmun, J.,
dissenting).
21
In Blue Chip Stamps, the Supreme Court further confined the
scope of Rule 10b-5 in the context of private causes of action.
421 U.S. at 731-34. Based on policy concerns, the court held that
only actual purchasers or sellers of securities have standing to
bring a private cause of action under Rule 10b-5. Id. at 733-35.

-29-
733-34 (contrasting the text of section 10(b) with that of section

17(a)); Naftalin, 441 U.S. at 773 (explaining that the statutory

terms "offer" and "sale" are "expansive enough to encompass the

entire selling process, including the seller/agent transaction");

see also 3 Hazen, supra, § 12.22.

In addition, as stated above, although private

plaintiffs can maintain a cause of action under Rule 10b-5, only

the SEC may bring a claim to enforce the prohibitions of section

17(a). See Ernst & Ernst, 425 U.S. at 196 ("Although § 10(b) does

not by its terms create an express civil remedy for its violation,

and there is no indication that Congress, or the Commission when

adopting Rule 10b-5, contemplated such a remedy, the existence of

a private cause of action for violations of the statute and the

Rule is now well established.") (footnote omitted); Maldonado v.

Dominguez, 137 F.3d 1, 6-8 (1st Cir. 1998) (joining a majority of

circuits in rejecting a private right of action under section

17(a)).22

22
In Maldonado, we based our decision not to imply a private
right of action in section 17(a) on our assessment of congressional
intent, which we ascertained through the express language of
section 17(a) and its neighboring provisions, as well as the
statute's legislative history. 137 F.3d at 6-8. Noting that
Congress explicitly provided for private causes of action in
sections 11 and 12 of the Securities Act of 1933 but not section
17(a), we concluded that because these provisions "address much of
the same conduct and benefit the same parties as a potential
implied private cause of action, the circumstances [relating to
section 17(a)] militate against that inference." Id. at 7-8.

-30-
 Finally, the degree of scienter required to establish a

violation under Rule 10b-5 and section 17(a)(2) differs. To prove

a claim under section 17(a)(2), the subsection pertaining to false

statements or omissions, the SEC need show only that the

defendants acted negligently. Under section 10(b) and Rule 10b-5,

however, the SEC must prove that defendants acted with intent,

knowledge or a high degree of recklessness. See Aaron v. SEC, 446

U.S. 680, 690-97 (1980); Maldonado, 137 F.3d at 7. This

distinction follows closely from the text of the respective

provisions. See Aaron, 446 U.S. at 690-97. Deciding the state of

mind requirements for section 10(b), the Court set forth in Ernst

& Ernst, and confirmed in Aaron, that Congress's inclusion of the

terms "manipulative," "device," and "contrivance" in section 10(b)

indicated that it sought to limit liability to acts that involved

scienter. Ernst & Ernst, 425 U.S. at 197 ("The words

'manipulative or deceptive' used in conjunction with 'device or

contrivance' strongly suggest that § 10(b) was intended to

proscribe knowing or intentional misconduct."); see also Aaron,

446 U.S. at 690-91. By contrast, the Court has noted that section

17(a)(2) "is devoid of any suggestion whatsoever of a scienter

requirement."23 Aaron, 446 U.S. at 696. Nevertheless, the SEC did

23
Likewise, section 17(a)(3), because it "focuses upon the
effect of particular conduct on members of the investing public,
rather than upon the culpability of the person responsible,"
Aaron, 446 U.S at 697, "does not require a 'showing [of] deliberate
dishonesty as a condition precedent to protecting investors.'" Id.

-31-
not rely on this distinction in its section 17(a)(2) claims

against appellees, alleging in the complaint that they acted with

intent, knowledge, or a high degree of recklessness.

The SEC has also invoked two additional statutory

provisions against the defendants. The 1934 Exchange Act includes

an additional antifraud provision targeted specifically at brokers

or dealers operating in the over-the-counter market.24 See 15

U.S.C. § 78o(c)(1)(A). Section 15(c)(1)(A) of the Act states:

No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to
effect any transaction in, or to induce or attempt to
induce the purchase or sale of, any security (other than
[certain exempted securities]) . . . by means of any
manipulative, deceptive, or other fraudulent device or
contrivance.

Id.

Finally, the Investment Advisers Act of 1940 "was

enacted to deal with abuses that Congress had found to exist in

the investment advisers industry." Transamerica Mortgage

Advisors, Inc. v. Lewis, 444 U.S. 11, 12-13 (1979). Intended to

"benefit the clients of investment advisers," id. at 17, Section

206 of the Act "establishes federal fiduciary standards"

(quoting Capital Gains, 375 U.S. at 200).
24
The over-the-counter market consists of stocks which do not
trade on a securities exchange. Louis Loss & Joel Seligman,
Fundamentals of Securities Regulation 753 (5th ed. 2004). Because
such trading is not centralized, it involves direct transactions
between potential buyers and market makers, who deal in a
particular security. See id.

-32-
enforceable by the SEC. Id. at 17, 24 (quotation marks and

citation omitted). The statute reads:

It shall be unlawful for any investment adviser, by use
of the mails or any means or instrumentality of
interstate commerce, directly or indirectly --
(1) to employ any device, scheme, or artifice to defraud
any client or prospective client;
(2) to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any
client or prospective client . . . .

15 U.S.C. § 80b-6(1)-(2).

B. The SEC's Claims

In its complaint, the SEC alleges primary and secondary

violations of the securities laws by Tambone and Hussey. Primary

violations refer to violations committed by Tambone and Hussey

themselves; secondary violations, also known as aiding and

abetting violations, refer to actions committed by the defendants

that aided and abetted other actors who committed primary

violations of the securities laws.25

25
The text of a securities statute defines the scope of
primary liability against a defendant. Primary liability may not
attach to conduct that falls short of the explicit statutory
language. Central Bank, 511 U.S. at 177-78. Secondary liability
involves claims brought against individuals and entities for
conduct that substantially contributes to another party's
fraudulent behavior, but does not rise to the level of primary
liability. See 15 U.S.C. § 78t(e) ("[A]ny person that knowingly
provides substantial assistance to another person in violation of
a provision of this chapter, or of any rule or regulation issued
under this chapter, shall be deemed to be in violation of such
provision to the same extent as the person to whom such assistance
is provided."). Although both the SEC and private individuals may
raise claims of primary liability against a defendant, only the SEC
may now bring claims of secondary liability against a defendant.
See id.; see also Central Bank, 511 U.S. at 191.

-33-
 The SEC alleges that Tambone and Hussey, officers of

Columbia Distributors, the primary underwriter responsible for

directing efforts to sell the Columbia Funds to investors,

committed primary violations of section 17(a)(2) of the Securities

Act by selling, and offering to sell, the Columbia securities with

false prospectuses. As such, they are alleged to have "obtain[ed]

money or property by means of [an] untrue statement of a material

fact." 15 U.S.C. § 77q(2)(a) (emphasis added).

Additionally, the SEC alleges that Tambone and Hussey

made untrue statements of material fact and hence also committed

primary violations of section 10(b) of the Exchange Act and Rule

10b-5. See 17 C.F.R. § 240.10b-5(b). As officers of the primary

underwriter for the Columbia Funds, appellees had a legal duty to

review and confirm, to a reasonable degree, the accuracy and

completeness of the prospectus statements they were responsible

for distributing. The SEC argues that, by overseeing the

distribution of prospectuses which they knew, or were reckless in

not knowing, contained false and misleading statements, Tambone

and Hussey adopted those statements as their own. The SEC also

alleges that, in light of their duties as primary underwriters --

securities professionals engaged in the offer and sale of

securities -- Tambone and Hussey impliedly made their own

statements to potential investors that they "had a reasonable

basis to believe that the key representations in the prospectuses

-34-
were truthful and complete." The SEC contends that, because the

prospectus statements prohibiting market timing were inaccurate,

this implied statement was false, a fact that defendants knew or

were reckless in not knowing when they used the prospectuses to

sell Columbia Funds.

The same allegations of fraudulent conduct engaged in by

Tambone and Hussey form the basis of the SEC's claims of secondary

liability under section 10(b), Rule 10b-5, section 206, and

section 15(c) of the securities laws. Specifically, the

Commission avers that the defendants substantially assisted

Columbia Advisors and Columbia Distributor in committing acts of

primary liability under the securities laws. By overseeing the

distribution of fund prospectuses which they knew (or were

reckless in not knowing) were false, the defendants assisted these

entities in making false statements to the public in connection

with the sale of Columbia securities.

IV.

A. The Scope of Liability under Section 17(a)(2) of the
Securities Act

Although the SEC's complaint raises general allegations

of fraud under sections 17(a)(1)-(3), the SEC only appeals the

district court's conclusions regarding section 17(a)(2), which

addresses untrue statements. To state a claim under section

17(a)(2), which is intended to prohibit fraud by securities

sellers, the SEC must allege that Tambone and Hussey have (1)

-35-
directly or indirectly (2) obtained money or property (3) by means

of any untrue statement of material fact or any omission to state

a material fact necessary in order to make the statements made, in

light of the circumstances under which they were made, not

misleading, such statement having been made (4) with negligence26

(5) in the offer or sale of any securities. See 15 U.S.C. § 77q;

Aaron, 446 U.S. at 696; see generally 3 Hazen, supra, § 12.22

(discussing the elements).

The parties agree that the SEC has adequately alleged

elements one, four, and five of the statute, but dispute the scope

of conduct covered under elements two and three, and also whether

the complaint adequately alleges these two elements. On the

question of the scope of actionable conduct, the SEC asserts that

section 17(a)(2) extends liability not only to securities sellers

who have directly communicated their personal false or misleading

statements to potential investors in the course of offering or

selling securities to them, but also to sellers who have obtained

money or property "by means of" an untrue statement of material

fact drafted or approved by another individual. Relying on the

statute's passive formulation and its focus on the conduct of

securities sellers, the Commission argues that the scope of

26
As we noted above, the SEC does not rely on this diminished
state of mind requirement when alleging its claims under section
17(a)(2). The SEC alleges that the defendants acted with knowledge
or a high degree of recklessness.

-36-
section 17(a)(2)'s prohibition is broader than that of section

10(b) and Rule 10b-5(b), which prohibit a securities actor from

"mak[ing] any untrue statement."

The defendants contest this reading of section 17(a)(2).

Specifically, they assert that the language "obtain money or

property by means of any untrue statement of a material fact" is

coterminous with the language of Rule 10b-5(b), which prohibits a

securities actor from "mak[ing] a statement." In other words, to

be liable under section 17(a)(2), a securities seller must make a

false or misleading statement in the course of selling or offering

to sell a security to an investor. To support this interpretation

of section 17(a)(2), Tambone and Hussey cite several cases that

equate the prohibitions of section 17(a) with those of section

10(b) and Rule 10b-5. See, e.g., SEC v. Monarch Funding Corp.,

192 F.3d 295, 308 (2d Cir. 1999)("Essentially the same elements

[as those required to show a violation of section 10(b) and Rule

10b-5] are required under Section 17(a)(1)-(3) in connection with

the offer or sale of a security . . . ."); SEC v. First Jersey

Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996). Noting that the

language of the provisions is nearly identical, and indeed, that

section 17(a) served as the model for Rule 10b-5, the defendants

assert that it defies logic and language to read section 17(a) as

prohibiting a broader range of conduct than Rule 10b-5. The

defendants also highlight the SEC's own failure to cite any case

-37-
law drawing the distinction that the SEC claims follows from the

text of the provisions. Accordingly, the defendants urge us to

read section 17(a) and section 10(b) as prohibiting the same range

of conduct, and thereby conclude that in order for the SEC to

state a claim of primary liability under section 17(a)(2), it must

allege that the defendants have made a false or misleading

statement.27

Without explicitly analyzing the text of section

17(a)(2), the district court adopted the defendants' position,

concluding that the provisions were identical for purposes of

evaluating the SEC's various claims in this case. Accordingly,

the court grouped section 17(a) together with section 10(b) when

undertaking its analysis. Citing Wright v. Ernst & Young LLP, 152

F.3d 169, 175 (2d Cir. 1998), a decision applying the language of

section 10(b) and Rule 10b-5 in a private securities action, the

district court explained that "[i]n order to be liable for a

primary violation of Section 10(b) of the Exchange Act and Section

17(a) of the Securities Act, a defendant must have personally made

either an allegedly untrue statement or a material omission."28

27
As we discuss below, the defendants then go on to argue that
the SEC has failed to allege that the defendants made any false or
misleading statement in connection with the sale or purchase of
securities. Tambone and Hussey argue that, having failed to state
a claim under section 10(b) and Rule 10b-5(b), the SEC has equally
failed to state a claim under section 17(a)(2).
28
Because Wright was a private suit, and section 17(a) claims
may be brought only by the SEC, the Second Circuit did not have
occasion to address whether the two provisions prohibited the same

-38-
Finding no false statement attributable to either Tambone or

Hussey, the court rejected the SEC's theory of liability under

both section 17(a)(2) and section 10(b).

When assessing the scope of a statute, we begin, and

often end, with its text and structure. See, e.g., Ernst & Ernst,

425 U.S. at 197 ("'[T]he starting point in every case involving

construction of a statute is the language itself.'" (quoting Blue

Chip Stamps, 421 U.S. at 756 (Powell, J., concurring))); Central

Bank, 511 U.S. at 174 ("Adherence to the text in defining the

conduct covered by § 10(b) is consistent with our decisions

interpreting other provisions of the securities Acts."); see also

Aaron, 446 U.S. at 695-97 (parsing the language of section

17(a)(1)-(3) to determine whether scienter is required to

establish a violation of each provision). In this context, we are

guided by the Supreme Court's oft-recited instruction that courts

must construe the language of the securities laws "'not

technically and restrictively, but flexibly to effectuate [their]

remedial purposes.'" Affiliated Ute Citizens of Utah v. United

States, 406 U.S. 128, 151 (1972) (quoting Capital Gains, 375 U.S.

at 195). Additionally, in comparing the text of section 17(a)

with that of section 10(b) and Rule 10b-5, the Supreme Court

itself has found meaningful distinctions in small variations in

range of fraudulent conduct. Instead, the court focused its
analysis on primary liability under section 10(b). For this
reason, we discuss Wright at length in Part V, infra.

-39-
language. See Aaron, 446 U.S. at 695-97 (finding that the

provisions, despite their common purpose and similar texts,

require different levels of scienter for liability). We must

display the same adherence to the importance of text.

We do not read the case law cited by the defendants as

foreclosing the Commission's argument that section 17(a)(2) is

broader than section 10(b) and Rule 10b-5(b). Although we have

previously analyzed section 17(a) claims identically to those made

under section 10(b) and Rule 10b-5 where the parties agreed that

the analysis was the same, see SEC v. Rocklage, 470 F.3d 1, 4 n.1

(1st Cir. 2006), that treatment does not preclude our recognition

here that the scope of actionable conduct under the two statutes

may be different. Indeed, this is necessarily so because, as we

have noted, the text of the statutes mandate different showings

with respect to scienter. See Aaron, 446 U.S. at 695-97. Nor are

the SEC's arguments foreclosed by Supreme Court precedent or

decisions of this circuit. Cf. Naftalin, 441 U.S. at 778

("[U]ndoubtedly[,] . . . the [Securities Act and the Exchange Act]

prohibit some of the same conduct. . . . But '[the] fact that

there may well be some overlap is neither unusual nor

unfortunate.'" (quoting SEC v. Nat'l Sec., Inc., 393 U.S. 453, 468

(1969))).

After carefully examining the respective texts at issue,

we find the Commission's argument regarding the scope of conduct

prohibited by section 17(a)(2) persuasive. Because section

-40-
17(a)(2) was drafted to apply to broker-dealers, its prohibitory

language focuses specifically on conduct engaged in by a seller.

The statute prohibits an individual from "obtain[ing] money or

property by means of any untrue statement." It does not state,

however, that the seller must himself make that untrue statement.

Indeed, the text suggests that the opposite is true -- that it is

irrelevant for purposes of liability whether the seller uses his

own false statement or one made by another individual. Liability

attaches so long as the statement is used "to obtain money or

property," regardless of its source.

In contrast to the "by means of any untrue statement"

language of section 17(a)(2), Rule 10b-5(b) renders it unlawful

"[t]o make any untrue statement of a material fact . . . in

connection with the purchase or sale of any security." As the

drafters intended, Rule 10b-5 expands liability to cover all

segments of the securities industry, including drafters, auditors,

accountants, and distributors. See Central Bank, 511 U.S. at 191.

As we stress below, any one of these actors who makes an untrue

statement in connection with the purchase or sale of a security

may be found primarily liable. See id. However, Rule 10b-5's

expansion of coverage beyond the seller of securities is

accompanied by a more restrictive statement of the conduct that

will suffice to establish liability. The "to obtain money or

property by means of any untrue statement" language of section

17(a)(2) is replaced by the requirement in Rule 10b-5(b) that the

-41-
actor "make" an "untrue statement of a material fact . . . in

connection with the purchase or sale of any security."

This reading of section 17(a)(2) (that it does not

require the defendant to make the false statement at issue), is

supported by Congress's inclusion of the phrase "directly or

indirectly" in the statutory text of section 17(a). The statute

makes it "unlawful for any person . . . directly or indirectly .

. . to obtain money or property by means of any untrue statement

of a material fact." That a seller may be liable for indirectly

obtaining money by means of an untrue statement reinforces the

conclusion that the untrue statement at issue need not have been

made by the securities seller.29 Cf. Ballay v. Legg Mason Wood

Walker, Inc., 925 F.2d 682, 691 (3d Cir. 1991) ("These words --

'directly or indirectly' -- convey a legislative intent to

encompass all conduct meeting the other elements of a section

17(a) claim."). Therefore, based on our reading of the text of

section 17(a)(2), we conclude that this provision covers conduct

that may not be prohibited by section 10(b) and Rule 10b-5.

Specifically, primary liability may attach under section 17(a)(2)

29
The defendants contend that the phrase "directly or
indirectly" modifies the "by the use of any means" clause of
section 17(a) and not the conduct described in section 17(a)(2).
This reading is not, however, the most natural reading of the
provision. Given the text and structure of the provision,
including the placement of a comma separating the "by the use of
any means" clause from the "directly or indirectly" clause, we read
the "directly or indirectly" language to modify the "to obtain
money or property" clause at the start of sub-section (2) of the
statute.

-42-
even when the defendant has not himself made a false statement in

connection with the offer or sale of a security.30

B. Applying Section 17(a)(2) to the Conduct of Defendants

Before we assess whether the SEC stated sufficient

allegations to support claims of liability under section 17(a)(2)

against Tambone and Hussey, we must describe generally the role of

an underwriter in the mutual fund process. Our understanding of

this role is central to our analysis both of this issue and

liability under section 10(b). Principal underwriters, also

commonly referred to as distributors, play an essential role in

the securities industry, and specifically the mutual fund market.

Section 2(a)(40) of the Investment Act defines an "underwriter" as

someone who has "purchased from an issuer with a view to, or sells

for an issuer in connection with, the distribution of any

security, or participates or has a direct or indirect

30
The dissent agrees that we must "give effect" to the
"striking divergence" between the language of section 17(a)(2) and
Rule 10b-5. However, it also accuses us of "glossing over" this
distinction in our discussion of defendants' liability under
section 10(b) and Rule 10b-5, infra. The dissent fails to
understand that, although the statutory provisions are not
coextensive, they may comfortably overlap. As the Supreme Court
has recognized, this "'fact is neither unusual nor unfortunate.'"
Naftalin, 441 U.S. at 778 (quoting Nat'l Sec., Inc., 393 U.S. at
468). Instead, "[t]he two [statutory provisions] can exist and be
useful, side by side." Edwards v. United States, 312 U.S. 473, 484
(1941) (discussing the interaction between the mail fraud statute
and the Securities Act of 1933). In other words, although it is
possible to violate section 17(a)(2) without "making" a statement
as required by Rule 10b-5, if defendants have "made" false
statements within the meaning of 10b-5, that conduct will always
satisfy the "by means of" element of 17(a)(2) liability.

-43-
participation in any such undertaking, or participates or has a

participation in the direct or indirect underwriting of any such

undertaking." 15 U.S.C. § 80a-2(a)(40). Likewise, a "principal

underwriter" of a mutual fund is

[a]ny underwriter who as principal purchases from such
company, or pursuant to contract has the right . . .
from time to time to purchase from such company, any
such security for distribution, or who as agent for such
company sells or has the right to sell any such security
to a dealer or to the public or both.

Id. § 80a-2(a)(29).

Often affiliated with the mutual fund's investment

adviser, in this case Columbia Advisors, the underwriter is thus

primarily responsible for the sale and distribution of specified

funds. The underwriter enters into agreements with brokers,

dealers, and other intermediaries for the sale of the fund's

shares or, alternatively, sells funds directly to the investing

public. See United States v. Nat'l Assoc. of Sec. Dealers, Inc.,

422 U.S. 694, 698-99 (1975). Regardless of how the funds are

distributed to the public, the underwriter is responsible for

ensuring that the investors or potential investors receive

prospectus statements. See 15 U.S.C. § 77e(b)(2) (requiring that

a prospectus be provided prior to the public sale of shares); 17

C.F.R. § 240.15c2-8(h) (requiring a distributor to provide a

broker-dealer participating in the distribution or trading of a

security with sufficient quantities of the prospectus to ensure

-44-
they reach the investors pursuant to section 5(b) of the

Securities Act).

Further, the underwriter is typically responsible for a

number of other tasks, including (1) creating and distributing

advertising materials and other disclosure documents for the

traded securities; (2) ensuring compliance with state and federal

offering requirements; (3) identifying potential investors and

responding to inquiries; (4) executing purchase and redemption

transactions; and (5) providing other services not provided by the

fund administrator. Laurin Blumenthal Kleiman & Carla G. Teodoro,

The ABCs of Mutual Funds 2007: Forming, Organizing and Operating

a Mutual Fund: Legal and Practical Considerations, 1612 PLI/Corp

9, 31-32 (2007). The underwriter is required to register with the

SEC under the Exchange Act of 1934, with the states in which it

sells securities under the applicable state blue sky laws, and

with the National Association of Securities Dealers ("NASD"). Id.

Not surprisingly, the allegations in the complaint are

consistent with this general description of the underwriter's role

in the mutual fund process. As executives of Columbia

Distributor, the principal underwriter for the Columbia Funds,

Tambone and Hussey were primarily responsible for distributing the

fund prospectuses to potential investors and other broker-dealers.

As the SEC states in its brief, "whether selling shares of the

Columbia funds directly to investors, or indirectly through other

-45-
broker-dealers, Columbia Distributor was required to offer and

sell those shares through the use of the fund prospectuses." The

SEC alleges that to make these sales, defendants used prospectuses

containing statements regarding market timing which they knew, or

were reckless in not knowing, were false, and even specifically

referred potential investors to those misleading prospectuses to

answer any questions the investors might have. Further, both

defendants' compensation depended significantly on their sale of

Columbia funds. Thus, assuming the allegations are correct, as we

must, the defendants' conduct falls squarely within the

prohibitions established by section 17(a)(2) of the Securities

Act. Tambone and Hussey, in offering and selling securities,

obtain[ed] money by means of an[] untrue statement of [] material

fact." The section 17(a)(2) claims should not have been dismissed

by the district court.31

V.

A. The Scope of Liability under Rule 10b-5(b): Making a Statement

Having concluded that the SEC has stated a claim of

primary liability against the defendants under section 17(a)(2),

we turn to the SEC's allegations regarding section 10(b) and Rule

10b-5. Although the SEC's complaint includes general allegations

31
The SEC, having raised allegations of fraud against the
defendants, must also satisfy the pleading particularity
requirements of Fed. R. Civ. P. 9(b). We address this issue in
Part VI. below.

-46-
of fraud in violation of sub-sections (a) and (c) of Rule 10b-5,

provisions that address the use of fraudulent practices, schemes,

devices, or courses of business, the SEC has not pursued on appeal

the district court's dismissal of these claims. Therefore, we

limit our discussion to Rule 10b-5(b), which prohibits the making

of false statements or omissions in connection with the purchase

or sale of any security.

To establish a claim of primary liability under Rule

10b-5(b), a private plaintiff must show (1) a material

misrepresentation or omission made by the defendant; (2) a

connection between the misrepresentation or omission and the

purchase or sale of a security; (3) scienter, specifically that

the defendant acted with intent, knowledge, or a high degree of

recklessness; (4) reliance by the plaintiff upon the

misrepresentation or omission; (5) economic loss; and (6) loss

causation. See Stoneridge, 128 S. Ct. at 768; ACA Fin., 512 F.3d

at 58. Because this is an SEC enforcement action rather than a

private claim, the Commission need not allege any of the elements

required to establish a direct link between a defendant's

misrepresentation and an investor's injury -- including reliance

by the investor on an explicit misstatement, economic loss, and

loss causation. See GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d

189, 206 n.6 (3d Cir. 2001); SEC v. Rana Research, Inc., 8 F.3d

1358, 1363-64 (9th Cir. 1993); Schellenbach v. SEC, 989 F.2d 907,

-47-
913 (7th Cir. 1993); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir.

1985); see also Stoneridge, 128 S. Ct. at 769 ("Reliance by the

plaintiff . . . is an essential element of the § 10(b) private

cause of action.") (emphasis added). As with the SEC's claim

under section 17(a)(2), the parties contest the legal standard

applicable to the first element of the claim -- that the defendant

made a materially false or misleading statement32 -- as well as

whether elements one and three have been sufficiently alleged in

the complaint. We first address the question of what it means to

"make" a statement for the purposes of Rule 10b-5(b).

The SEC urges us to conclude that the district court

erred in finding that defendants, by using false and misleading

prospectus statements to sell securities, did not "make" a

statement that could render them primarily liable. The Commission

argues that, as senior executives of the primary underwriter for

the Columbia Funds, Tambone and Hussey had a duty to confirm the

accuracy and completeness of the prospectuses they were

responsible for distributing to broker-dealers and potential

investors. In light of this duty, the SEC contends that the

32
Appellants do not claim that the statements or omissions at
issue were immaterial, insisting instead that they did not make
them. To satisfy the materiality element, the misrepresentations
must be "misleading to a material degree," In re Cabletron, 311
F.3d at 27, signifying that a reasonable investor would believe
that they "significantly altered the total mix of information made
available," Basic, Inc. v. Levinson, 485 U.S. 224, 232 (1988)
(internal quotation omitted).

-48-
defendants "made" statements in two ways. First, by using

misleading prospectuses despite a duty to review and confirm the

accuracy of their contents, the defendants adopted the false

statements made by others in the fund prospectuses as their own.

The SEC also asserts that by using the prospectuses in this way,

defendants made an implied statement of their own to potential

investors that they had a reasonable basis to believe that the key

statements in the prospectuses regarding market timing were

accurate and complete. Because certain statements in the

prospectuses regarding market timing were allegedly false,

defendants' implied statement was also false. In these two ways,

the SEC asserts that defendants' conduct rose to the level of

primary liability under section 10(b) and Rule 10b-5(b). On this

point, the Commission notes:

[I]t would be anomalous to shield the person responsible
for selling securities from primary liability for using
or offering materials that they know, or are reckless in
not knowing, are false and misleading simply because the
false statements are not ascribed to them. . . . Their
role is to act as the intermediary between the issuer of
the securities and the investors, to disseminate the
prospectus and to encourage investors to purchase the
securities on the basis of the prospectus. They are a
necessary link in the chain of distribution.

As we explain below, we agree with the Commission that

the text of section 10(b) and Rule 10b-5(b), the statutory duties

of underwriters, their role in the securities market, and case law

support the Commission's argument that Tambone and Hussey made

implied statements to investors, within the purview of Rule 10b-

-49-
5(b), that they had a reasonable basis to believe that the

statements in the prospectuses regarding market timing were

accurate and complete. Given this conclusion that Tambone and

Hussey made implied statements of their own about the

prospectuses, we do not reach the Commission's argument that

Tambone and Hussey also made false statements within the purview

of Rule 10b-5(b) by adopting the statements of others when they

distributed the prospectuses containing false statements on market

timing practices.

1. Text of Section 10(b)

As with all matters of statutory interpretation, we

begin our analysis with the text of the relevant provisions --

here, Rule 10b-5(b) and section 10(b) of the Exchange Act.

Although Rule 10b-5 itself offers little guidance on how to define

"make," we must also look to the text of section 10(b), its

authorizing statute. Ernst & Ernst, 425 U.S. at 197 ("In

addressing [the question of the proper scienter requirement under

section 10(b) and Rule 10b-5], we turn first to the language of

s 10(b), for '(t)he starting point in every case involving

construction of a statute is the language itself.'" (quoting Blue

Chip Stamps, 421 U.S. at 756 (Powell, J., concurring))); Pinter v.

Dahl, 486 U.S. 622, 653 (1988) ("The ascertainment of

congressional intent with respect to the scope of liability

created by a particular section of the Securities Act must rest

-50-
primarily on the language of that section."). The statutory

language is particularly relevant in this case because "[t]he

scope of Rule 10b-5 is coextensive with the coverage of § 10(b),"

a view which has led the Supreme Court to "use § 10(b) to refer

both to the statutory provision and the Rule." Zandford, 535 U.S.

813, 816 n.1 (2002); see also Stoneridge, 128 S. Ct. at 768 ("Rule

10b-5 encompasses only conduct already prohibited by § 10(b).").

In other words, the term "make a statement" in Rule 10b-5 must be

read in conjunction with the text of section 10(b), which deems it

"unlawful for any person . . . [t]o use or employ, in connection

with the purchase or sale of any security . . . , any manipulative

or deceptive device or contrivance in contravention of such rules

and regulations as the Commission may prescribe." 15 U.S.C. §

78j(b) (emphasis added).33

The SEC's allegations against appellants are stated in

precisely those statutory terms. The SEC avers that defendants

used and employed prospectuses containing statements prohibiting

market timing practices -- statements that they knew or were

reckless in not knowing were false -- in order to sell Columbia

Funds. In using the prospectuses in this way, they made implied

statements of their own regarding the accuracy and completeness of

33
The Second Circuit has stated that section 10(b) prohibits
"conduct involving manipulation or deception," and defined
deception as "misrepresentation, or nondisclosure intended to
deceive." Ganino, 228 F.3d at 161.

-51-
those prospectuses. These implied statements were false. As

such, they were a "manipulative or deceptive device or contrivance

in contravention" of the Commission's rules.34 Cf. 17 C.F.R. §

240.15c1-2 (defining "manipulative, deceptive, or other fraudulent

device or contrivance" in section 15(c)(1) of the Exchange Act to

include "any untrue statement of a material fact."). The implied

statements that Tambone and Hussey made about the truth and

accuracy of the prospectuses derive from their statutory duties

and their central role in the securities market.

2. The Duties of an Underwriter

In assessing whether a defendant has committed a primary

violation of the securities laws, courts have examined the

defendant's role in the securities market in addition to the

specific conduct alleged in the complaint. These decisions

34
The dissent accuses us of engaging in "sleight of hand" by
"us[ing] the broad language of the statute ['use or employ'] to
define the obviously narrower language of the rule ['to make']."
However, as we discuss above, the Supreme Court has stated that
"[t]he scope of Rule 10b-5 is coextensive with the coverage of
10(b)," and also that:

Rule 10(b)-5 was adopted pursuant to authority granted
the Commission under s 10(b). The rulemaking power
granted to an administrative agency charged with the
administration of a federal statute is not the power to
make law. Rather, it is the power to adopt regulations
to carry into effect the will of Congress as expressed by
the statute.

Ernst & Ernst, 425 U.S. at 212-14 (internal quotation marks and
citations omitted). Rule 10b-5(b) implements with some specificity
this broad prohibition of section 10(b). It does not narrow the
prohibition.

-52-
indicate that a defendant's general responsibilities and statutory

duties with respect to the sale and distribution of securities

inform the legal significance of specific conduct under Rule

10b-5(b). See, e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d

at 77 (analyzing a corporate executive's liability for "making"

misleading statements in light of his duties and

responsibilities); SEC v. KPMG LLP, 412 F. Supp. 2d 349, 376-77

(S.D.N.Y. 2006) (holding that three engagement partners of an

auditing firm who possessed the "ultimate authority to determine

whether an audit opinion should be issued" could be primarily

liable under the securities laws for misstatements contained in

the audit opinion letters, although a fourth defendant, who only

acted as a concurring review partner, could not be held primarily

liable, as his responsibilities were "not the equivalent of the

audit engagement partner's responsibilities"). Indeed, in Wright,

one of the "sensible precedents" the dissent accuses us of

"relegat[ing] . . . to the scrap heap," and which it praises for

its interpretation of Central Bank, see infra, the court

acknowledged that "silence where there is a duty to disclose can

constitute a false or misleading statement within the meaning of

§ 10(b) and Rule 10b-5." 152 F.3d at 177 (emphasis added). Just

as a defendant's particular role in the securities market may

convert his silence into a statement for the purposes of section

10(b), so too may a defendant, by virtue of his role in the market

-53-
and his statutory duties, make an implied statement without

actually uttering the words in question.

As already noted, underwriters play an essential role in

the sale and distribution of mutual funds to the investing public,

which occurs either directly or through other broker-dealers. The

text and statutory history of the Securities Act of 1933, and

specifically the statute's treatment of underwriters in sections

1135 and 12,36 highlight the unique position they occupy in the

securities industry. As the Southern District of New York has

observed in the context of evaluating several securities claims:

[I]n enacting section 11, "Congress recognized that
underwriters occupied a unique position that enabled
them to discover and compel disclosure of essential
facts about the offering. Congress believed that
subjecting underwriters to the liability provisions
would provide the necessary incentive to ensure their
careful investigation of the offering."

In re Worldcom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 662

(S.D.N.Y. 2004) (quoting The Regulation of Securities Offerings,

Securities Act Release No. 7606A, 63 Fed. Reg. 67174, 67230 (Dec.

4, 1998), 1998 WL 833389). Although underwriters are not insurers

35
Section 11 of the Securities Act "prohibits false statements
or omissions of material fact in registration statements" and
"identifies the various categories of defendants subject to
liability for a violation," including underwriters. Central Bank,
511 U.S. at 179; see also 15 U.S.C. § 77k(a)(5).
36
Section 12 "prohibits the sale of unregistered, nonexempt
securities as well as the sale of securities by means of a material
misstatement or omission; and it limits liability to those who
offer or sell the security." Central Bank, 511 U.S. at 179; see
also 15 U.S.C. § 77l(a).

-54-
for offerings, In re Worldcom, 346 F. Supp. 2d at 662, Congress

has mandated that they "exercise diligence of a type commensurate

with the confidence, both as to integrity and competence, that is

placed in [them]." H.R. Conf. Rep. No. 73-152, 1933 WL 984, at

*26 (1933). The duty of an underwriter to conduct a reasonable

investigation has been explained by the SEC as follows:

"By associating himself with a proposed offering [an
underwriter] impliedly represents that he has made such
an investigation in accordance with professional
standards. Investors properly rely on this added
protection which has a direct bearing on their appraisal
of the reliability of the representations in the
prospectus. The underwriter who does not make a
reasonable investigation is derelict in his
responsibilities to deal fairly with the investigating
public."

In re Worldcom, 346 F. Supp. 2d at 662-63 (insertions in original)

(quoting In re the Richmond Corp., Exchange Act Release No. 4585,

41 SEC Docket 398 [1961-1964 Transfer Binder] Fed. L. Sec. Rep.

(CCB) ¶ 76,904, 1963 WL 63647, at *7 (Feb. 27,1963); see also

Municipal Securities Disclosure, Exchange Act Release No. 26,100,

41 SEC Docket 1131, 1988 WL 999989, at *20 (Sept. 22, 1988)

(observing that the underwriter "occupies a vital position in an

offering" and that, by its participation in a sale of securities,

the underwriter makes a recommendation that "implies that the

underwriter has a reasonable basis for belief in the truthfulness

and completeness of the key representations made in any disclosure

-55-
documents used in the offerings")37; Sanders v. John Nuveen & Co.,

524 F.2d 1064, 1070 (7th Cir. 1975) ("[T]he relationship between

the underwriter and its customers implicitly involves a favorable

recommendation of the issued security. Because the public relies

on the integrity, independence and expertise of the underwriter,

the underwriter's participation significantly enhances the

marketability of the security." (footnote omitted)).

The case law addressing the duties of underwriters

buttresses the SEC's analysis and extends it beyond the

traditional context of sections 11 and 12 of the Securities Act.

Although sections 11 and 12 specifically concern an underwriter's

obligation to ensure the accuracy of registration statements and

prospectuses, underwriters are among the securities actors to whom

section 10(b) has been applied. See, e.g., SEC v. Dain Rauscher,

Inc., 254 F.3d 852, 858 (9th Cir. 2001) (finding genuine issue of

material fact as to whether underwriter violated Rule 10b-5 by not

complying with its "duty to make an investigation that would

provide him with a reasonable basis for a belief that the key

representations in the statements provided to the investors were

truthful and complete."); Flecker v. Hollywood Entm't Corp., 1997

WL 269488, at *9 (D. Or. Feb. 12, 1997) (finding triable issue of

37
The SEC specifically observes in this Release that the
underwriters' "obligation to have a reasonable basis for belief in
the accuracy of statements directly made concerning the offering is
underscored when a broker-dealer underwrites securities." Id. at
21.

-56-
section 10(b) primary liability against underwriter for allegedly

false statements that inflated stock prices); In re MTC Elec.

Techs. S'holder Litig., 993 F. Supp. 160, 162 (E.D.N.Y. 1997)

("MTC II")(applying the standard of primary liability to

underwriters in the context of private allegations of Rule 10b-5

violations); Phillips v. Kidder, Peabody & Co., 933 F. Supp. 303,

315-16 (S.D.N.Y. 1996) (same); In re U.S.A. Classic Sec. Litig.,

No. 93 Civ. 6667 (JSM), 1995 WL 363841, at *5 (S.D.N.Y. June 19,

1995) (finding that an underwriter's participation in the issuance

of a prospectus was sufficient to state a claim of primary

liability under Rule 10b-5); In re Software Toolworks, Inc. Sec.

Litig., 50 F.3d 615, 629 (9th Cir. 1994) (finding disputed issues

of material fact as to whether underwriters' participation in

drafting an allegedly misleading letter to the SEC violated

section 10(b)); Sanders, 524 F.2d at 1069 (applying Rule 10b-5 to

an underwriter alleged to have violated its duty to reasonably

investigate the securities it marketed and their issuer); In re

Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549,

612 (S.D. Tex. 2002) (finding, based on case law highlighting an

underwriter's duty to investigate an issuer and the securities it

offers to investors, that an underwriter of a public offering

could be held liable under section 10(b) and section 11 of the

Securities Act "for any material misstatements or omissions in the

registration statement made with scienter").

-57-
 These precedents reflect the unique position of

underwriters as securities insiders whose role is "that of a trail

guide -- not a mere hiking companion," and who are relied upon by

investors for their "reputation, integrity, independence, and

expertise." Dolphin and Bradbury, Inc. v. SEC, 512 F.3d 634, 640-

41 (D.C. Cir. 2008). Underwriters have access to information of

substantive interest and consequence to investors, and a

concomitant duty to investigate and confirm the accuracy of the

prospectuses and other fund materials that they distribute. See

id.; see also Sanders, 524 F.2d at 1071 ("Although the underwriter

cannot be a guarantor of the soundness of any issue, he may not

give it his implied stamp of approval without having a reasonable

basis for concluding that the issue is sound."); Walker v. SEC,

383 F.2d 344, 345 (2d Cir. 1967) ("The Commission is justified in

holding a securities salesman chargeable with knowledge of the

contents of sales literature.").

In light of this duty to review and confirm the accuracy

of the material in the documentation that it distributes, an

underwriter impliedly makes a statement of its own to potential

investors that it has a reasonable basis to believe that the

information contained in the prospectus it uses to offer or sell

securities is truthful and complete. The SEC alleges that Tambone

and Hussey made such implied statements to investors about timing

practices in the Columbia Funds when they knew, or were reckless

-58-
in not knowing, that the representations in the prospectuses about

timing practices were false. This falsity made their implied

statements false. As such, these implied statements were a

violation of Rule 10b-5(b).

B. The Counterarguments of The Defendants and The Dissent

Tambone and Hussey assert that the text of Rule 10b-5(b)

and cases analyzing the scope of primary liability under the Rule

and section 10(b) require that the Commission allege that they

actually made a misrepresentation which is publicly attributable

to them, not that they have impliedly done so. They contend that

to hold otherwise would be to disregard the Supreme Court's

holding in Central Bank and effectively eliminate the boundaries

between primary and secondary liability. The dissent takes this

position as well.

1. Central Bank and its Implications

The issue in Central Bank was whether the indenture

trustee for bonds issued by the public Building Authority to

finance improvements at a planned development in Colorado Springs

could be held liable in a private cause of action under Rule 10b-5

for aiding and abetting a primary violation of the law. Although

Central Bank had become aware that the collateral for the bonds

-59-
had likely become insufficient to support them, it delayed

undertaking an independent review of the original appraisal.

Before an independent review could be done, the Building Authority

defaulted on a portion of the bonds. The plaintiff raised claims

of primary liability against four violators: the Building

Authority, which issued the defaulted bonds in question, two

underwriters for the bonds, and a director of the development

company in charge of providing an appraisal of the bonds. The

Building Authority defaulted early in the litigation and the

claims against the underwriters were settled. See First

Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891, 893 n.1

(10th Cir. 1992).

The Supreme Court, relying on the text of section 10(b)

and Rule 10b-5, concluded that the aiding and abetting claims

against Central Bank must be dismissed because private plaintiffs

may only bring claims of primary liability, not aiding and

abetting liability, against defendants. Nevertheless, the Court

noted that "[i]n any complex securities fraud . . . there are

likely to be multiple violators; in this case, for example,

respondents named four defendants as primary violators."38 511

38
Tambone and Hussey urge us to reject the Commission's claims
of primary liability because of the SEC's own admission that
Columbia Advisors, not defendants, "remained primarily responsible
for all representations made" in the fund prospectuses. However,
this quotation from Central Bank illustrates the Supreme Court's
recognition that a securities fraud will likely involve multiple
violators, thereby suggesting that individuals with different

-60-
U.S. at 191. Finally, the Court concluded that it is not the

identity of a securities actor but his conduct that determines

whether he may be liable as a primary violator:

The absence of § 10(b) aiding and abetting liability
does not mean that secondary actors in the securities
markets are always free from liability under the
securities Acts. Any person or entity, including a
lawyer, accountant, or bank, who employs a manipulative
device or makes a material misstatement (or omission) on
which a purchaser or seller of securities relies may be
liable as a primary violator under 10b-5, assuming all
of the requirements for primary liability under Rule
10b-5 are met.

Id.39

responsibilities could be primarily liable for the same
misstatement. 511 U.S. at 191. Therefore, the primary liability
of Columbia Advisors does not preclude the primary liability of
Tambone and Hussey for their own use of the false and misleading
statements contained in those prospectuses. Additionally, in a
recent private suit, the Supreme Court confirmed this principle by
indicating that defendants Charter Communications, Scientific-
Atlanta, Inc., and Motorola, Inc., had all engaged in the
fraudulent conduct at issue. See Stoneridge, 128 S. Ct. at 769-70.
Although the Supreme Court's statement in Central Bank referred to
Rule 10b-5(b), addressing material statements and omissions, and
its comment in Stoneridge applied to 10b-5(a) or (c), addressing
devices, schemes, artifices, acts, practices, or courses of
business, the scope of primary liability in each subsection is
governed by the language of section 10(b) of the Exchange Act.
Therefore, the Supreme Court's recent confirmation that multiple
individuals may be primarily liable under Rule 10b-5(a) or (c) is
applicable to its interpretation of Rule 10b-5(b).
39
See also In re Ikon Office Solutions, Inc., 277 F.3d 658,
666-67 (3d Cir. 2002) (noting that "liability under section 10(b)
may extend to secondary actors in the securities markets," and that
this is consistent with "the primary purpose of the Securities
Exchange Act of 1934," namely, "to protect against manipulated
stock prices by imposing strict and extensive disclosure
requirements, irrespective of the type of actor that disseminates
information to the investing public"); Houston v. Seward & Kissel,
LLP, No. 07cv6305(HB), 2008 WL 818745, at *7 n.22 (S.D.N.Y. 2008)

-61-
 Defendants argue that the Commission's allegations are

insufficient to establish primary liability under Central Bank.

Similarly, the dissent, while acknowledging that Central Bank does

not foreclose the possibility that "persons in the defendants'

positions" may be found primarily liable, accuses us of

"dismantl[ing] Central Bank's interpretive prescription in its

entirety" and "fl[ying] in the teeth of the Supreme Court's

circumspect vision of primary liability." The dissent agrees with

defendants that our holding is at odds with Central Bank's careful

distinction between primary and secondary liability.

There is no conflict between Central Bank and our

interpretation of Rule 10b-5. The Court in Central Bank addressed

only the question of "whether private civil liability under

section 10(b) extends as well to those who do not engage in the

manipulative or deceptive practice, but who aid and abet the

violation." Stoneridge, 1128 S. Ct. at 775 (Stevens, J.,

dissenting)(quoting Central Bank, 511 U.S. at 167).40 As such, the

Court did not interpret the phrase "to make" in Rule 10b-5 as it

(noting that even after Central Bank, the implied right of action
"continues to cover secondary actors who commit primary
violations").
40
See also Central Bank, 511 U.S. at 176 (“The problem, of
course, is that aiding and abetting liability extends beyond
persons who engage even indirectly, in a proscribed activity;
aiding and abetting liability reaches persons who do not engage in
the proscribed activities at all, but who give a degree of aid to
those who do.”).

-62-
applies to primary liability -- which is the question that we

address above. See, e.g., SEC v. Wolfson, 539 F.3d 1249, 1258

(10th Cir. 2008) ("Recognizing the dichotomy between primary

liability and aiding and abetting liability created by Central

Bank, the Commission alleges that [defendants] are primary

violators of § 10(b). Thus, the question we confront today is

whether the acts [committed by defendants] are sufficient to show

that they 'made' the [alleged] material misstatements and

omissions . . . such that they can be held primarily liable."); In

re ZZZZ Best Sec. Litig., 864 F. Supp. 960, 969 n.11 (C.D. Cal.

1994) (noting that because "[p]laintiff's counsel in that case

expressly conceded that the Central Bank of Denver had not itself

committed a manipulative or deceptive act[,]" the Court "did not

have the opportunity to address the issue of whether [it] could

have been found primarily liable under Section 10(b)/Rule 10b-5

had such an allegation been added to the complaint and had the

issue of manipulation or deceit not been conceded."); Robert S.

DeLeon, The Fault Lines Between Primary Liability and Aiding and

Abetting Claims Under Rule 10b-5, 22 J. Corp. L. 723, 729 (1997)

("Although the Central Bank court used the phrase 'make a material

misstatement or omission,' the focus of its analysis . . . dealt

with the need for a 'material misstatement or omission' or a

'manipulative act' and not on the words 'making' or 'commission.'"

(footnote omitted)).

-63-
 Additionally, Central Bank analyzes the scope of section

10(b) and Rule 10b-5 in a suit brought by a private plaintiff.

Although, as the dissent rightly observes, the Court focused on

the text of the respective provisions, it also emphasized the

element of reliance (which was not satisfied in that case), as

well as a set of policy considerations that arise exclusively in

the context of private securities litigation. In this respect,

Central Bank was primarily a manifestation of the Court's desire

to limit the scope of the judicially-implied private cause of

action under Rule 10b-5.41 This is the context that must inform

our understanding of Central Bank's "interpretive prescription."

We therefore reject the dissent's assertion that Central Bank's

conservative approach to its interpretation of Rule 10b-5 in a

case brought by a private plaintiff should be stretched beyond its

logic to invalidate our interpretation, in an enforcement action,

of an element on which the Supreme Court was silent.

2. The Line Between Primary and Secondary Liability

Because aiding and abetting claims were no longer

available in private actions after Central Bank, there was more

pressure on courts to clearly delineate the outer boundaries of

primary liability -- a question the Supreme Court did not address

41
Cf. O'Hagan, 521 U.S. at 664 (noting that Central Bank
"concerned only private civil litigation under §10(b) and Rule 10b-
5, not criminal liability[,]" and therefore that its "reference to
purchasers or sellers of securities must be read in light of a
longstanding limitation on private § 10(b) suits.").

-64-
in Central Bank. Our sister circuits have crafted two divergent

standards to analyze the question: the "bright-line" test,

associated most closely with the Second Circuit, and the broader

"substantial participation" test, articulated by the Ninth

Circuit. We briefly outline these approaches and explain why they

are not relevant here, contrary to the arguments of the defendants

and the dissent.

Under the most prominent version of the bright-line

test, primary liability requires a showing of two elements: first,

that an individual has "actually [made] a false or misleading

statement," and second, that the statement (or omission) has been

"attributed to that specific actor at the time of public

dissemination." Wright, 152 F.3d at 175. Thus, with its

incorporation of these two elements, the standard purports to draw

a "bright-line" between primary and secondary liability. See

Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997) ("[I]f Central

Bank is to have any real meaning, a defendant must actually make

a false or misleading statement in order to be held liable under

Section 10(b). Anything short of such conduct is merely aiding

and abetting, and . . . not enough to trigger liability under

Section 10(b)." (quoting In re MTC Elec. Techs. S'holders Litig.,

898 F. Supp. 974, 987 (E.D.N.Y. 1995) ("MTC I"))).42

42
Several other circuits have also adopted the bright-line
test, or close variations of it. See, e.g., Ziemba v. Cascade
Int'l, Inc., 256 F.3d 1194, 1205 (11th Cir. 2001) ("Following the

-65-
 The first element of the bright-line test -- that the

defendant "actually make" the statement at issue -- mimics the

text of Rule 10b-5, thereby offering little additional guidance on

the precise boundaries of the term "make." The second part of the

test -- the public attribution requirement -- follows directly

from the element of reliance that is required in a private Rule

10b-5 action. To assert a successful claim under Rule 10b-5, a

plaintiff must establish that she has relied on a false and

material statement made by the defendant. See supra. This

requirement is designed to ensure that the "'requisite causal

connection between a defendant's misrepresentation and a

plaintiff's injury' exists as a predicate for liability."

Stoneridge, 128 S. Ct. at 769 (quoting Basic, 485 U.S. at 243).

The attribution requirement is a natural corollary of this

Second Circuit, we conclude that . . . the alleged misstatement or
omission upon which a plaintiff relied must have been publicly
attributable to the defendant at the time that the plaintiff's
investment decision was made."); see also Regents of Univ. of Cal.
v. Credit Suisse First Boston (USA), 482 F.3d 372, 386-90 (5th Cir.
2007) (analyzing Central Bank in the context of Rule 10b-5(a)and
(c)); In re Charter Commc'ns, Inc. Sec. Litig., 443 F.3d 987, 992
(8th Cir. 2006) ("[A]ny defendant who does not make or
affirmatively cause to be made a fraudulent statement or omission,
or who does not directly engage in manipulative securities trading
practices, is at most guilty of aiding and abetting and cannot be
held liable under § 10(b) or any subpart of Rule 10b-5."). The
Tenth Circuit, in Anixter v. Home-Stake Prod. Co., 77 F.3d 1215,
1226 (10th Cir. 1996), held that "in order for accountants [to be
primarily liable], they must themselves make a false or misleading
statement (or omission) that they know or should know will reach
potential investors." It has since clarified that, although this
is a "bright line" test, public attribution is not required.
Wolfson, 539 F.3d at 1260.

-66-
principle, because "[a]n individual who relies on a statement that

he believes was made by one person cannot then assert a claim

against another." SEC v. Collins & Aikman Corp., 524 F. Supp. 2d

477, 490 (S.D.N.Y. 2007).

The facts of Wright illustrate how the bright-line test

has been applied. In Wright, the court held that the auditing

firm Ernst & Young could not be liable for a misstatement approved

by the firm and contained in its client's press release because

the release noted that the information was unaudited and,

therefore, Ernst & Young's "assurances were never communicated to

the public either directly or indirectly." 152 F.3d at 176. The

plaintiff had alleged that Ernst & Young knew that its advice

would be passed on to investors and that it was understood in the

securities market that the press release contained an implicit

statement from the auditors that the financial information in the

release was accurate. The court rejected plaintiff's arguments as

insufficient to support primary liability under Central Bank

"because no false or misleading statement was attributed to Ernst

& Young at the time of public dissemination." Id. at 178.

In contrast, to allege a primary violation under the

substantial participation test, a plaintiff need only show that a

secondary actor has "substantially participated" or played "a

significant role" in the making of a fraudulent statement and not

that he has "made" or created the statement himself. See Howard

-67-
v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000)

("[W]e have held that substantial participation or intricate

involvement in the preparation of fraudulent statements is grounds

for primary liability even though that participation might not

lead to the actor's actual making of the statements."); In re

Software Toolworks, 50 F.3d at 628 n.3 (allowing potential

liability for accountants who "played a significant role" in the

drafting and reviewing of misstatements); In re ZZZZ Best Sec.

Litig., 864 F. Supp. at 970 (concluding that an accounting firm

could be held liable under § 10(b) for its undisclosed

participation in the review and preparation of documents released

to the public by the company and attributable only to that

company). Because of its broad interpretation of the scope of

primary liability, the substantial participation test has been

criticized as inconsistent with Central Bank's prohibition of

private aiding and abetting liability. See, e.g., Anixter, 77

F.3d at 1226 n.10 ("To the extent these cases allow liability to

attach without requiring a representation to be made by defendant,

and reformulate the 'substantial assistance' element of aiding and

abetting liability into primary liability, they do not comport

with Central Bank of Denver."). As a result, no other circuit has

adopted this test to assess primary liability.

Regardless of their relative merits, neither the bright-

line nor substantial participation test is relevant to this case.

-68-
The substantial participation test evaluates whether one actor can

be deemed to have made a statement made or created by another

because of the actor's substantial participation in the making or

creation of that statement. In this case, as we have explained,

Tambone and Hussey are accountable for their own implied

statements, making the "substantial participation" inquiry

unnecessary. See In re LDK Solar Sec. Litig., ___ F.3d ___, No.

C07-05182WHA, 2008 WL 4369987, at *8 (N.D. Cal. Sept. 24, 2008)

(declining to address defendants' claim that they had not

"substantially participated" in making the fraudulent statements

at issue because the court had already determined that they should

be "deemed actually to have made those statements.").

Similarly, the bright line test, which is urged upon us

by appellees and the dissent, does not address what it means to

"make" a statement, as we have described, and it imposes an

attribution requirement which, contrary to the position of the

district court, is inapplicable to SEC enforcement actions. In

the first place, the plain text of the statute does not require

attribution. Indeed, it would be ironic to read the requirements

of a private cause of action (which include attribution) into the

statutory text when section 10(b) and Rule 10b-5 initially applied

only to SEC enforcement actions. See, e.g., Stoneridge, 128 S.

Ct. at 768 ("Though the text of the Securities Exchange Act does

not provide for a private cause of action for § 10(b) violations,

-69-
the Court has found a right of action implied in the words of the

statute and its implementing regulation."); see also Merrill

Lynch, 547 U.S. at 80-83 (noting that the Supreme Court has placed

certain limitations on private causes of action under section

10(b) as a result of policy considerations).

Moreover, although public attribution, like direct

reliance, is necessary in a private action, public attribution

should not be required in a Commission action where there is no

need to establish such a causal connection. See, e.g., Wolfson,

539 F.3d at 1259-60 (observing that the attribution requirement

"stems directly from the need for private litigants to prove

reliance on alleged fraud to succeed on a private cause of

action," and, "given [this] unambiguous connection between

reliance and attribution," declining to "impose an attribution

element in an SEC enforcement action"); Collins & Aikman Corp.,

524 F. Supp. 2d at 490 ("If the attribution requirement is

motivated by the need to show reliance, which I find to be the

more cogent analysis, then it does not apply to actions brought by

the SEC."); KPMG, 412 F. Supp. 2d at 375 (in an enforcement

action, finding "no reason to impose a requirement that a

misstatement [be] publicly attributed to a defendant for liability

to attach").

Finally, we reject defendants' assertion that we should

require attribution as a matter of policy in order to ensure that

-70-
primary liability and secondary liability are sufficiently

delineated from one another.43 The Supreme Court in Central Bank

established the crucial dichotomy between those who, regardless of

their role in a securities transaction, make misleading

representations themselves, and those who merely assist the

culpable actor without personally using or employing any

"manipulative or deceptive device" as prohibited by section 10(b).

Thus, to distinguish between primary and secondary liability, we

must focus on the specific conduct of defendants in light of their

role in the securities market, rather than on whether investors

specifically relied on their statements. That is precisely what

we have done here in deciding that defendants' implied statements

that they had a reasonable basis to believe that the market timing

disclosures in the prospectuses were truthful and complete fall

within the purview of the "make a statement" requirement of Rule

10b-5(b). However, to survive a motion to dismiss, the complaint

must still allege facts supporting this theory of liability with

the requisite particularity. We turn now to the pleading issue.

VI.

A. Primary Liability

1. Section 17(a)(2)

43
But see Lucent, 363 F. Supp. 2d at 724 ("Not only is [the
bright-line public attribution] test consistent with the statutory
language of Section 10(b), but it more clearly delineates which
types of behavior will give rise to primary liability versus
secondary liability.").

-71-
 As we have described, to state a claim under section

17(a)(2), the SEC must allege that Tambone and Hussey have (1)

directly or indirectly (2) obtained money or property (3) by means

of any untrue statement of material fact or any omission to state

a material fact necessary in order to make the statements made, in

light of the circumstances under which they were made, not

misleading (4) with negligence (5) in the offer or sale of any

securities. See supra Part IV.A. The SEC goes beyond section

17(a)(2)'s relaxed scienter requirement, instead alleging that the

defendants acted either knowingly or highly recklessly.

The defendants assert that the SEC failed to state its

claims of securities fraud with sufficient particularity. They

argue that the complaint was deficient in omitting the specific

details of statements in the fund prospectuses that could be

deemed misleading as a result of the alleged market timing

arrangements. Further, they argue that the majority of the

defendants' conduct alleged in the complaint, including their

distribution activities and participation in preferred investor

arrangements, occurred prior to the adoption of the Strict

Prohibition language in the various prospectuses, and therefore

cannot provide the basis for a primary violation under the

securities laws.

a. General Allegations

-72-
 We are persuaded that the SEC's complaint satisfies the

pleading standards of Rule 9(b). The SEC alleges that Tambone, as

Co-President of Columbia Distributor, and Hussey, as Managing

Director of National Accounts for Columbia Distributor, were

responsible for overseeing the distribution of fund prospectuses

in connection with their sale of Columbia Funds. As executives of

the primary underwriter, the defendants had a duty to reasonably

investigate the fund prospectuses and other disclosure documents

released to the investing public to confirm their accuracy and

truthfulness.44

Tambone's obligation is confirmed by the hundreds of

selling agreements allegedly entered into by Columbia Distributor

and signed by Tambone, with terms governing the distribution of

Columbia Funds by other broker-dealers. Each agreement noted

Columbia Distributor's role as the principal distributor of the

relevant funds and referred the purchaser to the prospectuses for

information on the funds. Each selling agreement expressly

represented and warranted that (a) "the [p]rospectus . . . we

issue . . . will comply with all applicable state and Federal

laws, rules and regulations [and] (b) each [p]rospectus and all

44
According to the complaint, over half of the total
compensation Tambone and Hussey received each year consisted of
commissions for fund sales made pursuant to their duties. The
defendants do not dispute that they were compensated in part based
on their sale of the Columbia Funds. Rather, they contest the
degree to which their compensation was linked to the alleged
fraudulent conduct in connection with market timing activities.

-73-
sales literature we issue will not by statement or omission be

misleading . . . ."

The Commission also adequately alleges that the fund

prospectuses, which the defendants were responsible for

distributing, contained several disclosures concerning short-term

or excessive trading practices that could be deemed material

misrepresentations. The disclosures, which stated that the

individual Columbia Funds were hostile to and did not permit

short-term or excessive trading of their shares, could constitute

misrepresentations because at the time the disclosures were made,

the defendants had approved or had knowledge of arrangements with

several preferred entities to allow these prohibited practices.45

Further, the SEC alleges that defendants knew, or were highly

reckless in not knowing, that these statements in the prospectuses

were false.

The complaint also avers the defendants' scienter

generally, as required by Fed. R. Civ. P. 9(b), alleging that the

defendants oversaw the distribution of the various fund

prospectuses during 2002 and 2003, when they contained the Strict

Prohibition language. Concurrently, both Hussey and Tambone were

45
The prospectus disclosures were also material to the
Columbia Funds investors. Given the scope of the alleged trading
practices at issue, "there is a substantial likelihood that a
reasonable investor would consider [the statements] important in
making an investment decision." SEC v. PIMCO Advisors Fund Mgmt.
LLC, 341 F. Supp. 2d 454, 464 (S.D.N.Y. 2004); see Basic, 485 U.S.
at 231-32.

-74-
aware that preferred customers frequently engaged in short-term or

excessive trading practices contrary to the prospectus

disclosures. Although the market timing arrangements were

typically entered into before the Strict Prohibition language was

added to the fund prospectuses, the defendants' distribution of

the prospectuses, which was the fraudulent conduct at issue,

occurred both before and after the amendments to the prospectuses

and at a time when the defendants knew the market timing

arrangements were in place. By continuing to distribute these

prospectuses without revisions, in the face of such knowledge and

a duty to confirm the accuracy of the prospectus statements, the

defendants could be found to have acted knowingly or highly

recklessly. See, e.g., In re Scholastic, 252 F.3d at 76 ("Where

the complaint alleges that defendants knew facts or had access to

non-public information contradicting their public statements,

recklessness is adequately pled for defendants who knew or should

have known they were misrepresenting material facts . . . .").

b. Particular Instances

The SEC states these general claims with sufficient

particularity. Its most substantial allegations arise from the

arrangement between Ilytat, L.P. and Columbia Distributor. The

complaint alleges that Hussey, with Tambone's knowledge, approved

an arrangement beginning in 2000 that allowed Ilytat to engage in

frequent, short-term trading practices in return for Ilytat's

-75-
infusion of $20 million of "sticky assets" into the Newport Tiger

Fund. As a result of this arrangement, Ilytat allegedly executed

a number of round-trips into and out of the Newport Tiger Fund,

the Acorn International Fund, and the Acorn International Select

Fund. Specifically, the complaint alleges that Ilytat executed

over 30 round-trips during the period from May 2001 through

September 2002 in the Newport Tiger Fund, 27 round-trips from

September 2000 to December 2001 in the Acorn International Fund,

and at least 20 round-trips during the period from July 2000 to

June 2001 in the Acorn International Select Fund, all at times

when the respective prospectuses contained the Strict Prohibition

language expressing the fund's hostility to such practices.

According to the complaint, the defendants had knowledge

of Ilytat's arrangement and harmful conduct. By March 2001,

Ilytat had been placed, with Hussey's approval, on a list of

"Authorized Accounts for Frequent Trading," which contained the

preferred customers whose trading practices would not be limited,

regardless of their frequency. The same month, Hussey is alleged

to have allowed Ilytat to continue its trading practices with

respect to the Acorn International Fund specifically, by directing

the Columbia Services manager responsible for market timing

surveillance to prevent others from taking steps to halt such

practices. In 2002, Hussey prevented Columbia Services' market

timing surveillance personnel from halting Ilytat's trading

-76-
practices, thereby allowing the conduct to continue for almost

three additional months.

Tambone allegedly was similarly aware of the market

timing practices engaged in by Ilytat, at least with respect to

the Newport Tiger Fund. In October 2000 and March 2001, Tambone

and Hussey received e-mails from the Newport Tiger Fund portfolio

manager informing them of the potential damage that Ilytat's

trading practices could inflict on the fund. In response to an e-

mail in October 2000, Hussey set forth the guidelines for entering

market timing arrangements, which included a requirement that the

fund obtain a long-term asset stream "as a quid-pro-quo" for any

short-term movements. Tambone was copied on this response.

According to the complaint, Tambone was also informed on other

occasions by the Tiger Fund portfolio manager and his superior

regarding concerns about the negative impact of the frequent

trading practices on his fund. Although all of the dated

communications discussed in the complaint occurred prior to May

2001, when the Newport Trading Fund added the Strict Prohibition

representation, Tambone had been placed on notice that the market

timing practices were occurring.

The complaint alleges similar conduct by Tambone and

Hussey with respect to Daniel Calugar and the funds in which he

invested. In 1999, Hussey approved an arrangement allowing

Calugar to make one round-trip per month with his entire

-77-
investment in the Columbia Young Investor Fund and the Columbia

Growth Stock Fund. In May 1999, at the beginning of 2000, and

again in early 2001, Hussey received information that Calugar was,

in fact, engaging in frequent round-trips in these funds and

others. Tambone also received an email from Hussey in 2000

apprising him of Calugar's practices. The complaint alleges that

Calugar continued to trade through at least August 2001, months

after the Strict Prohibition language was adopted in these funds'

prospectuses.

The complaint levels additional allegations against

Hussey individually. According to the complaint, Hussey approved

an arrangement that permitted Signalert to invest in the Columbia

Young Investor Fund and the Columbia Growth Fund and to make a

number of round-trips in each fund annually. Hussey was

subsequently informed in 2000 that Signalert was engaging in these

practices and doing so in excess of the agreed-upon levels. After

February 2001, when the prospectuses for these two funds were

amended to include the Strict Prohibition language, Signalert

allegedly made 20 round-trips in the Young Investor Fund and over

20 in the Growth Stock Fund.

c. Summary

The SEC alleges that Tambone and Hussey, as executives

of the primary underwriter of the Columbia Funds, were responsible

for overseeing the distribution of fund prospectuses to potential

-78-
investors. In that capacity, the defendants allowed the

prospectuses, which contained statements that they knew, or should

have known, were false, to be disseminated and used to sell the

funds, earning money as a commission for those sales. Simply

stated, they "obtain[ed] money . . . by means of an[] untrue

statement of a material fact." This conduct amounts to a primary

violation under section 17(a)(2). Therefore, we find that the SEC

has stated claims of primary securities fraud against Tambone and

Hussey pursuant to Securities Act Section 17(a)(2) with sufficient

particularity to meet the requirements of Fed. R. Civ. P.

12(b)(6), in conjunction with Rule 9(b). Defendants' motions to

dismiss the section 17(a)(2) claims should have been denied.

2. Section 10(b) and Rule 10b-5

To state a claim of primary liability under Rule 10b-

5(b), the SEC's complaint must allege that the defendants (1) made

a materially false or misleading statement (2) in connection with

the sale or purchase of securities, and (3) acted with intent,

knowledge or a high degree of recklessness. See supra Part V.A.

The same allegations that the Commission made against

appellants in the context of its section 17(a)(2) claims also

apply to its claims under section 10(b) and Rule 10b-5(b). As the

SEC asserts, by using the prospectus statements to sell Columbia

Funds, defendants "made their own implied, but false,

representations to investors as to the truthfulness and

-79-
completeness of the statements made in the prospectuses." These

implied statements were a product of their duty "to make an

investigation that would provide [them] a reasonable basis for a

belief that the key representations in the statements provided to

the investors were truthful and complete." If the key

representations about the timing practices were false or

misleading, as the SEC alleges, this implied statement about the

truthfulness and completeness of the statements made in the

prospectus was also false. The SEC has sufficiently alleged that

defendants, either knowingly or highly recklessly, made multiple

false statements. Defendants' motions to dismiss the primary

liability claims under section 10(b) and Rule 10b-5(b) should have

been denied.

B. Aiding and Abetting Liability

We turn to the Commission's three claims of aiding and

abetting liability against Tambone and Hussey: that they aided and

abetted Columbia Advisors' violations of Sections 206(1) and

206(2) of the Advisers Act, Section 10(b) of the Exchange Act and

Rule 10b-5, and Section 15(c)(1) of the Exchange Act.

To establish a claim of aiding and abetting liability

under the securities laws, the Commission must prove: (1) a

primary violation was committed; (2) the defendant was generally

aware that his role or conduct was part of an overall activity

that was improper; and (3) the defendant knowingly and

-80-
substantially assisted in the primary violation. Cleary v.

Perfectune, Inc., 700 F.2d 774, 777 (1st Cir. 1983). If the

defendant has a duty to disclose the primary violations,

recklessness will suffice to establish scienter. Id.; see also

Graham v. SEC, 222 F.3d 994, 1004 (D.C. Cir. 2000) (indicating

that recklessness was sufficient to establish a claim of aiding

and abetting liability under section 10(b) and Rule 10b-5); SEC v.

Peretz, 317 F. Supp. 2d 58, 63 (D. Mass. 2004) (noting that the

pre-Central Bank case law regarding aiding and abetting liability

survived the enactment of Section 104 of the PSLRA). A

defendant's silence or inaction may satisfy the "knowing and

substantial assistance" standard if such silence or inaction was

consciously intended to further the principal violation. Cleary,

700 F.2d at 778.

1. Section 10(b) of the Exchange Act and Rule 10b-5

Our conclusions regarding secondary liability follow

directly from our analysis of the primary liability claims. The

SEC has sufficiently alleged an uncharged primary violation46 of

section 10(b) and Rule 10b-5 by Columbia Advisors, which is

primarily responsible for writing all statements made in the fund

46
As noted above, the SEC reached a settlement with Columbia
Advisors and Columbia Distributor, among others, regarding the
allegations in this complaint and therefore has not brought
separate actions against these entities.

-81-
prospectuses.47 It alleges generally that Columbia Advisors knew

and approved of all but one of the market timing arrangements

entered into, and specifically states that Columbia Advisors,

either itself or through various portfolio managers in charge of

the funds at issue, approved the initial agreement with Ilytat,

the arrangement with Ritchie related to the Growth Stock Fund and

the Short Term Bond Fund, as well as the arrangements with

Calugar, Giacalone, D.R. Loeser, and Signalert. With knowledge of

these arrangements and the subsequent market timing practices

occurring as a result of them, Columbia Advisors continued to make

statements in the prospectuses prohibiting such activities in

these funds. These allegations support the claim that Columbia

Advisors made the misleading prospectus statements and knew they

were being communicated to investors.

The second element of aider and abettor liability is

satisfied by allegations that the defendants knew, or were at

least reckless in not knowing, that the fund prospectuses they

were distributing contained false or misleading statements. As we

have emphasized, defendants' positions as officers of Columbia

Distributors imposed upon them a duty to review the accuracy of

47
The SEC alleges that defendants aided and abetted the
primary violations of both Columbia Advisors and Columbia
Distributor. Because we conclude that the allegations could
support a finding that Columbia Advisors committed a primary
violation of section 10(b) and Rule 10b-5, we need not address the
claims of primary liability asserted against Columbia Distributor
under this provision.

-82-
the prospectus disclosures. That duty was particularly relevant

here because Tambone and Hussey had knowledge of the market timing

arrangements and practices. Therefore, Tambone and Hussey knew or

should have known that the prospectuses contained false and

misleading statements regarding market timing practices. Further,

a review of the relevant prospectuses would have revealed that

Columbia Advisors, by drafting the false statements in the

prospectuses, was also engaging in primary violations of Rule 10b-

5.

Finally, we conclude that the SEC has satisfied the

third element of aiding and abetting liability. The defendants'

failure to correct the misleading disclosures in the prospectuses,

given their duties as underwriters, as well as their use of those

prospectuses to sell the funds to investors, substantially

assisted Columbia Advisors in its own primary violations. See

PIMCO, 341 F. Supp. 2d at 467-68. By distributing the

prospectuses written by Columbia Advisors, the defendants

communicated the false statements to the investing public, thereby

causing Columbia Advisors' primary violation of Rule 10b-5. See

Metge v. Baehler, 762 F.2d 621, 624 (8th Cir. 1985) (requiring a

showing that "the secondary party [has] proximately caused the

violation" and citing, with approval, another court's holding that

plaintiff must show "substantial causal connection between the

culpable conduct of the alleged aider and abetter and the harm."

-83-
(quoting Mendelsohn v. Capital Underwriters, Inc., 490 F. Supp.

1069, 1084 (N.D. Cal. 1979))).

In reaching this conclusion, we necessarily reject the

district court's finding that the defendants did not affirmatively

contribute to Columbia Advisors' primary violations. The district

court based its conclusion on its determination that the

"defendants were not under a duty to disclose the market timing

arrangements to investors." However, as explained above, we have

rejected that determination. As a result of their position as

executives of Columbia Distributor, the defendants had a duty to

review and investigate the fund prospectus statements and other

materials to determine their accuracy and truthfulness, a duty

independent of the fund issuer's responsibility to draft and

produce such materials, see Cleary, 700 F.2d at 777 (stating that

a duty to disclose may arise "where the law imposes special

obligations, as for accountants and brokers"); Chris-Craft Indus.,

Inc. v. Piper Aircraft Corp., 480 F.2d 341, 370 (2d Cir. 1973)

(finding an underwriter liable as an aider and abettor under

section 14(e), which prohibits false or misleading statements in

connection with a tender offer, for acting recklessly in

determining whether a registration statement contained a

materially false statement). In light of this duty, defendants'

conduct in overseeing the distribution of the false prospectuses

-84-
to potential investors amounted to affirmative acts in substantial

assistance of the primary violations.48

2. Section 206 of the Investment Advisers Act

The SEC also alleges that Tambone and Hussey aided and

abetted violations by Columbia Advisors of sections 206(1) and (2)

of the Investment Advisers Act. Section 206 of the Advisers Act

makes it unlawful for any investment adviser, among other things,

"(1) to employ any device, scheme, or artifice to defraud any

client or prospective client; [and] (2) to engage in any

transaction, practice, or course of business which operates as a

fraud or deceit upon any client or prospective client." 15 U.S.C.

§ 80b-6; see SEC v. Fife, 311 F.3d 1, 11 (1st Cir. 2002).

According to the Act, an "investment adviser" is "any person who,

for compensation, engages in the business of advising others,

either directly or through publications or writings, as to the

value of securities or as to the advisability of investing in,

purchasing, or selling securities." 15 U.S.C. § 80b-2(a)(11).

Section 206 imposes a fiduciary duty on investment advisers to act

at all times in the best interest of the fund and its investors,

and includes an obligation to provide "full and fair disclosure of

all material facts" to investors and independent trustees of the

48
Having reached this conclusion, we need not address, as the
district court did, whether the defendants' inaction was
accompanied by a "conscious intent[] to further the principal
violation." Cleary, 700 F.2d at 778.

-85-
fund. Capital Gains, 375 U.S. at 191, 194, 200-01 (addressing the

requirements of an investment adviser pursuant to section 206 of

the Advisers Act). An adviser has "an affirmative obligation to

employ reasonable care to avoid misleading [his or her] clients."

Id. at 194 (quotation marks and footnote omitted). Courts have

interpreted sections 206(1) and 206(2) to include essentially the

same elements as a section 17(a) claim, except that section 206(1)

requires proof of fraudulent intent on the part of the primary

actor, whereas the SEC need only allege negligence to state claims

under sections 206(2) and 17(a)(2) and (3). See, e.g., PIMCO, 341

F. Supp. 2d at 470.

We conclude that the SEC has alleged with sufficient

particularity a primary violation of sections 206(1) and (2) of

the Advisers Act. Columbia Advisors, an investment adviser to all

of the Columbia Funds, including those that maintained the

misleading prospectuses, allegedly failed to satisfy its fiduciary

obligations by placing its own interests above those of the funds

and their investors. Specifically, the complaint alleges that

Columbia Advisors knowingly allowed preferred investors to engage

in short-term and excessive trading in the Columbia Funds, and

that such trading harmed the interests of long-term shareholders.

Despite knowledge of these arrangements, Columbia Advisors

knowingly or intentionally failed to disclose the practices, and

the conflicts of interest they created. These fraudulent

-86-
disclosures or omissions allegedly constituted a "device, scheme,

or artifice to defraud" under section 206(1) and a "practice, or

course of business which operates as a fraud or deceit upon any

client or prospective client" under section 206(2). See PIMCO,

341 F. Supp. 2d at 470.

The second and third elements of secondary liability

were also adequately pled in the complaint. Tambone's and

Hussey's conduct and state of mind, discussed above, establish

with equal force the requisite elements for the SEC's claims under

section 206. The defendants allegedly knew, or were reckless in

not knowing, first, that Columbia Advisors' representations in the

prospectuses regarding market timing were false, and second, that

Columbia Advisors was disinclined to stem the harmful market

timing practices. In furtherance of the Advisors' deceptive

activities, defendants disseminated the misleading prospectuses

and allowed the market timing practices to continue. The section

206 claims against defendants should not have been dismissed.

3. Section 15(c) of the Exchange Act

Finally, the SEC alleges that defendants aided and

abetted a primary violation of Section 15(c)(1) of the Exchange

Act, 15 U.S.C. § 78o(c)(1), by Columbia Distributor. Section

15(c)(1) prohibits a broker-dealer from inducing or attempting to

induce the sale of any security by means of a "manipulative,

deceptive, or other fraudulent device or contrivance." 15 U.S.C.

-87-
§ 78o(c)(1). The relevant SEC regulation, Rule 15c1-2, 17 C.F.R.

§ 240.15c1-2, defines "manipulative, deceptive, or other

fraudulent device or contrivance" to include

any untrue statement of a material fact and any omission
to state a material fact necessary in order to make the
statements made, in the light of the circumstances under
which they are made, not misleading, which statement or
omission is made with knowledge or reasonable grounds to
believe that it is untrue or misleading.

The elements required to prove a violation under section

15(c)(1) are equivalent to those required under Securities Act

section 17(a), including that the defendant acted negligently.

See Aaron, 446 U.S. at 707-08 (Blackmun, J., concurring in part

and dissenting in part); SEC v. George, 426 F.3d 786, 792 (6th

Cir. 2005).

Based on the allegations in the complaint, we conclude

that the SEC has adequately stated a primary violation by Columbia

Distributor of section 15(c)(1), and related aiding and abetting

violations by Tambone and Hussey.49 Columbia Distributor, a

broker-dealer under the Exchange Act, induced or attempted to

induce the sale of various Columbia Funds by means of a misleading

statement in the fund prospectuses. Further, it did so with the

requisite level of scienter, ascertained through the mental state

49
We assess whether the SEC has adequately stated a primary
violation under section 15(c)(1) by Columbia Distributor rather
than Columbia Advisors because the statute applies only to broker-
dealers. The SEC has alleged that Columbia Distributor was a
broker-dealer from early 1998 through August 2003.

-88-
of its management, namely Tambone. See PIMCO, 341 F. Supp. 2d at

470; 3 Hazen, supra, § 12.8[4] ("[K]nowledge of a corporate

officer or agent acting within the scope of authority is

attributable to the corporation" (citing In re Atlantic Fin.

Mgmt., 784 F.2d 29, 31-34 (1st Cir. 1986) (applying principles of

apparent authority in the securities context))).

We need not rehash the allegations constituting the

other elements of liability. Tambone's and Hussey's conduct

elaborated above satisfies the remaining elements and compels our

conclusion that the SEC satisfied its burden under Fed. R. Civ. P.

12(b)(6) with respect to its aiding and abetting claims under

section 15(c)(1).

VII.

Reciting this court's prerogative to affirm a district

court's decision on any independently sufficient ground present in

the record, Hussey individually raises two additional rationales

for affirming the court's decision below to dismiss the SEC's

various claims. First, he asserts that the Due Process Clause of

the Constitution bars the SEC's claim because he and other

securities actors in his position were given insufficient notice

regarding the prohibited nature of his alleged activities.

Second, he argues that most of the SEC's claims are time-barred

because the SEC failed to comply with the five-year statute of

limitations period. Specifically, he asserts that many of the

-89-
alleged misstatements in question involved prospectuses issued as

long ago as 1998. Further, he claims that because the SEC had

knowledge that market timing practices were occurring, but failed

to act, it is not entitled to receive the benefit of equitable

tolling for its claims.

Neither of Hussey's claims have merit. The Commission

seeks with its action to enforce provisions of the securities laws

that have been in existence for over half a century. Since their

inception, it has been unlawful to offer or sell a securities

using a false or misleading statement. The Due Process Clause of

the Constitution requires nothing more by way of notice. See,

e.g., Hill v. Colorado, 530 U.S. 703, 732-33 (2000) (holding that

statute was not impermissibly vague under the Due Process Clause

because it provided a person of reasonable intelligence fair

notice of what is prohibited).

Regarding Hussey's second claim, the applicable five-

year statute of limitations period Hussey invokes applies only to

penalties sought by the SEC, not its request for injunctive relief

or the disgorgement of ill-gotten gains. See, e.g., SEC v.

Diversified Corporate Consulting Group, 378 F.3d 1219, 1224 (11th

Cir. 2004) ("When the SEC sues to enforce the securities laws, it

is vindicating public rights and furthering public interests, and

therefore is acting in the United States's sovereign capacity.

This is so even though the SEC seeks disgorgement as a remedy of

-90-
the violation . . . .") (per curiam); SEC v. Rind, 991 F.2d 1486,

1490-91 (9th Cir. 1993) (reaching the same conclusion); see also

28 U.S.C. § 2462. Therefore, those remedies are not barred.

On the issue of penalties, to gain the benefit of

equitable tolling, the SEC must establish (1) that there were

insufficient facts available to put it on inquiry notice of the

possibility of fraud, and (2) that it exercised due diligence in

attempting to uncover the factual basis underlying this alleged

fraudulent conduct at the point when those facts were available.

Maggio v. Gerard Freezer & Ice Co., 824 F.2d 123, 127-28 (1st Cir.

1987). Here, because of the self-concealing50 nature of the

defendants' conduct, as well as their failure to report any of the

alleged preferred investor arrangements to the independent

trustees of the Columbia Funds, the SEC did not become aware of

the activity until September 2003 when the Columbia entities

responded to an inquiry from the Commission. See Cook v. Avien,

Inc., 573 F.2d 685, 695 (1st Cir. 1978) (noting that the statute

of limitations is tolled until the "plaintiff in the exercise of

reasonable diligence discovered or should have discovered the

fraud," even if there are no "affirmative acts on the part of

defendants" to conceal their conduct from the other party); SEC v.

50
The acts were self-concealing because a reasonable investor
would not have been aware that market timing activities were
allegedly occurring in several of the Columbia funds, in light of
the text of the fund prospectuses that represented otherwise.

-91-
Power, 525 F. Supp. 2d 415, 425-26 (S.D.N.Y. 2007). Although

Hussey rightly points out that market timing activities were

widespread throughout the industry prior to 2003, and therefore

the SEC was on notice of such conduct, the basis of the

Commission's claims is not the market timing activities per se,

but rather the fraud committed upon investors by misleading them

about the presence of such activities in the Columbia Funds. As

stated in its complaint, the SEC received no information prior to

September 2003 that alerted it to any potential fraud or that

triggered a duty to inquire whether the defendants or the Columbia

entities were engaged in such activity. See Young v. Lepone, 305

F.3d 1, 8 (1st Cir. 2002) (discussing "storm warnings" that would

have triggered plaintiff's duty to act). Thus, we conclude that

the allegations here support a claim that the five-year statute of

limitations period was tolled until September 2003 when the SEC

rightly inquired and learned of the defendants' activities.

VIII.

We summarize our conclusions:

1. Section 17(a)(2) covers conduct that may not be

prohibited by section 10(b) and Rule 10b-5(b). Specifically,

primary liability may attach under section 17(a)(2) if the

defendant has "in the offer or sale of any securities . . .

obtain[ed] money . . . by means of any untrue statement of a

-92-
material fact," even if he has not himself made the untrue

statement within the meaning of Rule 10b-5(b).

2. Tambone and Hussey, executives of a mutual fund's

primary underwriter, were primarily responsible for distributing

fund prospectuses to potential investors and other broker-dealers.

To make their sales, they used prospectuses which they knew, or

were reckless in not knowing, contained representations about

market timing practices which were allegedly false. In doing so,

they "obtain[ed] money or property by means of an[] untrue

statement of [] material fact," in violation of section 17(a)(2).

3. Tambone and Hussey, executives of a mutual fund's

primary underwriter, had a legal duty to confirm the accuracy and

completeness of the fund prospectuses that they used in the sale

of the mutual fund's securities. As a result of this duty,

Tambone and Hussey made implied statements to potential investors

that they had a reasonable basis to believe that the statements in

the prospectuses regarding market timing practices were accurate

and complete. Because certain statements in the prospectuses

regarding market timing were allegedly false, defendants' implied

statements were also false. These implied statements fall within

the purview of section 10(b) and Rule 10b-5(b).

4. The district court erred by requiring the SEC to

allege actionable statements publicly attributed to Tambone and

-93-
Hussey as a distinct element of its claims of primary liability

under section 17(a), section 10(b), and Rule 10b-5.

5. The SEC's claims that Tambone and Hussey committed

primary violations of Section 17(a)(2) of the Securities Act,

Section 10(b) of the Exchange Act, and Rule 10b-5(b), were pled

with sufficient particularity to satisfy the requirements of Fed.

R. Civ. P. 9(b).

6. The SEC also stated claims of secondary liability in

its complaint against defendants Tambone and Hussey under Sections

10(b) and 15(c) of the Exchange Act, Rule 10b-5, and Sections

206(1) and 206(2) of the Advisers Act, and stated such claims with

sufficient particularity to satisfy the requirements of Fed. R.

Civ. P. 9(b).

The judgment of the district court is reversed; the case is

remanded to the district court for further proceedings consistent

with this opinion.

So ordered.

- Concurring and Dissenting Opinion Follows -

-94-
 SELYA, Circuit Judge (concurring in part and dissenting

in part). In recent months, the securities industry has been

wracked by a treacherous combination of market forces, overly

optimistic risk-taking, and lapses in judgment. The majority

proposes to add to this perfect storm by judicial enlargement of

the scope of primary liability for violations of the antifraud

provisions of the securities laws. I have come to conclude that

this path-breaking step, though taken in the guise of an

interpretation of Rule 10b-5, involves nothing less than a

rewriting of that rule. In the bargain, it stretches the concept

of primary liability beyond what I believe the Supreme Court would

countenance and allows the SEC to cast a wider net than any court

has ever thought possible.

I view this radical departure as an unwarranted

usurpation of legislative and administrative authority. Thus, I

respectfully dissent from Part V of the majority opinion. At the

same time, I agree with the majority's holding that the SEC has

stated a cognizable claim under section 17(a)(2) of the Securities

Act of 1933. I am nonetheless concerned that the language in

which the majority couches this holding is overly broad. Thus,

I concur in the judgment as to that issue without joining Part IV

of the majority opinion.

My exegesis begins with the text of the relevant statute

and rule. See Cent. Bank of Denver v. First Interstate Bank of

-95-
Denver, 511 U.S. 164, 173 (1994). Section 10(b) of the Exchange

Act of 1934 renders it unlawful for a person "directly or

indirectly . . . [t]o use or employ, in connection with the

purchase or sale of any security . . . 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). The

"in contravention of such rules" language invites clarification

of the statute through rulemaking. The SEC has obliged.

The rule providing clarification in this instance is

Rule 10b-5(b). That provision prohibits "any person" from

"directly or indirectly . . . mak[ing] any untrue statement of a

material fact or . . . omit[ting] to state a material fact." 17

C.F.R. § 240.10b-5(b). My disagreement revolves around the proper

interpretation of the first element of a Rule 10b-5(b) violation:

a material misstatement made by the defendant.

In my view, the verb choice is critical to an

understanding of the rule. Yet the majority casually conflates

this carefully chosen verb ("make") with a very different verb

("use") in order to impose primary liability on defendants who

have not "made" any misstatements but, rather, are alleged to have

used prospectuses that contain misstatements crafted by others.

See ante at 51. The word "make" is not infinitely elastic — and

I do not think that it either can or should be interpreted so

expansively. To make a bad situation worse, the majority's

-96-
confusion of these two distinct verbs flies in the teeth of the

Supreme Court's circumspect vision of primary liability with

respect to the antifraud provisions of the securities laws. Let

me briefly sketch the background and then explain the basis for

these two conclusions.

In this civil enforcement action, the SEC accuses the

defendants of sins of commission, not sins of omission; that is,

of making untrue statements of material fact. For present

purposes, then, the pivotal word in the rule is "make." Rule 10b-

5 does not define that word, and the Supreme Court has not

directly addressed its meaning in this setting.51 Thus, it seems

logical to consult the dictionary in order to glean the essence

of the word. See, e.g., Perrin v. United States, 444 U.S. 37, 42

(1979).

To "make" means to "act" or "cause to exist, occur, or

appear," or "create [or] cause." Webster's Third New

International Dictionary 1363 (1993). The SEC charges these

defendants, in substance, with passing along to brokers, dealers,

and customers prospectuses containing false statements of material

51
The majority correctly acknowledges that Rule 10b-5 cannot
be read to sweep more broadly than the statute to which it is
appurtenant. Ante at 51. It then turns this axiom inside out and
uses the broad language of the statute to define the obviously
narrower language of the rule. Ante at 51-52. I do not find
either this sleight of hand or the majority's circular attempt to
explain it, ante at 51 n.34, persuasive.

-97-
fact created by others.52 To stretch the word "make" to cover that

conduct, so that an underwriter's status as such renders him per

se liable for others' statements, requires a freewheeling

interpretation that disregards both plain meaning and orthodox

definitions. There is no principled justification for such an

interpretation; in the last analysis, it amounts to a thinly-

disguised attempt to rewrite the rule. That is a step forbidden

to us as judges. See Robinson v. Shell Oil Co., 519 U.S. 337, 340

(1997); United States v. Charles George Trucking Co., 823 F.2d

685, 688 (1st Cir. 1987).

There is a further problem. The majority's freewheeling

approach blurs the line that the Supreme Court has taken pains to

draw between primary and secondary liability with respect to the

antifraud provisions of the securities laws. As Rule 10b-5(b)

itself suggests, that line should be kept sharp and clear: a

person who does not actually make or affirmatively cause to be

made a materially false statement may be held liable as a

secondary violator (for aiding and abetting), but he cannot be

held liable as a primary violator. See In re: Charter Commc'ns,

Inc., Sec. Litig., 443 F.3d 987, 992 (8th Cir. 2006), aff'd sub

52
Although the SEC's complaint contains some vague allusions
that Tambone and Hussey may somehow have participated in drafting
the prospectuses, the SEC has focused its primary liability
arguments under section 10(b) and Rule 10b-5(b) on the defendants'
use of the prospectuses. In accordance with our usual praxis, I
deem abandoned arguments that have not been developed on appeal.
United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).

-98-
nom. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,

128 S. Ct. 761 (2008).

Central Bank is of central importance in arriving at

this conclusion. The majority labors to downplay the significance

of Central Bank by remarking the obvious: that the Court did not

address the specific issue with which we are faced. See ante at

61-63. But even though Central Bank's holding does not explicitly

control here, its teachings cannot be so blithely dismissed.

While the decision there left open the precise boundaries of

primary liability, it remains the beacon by which courts must

steer in navigating the interpretive channels that run through the

antifraud provisions of the securities laws.

In Central Bank, the Supreme Court laid out its approach

to interpreting section 10(b) in private securities actions. 511

U.S. at 167-90. The Court emphasized that a correct

interpretation must center on the language of the statute itself.

Id. at 175. It admonished that expansive readings of such

statutes, based on judicially manufactured policy rationales,

should be avoided. Id. at 188-89 (stating that "[p]olicy

considerations cannot override our interpretation of the text and

structure of the Act").

That prescription comprises the gold standard for courts

embroiled in securities fraud litigation. Fairly read, the

Court's opinion counsels against superimposing judicial policy

-99-
preferences on unsympathetic language in a statute or rule. The

majority opinion disregards that wise counsel.

Central Bank is informative in another respect as well.

The Court specifically held that a private plaintiff cannot

maintain an action for aiding and abetting under section 10(b) or

Rule 10b-5. Id. at 191. As a result, the line between primary

violators and secondary violators has become highly significant

for those who deal in securities. That line has ready application

here.

There is no need for me to reinvent this particular

wheel, for the Second Circuit has gotten it exactly right: "if

Central Bank is to have any real meaning, a defendant must

actually make a false or misleading statement in order to be held

liable under Section 10(b). Anything short of such conduct is

merely aiding and abetting, and no matter how substantial that aid

may be, it is not enough to trigger liability under Section

10(b)." Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.

1998) (quoting Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir.

1997)); accord Anixter v. Home-Stake Prod. Co., 77 F.3d 1215,

1226-27 (10th Cir. 1996) ("Reading the language of § 10(b) and

10b-5 through the lens of Central Bank of Denver, we conclude that

in order for [defendants] to 'use or employ' a 'deception'

actionable under the antifraud law, they must themselves make a

false or misleading statement . . . ."). The majority opinion in

-100-
this case effectively relegates these sensible precedents to the

scrap heap — and it does so without any meaningful support in the

case law.53

I find further support for a plain-meaning

interpretation of Rule 10b-5(b) in a comparison of its text with

that of section 17(a) of the Securities Act of 1933. It is common

ground that Rule 10b-5 was devised after and in light of section

17(a). See United States v. Persky, 520 F.2d 283, 287 (2d Cir.

1975). For the most part, the rule's provisions mirror the

counterpart provisions contained in section 17(a). Compare 17

C.F.R. § 240.10b-5(a) ("to employ any device"), and id. § 240.10b-

5(c) ("to engage in any act"), with 15 U.S.C. § 77q(a)(1) ("to

employ any device"), and id. § 77q(a)(3) ("to engage in any

transaction"). There is a notable difference in language,

however, between Rule 10b-5(b) and its counterpart provision,

section 17(a)(2). The former uses the word "make," 17 C.F.R. §

240.10b-5(b), while the latter uses the phrase "by means of," 15

U.S.C. § 77q(a)(2). It would be foolhardy to gloss over this

striking divergence or to view it as mere linguistic happenstance.

It represents a purposeful choice of language and, as such, it

53
To be sure, earlier cases, cited somewhat disingenuously by
the SEC, take a less categorical view. See, e.g., Chris-Craft
Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341, 370 (2d Cir.
1973). But these cases preceded the Supreme Court's seminal
decision in Central Bank and, thus, have no continuing vitality.

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must be given effect.54 See United States v. Ahlers, 305 F.3d 54,

59-60 (1st Cir. 2002) (discussing court's obligation to "presume

that . . . differential draftsmanship was deliberate"); cf. Nalley

v. Nalley, 53 F.3d 649, 652 (4th Cir. 1995) ("When the wording of

an amended statute differs in substance from the wording of the

statute prior to amendment, we can only conclude that Congress

intended the amended statute to have a different meaning.").

Doing so bars a court from reading "make" so open-endedly as to

distort its meaning and, in the same fell swoop, obscure the

obvious distinction between "make" and "by means of." The

majority's rendition ignores this distinction.

In an apparent effort to blunt the force of this

reasoning, the majority places weight on the fact that this is an

SEC enforcement action rather than a private securities fraud

suit. See ante at 47. I agree with the majority's conclusion

that the absence of any need to show reliance in an SEC

enforcement action means that the SEC is not required to

54
Indeed, the majority notes both the relationship and the
linguistic differences between section 17(a)(2) and Rule 10b-5(b)
in discussing section 17(a)(2) liability. See ante at 41-42.
There, the majority concedes that the scope of Rule 10b-5(b) is
"more restrictive" than that of section 17(a)(2). Id. at 41. I
fail to understand how the majority can rely on this distinction in
adjudicating the dismissal of the section 17(a)(2) claim, but
gloss over it in adjudicating the dismissal of the Rule 10b-5(b)
claim. The majority's cursory attempt to explain this
inconsistency, ante at 42 n.30, simply does not hold water. Once
the word "make" is construed to mean "implied making" through
"use," any principled distinction between "make" and "by means of"
is irretrievably lost.

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demonstrate public attribution. See SEC v. Wolfson, 539 F.3d

1249, 1260 (10th Cir. 2008) (declining to impose a public

attribution requirement in an SEC enforcement action "given the

unambiguous connection between reliance and attribution, and the

fact that the SEC need not prove reliance"). But for present

purposes, this is thin gruel: the absence of any need to prove

reliance does not allow a court to dismantle Central Bank's

interpretive prescription in its entirety.55 SEC enforcement

actions have no reliance requirement because they are meant to

protect the public generally. See Schellenbach v. SEC, 989 F.2d

907, 913 (7th Cir. 1993). That fact does not give the SEC carte

blanche to punish under a primary liability framework those whose

conduct is not proscribed by the language of the relevant statute

or rule. Nor does the absence of a reliance requirement give a

court a reason to expand the scope of primary liability for

violators of the antifraud provisions of the securities laws.

The majority concludes that "making" can be "implied."

Ante at 58. This is exactly the sort of judicial adventurism

55
In this respect, it is instructive to note that after
Central Bank courts began to strike down aiding and abetting claims
under Rule 10b-5 because "[i]t was difficult to understand how the
SEC could bring an aiding and abetting claim under Rule 10b-5 if a
private litigant [could] not." Louis Loss & Joel Seligman,
Fundamentals of Securities Regulation 1329 (2004). Congress later
enacted a different provision to allow the SEC to bring aiding and
abetting actions. See id. at 1329 n.37 (citing Sec. Ex. Act §
20(f)). Congress easily could have done the same in the Rule 10b-5
context, but it has not done so.

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against which the Central Bank Court warned. While I fully agree

that underwriter-executives owe a duty to their clients and to

those who purchase securities, a breach of that duty, without

more, does not expose those executives to whatever liability the

SEC decides to impose. The SEC's attempt in this case to employ

Rule 10b-5(b) to punish such a breach impermissibly equates a

passive omission — failing to correct a false statement made by

another — with the affirmative misconduct that the language of the

rule targets.56

If more were needed — and I doubt that it is — the

precedents are telling. Although this case is one of first

impression, the courts of appeals in the aftermath of Central Bank

generally have chosen one of two tests, limned by the majority,

see ante Part V.B.2, as an aid in drawing the line between primary

and secondary liability. Compare, e.g., Wright, 152 F.3d at 173-

76 (elucidating attribution test), with, e.g., Howard v. Everex

Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000) (elucidating

substantial participation test). I agree with the majority that

this case does not present a suitable occasion to choose between

these competing tests. My concern, however, is that the

56
I do not mean to suggest that persons in the defendants'
positions could never be found primarily liable for a section 10(b)
and Rule 10b-5 violation. As the Central Bank Court recognized,
511 U.S. at 191, such a scenario is conceivable. But the
allegations in this case, even if true, do not align with the
requirements for primary liability.

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majority's "implied making" theory of liability captures a much

broader range of conduct than either of the existing tests.

There is no need for me to wax longiloquent. This is

one of those occasions when the language and structure of a rule

and the teachings of the Supreme Court coalesce to signal a

particular result. Instead of heeding this signal, the majority

prefers to rewrite Rule 10b-5 to achieve a different result. That

rewriting is beyond the court's legitimate authority. Moreover,

the majority's result, I fear, has the potential to cause a great

deal of mischief. At the very least, the majority opinion will

garble the law and cause confusion in an industry much in need of

clarity.

Because the SEC's complaint fails to state a claim under

Rule 10b-5(b) upon which relief can be granted against these

defendants, I would affirm the district court's dismissal of that

count. To the extent that the majority holds to the contrary, I

respectfully dissent.

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