Securities and Exchange Commission v. James Tambone and Robert Hussey

United States Court of Appeals
For the First Circuit
No. 07-1384
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellant,
v.
JAMES TAMBONE AND 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
Lynch, Chief Judge,
Torruella, Selya, Boudin, Lipez and Howard,
Circuit Judges.
John W. Avery, Senior Litigation Counsel, with whom David M.
Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, and
Jacob H. Stillman, Solicitor, were on supplemental brief, for
appellant.
Arthur R. Miller, William B. Scoville, Jr., Peter G.A.
Safirstein, Milberg LLP, Kevin P. Roddy, Wilentz, Goldman &
Spitzer, P.A., Salvatore J. Graziano, Ann M. Lipton, and Bernstein
Litowitz Berger & Grossmann LLP, on supplemental brief for National
Association of Shareholder and Consumer Attorneys (NASCAT), amicus
curiae.
Paula J. DeGiacomo, with whom Elliot H. Scherker, Greenberg
Traurig LLP, A. John Pappalardo, John A. Sten, and Greenberg
Traurig, P.A. were on supplemental brief, for appellee Tambone.
Clifford M. Sloan, with whom Christopher M. Joralemon, Gibson,

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Dunn & Crutcher LLP, Warren L. Feldman, Skadden, Arps, Slate,
Meagher & Flom LLP, Frank A. Libby, Jr., John J. Commisso, and
LibbyHoopes, P.C. were on supplemental brief, for appellee Hussey.
Douglas R. Cox, Michael J. Scanlon, Jason J. Mendro, Gibson,
Dunn & Crutcher LLP on supplemental brief for Center for Audit
Quality, amicus curiae.
Carter G. Phillips, Jonathan F. Cohn, Daniel A. McLaughlin,
Eric D. McArthur, Sidley Austin LLP, Ira D. Hammerman, Kevin M.
Carroll on supplemental brief for Securities Industry and Financial
Markets Association, amicus curiae.
Richard D. Bernstein, Barry P. Barbash, Frank M. Scaduto,
Willkie Farr & Gallagher LLP, Robin S. Conrad, and Amar D. Sarwal
on supplemental brief for United States Chamber of Commerce, amicus
curiae.
John Pagliaro, Staff Attorney, and Martin J. Newhouse on
supplemental brief for New England Legal Foundation and Associated
Industries of Massachusetts, amici curiae.
OPINION EN BANC
March 10, 2010

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SELYA, Circuit Judge. Rule 10b-5(b), promulgated by the
Securities and Exchange Commission (SEC) under the aegis of section
10(b) of the Securities Exchange Act of 1934 (Exchange Act),
renders it unlawful "[t]o make any untrue statement of a material
fact . . . in connection with the purchase or sale of any
security." 17 C.F.R. § 240.10b-5(b). The issue before us is one
of first impression. It turns on the meaning of the word "make" as
used in Rule 10b-5(b). The SEC advocates an expansive definition,
contending that one may "make" a statement within the purview of
the rule by merely using or disseminating a statement without
regard to the authorship of that statement or, in the alternative,
that securities professionals who direct the offering and sale of
shares on behalf of an underwriter impliedly "make" a statement,
covered by the rule, to the effect that the disclosures in a
prospectus are truthful and complete.
We reject the SEC's expansive interpretation. It is
inconsistent with the text of the rule and with the ordinary
meanings of the phrase "to make a statement," inconsistent with the
structure of the rule and relevant statutes, and in considerable
tension with Supreme Court precedent. Consequently, we affirm the
district court's dismissal of the SEC's Rule 10b-5(b) claim.
I. BACKGROUND
Because this appeal follows the district court's granting
of a motion to dismiss, we rehearse the facts as well-pleaded in

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the SEC's complaint. See Centro Medico del Turabo, Inc. v.
Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir. 2005).
At all times material hereto (roughly, 1998-2003), the
defendants, James Tambone and Robert Hussey, were senior executives
of a registered broker-dealer, Columbia Funds Distributor, Inc.
(Columbia Distributor), or its predecessor in interest. Columbia
Distributor underwrites and markets mutual funds. The SEC alleges
that the defendants violated sundry provisions of both the
Securities Act of 1933 (Securities Act) and the Exchange Act. Its
complaint depicts a tangled web of interlocking entities. We
briefly trace the fibers within that web.
During the relevant period, Columbia Distributor was a
wholly-owned subsidiary of Columbia Management Group, Inc.
(Columbia Management) and an indirect subsidiary of FleetBoston
Financial Corporation (Fleet). Columbia Distributor was known as
Liberty Funds Distributor, Inc. (Liberty Distributor) until 2001,
when Fleet purchased its parent corporation, Liberty Financial
Group (Liberty).
Columbia Distributor acted as the principal underwriter
and distributor of over 140 mutual funds in the Columbia mutual
fund complex (the Columbia Funds). The Columbia Funds included
several funds that had been owned by Liberty prior to the take-over
by Fleet. In its wonted role, Columbia Distributor sold shares in

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the Columbia Funds and disseminated their prospectuses to
investors.
Direct responsibility for the representations contained
in the prospectuses rested with the funds' sponsor, Columbia
Management Advisors, Inc., and its predecessors in interest
(collectively, Columbia Advisors). Like Columbia Distributor,
Columbia Advisors was a wholly-owned subsidiary of Columbia
Management and, thus, an indirect subsidiary of Fleet for much of
the relevant period.
The defendants held positions of trust and responsibility
in this corporate pyramid. Tambone served as co-president of
Columbia Distributor from 2001 to 2004. Prior thereto, he held the
same post with Liberty Distributor. Hussey served as managing
director (national accounts) of Columbia Distributor from 2002
until 2004. Before that, he occupied a comparable position with
Liberty Distributor. The SEC does not allege that either defendant
worked for the Columbia Funds' sponsor, Columbia Advisors, during
the relevant time frame.
The short-term trading practice that lies at the
epicenter of this case is known in the trade as "market timing."
Market timing is the practice of frequent buying and selling of
shares of a single mutual fund in order to exploit inefficiencies
in mutual fund pricing. According to the SEC, market timing,
though not illegal per se, can harm other fund investors and,

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therefore, is commonly barred (or at least restricted) by those in
charge of mutual funds.
The Columbia Funds' prospectuses contained
representations touching upon the subject of market timing.
Starting at least as early as 1998, language was inserted into many
Columbia Funds' prospectuses restricting the number and frequency
of round-trips (i.e., exchanges from one fund to another and back
again) in which an investor could indulge. Emblematic of this
prophylaxis was language, first appearing in May of 1999, inserted
in prospectuses for funds belonging to the Acorn Fund Group, a
constituent of the Columbia Funds. That language stated that the
funds within the group "do not permit market-timing and have
adopted policies to discourage this practice."
This effort to curb market timing escalated over time.
In 2000, Hussey co-chaired an internet working group formed to
create procedures designed to detect and deter market timing in the
Columbia Funds. The working group ultimately recommended that each
of the member funds take a consistent position against market
timing in future prospectuses. As a result, a number of funds
began to include a "strict prohibition" in every prospectus,
expressly barring short-term or excessive trading. By 2003, the
strict prohibition language, or a variant of it, appeared in all
the Columbia Funds' prospectuses.

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An earlier action, filed in February of 2005, was dismissed 1
without prejudice for failure to plead fraud with particularity.
That action is of no moment here.
-7-
The SEC alleges that, despite the language in the
prospectuses expressing hostility toward market timing — the
existence of which Tambone and Hussey allegedly either knew or
recklessly ignored — the defendants jointly and severally entered
into, approved, and/or knowingly permitted arrangements allowing
certain preferred customers to engage in market timing forays in at
least sixteen different Columbia Funds during the relevant period.
The SEC also alleges that the defendants used the prospectuses in
their sales efforts by allowing them to be disseminated and
referring potential clients to them.
II. TRAVEL OF THE CASE
On May 19, 2006, the SEC filed a civil complaint in the
United States District Court for the District of Massachusetts.1
In its complaint, the SEC alleged that Tambone and Hussey had
violated section 17(a) of the Securities Act, section 10(b) of the
Exchange Act, and Rule 10b-5 thereunder. In addition, the SEC
alleged that the defendants had aided and abetted primary
violations of section 10(b) and Rule 10b-5 by Columbia Advisors and
Columbia Distributor, primary violations of section 15(c) of the
Exchange Act by Columbia Distributor, and primary violations of
section 206 of the Investment Advisers Act of 1940, 15 U.S.C.
§ 80b-6, by Columbia Advisors.

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This contention was based on the SEC's allegations that the 2
defendants reviewed and commented on the market timing statements
before those statements were included in the prospectuses. We do
not quote these allegations at length, as the SEC has not pursued
this line of argument on appeal.
In addition, the SEC argued that Tambone had made material 3
misrepresentations by signing selling agreements in which he
vouched for the accuracy of the statements in the prospectuses.
Because the SEC has not pursued this argument on appeal, we
disregard it. See United States v. Zannino, 895 F.2d 1, 17 (1st
Cir. 1990).
-8-
In due season, each defendant moved to dismiss. The SEC
opposed the motions. As the parties' arguments with respect to
liability under Rule 10b-5(b) are central to this appeal, we
summarize them succinctly.
The defendants premised their challenge on the thesis
that the SEC had failed properly to plead any actionable
misstatements on their part. In opposition, the SEC countered that
the complaint sufficiently alleged that the defendants had made
material misrepresentations regarding market timing in the Columbia
Funds' prospectuses. Specifically, the SEC argued that the
defendants "made" false statements of material facts within the
meaning of Rule 10b-5(b) by (i) participating in the drafting
process that went into the development of the market timing
language, and (ii) using the prospectuses in their sales efforts, 2
allowing the prospectuses to be disseminated and referring clients
to them for information. Finally, the SEC argued that the 3
defendants were liable for a material omission under Rule 10b-5(b).

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The district court granted the motions to dismiss. SEC
v. Tambone (Tambone I), 473 F. Supp. 2d 162, 168 (D. Mass. 2006).
With respect to the Rule 10b-5(b) claim premised on the defendants'
making of false statements, the court applied the bright-line test
articulated in Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d
Cir. 1998), and held that the SEC's allegations about the
defendants' participation in the drafting process and their
subsequent use of the prospectuses were too conclusory and
attenuated to satisfy the particularity requirement of Federal Rule
of Civil Procedure 9(b). Tambone I, 473 F. Supp. 2d at 166. The
court found unconvincing the SEC's other arguments for liability
under Rule 10b-5. Id. at 167. The court likewise rejected the
SEC's section 17(a) and aiding and abetting claims. Id. at 167-68.
The SEC appealed from the granting of the motions to
dismiss with respect to its section 17(a)(2), Rule 10b-5(b), and
aiding and abetting claims.
With respect to Rule 10b-5(b), the SEC briefed two
arguments as to how the defendants "made" the alleged
misrepresentations. First, the SEC argued that the defendants
"made" the misrepresentations by using the prospectuses to sell the
mutual funds. Second, the SEC argued that the defendants impliedly
made false representations to investors to the effect that they had
a reasonable basis for believing that the key representations in
the prospectuses were truthful and complete. This implied

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The panel parted ways only with respect to the Rule 10b-5(b) 4
claims. See Tambone II, 550 F.3d at 149 (Selya, J., concurring in
part and dissenting in part).
-10-
statement theory rested on the premise that a securities
professional engaged in the offering of securities has a "special
duty" to undertake an investigation that would provide him with a
reasonable basis for believing that the representations in the
prospectus are truthful and complete. Therefore, the theory goes,
a securities professional "makes" an implied representation to
investors that the prospectus is truthful and complete when he
engages in an offering.
What the SEC chose not to argue is also noteworthy. The
SEC did not allude to its argument, which at one point had been
raised below, that the defendants made the alleged misstatements
through their involvement with the preparation of the prospectuses.
Similarly, although the SEC had pleaded violations of subparagraphs
(a) and (c) of Rule 10b-5, it did not pursue those claims on
appeal. In accordance with our usual praxis, we deem abandoned all
arguments that have not been briefed and developed on appeal. See
United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990).
A divided panel of this court reversed the dismissal of
the SEC's section 17(a)(2), Rule 10b-5(b), and aiding and abetting
claims. SEC v. Tambone (Tambone II), 550 F.3d 106, 149 (1st Cir.
2008) (withdrawn). With respect to Rule 10b-5(b), the panel 4
majority adopted the SEC's implied representation theory and held

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that the SEC had thereby alleged that the defendants had made false
statements. Id. at 135.
The defendants filed petitions for en banc review, Fed.
R. App. P. 35, challenging all of the panel's holdings. The full
court withdrew the panel opinion but ordered rehearing en banc only
on the Rule 10b-5(b) issues. SEC v. Tambone, 573 F.3d 54, 55 (1st
Cir. 2009) (order granting rehearing en banc). The court declined
to rehear the parties' arguments concerning either the section
17(a)(2) or the aiding and abetting rulings. Id. Following a new
round of briefing (including helpful submissions by an array of
amici) and reargument, we took the matter under advisement.
III. STANDARD OF REVIEW
We review de novo a district court's disposition of a
motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).
Centro Medico del Turabo, 406 F.3d at 5. In the process, we accept
as true all well-pleaded facts set out in the complaint and indulge
all reasonable inferences in favor of the pleader. In re Colonial
Mortg. Bankers Corp., 324 F.3d 12, 15 (1st Cir. 2003).
As a general proposition, a complaint must contain no
more than "a short and plain statement of the claim showing that
the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). But
even though a complaint need not plead "detailed factual
allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007),
it must nonetheless "contain sufficient factual matter, accepted as

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true, to state a claim to relief that is plausible on its face,"
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal quotation
marks omitted). In other words, the complaint must include
"factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged."
Id. If the factual allegations in the complaint are too meager,
vague, or conclusory to remove the possibility of relief from the
realm of mere conjecture, the complaint is open to dismissal.
Twombly, 550 U.S. at 555.
Because the complaint in this case contains allegations
of fraud, an additional hurdle must be surmounted: the pleader
(here, the SEC) must "state with particularity the circumstances
constituting [the] fraud." Fed. R. Civ. P. 9(b). To satisfy this
particularity requirement, the pleader must set out the "time,
place, and content of the alleged misrepresentation with
specificity." Greebel v. FTP Software, Inc., 194 F.3d 185, 193
(1st Cir. 1999).
IV. ANALYSIS
This case presents the two-part question of whether a
securities professional can be said to "make" a statement, such
that liability under Rule 10b-5(b) may attach, either by (i) using
statements to sell securities, regardless of whether those
statements were crafted entirely by others, or (ii) directing the
offering and sale of securities on behalf of an underwriter, thus

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making an implied statement that he has a reasonable basis to
believe that the key representations in the relevant prospectus are
truthful and complete. The answer to each part of this two-part
question is "no."
We think it appropriate to commence our analysis with the
text of the relevant statute and rule. See Cent. Bank of Denver v.
First Interstate Bank of Denver, 511 U.S. 164, 173 (1994). Section
10(b) of the Exchange Act renders it unlawful for a person "[t]o
use or employ . . . 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). Pursuant to its
rulemaking authority under section 10(b), the SEC adopted Rule 10b-
5(b), which provides, in pertinent part, that "[i]t shall be
unlawful for any person, directly or indirectly, . . . [t]o 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." 17 C.F.R. § 240.10b-5(b). The inquiry here centers
on whether the defendants made untrue statements of material fact
within the meaning of this rule.
In conducting this inquiry, the pivotal word in the
rule's text is "make," as in "to make a statement." The rule
itself does not define that word, nor does it suggest that the word
is imbued with any exotic meaning. In the absence of either a

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built-in definition or some reliable indicium that the drafters
intended a special nuance, accepted canons of construction teach
that the word should be given its ordinary meaning. See Smith v.
United States, 508 U.S. 223, 228 (1993) ("When a word is not
defined by statute, we normally construe it in accord with its
ordinary or natural meaning."); Santa Fe Indus., Inc. v. Green, 430
U.S. 462, 472 (1977) (interpreting Rule 10b-5 according to the
"commonly accepted meaning" of its words); In re Hill, 562 F.3d 29,
32 (1st Cir. 2009) (noting that, in general, words in a statute
carry their ordinary meanings if not specially defined).
One reference point for determining the ordinary meaning
of a word is its accepted dictionary definition. See, e.g., Smith,
508 U.S. at 228-29 (consulting various dictionaries to discern the
plain meaning of the word "use" in the relevant statute). For
purposes of this analysis, we refer to several common and
representative dictionary definitions of "make," which include
"create [or] cause," Webster's Third New Int'l Dict. 1363 (2002);
"compose," id.; and "cause (something) to exist," Black's Law Dict.
1041 (9th ed. 2009).
This case does not require us to set forth a
comprehensive test for determining when a speaker may be said to
have made a statement. It is enough to say that the SEC's
purported reading of the word is inconsistent with each of these
definitions. In any event, the question does not turn on

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dictionary meanings alone. We also look to the structure of
section 10(b) and Rule 10b-5, as well as other, related provisions,
to interpret the term at issue. Chief among these structural
considerations is the relationship between section 10(b) and Rule
10b-5(b). Section 10(b) grants the SEC broad authority to
proscribe conduct that "use[s] or employ[s]" any "manipulative or
deceptive device or contrivance," in connection with the purchase
or sale of any security. 15 U.S.C. § 78j(b).
In Rule 10b-5(b), the SEC prohibited a specific subset of
all "manipulative or deceptive device[s] or contrivance[s],"
namely, untrue or misleading statements of material fact. It
likewise prohibited a specific subset of all conduct that might be
said to "use or employ" such a manipulative device or contrivance:
the making of untrue or misleading statements of material fact.
In light of this deliberate word choice ("make"), the
SEC's asseveration that one can "make" a statement when he merely
uses a statement created entirely by others cannot follow. That
asseveration ignores the obvious distinction between the verbs
contained in the statute ("use," "employ") and the significantly
different (and narrower) verb contained in Rule 10b-5(b) ("make").
Word choices have consequences, and this word choice virtually
leaps off the page. There is no principled way that we can treat
it as meaningless.

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Section 10(b) is helpful to our analysis in another way
as well. That provision conferred upon the SEC authority to
prohibit the "use or employ[ment]" of any manipulative device or
contrivance in connection with the purchase or sale of any
security. The SEC knew how to wield this authority and proscribe
"use or employ[ment]" of a manipulative device or contrivance: in
Rule 10b-5(a), it did just that, rendering it unlawful "to employ"
a device, scheme, or artifice to defraud. See 17 C.F.R. § 240.10b-
5(a). That the SEC wrote this prohibition in a different
subparagraph of the rule and selected a more inclusive verb is a
telling combination. The Supreme Court remarked on this phenomenon
in Affiliated Ute v. United States, 406 U.S. 128 (1972), observing
that:
[T]he second subparagraph of the rule
specifies the making of an untrue statement of
a material fact and the omission to state a
material fact. The first and third
subparagraphs are not so restricted.
Id. at 152-53. It is not the judiciary's proper province to
rewrite an administrative rule to sweep more broadly than its
language permits. Thus, we must honor the limitation that the
drafters deliberately built into Rule 10b-5(b).
In an effort to blunt the force of this reasoning, the
SEC suggests that the broad language of the statute ("use or
employ") requires an equally broad construction of the wording
contained in Rule 10b-5(b). To support this suggestion, it touts

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That section provides in pertinent part: 5
It shall be unlawful for any person . . ., 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
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the Supreme Court's statement that "[t]he scope of Rule 10b-5 is
coextensive with the coverage of § 10(b)." SEC v. Zandford, 535
U.S. 813, 816 n.1 (2002). On that basis, the SEC posits that
"make" must include "use" because the statute prohibits "use" and
the rule perforce must prohibit all that the statute prohibits.
This argument comprises more cry than wool. Most
notably, it fails to account for an abecedarian point: even if Rule
10b-5 is coextensive with the coverage of section 10(b), that
supposed verity does not mean that each of the subparagraphs of
Rule 10b-5, taken singly, is itself coextensive with the coverage
of section 10(b). That cannot be so. If it was, then each
subparagraph would proscribe exactly the same conduct. They do
not. See, e.g., Finkel v. Docutel/Olivetti Corp., 817 F.2d 356,
359-60 (5th Cir. 1987).
Our view of the meaning of Rule 10b-5(b) is reinforced
when we contrast the language of the rule with that of section
17(a) of the Securities Act. By way of background, the phrasing of
Rule 10b-5 largely mirrors the language of section 17(a) of the
Securities Act. That is not happenstance; the drafters of Rule 5

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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).
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10b-5 modeled the rule on section 17(a). See United States v.
Persky, 520 F.2d 283, 287 (2d Cir. 1975). But there is a salient
difference between the language of the rule and the language of
section 17(a) with respect to the types of conduct that may render
a person liable for a false statement. Section 17(a)(2) makes it
unlawful "to obtain money or property by means of any untrue
statement of a material fact," 15 U.S.C. § 77q(a)(2), whereas Rule
10b-5(b) makes it unlawful "to make any untrue statement of a
material fact," 17 C.F.R. § 240.10b-5(b).
In short, the drafters of Rule 10b-5 had before them
language that would have covered the "use" of an untrue statement
of material fact (regardless of who created or composed the
statement). The drafters easily could have copied that language.
They declined to do so. Instead, the drafters — who faithfully
tracked section 17(a) in other respects — deliberately eschewed the
expansive language of section 17(a)(2).
The import of this eschewal is clear: although section
17(a)(2) may fairly be read to cover the "use" of an untrue

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The SEC has in fact brought a separate section 17(a)(2) 6
claim against the defendants in this case. That claim is not
before the en banc court.
-19-
statement to obtain money or property, see, e.g., Edward J. Mawod
& Co. v. SEC, 591 F.2d 588, 596 (10th Cir. 1979), Rule 10b-5(b) is
more narrowly crafted and its reach does not extend that far. We 6
must honor the drafters' deliberate decision to insert the word
"make" in Rule 10b-5(b) in lieu of the more expansive phrase "by
means of." 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").
The SEC's other arguments for defining "make" to
encompass "use" with respect to Rule 10b-5(b) liability are
unavailing. One of the SEC's main arguments appears to be that
"[i]t seems self-evident that any statute or rule that prohibits
making a false statement in connection with the sale of property
would cover a seller who knowingly uses misleading sales
materials." This type of abstract, decontextualized approach to
the interpretation of a statute or regulation is ill-suited to the
construction of a rule laden with over sixty years of
interpretation in literally hundreds of opinions. This is
especially so because the rule in question is an integral part of
an extensive regulatory framework forged by Congress, the SEC, and
the federal courts.

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The SEC also endeavors to prop up its "use" theory of Rule 7
10b-5(b) liability by referring to a venerable Fourth Circuit case
deciding, for venue purposes, whether a defendant violated a
federal mortgage fraud statute in West Virginia or in Pennsylvania.
See Reass v. United States, 99 F.2d 752, 755 (4th Cir. 1938).
The only reason the opinion has even an epsilon's worth of
relevance to the issue at hand is that the challenged statute
rendered it unlawful to "make[] any statement, knowing it to be
false, for the purpose of influencing in any way the action of a
Federal Home Loan Bank upon any application for loan." Id. at 752.
But the Reass court did not presume to act as a legal
lexicographer, chiseling in stone a definition of "make" for all
time and for every purpose. The result in Reass proceeds from the
simple proposition that the statute could not be violated until the
defendant presented the misstatements to the bank "upon . . .
application for a loan." Id. at 755.
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At any rate, what the SEC now calls "self-evident" is not
self-evident at all. What does seem self-evident is that if the
SEC intended to prohibit more than just the actual making of a
false statement in Rule 10b-5(b), then it would not have employed
the solitary verb "make" in the text of the rule.7
There is another reason to reject the SEC's
interpretation; it is in tension with Supreme Court precedent.
Under modern Supreme Court precedent dealing with Rule 10b-5, much
turns on the distinction between primary and secondary violators.
See Cent. Bank, 511 U.S. at 191. Although Central Bank did not
address the precise issue with which we are concerned, the
definition of "make" that we propose is compatible with Central
Bank as it holds the line between primary and secondary liability
in a manner faithful to Central Bank. We explain briefly.

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The Exchange Act does not explicitly confer a private
right of action for section 10(b) violations. The Supreme Court
nevertheless has found a private right of action to be implicit in
the statute and the implementing rule (Rule 10b-5). Sup't of Ins.
of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971).
This right of action is not unbridled: private plaintiffs are
permitted to bring suit under Rule 10b-5 against only "primary"
violators. See Cent. Bank, 511 U.S. at 177-78.
In the wake of Central Bank, Congress amended section 20
of the Exchange Act to clarify that the SEC may bring suit against
aiders and abetters, that is, persons who knowingly provide
substantial assistance to primary violators of the securities laws.
Pub. L. 104-67, § 104, 109 Stat. 737, 757 (1995) (codified at 15
U.S.C. § 78t(e)). Although the SEC has exhorted Congress to extend
the same right to private parties, see 4 Thomas Lee Hazen, The Law
of Securities Regulation 506 n.31 (6th ed. 2009), Congress has not
done so. Thus, Rule 10b-5's private right of action extends only
to primary violations, not to secondary violations. If Central
Bank's carefully drawn circumscription of the private right of
action is not to be hollowed — and we do not think that it should
be — courts must be vigilant to ensure that secondary violations
are not shoehorned into the category reserved for primary
violations.

-- 21 of 66 --

Although the Central Bank Court focused its inquiry on 8
section 10(b), its methodology is equally applicable to Rule 10b-5.
The rule is incorporated into the statutory framework and, thus,
its scope "is coextensive with the coverage of § 10(b)." Zandford,
535 U.S. at 816 n.1. Fidelity to the text of section 10(b)
requires fidelity to the text of Rule 10b-5 and, therefore,
fidelity to the text of each of the subsections that comprise the
rule.
-22-
The SEC's position poses a threat to the integrity of
this dichotomy. Refined to bare essence, the SEC, through the
instrumentality of Rule 10b-5(b), seeks to impose primary liability
on the defendants for conduct that constitutes, at most, aiding and
abetting (a secondary violation). Allowing the SEC to blur the
line between primary and secondary violations in this manner would
be unfaithful to the taxonomy of Central Bank.
Of course, the Central Bank Court did not purpose to
decide the precise issue before us. Withal, the Court's
methodology for determining the scope of the private right of
action (and, thus, the scope of primary liability) is a beacon by
which we must steer. That methodology emphasizes fidelity to the
text of section 10(b) and Rule 10b-5. See Cent. Bank, 511 U.S. at
173 (explaining that a "private plaintiff may not bring a 10b-5
suit against a defendant for acts not prohibited by the text of
§ 10(b)"); see also id. ("We have refused to allow 10b-5 challenges
to conduct not prohibited by the text of the statute."). An 8
expansive reading of the rule, unmoored from its text and based on
judicially manufactured policy rationales, is plainly antithetic to

-- 22 of 66 --

-23-
this restrained methodology. See id. at 188 (warning that, absent
the prospect of a bizarre result, policy considerations cannot
override the text and structure of the statute).
There is more. Reading "make" to include the use of a
false statement by one other than the maker would extend primary
liability beyond the scope of conduct prohibited by the text of
Rule 10b-5(b). See id. Furthermore, doing so would "add a gloss
to the operative language of the [rule] quite different from its
commonly accepted meaning." Id. at 174 (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 199 (1976)). Allowing courts to imply
that "X" has made a false statement with only a factual allegation
that he passed along what someone else wrote would flout a core
principle that underpins the Central Bank decision. We decline the
SEC's invitation to go down that road.
As an aside, blurring the line between primary and
secondary violations also would create unacceptable tension with
the substantial body of case law that has evolved post-Central Bank
— case law that maps the outer boundaries of primary liability
under Rule 10b-5. This case law, though not directly on point,
does not fit comfortably with the view that the SEC espouses here.
Let us explain.
In the aftermath of Central Bank, several courts of
appeals have had to plot the line between primary violations and
mere aiding and abetting in Rule 10b-5 actions brought by private

-- 23 of 66 --

For example, the bright-line test cannot be imported 9
wholesale into the public enforcement context because its
attribution prong reflects the need to prove reliance, see Wright,
152 F.3d at 175 — an element that the SEC need not establish in a
Rule 10b-5 case. See Schellenbach v. SEC, 989 F.2d 907, 913 (7th
Cir. 1993); see also SEC v. Wolfson, 539 F.3d 1249, 1260 (10th Cir.
2008) (declining to impose the attribution requirement in an SEC
-24-
plaintiffs. Two divergent strains of authority have evolved. We
have not yet chosen between these divergent strains and we have no
need to do so today. It suffices to say that the line of authority
most hospitable to the establishment of primary violations of Rule
10b-5 embraces the "substantial participation" test, under which a
person's "substantial participation or intricate involvement in the
preparation of fraudulent statements" is enough to establish a
primary violation. Howard v. Everex Sys., Inc., 228 F.3d 1057,
1061 n.5 (9th Cir. 2000). The other line of authority, less
hospitable to plaintiffs, adheres to the "bright-line" test, under
which a primary violation requires proof both that the defendant
actually made a false or misleading statement and that it was
attributable to him at the time of public dissemination. See
Wright, 152 F.3d at 175; see also Ziemba v. Cascade Int'l, Inc.,
256 F.3d 1194, 1205 (11th Cir. 2001); Anixter v. Home-Stake Prod.
Co., 77 F.3d 1215, 1226 (10th Cir. 1996); In re Kendall Sq.
Research Corp. Sec. Litig., 868 F. Supp. 26, 28 n.2 (D. Mass.
1994).
While these tests are designed for private litigation,
and, thus, are poorly suited to public enforcement actions, one 9

-- 24 of 66 --

enforcement action).
Although the SEC at one time argued that the defendants 10
"made" untrue statements of material fact through some vaguely
described involvement in drafting the prospectuses, it has not
pursued that argument on appeal.
-25-
thing is crystal clear. The conduct for which the SEC strives to
hold the defendants as primary violators — the use and
dissemination of prospectuses created by others — does not satisfy
either test. Both tests focus, albeit to different degrees, on the
actual role that a defendant played in creating, composing, or
causing the existence of an untrue statement of material fact. The
SEC's attempt to impute statements to persons who may not have had
any role in their creation, composition, or preparation falls well
short. As the Second Circuit put it: "If Central Bank is to have 10
any real meaning, a defendant must actually make a false or
misleading statement in order to be held liable [as a primary
violator] under section 10(b). Anything short of such conduct is
merely aiding and abetting." Shapiro v. Cantor, 123 F.3d 717, 720
(2d Cir. 1997).
There is yet another problem with the SEC's implied
statement theory: that theory effectively imposes upon securities
professionals who work for underwriters an unprecedented duty. We
elaborate on this mischief below.
The SEC notes, correctly, that securities professionals
working for underwriters have a duty to investigate the nature and

-- 25 of 66 --

-26-
circumstances of an offering. See, e.g., SEC v. Dain Rauscher,
Inc., 254 F.3d 852, 857 (D.C. Cir. 2001). Building on this
foundation, the SEC theorizes that such securities professionals
impliedly "make" a representation to investors that the statements
in a prospectus are truthful and complete. If we were to give
credence to this theory, the upshot would be to impose primary
liability under Rule 10b-5(b) on these securities professionals
whenever they fail to disclose material information not included in
a prospectus, regardless of who prepared the prospectus. That
would be tantamount to imposing a free-standing and unconditional
duty to disclose. The imposition of such a duty flies in the teeth
of Supreme Court precedent.
The key precedent is Chiarella v. United States, 445 U.S.
222 (1980). It instructs that a party's nondisclosure of
information to another is actionable under Rule 10b-5 only when
there is an independent duty to disclose the information arising
from "a fiduciary or other similar relation of trust and
confidence" between the parties. Id. at 228. As the Fourth
Circuit explained, "the duty to disclose material facts arises only
when there is some basis outside the securities laws, such as state
law, for finding a fiduciary or other confidential relationship."
Fortson v. Winstead, McGuire, Sechrest & Minick, 961 F.2d 469, 472
(4th Cir. 1992); accord SEC v. Cochran, 214 F.3d 1261, 1264 (10th
Cir. 2000). Adopting the SEC's implied statement theory would pave

-- 26 of 66 --

-27-
the way for suits against securities professionals for
nondisclosure of material information without the required showing
of a fiduciary relationship. Fidelity to that requirement demands
that we reject the SEC's notion that a breach of a duty to
investigate, without more, is a breach of a duty to disclose (and,
thus, should be treated as a primary violation under Rule 10b-
5(b)).
The SEC labors to depict its implied statement theory as
firmly rooted in both case law and longstanding administrative
interpretation. This depiction is inaccurate.
As to case law, the SEC relies principally on three
decisions. See Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 641
(D.C. Cir. 2008); Sanders v. John Nuveen & Co., 524 F.2d 1064, 1070
(7th Cir. 1975); Chris-Craft Indus., Inc. v. Piper Aircraft Corp.,
480 F.2d 341, 370 (2d Cir. 1973). These decisions, it asserts,
stand for the linchpin proposition that an underwriter
participating in an offering makes an implied statement,
potentially actionable under Rule 10b-5(b), that he has a
reasonable basis for believing that the prospectus is truthful and
complete.
That assertion is incorrect. To begin, neither Dolphin
nor Sanders holds that an underwriter may be found liable as a
primary violator under Rule 10b-5(b) for "making" an implied
representation that proves to be false. Those cases did not

-- 27 of 66 --

That section provides in pertinent part that: "[i]t shall 11
be unlawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements made, in the light of the circumstances
under which they are made, not misleading, . . . in connection with
any tender offer." 15 U.S.C. § 78n(e).
-28-
present any issue as to whether the underwriter had "made" a
statement. In fact, in both cases the underwriter personally made
the misrepresentations. See Dolphin, 512 F.3d at 638, 640;
Sanders, 524 F.2d at 1067; see also Sanders v. John Nuveen & Co.,
619 F.2d 1222, 1234 (7th Cir. 1980). Both decisions were directed
toward a wholly distinct issue: whether the defendant acted with
the required state of mind in making the statements. See Dolphin,
512 F.3d at 639; Sanders, 524 F.2d at 1066. Any language
suggesting that various representations might be imputed to
underwriters must be viewed in this (very different) context.
Chris-Craft also fails to breathe life into the SEC's
argument. The case holds that an underwriter's constructive
representation that the statements made in registration materials
are truthful and complete constitutes the making of a statement
under section 14(e) of the Exchange Act. See Chris-Craft, 480 11
F.2d at 370. But Chris-Craft preceded Central Bank by over twenty
years, and its continued vitality with respect to this section
14(e) holding is doubtful.
In all events, nothing turned on the distinction between
primary and secondary violations at that time, so the Chris-Craft

-- 28 of 66 --

-29-
panel had no reason to distinguish between them. In retrospect, it
is reasonable to read Chris-Craft as holding that the underwriters
were liable only as secondary violators. See In re MTC Elec.
Techs. S'holder Litig., 993 F. Supp. 160, 162 (E.D.N.Y. 1997)
(concluding that "the holding of Chris-Craft was that an
underwriter was liable as an aider and abettor").
We turn next to the array of administrative
pronouncements. We freely accept the principle that the existence
of a longstanding pattern of administrative interpretation might
well call for Chevron deference. See Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984).
Here, however, the SEC's claim of a "longstanding administrative
interpretation" is wildly exaggerated.
The SEC has cobbled together a bricolage of agency
decisions and statements all of which antedate Central Bank.
Without exception, nothing in this carefully culled collection says
that an implied representation of an underwriter can constitute a
basis for primary liability under Rule 10b-5(b). The fact that the
SEC has never before articulated the implied statement theory as a
basis for Rule 10b-5(b) liability dooms its quest for Chevron
deference. After all, there is no occasion for Chevron deference
when there is nothing to which a court may defer.
Before leaving this topic, we wish to comment briefly on
the dissent's metronomic reliance on the special role and duties of

-- 29 of 66 --

-30-
underwriters. We agree that underwriters have a special niche in
the marketing of securities and, thus, have a special set of
responsibilities. But the duty that the dissent seeks to impose is
unprecedented — and far exceeds the scope of Rule 10b-5(b). While
that rule could have been drafted to cut a wider swath, it was not.
The SEC has other, more appropriate tools that it may use to police
the parade of horribilis that the dissent envisions, and it is
neither necessary nor wise to attempt to expand the rule by
judicial fiat. Most importantly, doing so would, as a matter of
law, be wrong.
There is one loose end, which relates to waiver. The SEC
argues to the en banc court that the defendants can be held
primarily liable for violating Rule 10b-5(b) under an entanglement
test. See, e.g., In re Cabletron Sys., Inc., 311 F.3d 11, 37-38
(1st Cir. 2002); Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163
(2d Cir. 1980). Under this test, a defendant may be held primarily
liable for misstatements appearing in reports authored by outside
analysts when those misrepresentations are based on information
provided by the defendant. See Cabletron, 311 F.3d at 38. Such
liability inheres when "defendants have expressly or impliedly
adopted the statements, placed their imprimatur on the statements,
or have otherwise entangled themselves with the analysts to a
significant degree." Id. at 37-38.

-- 30 of 66 --

-31-
This argument has not been preserved and, thus, need not
concern us. The SEC did not advance it before the district court
in connection with the dispositive motions to dismiss. To make a
bad situation worse, the SEC did not coherently present this
argument before the panel during the first stage of this appeal.
To the contrary, the SEC's panel briefs were devoid not only of any
developed argumentation to the effect that the defendants entangled
themselves with the statements in the prospectuses but also of
citations to Cabletron, Elkind, or any comparable precedent. In
this instance, silence speak volumes.
A party cannot switch horses mid-stream, changing its
theory of liability at a later stage of the litigation in hopes of
securing a swifter steed. So it is here: because the SEC unfurled
its "entanglement" argument for the first time in the en banc
proceedings, we have no occasion to address that argument. See
United States v. Slade, 980 F.2d 27, 30 (1st Cir. 1992) ("It is a
bedrock rule that when a party has not presented an argument to the
district court, she may not unveil it in the court of appeals.");
Zannino, 895 F.2d at 17 (explaining that "issues adverted to in a
perfunctory manner, unaccompanied by some effort at developed
argumentation, are deemed waived").
This is not the only waiver that has transpired. The SEC
unveiled for the first time in its reply brief regarding rehearing
en banc a contention that its implied statement theory of Rule 10b-

-- 31 of 66 --

Under the shingle theory, a broker-dealer may be held liable 12
under section 17(a) of the Securities Act or section 10(b) of the
Exchange Act if he sells a security to a customer for a price
unreasonably in excess of the current market price without
disclosing the fact of the markup. See Grandon v. Merrill Lynch &
Co., 147 F.3d 184, 192-93 (2d Cir. 1998); Duker & Duker, 6 S.E.C.
at 388-89. We have not been able to find any case in which the
shingle theory has successfully been applied, under Rule 10b-5(b),
to facts similar to the facts at hand.
-32-
5(b) liability could be upheld under the so-called shingle theory.
See, e.g., Duker & Duker, 6 S.E.C. 386, 388-89 (1939). This 12
belated contention is likewise waived.
V. CONCLUSION
We need go no further. This is one of those happy
occasions when the language and structure of a rule, the statutory
framework that it implements, and the teachings of the Supreme
Court coalesce to provide a well-lit decisional path. Following
that path, we affirm the district court's dismissal of the SEC's
Rule 10b-5(b) claim. Because en banc review is limited to this
claim, we reinstate those portions of the vacated panel judgment
that reversed the dismissal of the SEC's section 17(a)(2) and
aiding and abetting claims. To that end, we also reinstate those
portions of the withdrawn panel opinion, and concurrence thereto,
addressing those claims (which, when reinstated, will have the
force ordinarily associated with panel opinions). We remand the
case to the district court for further proceedings on the SEC's
section 17(a)(2) and aiding and abetting claims consistent, of
course, with this en banc opinion.

-- 32 of 66 --

-33-
So Ordered.
— Concurring Opinion and Dissenting Opinion follow —

-- 33 of 66 --

-34-
BOUDIN, Circuit Judge, with whom LYNCH, Chief Judge,
joins, concurring. A "plain language" approach to statutory
construction has well-known adherents, and--in construing the SEC's
rule at issue ("make any untrue statement of a material fact")--
bare wording forcefully supports Judge Selya's thorough and
persuasive decision. Yet even a more elastic "all things
considered" reading of the rule's language would not justify the
alarmingly ambitious use of it that the agency seeks to deploy in
this case.
The word "make," in reference to a statement, ordinarily
refers to one authoring the statement or repeating it as his own;
one who lends to a friend a book is not normally deemed to "make"
the statements in the book. See Regents of the Univ. of Cal. v.
Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 384 n.20 (5th
Cir. 2007). There is some breathing room: for example, imagine an
underwriter orally or in writing specifically affirming to an
investor the truth of specific statements in a prospectus that he
knew to be false.
Here, the SEC propounds a far more expansive view: it
asks the courts to treat securities professionals as a matter of
course as impliedly representing the entire contents of
prospectuses whenever they sell securities or assist those who do.
The argument against so sweeping a position begins with language,
but it does not end there: congressional policy, Supreme Court

-- 34 of 66 --

-35-
precedent, practical consequences and the nearly uniform view of
circuit courts that have spoken all argue against the SEC's
proposed interpretation. It helps focus the issue, and underscores
the reach of the SEC's position, to recite briefly the SEC's
allegations--both those rejected and not appealed, and those on
appeal--as to Tambone and Hussey's relationship to and use of the
Columbia Funds prospectuses.
Tambone and Hussey were officers of Columbia Funds
Distributor, Inc. ("Columbia Distributor"), which served as
principal underwriter for Columbia mutual funds. As underwriters,
they were required by law to furnish prospectuses to broker-dealers
selling Columbia funds and to investors to whom they sold directly.
See 15 U.S.C. § 77e(b) (2006); 17 C.F.R. § 240.15c2-8(b) (2009).
The prospectuses, however, were drafted by a separate entity,
Columbia Management Advisors, Inc. ("Columbia Advisors"), and the
SEC admits in its complaint that Columbia Advisors rather than
Columbia Distributor (and hence the defendants) "remained primarily
responsible for all representations made in the prospectuses for
those funds."
The SEC's more specific allegations concern the creation
of the prospectuses and, separately, their use. The SEC complaint
charged that the defendants were "involved in the process of
revising the prospectuses," "reviewed the market timing
representations before they were included in the prospectuses" and

-- 35 of 66 --

Oral or written statements made by underwriters while placing 13
securities can be predicates for securities violations. See, e.g.,
Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 638-40 (D.C. Cir.
2008); Sanders v. John Nuveen & Co., 554 F.2d 790 (7th Cir. 1977);
Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp.
1101, 1120-21 (W.D. Mich. 1996).
-36-
"comment[ed] on these representations to in-house counsel for
Columbia Advisors." The district court found that these
allegations failed to plead fraud with requisite particularity, SEC
v. Tambone, 473 F. Supp. 2d 162, 165-66 (D. Mass. 2006); the SEC
does not now challenge this determination.
As to the use of the prospectuses, the SEC initially
argued that Tambone and Columbia Distributor "signed hundreds of
[selling] agreements" with broker-dealers that expressly
represented and warranted that "each Prospectus and all sales
literature . . . [would] not by statement or omission be
misleading." The district court again found that these allegations
"flatly fail[ed]" to meet the particularity requirements. Tambone,
473 F. Supp. at 167. The SEC does not argue otherwise, nor does it
point to any other specific oral or written statements made by the
two defendants.13
The SEC's remaining allegations regarding the defendants'
use of the prospectuses, which are before us, are simply that the
defendants, as required, disseminated prospectuses to
broker-dealers and investors in their capacity as underwriters.
The SEC does not say that the defendants explicitly represented as

-- 36 of 66 --

Post Central Bank, this implied representation theory has 14
been regularly rejected by the circuits, see Lattanzio v. Deloitte
& Touche LLP, 476 F.3d 147, 155 (2d Cir. 2007) (rejecting an
"implied assertion" theory because "[p]ublic understanding that an
accountant is at work . . . does not create an exception to the
requirement that an actionable misstatement be made by the
accountant"); Fidel v. Farley, 392 F.3d 220, 235 (6th Cir. 2004);
Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205-06 (11th Cir.
2001); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226-27 (10th
Cir. 1996), with the exception of the Ninth Circuit, see Howard v.
Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000).
-37-
true to investors the prospectuses' market timing provisions or
that they even discussed the prospectuses with investors. The SEC
instead claims that in selling securities, a defendant who neither
personally authorized nor repeated an inaccurate statement
nevertheless "make[s]" an implied statement or representation under
Rule 10b-5(b) that the prospectuses prepared by the issuer are in
all respects accurate and not materially misleading.
Following Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), Congress gave
the SEC alone statutory authority to bring actions against
individuals who aided and abetted a section 10(b) violation, 15
U.S.C. § 78t(e); and this authority might be used to charge one who
distributed a false prospectus knowing that it contained false
statements. The SEC's position in this case would undo this
deliberate legislative compromise, see S. Rep. No. 104-98, at 19
(1995), and it would conflict with practically all of the pertinent
circuit cases.14

-- 37 of 66 --

See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. 15
Dabit, 547 U.S. 71, 86 (2006); Cent. Bank, 511 U.S. at 189; Va.
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1105 (1991); Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975).
-38-
While the defendants in this case held significant
positions, there is no obvious stopping point: virtually anyone
involved in the underwriting process might under the SEC's "making
a statement" theory be charged and subject to liability in a suit
under section 10(b). The SEC may select its defendants sensibly;
but private litigants have their own incentives, and the SEC
concedes that its definition of "make," if adopted, would apply to
private party actions as well. The Supreme Court has repeatedly
acknowledged the unique risk of "vexatious" securities litigation,15
and it has likewise cautioned against extending further the court-
created private remedy under section 10(b). See Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165
(2008); accord Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199-201
(1976).
Nothing justifies the adventure proposed by the agency.
The conduct charged is already covered by an aiding and abetting
remedy available to the SEC itself. 15 U.S.C. § 78t(e). Sections
11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k, 77l, allow private
suits--but with important limitations--against underwriters who
fail to make reasonable investigations into the prospectuses they
distribute. And private litigants are free to sue the actual

-- 38 of 66 --

-39-
authors of misstatements in the prospectus under section 10(b)
itself. See note 1, above.
More than enough is too much. No one sophisticated about
markets believes that multiplying liability is free of cost. And
the cost, initially borne by those who raise capital or provide
audit or other services to companies, gets passed along to the
public. Cent. Bank, 511 U.S. at 189; Winter, Paying Lawyers,
Empowering Prosecutors, and Protecting Managers: Raising the Cost
of Capital in America, 42 Duke L.J. 945, 962 (1993). Congress and
the Supreme Court have struck a balance; the SEC is obliged to
respect it.

-- 39 of 66 --

I join the majority's decision to reinstate the portions of 16
the panel opinion addressing the SEC's section 17(a)(2) and aiding
and abetting claims and the portions of the panel judgment
reversing those claims.
-40-
LIPEZ, Circuit Judge, with whom TORUELLA, Circuit Judge,
joins, dissenting in part. The majority acknowledges that the
Supreme Court in Central Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164 (1994), "did not purpose to
decide the precise issue before us" – what it means to "make" a
statement – but asserts that a construction of "make" that embraces
the conduct alleged in this case would be at odds with Central
Bank's careful distinction between primary and secondary liability.
There is no such conflict. My colleagues overstate the
significance of Central Bank for the interpretive issue before us,
fail to account for the underwriter's unique statutory duty to
provide investors with accurate information, and misguidedly allow
concerns about excessive private litigation to influence their
judgment on the scope of public enforcement by the Securities and
Exchange Commission. In my view, the language of section 10(b) and
Rule 10b-5(b), the underwriter's role and duties in the securities
market, and decades of case law – including Central Bank –
inescapably permit the SEC to proceed against Tambone and Hussey
for making false statements within the purview of Rule 10b-5(b).
I therefore respectfully dissent.16

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-41-
I.
The important issue before the en banc court is whether
the defendants' use of false and misleading prospectus statements
can constitute the making of statements that render the defendants
primarily liable under Rule 10b-5(b). The Commission asserts 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. It further
contends that, by using the prospectuses as required to perform
their duties to potential investors, defendants made implied
statements asserting that they had a reasonable basis to believe
that the key statements in the prospectuses regarding market timing
were accurate and complete. Because the defendants allegedly knew
that those statements were false, or were reckless in not knowing,
their implied statements were also false. The SEC argues that
these direct representations of Tambone and Hussey, albeit implied,
subject the defendants to primary liability under section 10(b) and
Rule 10b-5(b).
The majority dismisses the SEC's position as untenable on
the basis of "the language and structure of [the] rule, the
statutory framework that it implements, and the teachings of the
Supreme Court." It is the majority's view that is untenable. It
construes the Rule to exclude the long accepted understanding that

-- 41 of 66 --

-42-
underwriters "make" implied statements to investors about the
accuracy and completeness of prospectuses they are using to induce
investments. It rejects primary liability for fraudulent conduct
at the heart of Rule 10b-5's prohibitions by stretching Central
Bank beyond both its text and context and using that unjustified
expansion to justify its contraction of the Rule's scope.
As I shall explain, the language of the statute and the
Rule, viewed in the context of the unique role of underwriters in
selling securities, supports the Commission's allegation that
Tambone and Hussey made implied statements to investors that are
actionable as primary violations of Rule 10b-5(b). I begin,
however, by addressing the premise at the heart of the majority's
position – its unfounded assumption that Central Bank's "carefully
drawn circumscription of the private right of action" substantially
changed the landscape for securities claims under Rule 10b-5 in the
very different context of an SEC enforcement action against
underwriters.
A. Central Bank and Rule 10b-5
The majority argues that reading Rule 10b-5(b) to reach
the making of implied statements would be to disregard the Supreme
Court's holding in Central Bank and to effectively eliminate the
boundaries between primary and secondary liability required by that
decision. This contention overstates the substance of the case
and, consequently, its reach.

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-43-
1. What the Court Decided
The issue in Central Bank was whether the bank, 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 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 had to be dismissed because private plaintiffs
may only bring claims of primary liability, not aiding and abetting
liability. Nevertheless, the Court noted that "[i]n any complex

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Tambone and Hussey argue, inter alia, that the Commission's 17
claims of primary liability should be rejected 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 responsibilities could be primarily
liable for the same misstatement. See 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.
The Supreme Court recently confirmed this principle in a private
lawsuit by indicating that defendants Charter Communications,
Scientific-Atlanta, Inc., and Motorola, Inc., had all engaged in
the fraudulent conduct at issue. See Stoneridge Inv. Partners, LLC
v. Scientific-Atlanta, Inc., 552 U.S. 148, 158-61 (2008). Although
the 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 other types of
deceptive conduct, 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).
-44-
securities fraud . . . there are likely to be multiple violators;
in this case, for example, respondents named four defendants as
primary violators." 511 U.S. at 191. Finally, the Court 17
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

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-45-
be liable as a primary violator under 10b-5,
assuming all of the requirements for primary
liability under Rule 10b-5 are met.
Id. (emphasis omitted).
2. What the Court Did Not Decide
The Court in Central Bank addressed only the question of
"whether private civil liability under § 10(b) extends as well to
those who do not engage in the manipulative or deceptive practice,
but who aid and abet the violation." 511 U.S. at 167; see also id.
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."). The issue here is whether the
defendants themselves "engage[d] in the manipulative or deceptive
practice," i.e., whether the defendants' acts are "sufficient to
show that they 'made' the [alleged] material misstatements and
omissions . . . such that they can be held primarily liable." SEC
v. Wolfson, 539 F.3d 1249, 1258 (10th Cir. 2008). Holding Tambone
and Hussey responsible for their own false implied statements does
not threaten the primary/secondary dichotomy.
Moreover, it is critical to recognize that Central Bank
analyzes the scope of section 10(b) and Rule 10b-5 in a suit
brought by a private plaintiff. Although the Court focused on the
text of the provisions, it also emphasized the element of reliance

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Cf. United States v. O'Hagan, 521 U.S. 642, 664 (1997) 18
(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").
-46-
(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. See 511 U.S. at 173-178, 180, 188-89. In
this respect, Central Bank reflected the Court's desire to limit
the scope of the judicially implied private cause of action under
Rule 10b-5. Indeed, the Court has consistently distinguished 18
between the broad contours of the SEC's "express statutory
authority to enforce [Rule 10b-5]," Merrill Lynch, Pierce, Fenner
& Smith v. Dabit, 547 U.S. 71, 79-81 (2006), and the "narrow
dimensions" of the implied private right of action, Stoneridge, 552
U.S. at 167; see also SEC v. Zandford, 535 U.S. 813, 819 (2002)
(noting, in a Commission action, that the Securities Exchange Act,
including § 10(b), "should be 'construed "not technically and
restrictively, but flexibly to effectuate its remedial purposes"'")
(citations omitted).
Thus, as the SEC argues, "[p]olicy considerations
concerning private litigation can have no relevance in defining the
scope of primary liability under Section 10(b) in a Commission
enforcement action." The Court's restrictive application of Rule
10b-5 in Central Bank – a case brought by a private plaintiff –

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cannot sensibly be stretched beyond its logic to invalidate, in an
SEC enforcement action, an interpretation of an element of Rule
10b-5(b) on which the Supreme Court was silent.
3. Distinguishing between Primary and Secondary
Violations
Although the private action context limits Central Bank's
significance for the SEC enforcement action at issue here, the
Court did effect an important change in securities law by holding
that aiding and abetting claims were no longer available in private
actions. In its aftermath, lower courts sought to delineate the
outer boundaries of primary liability, an issue the Supreme Court
had not addressed. As the majority notes, 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. The majority observes that it is
unnecessary to choose one of these paths in this case because the
conduct at issue – "the use and dissemination of prospectuses
created by others" – does not satisfy either test. I agree that
there is no need to choose between these standards, but for a
different reason: neither the bright-line nor substantial
participation test is relevant here.
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

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-48-
making or creation of that statement. In this case, the SEC
alleges that Tambone and Hussey are accountable for their own
implied statements, making the "substantial participation" inquiry
unnecessary. See In re LDK Solar Sec. Litig., No. C07-05182WHA,
2008 WL 4369987, at *8 n.9 (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 does not address what it means to "make" a statement. It
simply requires that the defendant "actually make" the statement at
issue, Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.
1998), and it imposes an attribution requirement that is
inapplicable to SEC enforcement actions because it relates to the
element of reliance that is required only in a private Rule 10b-5
action. See 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").
Whether or not these tests are useful in distinguishing
primary from secondary conduct, they shed no light on the issue
that is before us: determining whether the defendants have "made"
a statement, which unquestionably would subject them to primary
liability.

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4. The Limited Relevance of Central Bank
The Supreme Court in Central Bank focused on the crucial
dichotomy between those who, regardless of their role in a
securities transaction, make misleading representations themselves,
and those who assist the culpable actor without personally using or
employing any "manipulative or deceptive device" as prohibited by
section 10(b). In this SEC enforcement action, primary liability
is premised on the defendants' having themselves impliedly stated
that they had a reasonable basis to believe that the market timing
disclosures in the prospectuses were truthful and complete.
Central Bank does not address the important issue in this
case – whether the defendants "made" statements within the meaning
of Rule 10b-5(b) – and we must look elsewhere for guidance. As I
describe below, both the language of the Rule and substantial
precedent on the role and status of underwriters in the
distribution of securities support the SEC's argument that
Tambone's and Hussey's alleged actions fall within the purview of
the "make a statement" requirement of Rule 10b-5(b).
B. The Scope of Liability under Rule 10b-5(b): Making a Statement
1. Text of Section 10(b)
Although Rule 10b-5 itself offers little guidance on how
to define "make," the text of section 10(b), its authorizing
statute, also must be examined. Ernst & Ernst v. Hochfelder, 425
U.S. 185, 197 (1976) ("In addressing [the question of the proper

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The Rule states: 19
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
(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
-50-
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 v. Manor Drug Stores, 421 U.S.
723, 756 (1975) (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 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 that has led the
Supreme Court to "use § 10(b) to refer to both the statutory
provision and the Rule." Zandford, 535 U.S. at 816 n.1; see also
Stoneridge, 552 U.S. at 157 ("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), 19

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or sale of any security.
17 C.F.R. § 240.10b-5.
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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). 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 – and in so
doing impliedly stated that they had a reasonable basis to believe
that the market timing disclosures in the prospectuses were
truthful and complete.
The majority counters that one cannot "'make' a statement
when he merely uses a statement created entirely by others." It
asserts that subsection (b) of Rule 10b-5 applies to only a subset
of the conduct that falls within the statute's proscription – i.e.,
only the literal "making" of statements and not all "uses" of them.
Id. The majority reinforces this pronouncement by pointing out
that another section of the Rule, 10b-5(a), does prohibit the
"employ[ment]" of any "device, scheme or artifice to defraud," and
it concludes that this difference in language proves that

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subsection (b) of the Rule was deliberately framed as a narrower
prohibition against "making," but not "using," statements.
The question before us is not whether the words "use" and
"make" are interchangeable, however – I agree they are not – but
whether the conduct that occurred here could constitute "making" a
statement within the meaning of Rule 10b-5(b). The majority's
position is that one cannot make a statement without explicitly
speaking or writing the words at issue. The statutory language,
however – prohibiting the "use," inter alia, of "deceptive
device[s]" – is broad enough to encompass less literal forms of
"making" a statement. Indeed, it defies ordinary experience to say
that a statement can only be "made" by "the physical or manual act
of writing or transcribing [a] report" or speaking words. State v.
O'Neil, 135 P. 60, 63 (Idaho 1913). It is a commonplace
observation that someone has "made a statement" through his or her
conduct.
Unsurprisingly, a broader reading of "make" also is
consistent with the dictionary definitions, which are more
inclusive than the majority acknowledges and include "deliver,
utter, or put forth." See The Random House Dictionary of the
English Language 1161 (2d ed. 1987). Those meanings embrace the
SEC's argument that, by using the prospectuses as they did, the
defendants "deliver[ed]" or "put forth" implied statements of their
own attesting to the accuracy and completeness of the prospectuses.

-- 52 of 66 --

-53-
In case law, as well as common parlance, this is not an
unprecedented interpretation of the word "make." In Reass v.
United States, 99 F.2d 752 (4th Cir. 1938), for example, the court
held that "making" a false statement for purposes of a federal
mortgage fraud statute meant communicating it and not merely
composing it. Id. at 755. Although the majority correctly points
out the very different context in Reass, the fact remains that the
court did not confine "making a statement" to the literal meaning
on which the majority insists. See also, e.g., O'Neil, 135 P. at
63.
To be sure, Rule 10b-5(b) contemplates some range of
conduct narrower than the statute's all-encompassing "use or
employ." But that fact does not mean that particular uses of
statements by particular players in the sale of securities cannot
constitute the "making" of implied statements. The Rule thus does
not require Tambone and Hussey to have explicitly spoken or written
the false statement at issue here, i.e., that "I have a reasonable
basis for believing that the market timing disclosures in the
prospectuses are truthful and complete." Rather, given the
statutory duties imposed upon them as underwriters, see infra, that
representation was implicit in the defendants' conduct in using the
prospectuses to induce individuals to invest in Columbia Funds.
As the SEC explains in its en banc brief, this
understanding of what it means to "make" a statement is necessary

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Although deceptive conduct in the sale of securities could 20
trigger liability under section 17(a), that provision does not
cover purchases and therefore would not always offer an alternative
vehicle for SEC enforcement.
-54-
to fulfill the objective of Congress and the Commission to punish
"any untrue statement of a material fact" made with knowledge or
reckless disregard for its truth. See Rule 10b-5(b). An
underwriter could well know that representations in a prospectus
are false even when the individual who actually wrote the words was
unaware of the inaccuracies. In those circumstances, an
underwriter who knowingly gives investors a prospectus containing
falsehoods could not be held liable in an SEC enforcement action
for aiding and abetting the unwitting drafter, who did not himself
commit fraud. If such an underwriter could not be held responsible
as a primary offender, the underwriter would, in the SEC's words,
"be free from any liability under Section 10(b) whatsoever." It 20
takes no stretch of the language of Rule 10b-5(b) to view such an
underwriter as having attested to the accuracy of the prospectus
contents, i.e., to have knowingly "made" an implied – false –
statement to investors that the prospectus accurately describes the
fund's risks. See Hanly v. SEC, 415 F.2d 589, 597 (2d Cir. 1969)
("By [an underwriter's] recommendation he implies that a reasonable
investigation has been made and that his recommendation rests on
the conclusions based on such investigation.").

-- 54 of 66 --

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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
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
63, 77 (2d Cir. 2001) (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, the Second
Circuit has made the particularly relevant observation that
"[s]ilence where there is a duty to disclose can constitute a false
or misleading statement within the meaning of § 10(b) and Rule
10b-5." Wright, 152 F.3d at 177 (emphasis added). Thus, by virtue

-- 55 of 66 --

Section 11 of the Securities Act "prohibits false statements 21
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).
Section 12 "prohibits the sale of unregistered, nonexempt 22
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).
-56-
of his role in the securities market and his statutory duties, a
defendant may make an implied statement without actually uttering
the words in question.
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 11 and 12, 21 22
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.

-- 56 of 66 --

-57-
4, 1998), 1998 WL 833389). Although underwriters are not insurers
for offerings, id., 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 was explained by
the SEC more than forty years ago 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

-- 57 of 66 --

The SEC specifically observes in this Release that the 23
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.
-58-
and completeness of the key representations made in any disclosure
documents used in the offerings").23
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, which
specifically concern an underwriter's obligation to ensure the
accuracy of registration statements and prospectuses. Courts have
repeatedly applied section 10(b) to underwriters. 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 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)
(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)

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-59-
(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)); 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").
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) ("Although other broker-dealers may have the
same responsibilities in certain contexts, underwriters have a
'heightened obligation' to ensure adequate disclosure."); see also
Chris-Craft Indus., Inc. v. Piper Aircraft Corp. 480 F.2d 341, 370

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(2d Cir. 1973) ("No greater reliance in our self-regulatory system
is placed on any single participant in the issuance of securities
than upon the underwriter."). 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.
Chris-Craft, 480 F.2d at 370; see also Sanders v. John Nuveen &
Co., 524 F.2d 1064, 1071 (7th Cir. 1975) ("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.").
The underwriter's statutory duty to review and confirm
the accuracy of the material in the documentation that it
distributes generates the implied statement to investors that the
underwriter has a reasonable basis to believe that the information
contained in the prospectus it uses to offer or sell securities is
truthful and complete. See Sanders, 524 F.2d at 1070, 1073 ("[T]he
relationship between the underwriter and its customers implicitly
involves a favorable recommendation of the issued security. . . .
[A]s an underwriter selling the . . . notes, Nuveen made an implied
representation that it had reasonable grounds for belief that these

-- 60 of 66 --

The judgment in Sanders was vacated and remanded for further 24
consideration in light of the Supreme Court's decision in Ernst &
Ernst v. Hochfelder, 425 U.S. 185 (1976), which held that scienter
is an element of a private cause of action under section 10(b) and
Rule 10b-5. See John Nuveen & Co. v. Sanders, 425 U.S. 929 (1976);
Hochfelder, 425 U.S. at 193. The Seventh Circuit on remand held
that liability could no longer rest on Rule 10b-5 because the
defendant's conduct had been "mistaken but honest in belief." 554
F.2d at 792. As the majority points out, when the Seventh Circuit
subsequently re-heard the case, it referred to explicit statements
made by the defendant underwriter. See 619 F.2d 1222, 1234 (7th
Cir. 1980). In its earlier ruling, however, the court had noted
that "the evidence does not indicate that all members of the class
relied on express recommendations," 524 F.2d at 1069, and it
therefore based liability on the underwriter's implied statements.
-61-
notes would be paid at maturity." (footnote omitted)); see also 24
Chris-Craft, 480 F.2d at 370. Thus, contrary to the majority's
assertion, this is not a situation in which the liability alleged
is based "merely" on the use of "a statement created entirely by
others." In this limited context, where the duties of underwriters
to potential investors are prescribed by statute, the knowing or
reckless use of a prospectus containing false statements involves
the underwriter's own implied statement falsely affirming the
accuracy of the prospectus content.
The majority attempts to discredit some of this
inconvenient precedent because it pre-dates Central Bank. The
majority's treatment of Chris-Craft, which strongly supports the
SEC's position, is illustrative. The Second Circuit held that an
underwriter "makes" a statement under section 14(e) of the Exchange
Act when constructively representing that registration materials

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Section 14(e) provides, in relevant part: "It shall be 25
unlawful for any person to make any untrue statement of a material
fact or omit to state any material fact necessary in order to make
the statements made, in light of the circumstances under which they
are made, not misleading, . . . in connection with any tender
offer." 15 U.S.C. § 78n(e). That language is in pertinent respects
identical to the language in Rule 10b-5(b) that is at issue here.
-62-
are accurate and complete. 480 F.2d at 370 (noting that, although 25
an underwriter does not "in a literal sense" make statements to
potential investors, we do not read § 14(e) so narrowly"). The
majority disregards Chris-Craft because it preceded Central Bank by
more than twenty years, observing that the Second Circuit had no
reason to distinguish between primary and secondary liability at
that time. As the SEC points out, however, and our discussion
above confirms, Central Bank did not diminish the statutory duties
of underwriters or otherwise affect the courts' identification of
the duties owed by underwriters to the investing public.
Hence, Chris-Craft and similar cases may not be cast
aside as no longer relevant. The majority errs in its dismissal of
precedent, fully consistent with Central Bank, indicating that
implied statements made by underwriters – a unique class of
securities professionals – may fall within the scope of Rule 10b-5.
II.
My colleagues fear that including implied statements
within the purview of Rule 10b-5(b) would trigger a flood of
vexatious private lawsuits against a wide spectrum of participants

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See Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 155 26
(2d Cir. 2007) (accountant); Fidel v. Farley, 392 F.3d 220, 235
(6th Cir. 2004) (auditor), overruled on other grounds by Tellabs,
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in the securities industry. I cannot deny that private plaintiffs
would try to push the SEC's implied statement position beyond its
context in this case. That is a predictable and familiar
phenomenon in our legal system. It then becomes the responsibility
of courts to determine which attempts to expand the law are
meritorious and which are not. Inescapably, this method of
developing the law imposes costs on defendants who ultimately
prevail. These inevitable costs should not deter us, however, from
reaching the result required by the applicable law in the case
before us. Specifically, they should not lead us here to
circumscribe the authority of the SEC to meet its responsibility to
the public to prevent fraud in the securities industry.
In addition, the majority's fears discount too readily
the particular context of this case. As I have described,
underwriters play a unique role in the securities industry, and
they have responsibilities and a statutory duty not shared by every
securities professional. Indeed, the cases cited in the
concurrence for the proposition that the implied representation
theory "has been regularly rejected by the circuits" all involve
secondary players, such as accountants, auditors and lawyers, who
typically lack the "trail guide" relationship with the investing
public that is the hallmark of the underwriter's role.26

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Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007);
Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205-06 (11th Cir.
2001) (accounting and law firms); Anixter v. Home-Stake Prod. Co.,
77 F.3d 1215, 1226-27 (10th Cir. 1996) (accountant).
The majority quotes Fortson v. Winstead, McGuire, Sechrest 27
& Minick, 961 F.2d 469 (4th Cir. 1992), for the proposition that
"'the duty to disclose material facts arises only when there is
some basis outside the securities laws, such as state law, for
finding a fiduciary or other confidential relationship.'" Id. at
472. Several circuits have adopted the proposition that federal
securities law cannot establish the requisite duty. Id. That
exclusion would be inappropriate for underwriters, whose unique
duty to investors is deeply embedded in federal law independent of
section 10(b) and Rule 10b-5. See supra Section B.2.
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Tambone's and Hussey's implied statements about their
belief in the accuracy of the prospectuses arise from their special
status, enforced by statute, which is both widely acknowledged and
of long duration. The majority, quoting Chiarella v. United
States, 445 U.S. 222, 228 (1980), acknowledges that a duty to
disclose information in the securities setting may arise from "'a
fiduciary or other similar relation of trust and confidence'
between the parties" that exists outside the obligations imposed by
Rule 10b-5. See SEC v. Cochran, 214 F.3d 1261, 1265 (10th Cir.
2000) (noting that "a duty to disclose under § 10(b) may be present
if either a federal statute (other than § 10(b) itself) or a state
statutory or common law recognizes a fiduciary or similar
relationship of trust and confidence"). Federal law imposes such
a duty on underwriters, and that duty provides the context in 27
which an underwriter's conduct may generate an implied statement
attesting to the accuracy of a prospectus the underwriter is using

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to sell securities. Plaintiffs seeking to expand the SEC's implied
statement approach beyond underwriters will face the challenge of
identifying an equivalent duty on the part of other actors in the
securities industry.
Moreover, private litigants face multiple burdens in
pleading securities claims. Not only must they meet the standard
requirement that allegations of fraud be pleaded with
particularity, see Fed. R. Civ. P. 9(b), but – unlike the SEC –
they also must prove reliance on the alleged misrepresentations,
economic loss, and loss causation, see, e.g., Stoneridge, 552 U.S.
at 157. The reliance requirement, in particular, weakens my
colleagues' concern that private litigants will be able to bring
impermissible aiding and abetting claims in the guise of primary
claims. With significant barriers already in place to protect
against excessive securities litigation by private plaintiffs, the
way to protect against overreaching by private plaintiffs is to
strictly enforce those requirements – not to deny the SEC the full
scope of its enforcement authority.
III.
The underwriter's special duty to investors is anchored
in statutes and administrative guidance and confirmed by case law
whose relevant wisdom was unaffected by the Supreme Court's
decision in Central Bank. In light of that duty, an underwriter
who uses a prospectus in a securities transaction in the manner

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The allegations in the SEC's complaint are described in 28
detail in the panel decision, SEC v. Tambone, 550 F.3d 106, 141-143
(1st Cir. 2008), and need not be repeated here. It suffices to say
that the SEC meticulously identified the alleged
misrepresentations, the defendants' roles in overseeing the
distribution of fund prospectuses in connection with the sale of
Columbia Funds, and the basis for their knowledge or recklessness
in not knowing that prohibited market timing arrangements existed
(rendering the prospectus statements false).
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alleged here impliedly states that he has reason to believe the
contents of the prospectus are accurate. If the underwriter knows,
or is reckless in not knowing, that the statements contained within
the prospectus are in fact false, the underwriter's implied
statement is likewise false. An underwriter who makes such a
statement has violated Rule 10b-5(b).
The SEC in this case alleges that Tambone and Hussey made
such statements to investors when they used the prospectuses
containing false statements about timing practices to sell the
Columbia Funds. They allegedly knew, or were reckless in not
knowing, that those statements were false. These allegations were
stated with sufficient particularity to meet the requirements of
Fed. R. Civ. P. 12(b)(6), in conjunction with Rule 9(b).28
Defendants' motions to dismiss the primary liability claims under
section 10(b) and Rule 10b-5(b) should therefore have been denied.
Hence, I would reverse the dismissal of the SEC's claims
under section 10(b) and Rule 10b-5(b) and remand to the district
court for further proceedings on those claims, as well as on the
section 17(a)(2) and aiding and abetting claims.

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