Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, November 1, 2011

SEC ALJ Dismisses Fraud Charges Against 2 Former State Bank and Trust officials

An SEC administrative law judge dismissed charges that two former Street State Bank and Trust Co. employees misled investors about their exposure to subprime mortgage-backed securities in an unregistered fund, In re John P. Flannery and James D. Hopkins (File No. 3-14081 10/28/11Download InreFlannery).  The fund at issue was the Limited Duration Bond Fund (LDBF), an actively managed "enhanced cash" fund whose objective was to match or exceed the return of the J.P. Morgan one-month U.S. Dollar LIBOR Index by 50-75 basis points over an interest-rate cycle.  LDBF's clients consisted of sophisticated investors such as public funds, pension funds, endowments and foundations.

The ALJ emphasized that she found both respondents to be credible witnesses and that "testaments of their honesty, good character, hard work, and concern for clients were delivered enthusiastically" by every witness on their behalf.

The 58-page opinion thoroughly reviews the facts and testimony.  In her legal analysis, the ALJ determined that the Janus test was the appropriate standard to apply in evaluating the extent of the respondets' conduct and that, therefore, with respect to allegations involving documentary evidence, the Division must establish that the respondents had ultimate authority and control over the documents.

Ultimately, the ALJ concluded that

neither Flannery nor Hopkins was responsible for, or had ultimate authority over, the allegedly false and materially misleading documents at issue in this proceeding.... Moreover, I find that these documents, as well as Hopkins’ representation to Hammerstein on April 9, 2007, and Flannery’s August 14 letter, did not contain materially false or misleading statements or material omissions. Because I find there were no materially false or misleading statements or omissions, there can also be no fraudulent “course of conduct” or “scheme liability.”

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