Securities Law Prof Blog

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

Saturday, April 25, 2009

Fifth Circuit Affirms Rule 10b-5 Judgment Against Market-Timing Broker

In SEC v. Gann (5th Cir. 4/17/09), the Fifth Circuit affirmed a district court's judgment that a broker that facilitated his customers' market-timing activities violated Rule 10b-5, although its affirmance seemed somewhat begrudging.  In a seven-month period, the broker concluded 2500 trades in the mutual funds of 56 companies and received 69 block notices.  On the question of scienter, the court mused:

The SEC is essentially enforcing corporate regulations on behalf of the various mutual funds. Because market timing itself is not illegal, the SEC had to prove an intent to deceive to fit Gann’s behavior within Section 10(b) and Rule 10b-5. This creates a dilemma for the courts, which are asked to determine whether the defendant’s legal acts are made illegal by his compliance or noncompliance with corporate regulations that companies sometimes suspend or ignore, either tacitly or expressly, depending on the circumstances of that particular trade. ... We emphasize again, however, that market timing is not illegal. The SEC’s prosecution of Gann is based on the fund companies’ regulations and Gann’s violation of those regulations.   The SEC’s chief evidence of Gann’s intent to deceive was his use of numerous account and registration numbers that actually represented his (and Fasciano’s) work for HCM. The SEC contended that Gann’s efforts were meant  to circumvent the funds’ regulations for his own gain and that of his customer.  We perceive the evidence in this case to be in equipoise, making critical the question of credibility. The district court found Gann not credible and sided with the SEC. Based on this express finding, the district court adopted the SEC’s version of the facts. Credibility is uniquely “the province of the trier of fact,” and we defer to it.

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