Broker-Dealer Litigation - Greenberg Traurig LLP

avoid ambiguous, potentially misleading disclosures on this complex subject, not the role of an
outside director.
The Eighth Circuit also affirmed the district court’s conclusion that the SEC failed to
present sufficient evidence of negligence with respect to its claims brought pursuant to Section
17(a)(2) and (3) because the SEC failed to offer any evidence regarding the duties of members of
a board of directors or any testimony, lay or expert, regarding the degree of care that an ordinary
person would exercise under the circumstances and failed to prove that the disclosures about
options dating were unambiguous. In short, because it was undisputed that the defendant was an
outside director, had no personal expertise in these complex matters, that the company complied
with accounting principles at the time, no one alerted the outside director to any potential
concern and there was no evidence that the defendant violated the appropriate standard of care,
the SEC failed to state a claim for violations of Sections 17(a)(2) and (3).
SEC v. Tecumseh Holdings Corp., 765 F. Supp. 2d 340 (S.D.N.Y. 2011).
The SEC and defendant Milling, a former officer of Tecumseh, filed cross motions for
summary judgment in this action alleging violations of the antifraud provisions of the Securities
Exchange Act and Section 17(a) of the Securities Act. The SEC alleged that Tecumseh’s
offering documents as well a letter to shareholders were false and misleading because of their
description of the quarterly distributions. The SEC argued that the offering documents and
shareholder letter did not disclose to investors that the companies had been losing money and
that any profit-derived dividends were highly unlikely and instead implied that the companies
were a profitable enterprise.
In response, Milling relied upon certain cautionary language included in the offering
documents, specifically language providing that there was no assurance that Tecumseh would
pay dividends. The court stated that these cautionary statements were insufficient to advise
investors that the “dividend” payments were not actually dividends but rather, returns of investor
capital. The court concluded that even the cautionary language implied that at least part of the
distributions would be profit-derived, and that informing investors that their quarterly
“distributions”—which were also intermittently referred to as dividends or “ROIs”—might be
paid from a “general fund,” (rather than from profits), fell far short of disclosing a piece of
information that is obviously important to a reasonable investor—that the distributions could not
have been paid from earnings, because the earnings were non-existent.
SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011).
In approving the SEC and Vitesse’s proposed consent judgment, Judge Rakoff again
criticized the SEC over the boiler-plate language included in nearly every securities regulatory
settlement—that the defendant neither “admits nor denies” any wrongdoing. Judge Rakoff
approved a $3 million agreement between the SEC and Vitesse Semiconductor and three former
B.3
B.3
51