The Eleventh Circuit Court of Appeals recently issued a decision in the SEC v. Morgan Keegan overturning the trial court in a civil enforcement action concerning auction rate securities.
The SEC’s lawyers alleged that Morgan Keegan’s brokers misrepresented that auction rate securities (“ARS”) were safe cash-equivalents with no liquidity risk and continued to recommend ARS as short-term, liquid investments despite numerous auction failures and significant trouble in the ARS market in late 2007 and early 2008.
The trial judge granted summary judgment in Morgan Keegan’s favor holding that the undisputed facts failed to show a “material” misrepresentation or omission, as required for liability under the Securities Exchange Act of 1934, the Securities Act of 1933, and Rule 10b-5. In particular, the trial court found that oral misrepresentations of four brokers were insufficient to establish material misstatements to the public.
In reversing the trial court, the Eleventh Circuit held that the “misstatement or omission by an individual broker to an individual investor” must be considered in the analysis of the “total mix” of information available to the hypothetical reasonable investor in a materiality inquiry. Accordingly, the SEC “may establish a securities violation with respect to each of those four investors irrespective of ‘an institutional effort to mislead’ customers and irrespective of whether any additional brokers attempted to mislead Morgan Keegan’s other customers.” Further, the Eleventh Circuit noted that “in securities cases, whether written disclosures should trump oral misrepresentations is highly fact-specific and therefore is not amenable to bright-line rules.”
Securities and Exchange Commission v. Morgan Keegan & Company, Inc., Case No. 09-cv-01965 (11th Cir. May 2, 2012).
