1st Circuit: Broad Reading of Rule 10b-5 Nixed
In a March 10 ruling in Securities and Exchange Commission v. Tambone, the en banc 1st Circuit rejected a broad interpretation of SEC Rule 10b-5.
Directors of mutual fund distributor Columbia Funds Distributors put out prospectuses that prohibited market timing. However, the SEC claims the directors knew certain investors were authorized to engage in market timing trading. The SEC sued under provisions including Rule 10b-5, which makes it illegal to “make” a false statement for financial gain. The Columbia directors said they didn’t actually write or speak language in the prospectuses and therefore were not liable. Earlier, however, a 1st Circuit panel in Tambone broadened the scope of Rule 10b-5 by ruling the defendants could be found liable for merely “using” a false or misleading statement.
On March 10, the en banc 1st Circuit disagreed, vacating the earlier ruling that reversed dismissal.
The ruling discussed the circuit split that has developed recently over the scope of Rule 10b-5–the 2nd Circuit has backed a “bright-line” test requiring proof that the defendant actually made the statement, while in the 9th Circuit “substantial participation” suffices to establish primary violations. The majority stated that the SEC’s claim against the Columbia directors satisfies neither test.
2nd Circuit: Court Expects More Judicial Googling
Judges deciding cases can use Internet searches to confirm reasonable intuitions or matters of common knowledge, the 2nd Circuit ruled March 22 in U.S. v. Bari.
U.S. District Judge Denny Chin of the Southern District of New York revoked the parole of convicted bank robber Anthony Bari because he was accused of robbing another bank after being found to possess a yellow rain hat identical to one worn during the crime. Chin stated his chambers had Googled yellow hats and found that many different styles exist, making it more likely the hats were one and the same.
Bari appealed the parole revocation on grounds that the court’s search violated federal evidence rules, which the 2nd Circuit found loosely govern parole revocation hearings.
The 2nd Circuit ruled Chin’s search was permissible under Federal Rule of Evidence 201, which allows a court to “take judicial notice, whether requested or not,” of matters of common knowledge and facts capable of verification.
“Today … a judge need only take a few moments to confirm his intuition by conducting a basic Internet search,” the court wrote. “As the cost of confirming one’s intuition decreases, we would expect to see more judges doing just that.”
4th Circuit: Female Trucker Wins Bias Suit
Deborah Merritt worked for Old Dominion Freight Line as a long-haul truck driver for six years but wanted to become a pickup and delivery driver, which would allow her to stay closer to home and work more regular hours. Temporary stints in the role earned Merritt compliments from clients. But managers twice passed her over and promoted less-experienced males to the position.
Merritt was eventually promoted but was subject to a 90-day probationary period, which no male drivers had faced. And after Merritt sustained a minor, treatable ankle injury, Old Dominion sent her for a series of full-body physical tests. She failed and was fired. However, the failure did not involve her ankle, and males similarly situated to Merritt were not subject to the test.
A district court dismissed Merritt’s sex discrimination claims, but the 4th Circuit reversed, calling Merritt’s story “one of a certain grit and perseverance.”
8th Circuit: Data Suppressed in “Reckless” Search
Federal prosecutors’ $4.9 million H-1B fraud case against Vision Systems Group Inc. got a major blow March 30 when a federal judge in Iowa suppressed all of the electronic evidence the Department of Homeland Security (DHS) gathered in a search he called “highly reckless.”
Chief Judge Robert Pratt of the Southern District of Iowa wrote March 24 that the government’s handling of digital information showed “utter disregard for the protocol explicitly set forth” in the search warrant.
The government failed to properly search electronic data collected from Vision Systems within 60 days or to request a time extension as the warrant directed. Moreover, Pratt wrote, the deadline failure did not stem from “a reasonable reaction to an unanticipated hindrance.” Rather, it was a result of the DHS search team’s use of overbroad search terms, which included “all e-mail files” and “Word (or Word-type) documents opened/modified in the last year.”
Pratt also dismissed eight claims of mail fraud against New Jersey-based Vision Systems. Its president and an officer face charges that they set up shell companies in Iowa to take advantage of the state’s low wage rates and pay H-1B employees less.