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BOSTON � A federal judge’s second dismissal of a recent U.S. Securities and Exchange Commission fraud case against two mutual fund executives for deficiencies in the complaint is one of several recent federal court setbacks for the agency’s aggressive securities enforcement program. In the past few months, the SEC also lost another case on summary judgment in New York and had a Connecticut federal case dismissed for failure to prosecute due to long delays. Also, a judge’s ruling in another Massachusetts case dismissed half of the defendants and denied leave to amend the complaint. Lawyers say the agency’s heightened enforcement activity is leading to cases against executives with indirect or peripheral involvement in alleged wrongdoing. That factor, coupled with the agency’s push for barring defendants from serving as officers or directors of a company with registered securities or working in the securities industry, motivates defendants to fight harder. An SEC spokesman would not comment on individual cases, but did point to the commission’s perfect fiscal 2006 trial court record of 10 wins out of 10 cases. Expanding reach The SEC is seeking to expand the reach of the anti-fraud securities laws, said John Sten, a shareholder in the Boston office of Greenberg Traurig who is a defense lawyer on the case dismissed for complaint deficiencies by the federal judge. “If the SEC has its way, persons in a position of authority will find themselves facing liability simply by virtue of their status as company leaders � whether or not they took any action in furtherance of the alleged fraud or not,” Sten said. Sten is on the defense team for the two former executives of the Columbia Funds’ parent company, Columbia Funds Distributor Inc. According to the SEC, the pair allowed select customers to engage in market timing, which is frequent trading of shares in the same mutual fund to capitalize on inefficiencies in mutual fund pricing. The SEC alleges that the pair committed securities fraud and aided and abetted their company’s violations of securities laws and the Investment Advisers Act of 1940 by not disclosing these practices to other investors, who received prospectuses that discussed the company’s prohibitions and limits on market timing. SEC v. James Tambone, No. 06-10885 (D. Mass.). The SEC’s first case against the two defendants was filed in February 2005 and dismissed in January 2006. The SEC’s new May 2006 lawsuit was dismissed in December 2006 and appealed in March. The appeal is pending. In its December dismissal, the court cited “deficiencies” in the complaint stemming from the SEC’s failure to meet the particularity requirements for a securities fraud case by proving that defendants made fraudulent or misleading statements or committed a deceptive act. In its appeal, the SEC said the executives aided and abetted their company’s securities fraud and violations of the securities fraud laws and the Investment Advisers Act of 1940. The SEC also said the executives’ role in using false and misleading prospectus to sell securities makes them liable for securities fraud. SEC v. James Tambone, No. 07-1384 (1st Cir.). In another recent Massachusetts setback, a March order in an ongoing case dismissed claims against three of six former Putnam Fiduciary Trust Co. executives because the SEC’s allegations were “insufficient” to show “substantial participation” in the allegedly fraudulent scheme. According to the complaint, the company hid its failure to comply with a corporate retirement-plan client’s investment instructions that would have increased the company’s account by $4 million by illegally backdating trades in other mutual funds. The SEC said the executives also used accounting adjustments to hide the losses suffered by the other funds because of the scheme. SEC v. Durgarian, No. 05-cv-12618 (D. Mass.). In the same order, the court also denied the SEC’s motion for leave to file an amended complaint. Summary judgment In a February setback, the Southern District of New York issued a late-stage summary judgment about a month before the SEC was slated to start its trial against former Citigroup Asset Management executives. The SEC charged the two executives with aiding and abetting violations of the Investment Advisers Act for omissions and misleading statements to the mutual funds’ board of directors about the nature and profitability of the proposed transfer agency agreement between the funds and a Citigroup affiliate company. SEC v. Jones, No. 05-7044 (S.D.N.Y.). In a March ruling in a Connecticut federal court, the agency encountered another rare outcome � a dismissal due to the agency’s long delays in mounting a securities fraud case against individuals and companies accused of pumping up the value of PacketPort.Com’s stock before dumping, or selling, it. SEC v. PacketPort.Com Inc., No. 05-1747, (D.Conn.).

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