First Circuit Vacates SEC Sanctions Against Two Bank Execs

The U.S. Court of Appeals for the First Circuit has vacated a Securities and Exchange Commission (SEC) order that imposed sanctions against two State Street Bank and Trust Co. executives, saying that the SEC had abused its discretion in assessing liability to the two bankers.

In Flannery v. SEC, the SEC brought charges against State Street Bank and Trust Co. executives James D. Hopkins and John P. Flannery for allegedly misleading investors regarding an unregistered fund managed by the bank, the Limited Duration Bond Fund. The fund, which was offered solely to institutional investors, included mostly asset-backed securities and had underperformed substantially beginning in mid-2007 amid the subprime mortgage crisis.

After a hearing on the matter, an SEC administrative law judge (ALJ) dismissed the complaint, find that the documents at issue did not include misleading or materially false statements and that neither Hopkins or Flannery were responsible for the documents.

The SEC appealed to the Commission, which reversed the ALJ’s decision and imposed sanctions on Hopkins and Flannery that included suspending them from any association with an investment adviser or company for one year as well as monetary fines. In making its ruling, the Commission relied on a slide presentation Hopkins made to an investor in the fund that included a slide entitled, “Typical Portfolio Exposures and Characteristics—Limited Duration Bond Strategy.” The slide, one of 20 or more, showed ABS allocation at 55% when the actual fund’s investment in ABS was almost 100%. The Commission found this particular slide to be misleading.

Hopkins and Flannery appealed the Commission’s finding to the First Circuit. In reviewing the slide in question, the First Circuit found that “context makes a difference,” and noted that the slide was only one in 20 and that the fund’s actual allocation was readily available to investors through other documents. The court also found expert testimony that a typical investor would not rely solely on a slide presentation persuasive.

In addition, the court noted that there was no testimony from actual investors in the fund to support the Commission’s findings of materiality. The court vacated the SEC order against Hopkins and Flannery, saying the SEC failed to meet its burden of proof.

The Cogdell Law Firm is a boutique law firm focusing on large, complex business and criminal financial-related litigation, including white collar criminal defense, securities fraud, health care fraud investigation, criminal appeals and state criminal defense. When results matter most, contact Dan Cogdell at (713) 426-2244 or dan@cogdell-law.com.

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