Case Name: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. James TAMBONE and Robert Hussey, Defendants, Appellees
Court: United States Court of Appeals for the First Circuit
Jurisdiction: United States
Decision Date: 2010-03-10
Citations: 597 F.3d 436
Docket Number: No. 07-1384
Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. James TAMBONE and Robert Hussey, Defendants, Appellees.
Judges: with whom LYNCH, Chief Judge, joins,
Reporter: Federal Reporter 3d Series
Volume: 597
Pages: 436–464

Head Matter:
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, Appellant, v. James TAMBONE and Robert Hussey, Defendants, Appellees.
No. 07-1384.
United States Court of Appeals, First Circuit.
Heard Oct. 6, 2009.
Decided March 10, 2010.
John W. Avery, Senior Litigation Counsel, with whom David M. Becker, General Counsel, Mark D. Cahn, Deputy General Counsel, and Jacob H. Stillman, Solicitor, were on supplemental brief, for appellant.
Arthur R. Miller, William B. Scoville, Jr., Peter G.A. Safirstein, Milberg LLP, New York City, Kevin P. Roddy, Wilentz, Goldman & Spitzer, P.A., Woodbridge, NJ, Salvatore J. Graziano, Ann M. Lipton, and Bernstein Litowitz Berger & Grossmann LLP, New York City, on supplemental brief for National Association of Shareholder and Consumer Attorneys (NAS-CAT), amicus curiae.
Paula J. DeGiacomo, with whom Elliot H. Scherker, Greenberg Traurig LLP, A. John Pappalardo, John A. Sten, and Greenberg Traurig, P.A., Boston, MA, were on supplemental brief, for appellee Tambone.
Clifford M. Sloan, with whom Christopher M. Joralemon, Gibson, Dunn & Crutcher LLP, New York City, Warren L. Feldman, Skadden, Arps, Slate, Meagher & Flom LLP, New York City, Frank A. Libby, Jr., John J. Commisso, and LibbyHoopes, P.C., Boston, MA, were on supplemental brief, for appellee Hussey.
Douglas R. Cox, Michael J. Scanlon, Jason J. Mendro, Gibson, Dunn & Crutcher LLP, Washington, DC, on supplemental brief for Center for Audit Quality, amicus curiae.
Carter G. Phillips, Jonathan F. Cohn, Daniel A. McLaughlin, Eric D. McArthur, Sidley Austin LLP, Washington, DC, Ira D. Hammerman, Kevin M. Carroll, on supplemental brief for Securities Industry and Financial Markets Association, amicus curiae.
Richard D. Bernstein, Barry P. Barbash, Frank M. Scaduto, Willkie Farr & Gallagher LLP, Robin S. Conrad, and Amar D. Sarwal, Washington, DC, on supplemental brief for United States Chamber of Commerce, amicus curiae.
John Pagliaro, Staff Attorney, and Martin J. Newhouse, Boston, MA, on supplemental brief for New England Legal Foundation and Associated Industries of Massachusetts, amici curiae.

Opinion:
OPINION EN BANC
SELYA, Circuit Judge.
Rule 10b — 5(b), promulgated by the Securities and Exchange Commission (SEC) under the aegis of section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), renders it unlawful "[t]o make any untrue statement of a material fact . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b). The issue before us is one of first impression. It turns on the meaning of the word "make" as used in Rule 10b-5(b). The SEC advocates an expansive definition, contending that one may "make" a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly "make" a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.
We reject the SEC's expansive interpretation. It is inconsistent with the text of the rule and with the ordinary meanings of the phrase "to make a statement," inconsistent with the structure of the rule and relevant statutes, and in considerable tension with Supreme Court precedent. Consequently, we affirm the district court's dismissal of the SEC's Rule 10b-5(b) claim.
I. BACKGROUND
Because this appeal follows the district court's granting of a motion to dismiss, we rehearse the facts as well-pleaded in the SEC's complaint. See Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir.2005).
At all times material hereto (roughly, 1998-2003), the defendants, James Tam-bone and Robert Hussey, were senior executives of a registered broker-dealer, Columbia Funds Distributor, Inc. (Columbia Distributor), or its predecessor in interest. Columbia Distributor underwrites and markets mutual funds. The SEC alleges that the defendants violated sundry provisions of both the Securities Act of 1933 (Securities Act) and the Exchange Act. Its complaint depicts a tangled web of interlocking entities. We briefly trace the fibers within that web.
During the relevant period, Columbia Distributor was a wholly-owned subsidiary of Columbia Management Group, Inc. (Columbia Management) and an indirect subsidiary of FleetBoston Financial Corporation (Fleet). Columbia Distributor was known as Liberty Funds Distributor, Inc. (Liberty Distributor) until 2001, when Fleet purchased its parent corporation, Liberty Financial Group (Liberty).
Columbia Distributor acted as the principal underwriter and distributor of over 140 mutual funds in the Columbia mutual fund complex (the Columbia Funds). The Columbia Funds included several funds that had been owned by Liberty prior to the take-over by Fleet. In its wonted role, Columbia Distributor sold shares in the Columbia Funds and disseminated their prospectuses to investors.
Direct responsibility for the representations contained in the prospectuses rested with the funds' sponsor, Columbia Management Advisors, Inc., and its predecessors in interest (collectively, Columbia Advisors). Like Columbia Distributor, Columbia Advisors was a wholly-owned subsidiary of Columbia Management and, thus, an indirect subsidiary of Fleet for much of the relevant period.
The defendants held positions of trust and responsibility in this corporate pyramid. Tambone served as co-president of Columbia Distributor from 2001 to 2004. Prior thereto, he held the same post with Liberty Distributor. Hussey served as managing director (national accounts) of Columbia Distributor from 2002 until 2004. Before that, he occupied a comparable position with Liberty Distributor. The SEC does not allege that either defendant worked for the Columbia Funds' sponsor, Columbia Advisors, during the relevant time frame.
The short-term trading practice that lies at the epicenter of this case is known in the trade as "market timing." Market timing is the practice of frequent buying and selling of shares of a single mutual fund in order to exploit inefficiencies in mutual fund pricing. According to the SEC, market timing, though not illegal per se, can harm other fund investors and, therefore, is commonly barred (or at least restricted) by those in charge of mutual funds.
The Columbia Funds' prospectuses contained representations touching upon the subject of market timing. Starting at least as early as 1998, language was inserted into many Columbia Funds' prospectuses restricting the number and frequency of round-trips exchanges from one fund to another and back again) in which an investor could indulge. Emblematic of this prophylaxis was language, first appearing in May of 1999, inserted in prospectuses for funds belonging to the Acorn Fund Group, a constituent of the Columbia Funds. That language stated that the funds within the group "do not permit market-timing and have adopted policies to discourage this practice."
This effort to curb market timing escalated over time. In 2000, Hussey co-chaired an internet working group formed to create procedures designed to detect and deter market timing in the Columbia Funds. The working group ultimately recommended that each of the member funds take a consistent position against market timing in future prospectuses. As a result, a number of funds began to include a "strict prohibition" in every prospectus, expressly barring short-term or excessive trading. By 2003, the strict prohibition language, or a variant of it, appeared in all the Columbia Funds' prospectuses.
The SEC alleges that, despite the language in the prospectuses expressing hostility toward market timing' — the existence of which Tambone and Hussey allegedly either knew or recklessly ignored — the defendants jointly and severally entered into, approved, and/or knowingly permitted arrangements allowing certain preferred customers to engage in market timing forays in at least sixteen different Columbia Funds during the relevant period. The SEC also alleges that the defendants used the prospectuses in their sales efforts by allowing them to be disseminated and referring potential clients to them.
II. TRAVEL OF THE CASE
On May 19, 2006, the SEC filed a civil complaint in the United States District Court for the District of Massachusetts. In its complaint, the SEC alleged that Tambone and Hussey had violated section 17(a) of the Securities Act, section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. In addition, the SEC alleged that the defendants had aided and abetted primary violations of section 10(b) and Rule 10b-5 by Columbia Advisors and Columbia Distributor, primary violations of section 15(c) of the Exchange Act by Columbia Distributor, and primary violations of section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, by Columbia Ad-visors.
In due season, each defendant moved to dismiss. The SEC opposed the motions. As the parties' arguments with respect to liability under Rule 10b-5(b) are central to this appeal, we summarize them succinctly.
The defendants premised their challenge on the thesis that the SEC had failed properly to plead any actionable misstatements on their part. In opposition, the SEC countered that the complaint sufficiently alleged that the defendants had made material misrepresentations regarding market timing in the Columbia Funds' prospectuses. Specifically, the SEC argued that the defendants "made" false statements of material facts within the meaning of Rule 10b — 5(b) by (i) participating in the drafting process that went into the development of the market timing language, and (ii) using the prospectuses in their sales efforts, allowing the prospectuses to be disseminated and referring clients to them for information. Finally, the SEC argued that the defendants were liable for a material omission under Rule 10b-5(b).
The district court granted the motions to dismiss. SEC v. Tambone (Tambone I), 473 F.Supp.2d 162, 168 (D.Mass.2006). With respect to the Rule 10b—5(b) claim premised on the defendants' making of false statements, the court applied the bright-line test articulated in Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.1998), and held that the SEC's allegations about the defendants' participation in the drafting process and their subsequent use of the prospectuses were too conclusory and attenuated to satisfy the particularity requirement of Federal Rule of Civil Procedure 9(b). Tambone I, 473 F.Supp.2d at 166. The court found unconvincing the SEC's other arguments for liability under Rule 10b-5. Id. at 167. The court likewise rejected the SEC's section 17(a) and aiding and abetting claims. Id. at 167-68.
The SEC appealed from the granting of the motions to dismiss with respect to its section 17(a)(2), Rule 10b — 5(b), and aiding and abetting claims.
With respect to Rule 10b-5(b), the SEC briefed two arguments as to how the defendants "made" the alleged misrepresentations. First, the SEC argued that the defendants "made" the misrepresentations by using the prospectuses to sell the mutual funds. Second, the SEC argued that the defendants impliedly made false representations to investors to the effect that they had a reasonable basis for believing that the key representations in the prospectuses were truthful and complete. This implied statement theory rested on the premise that a securities professional engaged in the offering of securities has a "special duty" to undertake an investigation that would provide him with a reasonable basis for believing that the representations in the prospectus are truthful and complete. Therefore, the theory goes, a securities professional "makes" an implied representation to investors that the prospectus is truthful and complete when he engages in an offering.
What the SEC chose not to argue is also noteworthy. The SEC did not allude to its argument, which at one point had been raised below, that the defendants made the alleged misstatements through their involvement with the preparation of the prospectuses. Similarly, although the SEC had pleaded violations of subparagraphs (a) and (c) of Rule 10b-5, it did not pursue those claims on appeal. In accordance with our usual praxis, we deem abandoned all arguments that have not been briefed and developed on appeal. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir.1990).
A divided panel of this court reversed the dismissal of the SEC's section 17(a)(2), Rule 10b—5(b), and aiding and abetting claims. SEC v. Tambone (Tambone II), 550 F.3d 106, 149 (1st Cir.2008) (withdrawn). With respect to Rule 10b — 5(b), the panel majority adopted the SEC's implied representation theory and held that the SEC had thereby alleged that the defendants had made false statements. Id. at 135.
The defendants filed petitions for en banc review, Fed. R.App. P. 35, challenging all of the panel's holdings. The full court withdrew the panel opinion but ordered rehearing en banc only on the Rule 10b-5(b) issues. SEC v. Tambone, 573 F.3d 54, 55 (1st Cir.2009) (order granting rehearing en banc). The court declined to rehear the parties' arguments concerning either the section 17(a)(2) or the aiding and abetting rulings. Id. Following a new round of briefing (including helpful submissions by an array of amici) and reargument, we took the matter under advisement.
III. STANDARD OF REVIEW
We review de novo a district court's disposition of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Centro Medico del Turabo, 406 F.3d at 5. In the process, we accept as true all well-pleaded facts set out in the complaint and indulge all reasonable inferences in favor of the pleader. In re Colo nial Mortg. Bankers Corp., 324 F.3d 12, 15 (1st Cir.2003).
As a general proposition, a complaint must contain no more than "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R.Civ.P. 8(a)(2). But even though a complaint need not plead "detailed factual allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), it must nonetheless "contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face," Ashcroft v. Iqbal, — U.S. -, -, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted). In other words, the complaint must include "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. If the factual allegations in the complaint are too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture, the complaint is open to dismissal. Twombly, 550 U.S. at 555, 127 S.Ct. 1955.
Because the complaint in this case contains allegations of fraud, an additional hurdle must be surmounted: the pleader (here, the SEC) must "state with particularity the circumstances constituting [the] fraud." Fed.R.Civ.P. 9(b). To satisfy this particularity requirement, the pleader must set out the "time, place, and content of the alleged misrepresentation with specificity." Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir.1999).
IV. ANALYSIS
This case presents the two-part question of whether a securities professional can be said to "make" a statement, such that liability under Rule 10b-5(b) may attach, either by (i) using statements to sell securities, regardless of whether those statements were crafted entirely by others, or (ii) directing the offering and sale of securities on behalf of an underwriter, thus making an implied statement that he has a reasonable basis to believe that the key representations in the relevant prospectus are truthful and complete. The answer to each part of this two-part question is "no."
We think it appropriate to commence our analysis with the text of the relevant statute and rule. See Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 173, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). Section 10(b) of the Exchange Act renders it unlawful for a person "[t]o use or employ . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b). Pursuant to its rulemaking authority under section 10(b), the SEC adopted Rule 10b — 5(b), which provides, in pertinent part, that "[i]t shall be unlawful for any person, directly or indirectly, . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). The inquiry here centers on whether the defendants made untrue statements of material fact within the meaning of this rule.
In conducting this inquiry, the pivotal word in the rule's text is "make," as in "to make a statement." The rule itself does not define that word, nor does it suggest that the word is imbued with any exotic meaning. In the absence of either a built-in definition or some reliable indicium that the drafters intended a special nuance, accepted canons of construction teach that the word should be given its ordinary meaning. See Smith v. United States, 508 U.S. 223, 228, 113 S.Ct. 2050, 124 L.Ed.2d 138 (1993) ("When a word is not defined by statute, we normally construe it in accord with its ordinary or natural meaning."); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 472, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977) (interpreting Rule 10b-5 according to the "commonly accepted meaning" of its words); In re Hill, 562 F.3d 29, 32 (1st Cir.2009) (noting that, in general, words in a statute carry their ordinary meanings if not specially defined).
One reference point for determining the ordinary meaning of a word is its accepted dictionary definition. See, e.g., Smith, 508 U.S. at 228-29, 113 S.Ct. 2050 (consulting various dictionaries to discern the plain meaning of the word "use" in the relevant statute). For purposes of this analysis, we refer to several common and representative dictionary definitions of "make," which include "create [or] cause," Webster's Third New Int'l Diet. 1363 (2002); "compose," id.; and "cause (something) to exist," Black's Law Dict. 1041 (9th ed.2009).
This case does not require us to set forth a comprehensive test for determining when a speaker may be said to have made a statement. It is enough to say that the SEC's purported reading of the word is inconsistent with each of these definitions. In any event, the question does not turn on dictionary meanings alone. We also look to the structure of section 10(b) and Rule 10b-5, as well as other, related provisions, to interpret the term at issue. Chief among these structural considerations is the relationship between section 10(b) and Rule 10b-5(b). Section 10(b) grants the SEC broad authority to proscribe conduct that "use[s] or employ[s]" any "manipulative or deceptive device or contrivance," in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b).
In Rule 10b-5(b), the SEC prohibited a specific subset of all "manipulative or deceptive device[s] or contrivance[s]," namely, untrue or misleading statements of material fact. It likewise prohibited a specific subset of all conduct that might be said to "use or employ" such a manipulative device or contrivance: the making of untrue or misleading statements of material fact.
In light of this deliberate word choice ("make"), the SEC's asseveration that one can "make" a statement when he merely uses a statement created entirely by others cannot follow. That asseveration ignores the obvious distinction between the verbs contained in the statute ("use," "employ") and the significantly different (and narrower) verb contained in Rule 10b-5(b) ("make"). Word choices have consequences, and this word choice virtually leaps off the page. There is no principled way that we can treat it as meaningless.
Section 10(b) is helpful to our analysis in another way as well. That provision conferred upon the SEC authority to prohibit the "use or employ[ment]" of any manipulative device or contrivance in connection with the purchase or sale of any security. The SEC knew how to wield this authority and proscribe "use or employ[ment]" of a manipulative device or contrivance: in Rule 10b-5(a), it did just that, rendering it unlawful "to employ" a device, scheme, or artifice to defraud. See 17 C.F.R. § 240.10b-5(a). That the SEC wrote this prohibition in a different sub-paragraph of the rule and selected a more inclusive verb is a telling combination. The Supreme Court remarked on this phenomenon in Affiliated Ute v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), observing that:
[T]he second subparagraph of the rule specifies the making of an untrue statement of a material fact and the omission to state a material fact. The first and third subparagraphs are not so restricted.
Id. at 152-53, 92 S.Ct. 1456. It is not the judiciary's proper province to rewrite an administrative rule to sweep more broadly than its language permits. Thus, we must honor the limitation that the drafters deliberately built into Rule 10b-5(b).
In an effort to blunt the force of this reasoning, the SEC suggests that the broad language of the statute ("use or employ") requires an equally broad construction of the wording contained in Rule 10b-5(b). To support this suggestion, it touts the Supreme Court's statement that "[t]he scope of Rule 10b-5 is coextensive with the coverage of § 10(b)." SEC v. Zandford, 535 U.S. 813, 816 n. 1, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). On that basis, the SEC posits that "make" must include "use" because the statute prohibits "use" and the rule perforce must prohibit all that the statute prohibits.
This argument comprises more cry than wool. Most notably, it fails to account for an abecedarian point: even if Rule 10b-5 is coextensive with the coverage of section 10(b), that supposed verity does not mean that each of the subparagraphs of Rule 10b-5, taken singly, is itself coextensive with the coverage of section 10(b). That cannot be so. If it was, then each subparagraph would proscribe exactly the same conduct. They do not. See, e.g., Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 359-60 (5th Cir.1987).
Our view of the meaning of Rule 10b-5(b) is reinforced when we contrast the language of the rule with that of section 17(a) of the Securities Act. By way of background, the phrasing of Rule 10b-5 largely mirrors the language of section 17(a) of the Securities Act. That is not happenstance; the drafters of Rule 10b-5 modeled the rule on section 17(a). See United States v. Persky, 520 F.2d 283, 287 (2d Cir.1975). But there is a salient difference between the language of the rule and the language of section 17(a) with respect to the types of conduct that may render a person liable for a false statement. Section 17(a)(2) makes it unlawful "to obtain money or property by means of any untrue statement of a material fact," 15 U.S.C. § 77q(a)(2), whereas Rule 10b-5(b) makes it unlawful "to make any untrue statement of a material fact," 17 C.F.R. § 240.10b-5(b).
In short, the drafters of Rule 10b-5 had before them language that would have covered the "use" of an untrue statement of material fact (regardless of who created or composed the statement). The drafters easily could have copied that language. They declined to do so. Instead, the drafters — who faithfully tracked section 17(a) in other respects — deliberately eschewed the expansive language of section 17(a)(2).
The import of this eschewal is clear: although section 17(a)(2) may fairly be read to cover the "use" of an untrue statement to obtain money or property, see, e.g., Edward J. Mawod & Co. v. SEC, 591 F.2d 588, 596 (10th Cir.1979), Rule 10b-5(b) is more narrowly crafted and its reach does not extend that far. We must honor the drafters' deliberate decision to insert the word "make" in Rule 10b-5(b) in lieu of the more expansive phrase "by means of." See United States v. Ahlers, 305 F.3d 54, 59-60 (1st Cir.2002) (discussing court's obligation to "presume that . differential draftsmanship was deliberate").
The SEC's other arguments for defining "make" to encompass "use" with respect to Rule 10b-5(b) liability are unavailing. One of the SEC's main arguments appears to be that "[i]t seems self-evident that any statute or rule that prohibits making a false statement in connection with the sale of property would cover a seller who knowingly uses misleading sales materials." This type of abstract, decontextualized approach to the interpretation of a statute or regulation is ill-suited to the construction of a rule laden with over sixty years of interpretation in literally hundreds of opinions. This is especially so because the rule in question is an integral part of an extensive regulatory framework forged by Congress, the SEC, and the federal courts.
At any rate, what the SEC now calls "self-evident" is not self-evident at all. What does seem self-evident is that if the SEC intended to prohibit more than just the actual making of a false statement in Rule 10b-5(b), then it would not have employed the solitary verb "make" in the text of the rule.
There is another reason to reject the SEC's interpretation; it is in tension with Supreme Court precedent. Under modern Supreme Court precedent dealing with Rule 10b-5, much turns on the distinction between primary and secondary violators. See Cent. Bank, 511 U.S. at 191, 114 S.Ct. 1439. Although Central Bank did not address the precise issue with which we are concerned, the definition of "make" that we propose is compatible with Central Bank as it holds the line between primary and secondary liability in a manner faithful to Central Bank. We explain briefly.
The Exchange Act does not explicitly confer a private right of action for section 10(b) violations. The Supreme Court nevertheless has found a private right of action to be implicit in the statute and the implementing rule (Rule 10b-5). Sup't of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). This right of action is not unbridled: private plaintiffs are permitted to bring suit under Rule 10b-5 against only "primary" violators. See Cent. Bank, 511 U.S. at 177-78, 114 S.Ct. 1439.
In the wake of Central Bank, Congress amended section 20 of the Exchange Act to clarify that the SEC may bring suit against aiders and abetters, that is, persons who knowingly provide substantial assistance to primary violators of the secu rities laws. Pub.L. 104-67, § 104, 109 Stat. 737, 757 (1995) (codified at 15 U.S.C. § 78t(e)). Although the SEC has exhorted Congress to extend the same right to private parties, see 4 Thomas Lee Hazen, The Law of Securities Regulation 506 n. 31 (6th ed.2009), Congress has not done so. Thus, Rule 10b-5's private right of action extends only to primary violations, not to secondary violations. If Central Bank's carefully drawn circumscription of the private right of action is not to be hollowed— and we do not think that it should be— courts must be vigilant to ensure that secondary violations are not shoehorned into the category reserved for primary violations.
The SEC's position poses a threat to the integrity of this dichotomy. Refined to bare essence, the SEC, through the instrumentality of Rule 10b — 5(b), seeks to impose primary liability on the defendants for conduct that constitutes, at most, aiding and abetting (a secondary violation). Allowing the SEC to blur the line between primary and secondary violations in this manner would be unfaithful to the taxonomy of Central Bank.
Of course, the Central Bank Court did not purpose to decide the precise issue before us. Withal, the Court's methodology for determining the scope of the private right of action (and, thus, the scope of primary liability) is a beacon by which we must steer. That methodology emphasizes fidelity to the text of section 10(b) and Rule 10b-5. See Cent. Bank, 511 U.S. at 173, 114 S.Ct. 1439 (explaining that a "private plaintiff may not bring a 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b)"); see also id. ("We have refused to allow 10b-5 challenges to conduct not prohibited by the text of the statute."). An expansive reading of the rule, unmoored from its text and based on judicially manufactured policy rationales, is plainly antithetic to this restrained methodology. See id. at 188, 114 S.Ct. 1439 (warning that, absent the prospect of a bizarre result, policy considerations cannot override the text and structure of the statute).
There is more. Reading "make" to include the use of a false statement by one other than the maker would extend primary liability beyond the scope of conduct prohibited by the text of Rule 10b-5(b). See id. Furthermore, doing so would "add a gloss to the operative language of the [rule] quite different from its commonly accepted meaning." Id. at 174, 114 S.Ct. 1439 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). Allowing courts to imply that "X" has made a false statement with only a factual allegation that he passed along what someone else wrote would flout a core principle that underpins the Central Bank decision. We decline the SEC's invitation to go down that road.
As an aside, blurring the line between primary and secondary violations also would create unacceptable tension with the substantial body of ease law that has evolved post -Central Bank — case law that maps the outer boundaries of primary liability under Rule 10b-5. This case law, though not directly on point, does not fit comfortably with the view that the SEC espouses here. Let us explain.
In the aftermath of Central Bank, several courts of appeals have had to plot the line between primary violations and mere aiding and abetting in Rule 10b-5 actions brought by private plaintiffs. Two divergent strains of authority have evolved. We have not yet chosen between these divergent strains and we have no need to do so today. It suffices to say that the line of authority most hospitable to the establishment of primary violations of Rule 10b-5 embraces the "substantial participation" test, under which a person's "substantial participation or intricate involvement in the preparation of fraudulent statements" is enough to establish a primary violation. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n. 5 (9th Cir.2000). The other line of authority, less hospitable to plaintiffs, adheres to the "bright-line" test, under which a primary violation requires proof both that the defendant actually made a false or misleading statement and that it was attributable to him at the time of public dissemination. See Wright, 152 F.3d at 175; see also Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205 (11th Cir.2001); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th Cir.1996); In re Kendall Sq. Research Corp. Sec. Litig., 868 F.Supp. 26, 28 n. 2 (D.Mass.1994).
While these tests are designed for private litigation, and, thus, are poorly suited to public enforcement actions, one thing is crystal clear. The conduct for which the SEC strives to hold the defendants as primary violators-the use and dissemination of prospectuses created by others-does not satisfy either test. Both tests focus, albeit to different degrees, on the actual role that a defendant played in creating, composing, or causing the existence of an untrue statement of material fact. The SEC's attempt to impute statements to persons who may not have had any role in their creation, composition, or preparation falls well short. As the Second Circuit put it: "If Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable [as a primary violator] under section 10(b). Anything short of such conduct is merely aiding and abetting." Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir.1997).
There is yet another problem with the SEC's implied statement theory: that theory effectively imposes upon securities professionals who work for underwriters an unprecedented duty. We elaborate on this mischief below.
The SEC notes, correctly, that securities professionals working for underwriters have a duty to investigate the nature and circumstances of an offering. See, e.g., SEC v. Dain Rauscher, Inc., 254 F.3d 852, 857 (9th Cir.2001). Building on this foundation, the SEC theorizes that such securities professionals impliedly "make" a representation to investors that the statements in a prospectus are truthful and complete. If we were to give credence to this theory, the upshot would be to impose primary liability under Rule 10b-5(b) on these securities professionals whenever they fail to disclose material in- formation not included in a prospectus, regardless of who prepared the prospectus. That would be tantamount to imposing a free-standing and unconditional duty to disclose. The imposition of such a duty flies in the teeth of Supreme Court precedent.
The key precedent is Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). It instructs that a party's nondisclosure of information to another is actionable under Rule 10b-5 only when there is an independent duty to disclose the information arising from "a fiduciary or other similar relation of trust and confidence" between the parties. Id. at 228, 100 S.Ct. 1108. As the Fourth Circuit explained, "the duty to disclose material facts arises only when there is some basis outside the securities laws, such as state law, for finding a fiduciary or other confidential relationship." Fortson v. Winstead, McGuire, Sechrest & Minick, 961 F.2d 469, 472 (4th Cir.1992); accord SEC v. Cochran, 214 F.3d 1261, 1264 (10th Cir.2000). Adopting the SEC's implied statement theory would pave the way for suits against securities professionals for nondisclosure of material information without the required showing of a fiduciary relationship. Fidelity to that requirement demands that we reject the SEC's notion that a breach of a duty to investigate, without more, is a breach of a duty to disclose (and, thus, should be treated as a primary violation under Rule 10b — 5(b)).
The SEC labors to depict its implied statement theory as firmly rooted in both case law and longstanding administrative interpretation. This depiction is inaccurate.
As to case law, the SEC relies principally on three decisions. See Dolphin & Bradbury, Inc. v. SEC, 512 F.3d 634, 641 (D.C.Cir.2008); Sanders v. John Nuveen & Co., 524 F.2d 1064, 1070 (7th Cir.1975); Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341, 370 (2d Cir.1973). These decisions, it asserts, stand for the linchpin proposition that an underwriter participating in an offering makes an implied statement, potentially actionable under Rule 10b-5(b), that he has a reasonable basis for believing that the prospectus is truthful and complete.
That assertion is incorrect. To begin, neither Dolphin nor Sanders holds that an underwriter may be found liable as a primary violator under Rule 10b-5(b) for "making" an implied representation that proves to be false. Those cases did not present any issue as to whether the underwriter had "made" a statement. In fact, in both cases the underwriter personally made the misrepresentations. See Dolphin, 512 F.3d at 638, 640; Sanders, 524 F.2d at 1067; see also Sanders v. John Nuveen & Co., 619 F.2d 1222, 1224 (7th Cir.1980). Both decisions were directed toward a wholly distinct issue: whether the defendant acted with the required state of mind in making the statements. See Dolphin, 512 F.3d at 639; Sanders, 524 F.2d at 1066. Any language suggesting that various representations might be imputed to underwriters must be viewed in this (very different) context.
Chris-Craft also fails to breathe life into the SEC's argument. The case holds that an underwriter's constructive representation that the statements made in registration materials are truthful and complete constitutes the making of a statement under section 14(e) of the Exchange Act. See Chris-Craft, 480 F.2d at 370. But Chris-Craft preceded Central Bank by over twenty years, and its continued vitality with respect to this section 14(e) holding is doubtful.
In all events, nothing turned on the distinction between primary and secondary violations at that time, so the Chris-Craft panel had no reason to distinguish between them. In retrospect, it is reasonable to read Chris-Craft as holding that the underwriters were liable only as secondary violators. See In re MTC Elec. Techs. S'holder Litig., 993 F.Supp. 160, 162 (E.D.N.Y.1997) (concluding that "the holding of Chris-Craft was that an underwriter was liable as an aider and abettor").
We turn next to the array of administrative pronouncements. We freely accept the principle that the existence of a longstanding pattern of administrative interpretation might well call for Chevron deference. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Here, however, the SEC's claim of a "longstanding administrative interpretation" is wildly exaggerated.
The SEC has cobbled together a bricolage of agency decisions and statements all of which antedate Central Bank. Without exception, nothing in this carefully culled collection says that an implied representation of an underwriter can constitute a basis for primary liability under Rule 10b-5(b). The fact that the SEC has never before articulated the implied statement theory as a basis for Rule 10b~5(b) liability dooms its quest for Chevron deference. After all, there is no occasion for Chevron deference when there is nothing to which a court may defer.
Before leaving this topic, we wish to comment briefly on the dissent's metronomic reliance on the special role and duties of underwriters. We agree that underwriters have a special niche in the marketing of securities and, thus, have a special set of responsibilities. But the duty that the dissent seeks to impose is unprecedented — and far exceeds the scope of Rule 10b-5(b). While that rule could have been drafted to cut a wider swath, it was not. The SEC has other, more appropriate tools that it may use to police the parade of horribilis that the dissent envisions, and it is neither necessary nor wise to attempt to expand the rule by judicial fiat. Most importantly, doing so would, as a matter of law, be wrong.
There is one loose end, which relates to waiver. The SEC argues to the en banc court that the defendants can be held primarily liable for violating Rule 10b-5(b) under an entanglement test. See, e.g., In re Cabletron Sys., Inc., 311 F.3d 11, 37-38 (1st Cir.2002); Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir.1980). Under this test, a defendant may be held primarily liable for misstatements appearing in reports authored by outside analysts when those misrepresentations are based on information provided by the defendant. See Cabletron, 311 F.3d at 38. Such liability inheres when "defendants have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree." Id. at 37-38.
This argument has not been preserved and, thus, need not concern us. The SEC did not advance it before the district court in connection with the dispositive motions to dismiss. To make a bad situation worse, the SEC did not coherently present this argument before the panel during the first stage of this appeal. To the con trary, the SEC's panel briefs were devoid not only of any developed argumentation to the effect that the defendants entangled themselves with the statements in the prospectuses but also of citations to Cabletron, Elkind, or any comparable precedent. In this instance, silence speak volumes.
A party cannot switch horses midstream, changing its theory of liability at a later stage of the litigation in hopes of securing a swifter steed. So it is here: because the SEC unfurled its "entanglement" argument for the first time in the en banc proceedings, we have no occasion to address that argument. See United States v. Slade, 980 F.2d 27, 30 (1st Cir.1992) ("It is a bedrock rule that when a party has not presented an argument to the district court, she may not unveil it in the court of appeals."); Zannino, 895 F.2d at 17 (explaining that "issues adverted to in a perfunctory manner, unaccompanied by some effort at developed argumentation, are deemed waived").
This is not the only waiver that has transpired. The SEC unveiled for the first time in its reply brief regarding rehearing en banc a contention that its implied statement theory of Rule 10b-5(b) liability could be upheld under the so-called shingle theory. See, e.g., Duker & Duker, 6 S.E.C. 386, 388-89, 1939 WL 36426 (1939). This belated contention is likewise waived.
y. CONCLUSION
We need go no further. This is one of those happy occasions when the language and structure of a rule, the statutory framework that it implements, and the teachings of the Supreme Court coalesce to provide a well-lit decisional path. Following that path, we affirm the district court's dismissal of the SEC's Rule 10b-5(b) claim. Because en banc review is limited to this claim, we reinstate those portions of the vacated panel judgment that reversed the dismissal of the SEC's section 17(a)(2) and aiding and abetting claims. To that end, we also reinstate those portions of the withdrawn panel opinion, and concurrence thereto, addressing those claims (which, when reinstated, will have the force ordinarily associated with panel opinions). We remand the case to the district court for further proceedings on the SEC's section 17(a)(2) and aiding and abetting claims consistent, of course, with this en banc opinion.
So Ordered.
. An earlier action, filed in February of 2005, was dismissed without prejudice for failure to plead fraud with particularity. That action is of no moment here.
. This contention was based on the SEC's allegations that the defendants reviewed and commented on the market timing statements before those statements were included in the prospectuses. We do not quote these allegations at length, as the SEC has not pursued this line of argument on appeal.
.In addition, the SEC argued that Tambone had made material misrepresentations by signing selling agreements in which he vouched for the accuracy of the statements in the prospectuses. Because the SEC has not pursued this argument on appeal, we disregard it. See United States v. Zannino, 895 F.2d 1, 17 (1st Cir.1990).
. The panel parted ways only with respect to the Rule 10b-5(b) claims. See Tambone II, 550 F.3d at 149 (Selya, J., concurring in part and dissenting in part).
. That section provides in pertinent part:
It shall be unlawful for any person ., directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3)to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a).
. The SEC has in fact brought a separate section 17(a)(2) claim against the defendants in this case. That claim is not before the en banc court.
. The SEC also endeavors to prop up its "use" theory of Rule 10b — 5(b) liability by referring to a venerable Fourth Circuit case deciding, for venue purposes, whether a defendant violated a federal mortgage fraud statute in West Virginia or in Pennsylvania. See Reass v. United States, 99 F.2d 752, 755 (4th Cir.1938).
The only reason the opinion has even an epsilon's worth of relevance to the issue at hand is that the challenged statute rendered it unlawful to "make[] any statement, knowing it to be false, for the purpose of influencing in any way the action of a Federal Home Loan Bank upon any application for loan." Id. at 752. But the Reass court did not presume to act as a legal lexicographer, chiseling in stone a definition of "make" for all time and for every purpose. The result in Reass proceeds from the simple proposition that the statute could not be violated until the defendant presented the misstatements to the bank "upon . application for a loan." Id. at 755.
. Although the Central Bank Court focused its inquiry on section 10(b), its methodology is equally applicable to Rule 10b-5. The rule is incorporated into the statutory framework and, thus, its scope "is coextensive with the coverage of § 10(b)." Zandford, 535 U.S. at 816 n. 1, 122 S.Ct. 1899. Fidelity to the text of section 10(b) requires fidelity to the text of Rule 10b-5 and, therefore, fidelity to the text of each of the subsections that comprise the rule.
. For example, the bright-line test cannot be imported wholesale into the public enforcement context because its attribution prong reflects the need to prove reliance, see Wright, 152 F.3d at 175 — an element that the SEC need not establish in a Rule 10b-5 case. See Schellenbach v. SEC, 989 F.2d 907, 913 (7th Cir.1993); see also SEC v. Wolfson, 539 F.3d 1249, 1260 (10th Cir.2008) (declining to impose the attribution requirement in an SEC enforcement action).
. Although the SEC at one time argued that the defendants "made" untrue statements of material fact through some vaguely described involvement in drafting the prospectuses, it has not pursued that argument on appeal.
. That section provides in pertinent part that: "[i]t shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, . in connection wilh any tender offer." 15 U.S.C. § 78n(e).
. Under the shingle theory, a broker-dealer may be held liable under section 17(a) of the Securities Act or section 10(b) of the Exchange Act if he sells a security to a customer for a price unreasonably in excess of the current market price without disclosing the fact of the markup. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 192-93 (2d Cir.1998); Duker & Duker, 6 S.E.C. at 388-89. We have not been able to find any case in which the shingle theory has successfully been applied, under Rule 1 Ob — 5(b), to facts similar to the facts at hand.