Opinion ID: 799254
Heading Depth: 2
Heading Rank: 2

Heading: The Total Mix of Information in an SEC Enforcement Action

Text: We now apply this materiality test to the facts of this SEC enforcement action. To do so, however, we must answer the threshold question of whether, in an SEC enforcement action, a misstatement or omission by an individual broker to an individual investor may be included in the analysis of the total mix of information available to the hypothetical reasonable investor. For several reasons, we conclude that the brokers' alleged misstatements are included in the materiality inquiry in an SEC enforcement action. Morgan Keegan's principal argument on appeal is that an SEC enforcement action is designed to protect the public as a whole, and therefore the SEC must demonstrate that Morgan Keegan misled the public as a whole and not just a small subset of customers. Morgan Keegan argues that the materiality of a misrepresentation in an SEC enforcement action is evaluated in the context of only disclosures to the public as a whole and without any consideration of a broker's communications to a particular investor. [16] This argument fails because the Supreme Court's materiality standard analyzes the total mix of information available to a hypothetical reasonable investor, not just to the public at large. See Matrixx, 131 S.Ct. at 1318 (stating the test for materiality is whether there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available (emphasis added) (quotations marks omitted)); see also Basic, 485 U.S. at 236, 108 S.Ct. at 986 (stating the materiality analysis requires delicate assessments of the inferences a ` reasonable shareholder ' would draw from a given set of facts and the significance of those inferences to him  (emphasis added)); Merch. Capital, 483 F.3d at 768-71 (applying reasonable man standard). In other words, the materiality test requires the court to consider all the information available to the hypothetical reasonable investor, which necessarily includes private communications. See Aaron v. SEC, 446 U.S. 680, 682-83, 100 S.Ct. 1945, 1948-49, 64 L.Ed.2d 611 (1980) (considering, in SEC enforcement action against managerial employee of broker-dealer, misleading statements by two individual brokers to prospective investors). By failing to consider the brokers' alleged oral misrepresentations, Morgan Keegan's analysis deprives the publicly available written disclosures of their complete context and deprives its brokers' oral misrepresentations of any role in SEC enforcement actions. The problem for Morgan Keegan is the SEC enjoys the authority to seek relief for any violation of the securities laws, no matter how small or inconsequential. [17] And it is well-settled that a violation of § 10(b) of the Exchange Act requires only a (1) material misrepresentation or materially misleading omission, (2) in connection with the purchase or sale of securities, (3) made with scienter. Merch. Capital, 483 F.3d at 766. The SEC thus may seek a civil penalty against any defendant who has made a single misstatement or omission, if material and made with scienter and in connection with the purchase or sale of securities. [18] Morgan Keegan cannot show that its oral misstatements were immaterial merely by showing that those statements were not made publicly. Moreover, a rule excluding all individual broker-investor communications from the materiality inquiry is underinclusive, just like the agreement-in-principle rule the Supreme Court rejected in Basic and the statistical significance rule it rejected in Matrixx. See Basic, 485 U.S. at 236, 108 S.Ct. at 986; Matrixx, 131 S.Ct. at 1319. That is, the hypothetical reasonable investor looking for a short-term, liquid investment is likely to consider his broker's statements about the relative merit (and lack of risk) of certain investments in deciding among different investment options. [19] And the fact-finder could easily conclude that a reasonable investor would find liquidity risk an important factor in determining whether to invest in ARS, especially given Morgan Keegan's advertising ARS as a highly liquid alternative to money market funds. Further, there is no statutory or precedential support for Morgan Keegan's argument that some threshold number of investors must be misled before finding its brokers' misrepresentations material in an SEC enforcement action. The SEC is not required to prove an institution-wide effort by brokers to mislead customers in order to bring or to prevail in an SEC enforcement action. The extent of the brokers' misrepresentations may ultimately affect the size of the remedy, such as fines or disgorgement imposed, but there is no minimum number of misrepresentations required for a materiality finding in an SEC enforcement action. Simply put, a numerical threshold for materiality runs counter to the securities acts' broad grant of authority to the SEC to bring an action for any violation of the securities laws. In this case, the SEC presented evidence that four Morgan Keegan brokers misrepresented the liquidity risk of ARS to customers. [20] Under principles of respondeat superior, Morgan Keegan is liable for the acts of these brokers so long as they acted within the scope of their authority. See Paul F. Newton & Co. v. Tex. Commerce Bank, 630 F.2d 1111, 1118 (5th Cir.1980) (concluding that common law agency principles, including the doctrine of respondeat superior, remain viable in actions under the Exchange Act). [21] Morgan Keegan concedes that these four brokers were acting within the scope of their authority when they made the alleged misrepresentations. Thus, the SEC, at a minimum, 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. In this SEC enforcement action, we discern no reason to exclude Morgan Keegan's brokers' misrepresentations from the materiality analysis of the total mix of information available to the reasonable investor.