Opinion ID: 186545
Heading Depth: 3
Heading Rank: 1

Heading: Misclassification

Text: 35 Rockies Fund petitioners admit that the Fund misclassified its Premier holdings in several SEC filings. Those filings incorrectly labeled the vast majority of the Fund's shares of Premier stock as unrestricted when only 750 were actually held as unrestricted shares. The Fund should have listed the shares as restricted in each filing; listed as unrestricted, the statements qualify as untrue under Rule 10b-5. 36 The Fund petitioners do, however, challenge the materiality of the misclassification. In its opinion, the SEC determined that the misclassifications were material in two ways. First, the misclassifications affected the value of the Premier holdings — and, therefore, the Fund's financial statements. Second, the misclassifications caused the Fund's holdings to appear more liquid than they really were. In addition, Premier occupied a large percentage of the Fund's total assets, magnifying the effect of any misinformation about Premier. Under these circumstances, a reasonable investor certainly would have viewed the misclassification as significantly alter[ing] the `total mix' of information. See Basic, Inc., 485 U.S. at 231-32, 108 S.Ct. 978 (citation omitted). 37 The Rockies Fund petitioners also argue that they lacked the requisite intent under Rule 10b-5. The SEC found it implausible that the Fund directors could have overlooked this kind of error in six separate filings. The Fund weakly disputes the SEC's scienter determination, but the SEC's opinion has ample support. Premier represented a large part of the Fund's holdings — between ten and forty percent. An attentive director would have rectified the error absent extreme abdication of ordinary care. In addition to the simple misclassification, each filing used valuation language only appropriate for unrestricted shares. Therefore, substantial evidence supports the SEC's finding of reckless indifference and extreme recklessness.