Opinion ID: 2723829
Heading Depth: 3
Heading Rank: 3

Heading: Securities-Fraud Jury Instruction

Text: The defendants also challenge the district court’s refusal to give their proposed securities-fraud jury instruction, which described their theory of defense by defining the phrase “in connection with the purchase or sale of any security” under § 10(b) of the Securities and Exchange Act of 1934. 15 U.S.C. § 78j(b). A defendant is entitled to a theory-of-defense jury instruction if: (1) the instruction represents an accurate statement of the law; (2) the instruction reflects a theory that is supported by the evidence; (3) the instruction reflects a theory which is not already part of the charge; and (4) the failure to include the instruction would deny the [defendant] a fair trial. United States v. Walker, 746 F.3d 300, 307 (7th Cir. 2014) (internal quotation marks omitted). Section 10(b) of the Act makes it a crime “[t]o use or employ, in connection with the purchase or sale of any security … [,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). The SEC implements this provision through Rule 10(b)-5, see 17 C.F.R. § 240.10b-5, which “is coextensive with the coverage Nos. 12-3819, 12-3833 & 12-3867 15 of § 10(b).” S.E.C. v. Zandford, 535 U.S. 813, 816 n.1 (2002). The defendants’ proposed instruction sought to define the scope of liability under § 10(b) to advance their theory of defense that “a scheme to delay is not a scheme to defraud.”1 The district 1 The entire proposed instruction reads: The fifth element that the government must prove beyond a reasonable doubt is that a subordinated lender (a Fair Finance Investment Certificate purchase) purchased or sold investment securities from Fair Finance and that the purchase or sale of the interests was made in connection with the alleged untrue statements of material fact. First, there must be a purchase or sale of a security. This means that the transfer of ownership of an asset is required for a purchase and sale. Simply continuing to holding [sic] a security does not qualify. Furthermore, delaying an interest payment or redemption of an Investment Certificate is not a purchase or sale of a security. Second, to satisfy the “in connection with” requirement, the government must prove beyond a reasonable doubt that there was some nexus or relationship between the alleged untrue statements of material fact and the purchase or sale of interests in Fair Finance. The misrepresentations must have some direct pertinence to a securities transaction. Evidence that defendants made untrue statements or omissions of material fact following the purchase of an Investment Certificate is inadequate. Likewise, evidence that investors purchased or sold interests in spite of defendants’ alleged untrue statements of material fact is insufficient. Instead, the government must prove beyond a reasonable doubt that investors actually purchased or sold some or all of their Investment (continued...) 16 Nos. 12-3819, 12-3833 & 12-3867 court rejected the proposed instruction, opting instead to give one that mirrored the statutory language. We review that decision de novo. Love, 706 F.3d at 838.2 The defendants’ proposed instruction runs into trouble both in its statement of the law and its fit with the facts of the case. At the outset we note that the instruction takes a toonarrow view of the “in connection with” language in § 10(b). When the Supreme Court has “sought to give meaning to the phrase [‘in connection with’] in the context of § 10(b) and Rule 10b-5, it has espoused a broad interpretation.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit (“Merrill Lynch”), 547 U.S. 71, 85 (2006).3 The defendants asked the court to 1 (...continued) Certificates in Fair in connection with the defendants’ alleged untrue statements of material fact. 2 The government argues that we should review for plain error because the defendants forfeited this claim. We disagree. At the instruction conference, Durham’s counsel submitted and argued for the proposed instruction, which the judge then denied. That is enough to preserve the issue for review. Counsel did not need to object immediately after this colloquy to avoid forfeiture. See United States v. James, 464 F.3d 699, 707 n.1 (7th Cir. 2006). 3 Merrill Lynch interpreted the key phrase “in connection with” the purchase or sale of a security in the context of the Securities Litigation Uniform Standards Act of 1998, which prohibits securities class actions if the class has more than 50 members, the suit is not exclusively derivative, relief is sought on the basis of state law, and the class action suit is (continued...) Nos. 12-3819, 12-3833 & 12-3867 17 instruct the jury that a misrepresentation is made “in connection with” the purchase or sale of a security if it has “some direct pertinence” to the transaction. The Supreme Court, on the other hand, has treated the in-connection-with requirement as merely requiring a misrepresentation “coincid[ing]” with, Zandford, 535 U.S. at 822, or “touching,” Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971), a securities transaction. Moreover, the core theory reflected in the defendants’ proposed instruction—that “a scheme to delay is not a scheme to defraud”—is problematic as a legal matter and in the context of the evidence in this case. Many, though not all, of the misrepresentations in this case were statements falsely explaining the delayed interest payments or encouraging investors to delay redemption of their investment certificates. The defendants urged the court to instruct the jury that “[s]imply continuing to hold[] a security does not qualify” as a purchase or sale of a security. This argument was premised on civil cases involving the judicially created private cause of action under § 10(b) and Rule 10b-5, but the “rules governing private 3 (...continued) brought by “any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” Brown v. Calamos, 664 F.3d 123, 124 (7th Cir. 2011) (quoting 15 U.S.C. § 78bb(f)(1)). Though appearing in different statutory sections, the Supreme Court has treated the in-connection-with language appearing in both provisions as having the same meaning. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85–86 (2006). 18 Nos. 12-3819, 12-3833 & 12-3867 Rule 10b–5 actions … developed differently from the law defining what constitute[s] a substantive violation of Rule 10b–5.” Merrill Lynch, 547 U.S. at 80. More specifically, in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975), the Supreme Court concluded that only plaintiffs who were themselves purchasers or sellers of a security had standing to sue for securities fraud, a requirement often referred to as the “purchaser-seller” rule or “Birnbaum Rule.” See Merrill Lynch, 547 U.S. at 80. This rule is meant to cabin the reach of private actions for securities fraud. The defendants’ argument for their proposed instruction is based on cases drawn from that context. For example, the defendants cite Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977), which relied on Blue Chip Stamps—not the text of § 10(b)—to conclude that “fraud in connection with the purchase or sale of a security is not satisfied by an allegation that plaintiffs were induced fraudulently not to sell their securities.” Another example is Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1443 n.7 (5th Cir. 1993), which also involved a private cause of action. Krim cited Blue Chip Stamps for the proposition that “[i]t is well established that mere retention of securities in reliance on material misrepresentations or omissions does not form the basis for a § 10(b) or Rule 10b-5 claim.” But what matters in this context is the scope of substantive criminal liability under § 10(b), not the judicially created rules for private civil actions. See Merrill Lynch, 547 U.S. at 84 (“Blue Chip Stamps … purported to define the scope of a private right of action under Rule 10b-5—not to define the words ‘in connection with the purchase or sale.’”); see also Blue Chip Nos. 12-3819, 12-3833 & 12-3867 19 Stamps, 421 U.S. at 751 n.14 (“[T]he purchaser-seller rule imposes no limitation on the standing of the SEC to bring actions for injunctive relief under § 10(b) and Rule 10b-5.”). This line of cases does not provide a defense to criminal liability for securities fraud. The proposed instruction thus would have misled the jury about the scope of § 10(b). Moreover, the proposed instruction lacked an adequate foundation in the evidence. In the context of the broader scheme at issue here, the defendants’ misrepresentations did not merely induce investors to “continue to hold” their investment certificates. Fair’s investors made decisions to buy, renew, or redeem their certificates based on a massive fraud that included lulling statements about the delayed interest payments as well as misrepresentations intended to induce delayed redemptions. The reliable payment of interest was precisely what gave the investment certificates value and would have played a large role in an investor’s decision to cash out an existing certificate, renew that certificate (which itself involved issuance of a new certificate), or buy one for the first time. In addition, the defendants made misrepresentations in Fair circulars about the general financial status of the company and how it used investors’ money. Finally, the judge’s decision to instruct the jury using the statutory language hardly deprived the defendants of a fair trial. They were free to argue their theory that a scheme to delay is not a scheme to defraud, and in fact did so. Accordingly, the district court did not err in rejecting the defendant’s proposed instruction; neither the law nor the evidence supported it. 20 Nos. 12-3819, 12-3833 & 12-3867