Opinion ID: 3160896
Heading Depth: 2
Heading Rank: 1

Heading: Hopkins

Text: Liability under Section 17(a)(1), Section 10(b), and Rule 10b-5 requires materiality and scienter. See SEC v. Ficken, 546 F.3d 45, 47 (1st Cir. 2008); see also Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1318 (2011). [T]o fulfill the materiality requirement 'there must be 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.' Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Scienter is an intention 'to deceive, manipulate, or defraud.' Ficken, 546 F.3d at 47 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)); see also Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980). Hopkins concedes that scienter can be established by proving a high degree of recklessness, but denies that he was reckless. Compare Ficken, 546 F.3d at 47 (In this circuit, proving scienter - 17 - requires 'a showing of either conscious intent to defraud or a high degree of recklessness.' (quoting ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008))), with Matrixx Initiatives, 131 S. Ct. at 1323 (We have not decided whether recklessness suffices to fulfill the scienter requirement.). Questions of materiality and scienter are connected. City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 757 (1st Cir. 2011). If it is questionable whether a fact is material or its materiality is marginal, that tends to undercut the argument that defendants acted with the requisite intent or extreme recklessness in not disclosing the fact. Id. Here, assuming the Typical Portfolio Slide was misleading,3 evidence supporting the Commission's finding of materiality was marginal. The Commission's opinion states that 3 While the actual investment in ABS exceeded that which was on the slide, the slide was clearly labeled Typical Portfolio Exposures and Characteristics -- Limited Duration Bond Strategy and did not purport to show the actual exposures to each sector at any given time. The Commission contends that the allocation the slide represented was still not typical during the 2006–2007 time period. In response to the ALJ's question of whether the sector breakdown was, in fact, what existed at that time, Hopkins responded, I think it probably was -- in terms of the sector breakdown on this page, it was not . . . what was typical. We assume this was an admission that the slide was misleading as to its typicality. We also assume that the Commission did not err in its finding that Hopkins in fact presented the Typical Portfolio Slide in his presentation to the NJC on May 10, 2007. - 18 - reasonable investors would have viewed disclosure of the fact that, during the relevant period, LDBF's exposure to ABS was substantially higher than was stated in the slide as having significantly altered the total mix of information available to them. Yet the Commission identifies only one witness other than Hopkins relevant to this conclusion. Hammerstein, Yanni Partners' chief strategist,4 testified that at the May 10 meeting, Hopkins spoke for about thirty minutes,5 presented the Typical Portfolio Slide, and said that the fund was of very high quality. Hammerstein said that the information on the Typical Portfolio Slide was important to him because [i]t led to the impression that the fund was well diversified, and therefore that State Street took steps to reduce the risks or control the risks. Hammerstein testified that when he later learned that the LDBF's ABS exposure actually approached 100 percent, he was surprised in light of the May 10 meeting. This led Yanni Partners to advise its clients to liquidate their positions in the LDBF. Hammerstein said they came to this conclusion because they felt that State Street did not adequately inform [them] of the risks in the portfolio, and [they] 4 Hammerstein himself was not actually an investor. He was the chief strategist at Yanni Partners, which is an investment consulting firm that works with investors. The Commission points to no actual investors to support a finding of materiality. 5 Amanda Williams, who co-presented with Hopkins, wrote in a note the day after the meeting that they had only about fifteen minutes for their presentation. - 19 - cited the example of the presentation that State Street made to National Jewish on May 10 when State Street stated that . . . the typical allocation was 55 percent to the ABS sector, but as recently as March 31 of 2007, the actual ABS allocation was 100 percent. The Division presented a letter Yanni Partners sent to every client invested in the LDBF, signed by the field consultant responsible for the specific client, recommending that they liquidate their holdings and citing the May 10 meeting where [t]he LD Bond Fund Portfolio Manager . . . did not disclose the actual sector exposure at the time, instead presenting 'typical' portfolio characteristics . . . . On the other hand, the slide was clearly labeled Typical. As far as Hammerstein was aware, through May 2007, Yanni Partners never asked SSgA for a breakdown of the LDBF's actual investment by sector nor was he aware of any request from Yanni Partners for the LDBF's audited financial statements. Further, the Commission has not identified any evidence in the record that the credit risks posed by ABS, CMBS, or MBS were materially different from each other,6 arguing instead that the 6 We also note that the LDBF's composition in terms of credit quality of holdings remained relatively constant, and, if anything, improved. The Typical Portfolio Slide represented that 85% of the LDBF's investment was in AAA- and AA-rated bonds (45% and 40% respectively), while the March 31, 2007, fact sheet disclosed that 94.46% of its investment was in AAA- and AA-rated bonds (62.2% and 32.26% respectively). - 20 - percent of investment in ABS and diversification as such are important to investors. Context makes a difference. According to a report Hammerstein authored the day after the meeting, the meeting's purpose was to explain why the LDBF had underperformed in the first quarter of 2007 and to discuss its investment in a specific index that had contributed to the underperformance. The Typical Portfolio Slide was one slide of a presentation of at least twenty. Perhaps unsurprisingly, the slide was not mentioned in Hammerstein's report. Hopkins presented expert testimony from John W. Peavy III (Peavy) that [p]re-prepared documents such as . . . presentations . . . are not intended to present a complete picture of the fund, but rather serve as starting points, after which due diligence is performed. Peavy explained that a typical investor in an unregistered fund would understand that it could specifically request additional information regarding the fund.7 And not only were clients given specific information upon request, information about the LDBF's actual percent of sector investment was available through the fact sheets and annual audited financial 7 Peavy also opined that in the hundreds of . . . meetings and presentations [he has] attended, [he did] not recall a single instance in which the discussion was based solely on the content of material prepared beforehand or a rote reading of a PowerPoint presentation slide deck. - 21 - statements.8 The March 31, 2007, fact sheet, available six weeks prior to the May 10, 2007, presentation, included that the LDBF was 100% invested in ABS. The June 30, 2007, fact sheet included that the LDBF was 81.3% invested in ABS. These facts weigh against any conclusion that the Typical Portfolio Slide had significantly altered the 'total mix' of information made available. Basic, 485 U.S. at 232 (quoting TSC Indus., Inc., 426 U.S. at 449) (internal quotation mark omitted). This thin materiality showing cannot support a finding of scienter here.9 See Geffon v. Micrion Corp., 249 F.3d 29, 35 (1st Cir. 2001). Hopkins testified that in his experience, 8 Information was also provided on SSgA's website through the password protected Client's Corner and Consultant's Corner sections. However, the information available on these parts of the website varied by fund and client. Hopkins presented evidence that during 2007, the Client's Corner section was logged into 28,969 times by 465 unique users. Hopkins also presented evidence that Hammerstein was copied on an e-mail about the Client's Corner section of the website, but Hammerstein had no recollection of seeing the e-mail. We do not suggest that the mere availability of accurate information negates an inaccurate statement. Rather, when a slide is labeled typical, and where a reasonable investor would not rely on one slide but instead would conduct due diligence when making an investment decision, the availability of actual and accurate information is relevant. 9 Our determination is based on how a reasonable investor would react. Given our conclusion that the Commission abused its discretion in holding Hopkins liable under Section 17(a)(1), Section 10(b), and Rule 10b-5, we need not decide whether the level of sophistication of the LDBF investors would have made any misrepresentation immaterial. Cf. SEC v. Happ, 392 F.3d 12, 21– 23 (1st Cir. 2004). - 22 - investors did not focus on sector breakdown when making their investment decisions and that LDBF investors did not focus on how much of the LDBF investment was in ABS versus MBS.10 In fact, Hopkins did not recall ever discussing the Typical Portfolio Slide or being asked a question about the actual sector breakdown when presenting the slide.11 He did not update the Typical Portfolio Slide's sector breakdowns because he did not think the typical sector breakdowns were important to investors. To the extent that an investor would want to know the actual sector breakdowns, Hopkins would bring notes with the accurate information so that he could answer any questions that arose. We cannot say that these handwritten notes provide substantial evidence of recklessness, much less intentionality to mislead -- particularly in light of Hopkins's belief that this information was not important to investors. Cf. City of Dearborn Heights, 632 F.3d at 757 ([T]he question of whether Defendants recklessly failed to disclose [a fact] is . . . intimately bound up with whether Defendants either actually knew or recklessly ignored that the [fact] was material 10 Hopkins was not alone in his belief. Lawrence J. Carlson, the co-head of Relationship Management at SSgA in 2007, testified that at least prior to the summer of 2007, he did not recall clients ever asking for a sector breakdown of the LDBF, and expert witness Peavy testified that it was common for clients not to ask for holdings. 11 Outside of the presentations, prior to the May 10 meeting, there were at least occasional inquiries about the LDBF's holdings, to which Hopkins provided answers. - 23 - and nevertheless failed to disclose it. (alterations in original) (quoting City of Phila. v. Fleming Cos., 264 F.3d 1245, 1265 (10th Cir. 2001))). Given the evidence weighing against the materiality of the portion of the slide to which the SEC objects, we cannot say there is substantial evidence that Hopkins's presentation of a slide containing sector breakdowns labeled typical, with notes of the actual sector breakdown ready at hand, constitutes a highly unreasonable [action], involving not merely simple, or even inexcusable[] negligence, but an extreme departure from the standards of ordinary care . . . that is either known to [Hopkins] or is so obvious [Hopkins] must have been aware of it. Ficken, 546 F.3d at 47–48 (second alteration in original) (quoting SEC v. Fife, 311 F.3d 1, 9–10 (1st Cir. 2002)). We conclude that the Commission abused its discretion in holding Hopkins liable under Section 17(a)(1), Section 10(b), and Rule 10b-5.