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United States Securities and Exchange Commission v. H. Thomas Fehn

Court of Appeals for the Ninth Circuit
97 F.3d 1276 (1996)
ELI5:

Rule of Law:

Section 104 of the Private Securities Litigation Reform Act of 1995 explicitly authorizes the Securities and Exchange Commission (SEC) to bring injunctive actions against any person who knowingly provides substantial assistance to another in violation of the Securities Exchange Act.


Facts:

  • CTI Technical, Inc., promoted by Edwin 'Bud' Wheeler, conducted an initial public offering (IPO) that was tainted by violations of securities laws, including the failure to disclose Wheeler as the company's promoter.
  • The Securities and Exchange Commission (SEC) began a formal investigation into CTI's IPO.
  • CTI and Wheeler retained attorney H. Thomas Fehn to represent them during the SEC investigation.
  • During his representation, Fehn became aware that CTI had failed to file required quarterly reports (Form 10-Q) and had not disclosed that its main product had been banned by the FDA.
  • Fehn advised Wheeler that CTI must file the reports and disclose the FDA ban, but Wheeler refused to disclose the company's potential civil liabilities stemming from the IPO violations.
  • A non-lawyer CTI employee drafted the Form 10-Qs, which contained material misrepresentations about Wheeler's role at the company and omitted the contingent liabilities.
  • Fehn reviewed, edited, and his law firm submitted these materially misleading Form 10-Qs to the SEC on behalf of CTI.

Procedural Posture:

  • The SEC filed a complaint in U.S. District Court against attorney H. Thomas Fehn, alleging he aided and abetted securities law violations.
  • Following a bench trial, the district court entered a final judgment against Fehn.
  • The district court issued an order permanently enjoining Fehn from future aiding and abetting of violations of specific sections of the Securities Exchange Act.
  • Fehn, as appellant, timely appealed the district court's judgment and injunction to the U.S. Court of Appeals for the Ninth Circuit, with the SEC as appellee.

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Issue:

Does Section 104 of the Private Securities Litigation Reform Act of 1995 authorize the Securities and Exchange Commission to bring an injunctive action against an individual for aiding and abetting violations of Section 10(b) and Section 15(d) of the Securities Exchange Act?


Opinions:

Majority - Hawkins, J.

Yes. Section 104 of the Private Securities Litigation Reform Act of 1995 authorizes the SEC to bring injunctive actions for aiding and abetting securities law violations. First, the court determined that although the Act was passed after the district court's judgment and while this appeal was pending, its principles should apply to this case. Applying the test from Landgraf v. USI Film Products, the court found the Act's application was not improperly retroactive because it authorized prospective relief (an injunction) and did not attach new legal consequences to Fehn's past conduct, as SEC authority to enjoin aiders and abettors was the law at the time of his actions. Second, the court held that the language of Section 104, which prohibits 'knowingly provid[ing] substantial assistance' to a primary violator, restored the pre-Central Bank standard for aiding and abetting liability. Applying this standard, the court found CTI and Wheeler committed primary violations by filing false reports, Fehn had actual knowledge of the misrepresentations and omissions, and he provided substantial assistance by editing and submitting the false documents. Fehn's professional advice was not a valid defense as it was not reasonable in light of well-established disclosure requirements.



Analysis:

This decision is significant as one of the first appellate interpretations of the Private Securities Litigation Reform Act of 1995 (PSLRA). It confirms that Congress, through the PSLRA, effectively reversed the impact of Central Bank of Denver v. First Interstate Bank of Denver on the SEC's enforcement powers. The ruling solidifies the SEC's authority to pursue secondary actors like lawyers and accountants who facilitate securities fraud, ensuring a critical enforcement tool remains available. This case establishes a strong precedent that securities professionals cannot hide behind a client's directives to avoid liability when they knowingly and substantially assist in misleading the investing public.

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