Last Wednesday, Judge Rakoff explained why, back in February, he denied ex-Citigroup executive Brian Stoker’s motion to dismiss the SEC’s enforcement action against him. As we previously blogged, the SEC has charged Stoker with securities fraud in connection with a CDO that he allegedly helped to create and market. The SEC contends that Stoker failed to disclose to investors that Citigroup influenced the selection of the CDO’s assets and then shorted those assets. Judge Rakoff’s decision is significant in two respects. First, it holds that to state a claim under Section 17(a)(2) of the Securities Act of 1933, the SEC is required to allege only that a defendant “obtained money or property for his employer while acting as its agent” or, alternatively, that the defendant “personally obtained money indirectly from the fraud.” While acknowledging that the case law is “surprisingly sparse, and inconclusive” on this point, Judge Rakoff rejected Stoker’s argument that Section 17(a)(2) requires that a defendant must have personally obtained money or property by means of the alleged misleading statements or omissions.

Second, Judge Rakoff concluded that last year’s Supreme Court decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), supports an interpretation of Section 17(a)(2) that is broader than Section 10(b) of the Exchange Act of 1934.  Although courts in the Second Circuit have consistently construed the two statutes as requiring the same elements, Judge Rakoff rejected Stoker’s argument that, to state a claim under Section 17(a)(2), Janus required the SEC to allege that he “made” the allegedly misleading statements.  Focusing on the difference in language in the two statutes – Section 10(b) and Rule 10b-5 make it unlawful to “make an untrue statement,” whereas Section 17(a) prohibits a defendant from obtaining money “by means of” an untrue statement – Judge Rakoff concluded:

Although ‘to make a statement’ is the equivalent of ‘to state,’ to obtain money ‘by means of’ a statement plainly covers a broader range of activity.

According to Judge Rakoff, a defendant thus may be liable under 17(a)(2), but not under 10b-5, if “he obtains money or property by use of a false statement, whether prepared by himself or by another.” Judge Rakoff’s decision adds to a growing split among district courts.  A number of decisions, like Judge Rakoff’s, have held that Janus’ stringent standard for primary liability under Section 10(b) does not apply to claims under Section 17(a), while others, including one from the Southern District of New York, have concluded that it does apply.   This issue is likely headed to the Courts of Appeals and then the Supreme Court.