In the Courts

Since 2011, numerous SEC enforcement cases have applied Janus outside of the private cause of action context. The SEC has also acknowledged that some statements at issue in previous enforcement proceedings would not be considered to be “made” by the defendant under the Janus standard. But the Fourth Circuit significantly limited the Janus holding when it became the first federal appellate court to address the question of whether it applies to criminal charges.

In 2004, Thomas Prousalis Jr. was convicted of securities fraud, conspiracy to commit securities, wire and mail fraud, and failure to disclose interest of counsel in SEC registration materials. Prousalis, a securities lawyer who represented small companies seeking to raise capital, persuaded company management for Busybox, a small Internet company, to pursue an IPO of over $10 million. Prousalis prepared registration materials that Busybox signed and filed with the SEC that failed to accurately disclose that his compensation was contingent on the IPO's success. Further, when Prousalis learned that Busybox had not secured enough funds for its IPO, he orchestrated a secret scheme to recycle the IPO proceeds in order to complete the IPO by purchasing shares that were used to compensate himself and to pay salaries and bonuses to Busybox officers. Prousalis pled guilty to all counts. He was sentenced to 57 months in prison and one year of supervised release.

Relying on Janus , Prousalis filed a habeas petition under 28 U.S.C. ' 2241. Under ' 2241, he is only eligible for relief if the conduct for which he was originally convicted is no longer a crime. Prousalis argued in his appeal that the false statements he admitted to making no longer amount to a crime because the company, not he, was the “maker” of the false statements contained in the SEC registration materials.

In Prousalis v. Moore , the Fourth Circuit affirmed the dismissal of Prousalis' petition and held that Janus was inapplicable outside the context of a judicially created private cause of action. Judge J. Harvie Wilkinson III, writing on behalf of the majority, explained that Janus and other decisions construing the scope of an implied private cause of action under Rule 10b-5 were motivated by the Supreme Court's “general desire to circumscribe implied causes of action.” In contrast, criminal prosecutions for securities violations have been explicitly authorized by congressional action and raise none of the legitimacy, institutional competency, and judicial policymaking concerns attendant upon implied causes of action.

Further, the Fourth Circuit rejected Prousalis' argument that Janus rested primarily on a textual analysis of Rule 10b-5 that is equally applicable to the criminal context. According to the majority, the textual conclusion announced in a private right of action civil case are not “casually generalizable to the criminal context” and such an application would “disfigure the Court's analysis of civil actions by wrenching its conclusion from the distinctive contextual considerations that gave it birth.”

Chief Judge William Byrd Traxler, Jr., concurred in the result but for entirely different reasons. In his view, the term “'make' has the same meaning in the criminal context as it does in the context of a private right of action.” Prousalis' conduct, however, would be illegal under subsection 2(b) of Title 18, which imposes criminal liability on an individual who causes an intermediary to perform a criminal act. The combination of Prousalis' willful intent to defraud and Busybox's duty to not make material misrepresentations or omissions in their SEC registration materials amounts to illegal conduct.

In the Courts and Business Crimes Hotline were written by Kristina M. Portner and Associate Editor Matthew J. Alexander, respectively. Both are associates at Mayer Brown LLP, Washington, DC.

Fourth Circuit Limits Supreme Court's Janus Holding to Private Causes of Action

A recent decision by the U.S. Court of Appeals for the Fourth Circuit held that a 2011 U.S. Supreme Court decision limiting the scope of liability for making false and misleading statements under Section 10(b) of the Securities and Exchange Act and SEC Rule 10b-5 was not applicable to criminal prosecutions.

In Janus Capital Group Inc. v. First Derivative Traders, the Supreme Court limited the “maker” of a false statement to the person or entity with “ultimate authority” over the content and communication of the statement for the purposes of private lawsuits under Section 10(b) of the Securities and Exchange Act and Rule 10b-5. Absent control, an individual or entity can only suggest what to say, not “make” a statement. The Court held in Janus that an investment adviser who had taken part in drafting an allegedly misleading prospectus for a client could not be held liable in a private cause of action because the client, not the investment adviser himself, filed the prospectus with the SEC.

Since 2011, numerous SEC enforcement cases have applied Janus outside of the private cause of action context. The SEC has also acknowledged that some statements at issue in previous enforcement proceedings would not be considered to be “made” by the defendant under the Janus standard. But the Fourth Circuit significantly limited the Janus holding when it became the first federal appellate court to address the question of whether it applies to criminal charges.

In 2004, Thomas Prousalis Jr. was convicted of securities fraud, conspiracy to commit securities, wire and mail fraud, and failure to disclose interest of counsel in SEC registration materials. Prousalis, a securities lawyer who represented small companies seeking to raise capital, persuaded company management for Busybox, a small Internet company, to pursue an IPO of over $10 million. Prousalis prepared registration materials that Busybox signed and filed with the SEC that failed to accurately disclose that his compensation was contingent on the IPO's success. Further, when Prousalis learned that Busybox had not secured enough funds for its IPO, he orchestrated a secret scheme to recycle the IPO proceeds in order to complete the IPO by purchasing shares that were used to compensate himself and to pay salaries and bonuses to Busybox officers. Prousalis pled guilty to all counts. He was sentenced to 57 months in prison and one year of supervised release.

Relying on Janus , Prousalis filed a habeas petition under 28 U.S.C. ' 2241. Under ' 2241, he is only eligible for relief if the conduct for which he was originally convicted is no longer a crime. Prousalis argued in his appeal that the false statements he admitted to making no longer amount to a crime because the company, not he, was the “maker” of the false statements contained in the SEC registration materials.

In Prousalis v. Moore , the Fourth Circuit affirmed the dismissal of Prousalis' petition and held that Janus was inapplicable outside the context of a judicially created private cause of action. Judge J. Harvie Wilkinson III, writing on behalf of the majority, explained that Janus and other decisions construing the scope of an implied private cause of action under Rule 10b-5 were motivated by the Supreme Court's “general desire to circumscribe implied causes of action.” In contrast, criminal prosecutions for securities violations have been explicitly authorized by congressional action and raise none of the legitimacy, institutional competency, and judicial policymaking concerns attendant upon implied causes of action.

Further, the Fourth Circuit rejected Prousalis' argument that Janus rested primarily on a textual analysis of Rule 10b-5 that is equally applicable to the criminal context. According to the majority, the textual conclusion announced in a private right of action civil case are not “casually generalizable to the criminal context” and such an application would “disfigure the Court's analysis of civil actions by wrenching its conclusion from the distinctive contextual considerations that gave it birth.”

Chief Judge William Byrd Traxler, Jr., concurred in the result but for entirely different reasons. In his view, the term “'make' has the same meaning in the criminal context as it does in the context of a private right of action.” Prousalis' conduct, however, would be illegal under subsection 2(b) of Title 18, which imposes criminal liability on an individual who causes an intermediary to perform a criminal act. The combination of Prousalis' willful intent to defraud and Busybox's duty to not make material misrepresentations or omissions in their SEC registration materials amounts to illegal conduct.

In the Courts and Business Crimes Hotline were written by Kristina M. Portner and Associate Editor Matthew J. Alexander, respectively. Both are associates at Mayer Brown LLP, Washington, DC.