SEC v. Zandford

Brief Fact Summary. Lacking William Wood’s knowledge, Zandford (Defendant), a stockbroker, traded in securities in the account of Wood and his daughter for Zandford’s own benefit. Following Zandford’s conviction on criminal charges for his conduct, the Securities and Exchange Commission (SEC) (Plaintiff) filed a civil complaint claiming that § 10 of the Securities and Exchange Act of 1934, and Rule 10b-5 thereunder, had been violated by Zandford by his participating in a scheme to deceive the Woods and misusing their securities without their awareness or approval.

Synopsis of Rule of Law. Where a stockbroker participates in a deceitful scheme in which he yields sales of his customer’s securities for his own benefit, such deceitfulbehavior is “in connection with the purchase or sale of any security†as defined by § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Facts. An elderly man, William Wood, was persuaded by Zandford, a stockbroker, to open a joint investment account for himself and his mentally retarded daughter. Zandford was given responsibility to oversee the account and general power of attorney to make securities transactions lacking prior approval. By the time Woods passed away a few years later, all the money he trusted with Zandford was had disappeared. Zandford was later indicted on federal wire fraud charges for, inter alia, vending securities in the Woods’ account and personally benefiting from the profits. The SEC filed a civil complaint in the same court, claiming that § 10 of the Securities and Exchange Act of 1934, and Rule 10b-5 thereunder, had been violated by Zandford by his participating in a scheme to deceive the Woods and misusing their securities without their awareness or approval. Following Zandford’s criminal case conviction, the district court ruled in favor of the SEC in the civil case. The court of appeals reversed, and the Supreme Court granted review.

Issue. Once a stockbroker participates in a deceitful scheme in which he yields sales of his client’s securities for his own benefit, is such deceitful behavior “in connection with the purchase or sale of any security†as defined by § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5?

Held. (Stevens, J.) Yes. Once a stockbroker participates in a deceitful scheme in which he yields sales of his client’s securities for his own benefit, such deceitful behavior is “in connection with the purchase or sale of any security†as defined by § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Presuming that the complaint’s accusations are accurate, Zandford’sbehavior was “in connection with the purchase or sale of any security.†The SEC constantly employed a vast interpretation of “in connection with the purchase or sale of any security,†upholding that a broker who receives money for securities that he does not intend to distribute, or who sells securities with an objective to misuse the profits, is in violation of § 10(b) and Rule 10b-5. This understanding of the statutes vague text in the framework of formal adjudication is permitted respect. The need for an inaccuracy regarding a specific security’s worth for a violation of the Act to occur has been never held by the Court or the SEC. Zandford’s claim that although misuse of the profits was deceitful it fails to make the connection with the totally legal sales, is denied because the securities sales and Zandford’s routines were not sovereign actions. Accepting the accusations as accurate, his scheme was furthered by each sale, and was deceitful because none of the sales were approved by, or revealed to, the Woods. Combined, the sales are property regarded as a course of business that functioned as a deception or dishonesty on a stockbroker’s client. Like in similar cases where the Court found a § 10(b) violation, here, the SEC complaintdefines a deceitful scheme in which the securities transactions and violations of fiduciary duty overlap. Those violations were consequently “in connection with†securities sales as defined by § 10(b). Reversed and remanded.

Discussion. In this case the court of appeals determined that Zandford’s scheme was not to control a specific security but instead to embezzle the Wood’s assets, and that the scheme had no connection to market integrity or investor knowledge. So, the court held that there was not a§ 10(b) violation and cautioned that todiscover a § 10(b) violation in every instance a crime dealing with securities would alter every violation of fiduciary duty into a federal securities violation. The Supreme Court opposed this expectation, and suggested many theoretical that disproved the court of appeals opinion – as where a broker misuses cash from a customer’s account.