Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 1 of 32 No. 13-6814 IN THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT THOMAS T. PROUSALIS, JR., v. Petitioner-Appellant, CHARLES E. MOORE, Senior U.S. Probation Officer, Defendant-Appellee. On Appeal from the United States District Court for the Eastern District of Virginia BRIEF FOR APPELLANT Scott P. Martin Counsel of Record GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 Telephone: (202) 955-8500 Facsimile: (202) 467-0539 Counsel for Appellant
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 2 of 32 TABLE OF CONTENTS Page INTRODUCTION... 1 JURISDICTIONAL STATEMENT... 2 STATUTORY AND REGULATORY PROVISIONS INVOLVED... 3 STATEMENT OF ISSUE PRESENTED FOR REVIEW... 3 STATEMENT OF THE CASE... 3 STATEMENT OF FACTS... 4 A. The Busybox IPO... 5 B. Mr. Prousalis s Conviction... 7 C. The Instant Habeas Petition... 8 SUMMARY OF ARGUMENT... 9 STANDARD OF REVIEW... 11 ARGUMENT... 11 Under The Supreme Court s Decision In Janus Capital Group, Inc. v. First Derivative Traders, Mr. Prousalis Did Not Make A False Statement For Purposes Of Rule 10b-5.... 13 A. The Janus Decision Constituted A Sweeping Change In the Substantive Law Governing Liability Under Rule 10b-5.... 15 B. Janus Applies Equally To Criminal Proceedings.... 20 C. Mr. Prousalis Did Not Make Any Of The Statements At Issue For Purposes of Rule 10b-5.... 23 CONCLUSION... 26 i
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 3 of 32 TABLE OF AUTHORITIES Cases Page(s) Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 191 (1994)... 17, 18, 22 First Derivative Traders v. Janus Capital Group Inc. (In re Mutual Funds Inv. Litig.), 566 F.3d 111 (4th Cir. 2009)... 14, 15, 16 In re DVI Inc. Sec. Litig., No. 03-5336, 2013 WL 56073 (E.D. Pa. Jan. 4, 2013)... 25 In re Jones, 226 F.3d 328 (4th Cir. 2000)... 10, 12 In re Vial, 115 F.3d 1192 (4th Cir. 1997)... 11 Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011)... passim Prousalis v. United States, 06 Civ. 12946, 2007 WL 2438422 (S.D. N.Y. Aug. 24, 2007)... 24 Rice v. Rivera, 617 F.3d 802 (4th Cir. 2000)... 11 SEC v. Boyd, No. 95-cv-03174, 2012 WL 1060034 (D. Colo. Mar. 29, 2012)... 25 SEC v. Carter, No. 10 C 6145, 2011 WL 5980966 (N.D. Ill. Nov. 28, 2011)... 22, 25 SEC v. Daifotis, No. C 11-00137, 2011 WL 4714250 (N.D. Cal. Oct. 7, 2011)... 22 SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011)... 21, 22 ii
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 4 of 32 TABLE OF AUTHORITIES (continued) Page(s) SEC v. Mannion, No. 10-cv-3374, 2013 WL 1291621 (N.D. Ga. Mar. 25, 2013)... 21 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008)... 18, 19, 22 Yi v. Fed. Bureau of Prisons, 412 F.3d 526 (4th Cir, 2005)... 11 Statutes 15 U.S.C. 78j... 3, 4, 7, 13 18 U.S.C. 371... 7 28 U.S.C. 1291... 2 28 U.S.C. 2241... passim 28 U.S.C. 2255... passim Rules 17 C.F.R. 228.509... 7 17 C.F.R. 240.10b-5... passim Fed. R. App. P. 4... 2 iii
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 5 of 32 INTRODUCTION In December 2003, Petitioner-Appellant Thomas T. Prousalis, Jr. was charged with making false statements in certain financial documents filed by Mr. Prousalis s client, Busybox.com, Inc., with the United States Securities and Exchange Commission ( SEC ). Mr. Prousalis pleaded guilty to three counts involving securities fraud and served more than three years in federal prison before being placed on supervised release in Richmond, Virginia. In June 2011, however, the Supreme Court of the United States fundamentally changed the scope of liability for securities fraud under the SEC s Rule 10b- 5(b). In Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Supreme Court held for the first time that a person or entity that merely assisted with the preparation of materials filed with the SEC cannot be held liable as the maker of any allegedly misleading statements in those filings. Instead, only the person or entity with ultimate authority over the statements typically, the securities issuer itself is their maker. In light of the Janus decision, the core conduct underlying Mr. Prousalis s conviction is no longer criminal. Mr. Prousalis petitioned the United States District Court for the Eastern District of Virginia for a writ of habeas corpus pursuant to 28 U.S.C. 2241. The government conceded that, if Janus applies to criminal convictions, then Mr. Prousalis is entitled to relief. Yet the district court nonetheless dismissed 1
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 6 of 32 Mr. Prousalis s petition on the ground that Janus is applicable only to private civil suits, and not to criminal cases. That conclusion fundamentally misunderstands the Janus decision, which rests on an interpretation of Rule 10b-5 s text language that applies equally to criminal and civil cases. This Court should conclude that Janus applies to criminal cases and thus reverse the judgment below. JURISDICTIONAL STATEMENT The district court had jurisdiction over Mr. Prousalis s petition for a writ of habeas corpus pursuant to 28 U.S.C. 2241, which is available when the remedy provided by 28 U.S.C. 2255 is inadequate or ineffective. As discussed in more detail below, Mr. Prousalis demonstrated the inadequacy and ineffectiveness of Section 2255 by showing that the substantive law had changed following his conviction, and that the conduct for which he was convicted is no longer criminal. See infra at 11 13. The district court, however, concluded there had been no relevant change in law, deemed Mr. Prousalis s Section 2241 petition as an unauthorized, successive [Section] 2255 motion, and dismissed it. J.A. 557. This Court has jurisdiction over the final judgment of the district court pursuant to 28 U.S.C. 1291. The district court issued a final order dismissing the petition on March 20, 2013. See J.A. 559. Mr. Prousalis filed a timely notice of appeal on May 16, 2013. See id. at 560; see also Fed. R. App. P. 4(a)(1)(B). 2
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 7 of 32 provides: STATUTORY AND REGULATORY PROVISIONS INVOLVED Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange... [t]o use or employ, in connection with the purchase or sale of any security... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Securities and Exchange Commission Rule 10b-5(b), 17 C.F.R. 240.10b-5(b), provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading[.] STATEMENT OF ISSUE PRESENTED FOR REVIEW Whether the Supreme Court s decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), applies to criminal cases alleging securities fraud through violations of the SEC s Rule 10b-5. STATEMENT OF THE CASE This appeal stems from the dismissal of a habeas petition, filed pursuant to 28 U.S.C. 2241, through which Mr. Prousalis sought to challenge his conviction for securities fraud and other offenses based on the Supreme Court s intervening 3
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 8 of 32 decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011). As the district court acknowledged below, Section 2241 petitions are appropriately used to raise a change in law that renders the conduct at issue in the conviction no longer criminal. See J.A. 546 47. The Janus decision limited the scope of conduct that can give rise to securities fraud, and Mr. Prousalis argued in his petition that the decision also applies to criminal cases like his. The district court, however, rejected this argument, concluding instead that the Supreme Court had no intention of limiting criminal liability for securities fraud violations in Janus. J.A. 556. The court accordingly ordered Mr. Prousalis s Section 2241 petition to be dismissed. See J.A. 559. STATEMENT OF FACTS Mr. Prousalis pleaded guilty in the United States District Court for the Southern District of New York for making untrue statements of material fact in financial statements filed with the SEC and failing to disclose the interest of counsel in connection with an offering under Securities Regulation S B. See J.A. 251 56; see also id. at 364. The counts included alleged securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and the SEC s Rule 10b-5, and were based on statements contained in SEC submissions by Mr. Prousalis s client. Years after Mr. Prousalis s conviction, the Supreme Court of the United States limited the scope of Rule 10b-5 in Janus Capital Group, Inc. 4
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 9 of 32 v. First Derivative Traders, 131 S. Ct. 2296 (2011). Mr. Prousalis sought habeas relief under 28 U.S.C. 2241 on the ground that, under Janus, he did not make any of the false statements at issue in his conviction and therefore that he cannot be liable for securities fraud based on those false statements. A. The Busybox IPO Mr. Prousalis is a former Air Force pilot and securities attorney, who was a member in good standing of the District of Columbia bar for more than 25 years before his conviction. See J.A. 226; see also id. at 59. Busybox was an Internet company originally based in San Francisco, California. See id. at 225. On December 9, 1998, Busybox retained Mr. Prousalis to assist the company in the preparation of an initial public offering ( IPO ) registration statement and prospectus. See J.A. 61-64. The retainer agreement provided that Busybox would compensate Mr. Prousalis in the amount of $375,000 or 7.5% of the gross proceeds of the IPO whichever was greater upon the IPO s closing. See id. at 62, 228. Busybox also retained Barron Chase Securities Inc. ( Barron Chase ) to provide a variety of investment banking services, including raising money for Busybox through both public and private securities offerings. See id. at 228. Mr. Prousalis prepared various registration materials for Busybox s IPO, which Busybox in turn filed with the SEC; these materials were signed by Busybox directors and officers. See J.A. 229. The materials explained that Busybox 5
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 10 of 32 would raise $12,812,500 in gross proceeds through the IPO, and that the net proceeds of the offering would be $10,559,375; they also reflected legal fees of $375,000. See ibid. Barron Chase agreed to a firm commitment underwriting in which it committed to purchase all of the securities offered by this prospectus, and would then sell those shares to the public. See id. at 230. The government alleged, however, that Barron Chase was unable to find sufficient investors for the entire amount of the shares and unwilling to commit its own capital to complete the deal. See id. at 231. The government alleged that Mr. Prousalis entered into an agreement with the head of Barron Chase to conceal the bank s inability to complete the IPO. See J.A. 231 32. According to the government, they agreed to use the IPO proceeds to pay Mr. Prousalis s fee and to purchase shares for Busybox officers and directors. See id. at 233. On June 26, 2000, Barron Chase signed an underwriting agreement with Busybox, the IPO became effective, and Busybox shares were listed on the NASDAQ Small Cap Market. See id. at 234. The government maintains that, two days later, Mr. Prousalis informed the Busybox board that Barron Chase could not complete its commitment, but indicated that he could complete the IPO by accepting his fee in Busybox shares and that the officers and directors should accept future bonuses in the form of Busybox shares, all funded by the IPO proceeds. See J.A. 234. This purported use of the 6
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 11 of 32 IPO proceeds was not disclosed in the registration materials that Busybox filed with the SEC. See id. at 235. The government alleged that Mr. Prousalis obtained $1,255,625 in Busybox shares funded by IPO proceeds. See id. at 237. Mr. Prousalis allegedly sold his shares in Busybox for approximately $750,000 in September 2000. See J.A. 237. Busybox subsequently experienced financial distress, was delisted by NASDAQ in April 2011, and filed for bankruptcy protection thereafter. See ibid. B. Mr. Prousalis s Conviction On December 29, 2003, the government indicted Mr. Prousalis in the Southern District of New York on charges of conspiracy to commit securities fraud, in violation of 18 U.S.C. 371, and securities fraud, in violation of 15 U.S.C. 78j(b) and 17 C.F.R. 240.10b-5. See United States v. Prousalis, 03 Cr. 1509 (S.D.N.Y.). On May 10, 2004, the government filed a superseding indictment under seal, which included the first two counts in the original indictment and a third count for failure to disclose interest of counsel in the registration materials filed with the SEC, allegedly in violation of 17 C.F.R. 228.509. J.A. 224 50. The government claimed that Mr. Prousalis committed these violations because the full amount he stood to earn was purportedly not disclosed in the registration materials that had been filed with the SEC by Busybox. 7
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 12 of 32 Trial commenced on June 7, 2004. Following several days of testimony, Mr. Prousalis entered into a plea agreement with the government on June 15, 2004, in which he agreed to plead guilty to all three counts of the superseding indictment. See J.A. 250 56. The district court held a sentencing hearing on October 28, 2004, and sentenced Mr. Prousalis to 57 months imprisonment and three years of supervised release. See id. at 356 58, 364 69. In addition, he was ordered to pay restitution in the amount of $12,800,000. In January 2005, Mr. Prousalis appealed his conviction and sentence to the United States Court of Appeals for the Second Circuit, which dismissed the appeal in light of the appeal waiver in Mr. Prousalis s plea agreement. See United States v. Prousalis, No. 05-0671-cr (2d Cir. Dec. 29, 2005). On November 6, 2006, Mr. Prousalis filed a habeas petition pursuant to 28 U.S.C. 2255, seeking to vacate his judgment based on ineffective assistance of counsel. The district court denied Mr. Prousalis s petition on August 24, 2007, see J.A. 455 66, and the Second Circuit affirmed, see Prousalis v. United States, No. 08-0372-pr (2d Cir. July 2, 2008), cert. denied, No. 08-5876 (2008). C. The Instant Habeas Petition On June 13, 2011, the Supreme Court of the United States decided Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), which announced for the first time that a service provider who merely assists with the prep- 8
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 13 of 32 aration of documents filed with the SEC is not the maker of those documents under Rule 10b-5. On February 21, 2012, Mr. Prousalis filed a petition for a writ of habeas corpus seeking to vacate his convictions pursuant to 28 U.S.C. 2241. The government, representing the probation officer named as respondent in the petition, moved to dismiss. The government conceded that Mr. Prousalis would be entitled to relief under Section 2241 if the holding of Janus were applied to [Mr. Prousalis s] convictions such that the conduct of which he was convicted was determined not to be criminal. J.A. 410. But, the government insisted, Janus is inapplicable to criminal conduct. Ibid. The district court agreed with the government. The court emphasized that Janus arose in the civil context, where the Supreme Court has imposed limits on the ability of private plaintiffs to invoke an implied right of action under Rule 10b- 5. J.A. 555. While the Supreme Court s decision interpreted the text of Rule 10b- 5, which applies equally in civil and criminal cases, the district court believed that the Supreme Court had no intention of limiting liability for securities fraud in Janus. Id. at 556. Instead, the decision expresses the Court s concern with expanding an implied civil cause of action. Ibid. SUMMARY OF ARGUMENT Mr. Prousalis s petition for a writ of habeas corpus should be granted. The conduct underlying his convictions was the submission of allegedly false and mis- 9
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 14 of 32 leading registration statements to the SEC, but the Supreme Court has subsequently clarified that Mr. Prousalis is not a maker of those statements for purposes of securities-fraud liability. Instead, Busybox itself had ultimate authority over the statements, and thus only Busybox can be held liable as their maker under Rule 10b-5. Section 2241 provides a habeas remedy when Section 2255 proves inadequate or ineffective to test the legality of a detention. As the district court recognized below, Section 2241 is available when, after the petitioner s direct appeal and first Section 2255 motion, the substantive law has changed such that the conduct for which the petitioner was convicted is no longer criminal. See In re Jones, 226 F.3d 328, 333 34 (4th Cir. 2000). That is precisely the case here. In Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Supreme Court held that a service provider who helps prepare a statement for filing with the SEC cannot be found to have made that statement for purposes of Rule 10b-5 unless the service provider had ultimate authority over the statement s content and delivery. The Court did not limit this ruling to private civil actions, but instead clarified the meaning of Rule 10b-5 whose language applies equally in civil and criminal actions. Mr. Prousalis had neither control nor authority over the statements made by Busybox, and he therefore cannot have made those statements for purposes of 10
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 15 of 32 securities-fraud liability. The government s allegations and Mr. Prousalis s conviction rest fundamentally on the assumption that Mr. Prousalis was responsible for Busybox s statements, but that assumption is untenable after Janus. In the aftermath of Janus, courts have routinely concluded that attorneys like Mr. Prousalis who prepare allegedly false statements for an issuing company did not make those statements. The same conclusion should apply here. STANDARD OF REVIEW This court reviews de novo the district court s order dismissing Mr. Prousalis s petition under 28 U.S.C. 2241. See Yi v. Fed. Bureau of Prisons, 412 F.3d 526, 530 (4th Cir. 2005). ARGUMENT Title 28 of the United States Code provides two independent routes for bringing a collateral challenge to a federal conviction. Under 28 U.S.C. 2255, a federal prisoner may challenge the conviction and sentence through a motion filed in the sentencing court. See In re Vial, 115 F.3d 1192, 1194 (4th Cir. 1997). When Section 2255 proves inadequate or ineffective to test the legality of a detention, then a petitioner may pursue habeas relief under [28 U.S.C. ] 2241. Rice v. Rivera, 617 F.3d 802, 807 (4th Cir. 2000); see also 28 U.S.C. 2255(e). Section 2241 provides that [w]rits of habeas corpus may be granted by the Supreme 11
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 16 of 32 Court, any justice thereof, the district courts and any circuit judge within their respective jurisdictions. 28 U.S.C. 2241(a). This Court has held that Section 2255 is inadequate and ineffective to test the legality of a conviction, and thus the petitioner may proceed under Section 2241, under the following circumstances: (1) at the time of conviction, settled law of this circuit or the Supreme Court established the legality of the conviction; (2) subsequent to the prisoner s direct appeal and first Section 2255 motion, the substantive law changed such that the conduct for which the prisoner was convicted is deemed not to be criminal; and (3) the prisoner cannot satisfy the gatekeeping provisions of Section 2255 because the new rule is not one of constitutional law. In re Jones, 226 F.3d 328, 333 34 (4th Cir. 2000) (emphasis added). Mr. Prousalis satisfies these requirements because, following his conviction and Section 2255 motion, the Supreme Court concluded in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), that the conduct in which he engaged could not amount to securities fraud. As the government conceded below, [a]t the time of [Mr.] Prousalis s conviction, settled law established the legality of his convictions. J.A. 410. Indeed, it was not until the Supreme Court sharply limited the scope of liability for securities fraud in Janus almost four years after the denial of [Mr. Prousalis s] first [Section] 2255 petition, J.A. 410 that Mr. Prousalis s conduct was deemed not to be criminal, Jones, 226 F.3d at 334. And the Janus decision did not involve an 12
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 17 of 32 issue of constitutional law, but instead the proper interpretation of the securities laws. For these reasons, the government has acknowledged that, if the holding of Janus applied to [Mr. Prousalis s] convictions so that the conduct of which he was convicted was determined not to be criminal, [Mr. Prousalis] could be eligible for relief under [Section] 2241. J.A. 410. The district court nonetheless denied relief based on its conclusion that the Supreme Court s decision in Janus was categorically inapplicable to criminal liability for securities fraud. J.A. 555. That decision rests on a misinterpretation of Janus that, once corrected, reveals that Mr. Prousalis stands convicted of conduct that is no longer criminal. The district court erred in dismissing Mr. Prousalis s habeas petition and should instead have granted a writ of habeas corpus. Under The Supreme Court s Decision In Janus Capital Group, Inc. v. First Derivative Traders, Mr. Prousalis Did Not Make A False Statement For Purposes Of Rule 10b-5. Section 10(b) of the Exchange Act provides that it is unlawful for any person... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange, any manipulative or deceptive device or contrivance. 15 U.S.C. 78j(b). The SEC has implemented Section 10(b) in its Rule 10b-5, which (as relevant here) makes it unlawful for any person... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances 13
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 18 of 32 under which they were made, not misleading. 17 C.F.R. 240.10b-5(b). The language of Rule 10b-5 is the same whether it is invoked by a private party in a civil suit, by the SEC in the administrative context, or by the Department of Justice in a criminal action. See ibid. In Janus, the Supreme Court concluded that a service provider cannot be held liable under Rule 10b-5 for allegedly misleading language in its client s prospectuses. Instead, the Court made clear that the proper defendant under Rule 10b- 5 is the maker of the statement that is, the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. 131 S. Ct. at 2302. The principal defendant in the Janus case was a registered investment adviser that allegedly helped draft the prospectuses issued by its mutual-fund clients; this Court had found such participat[ion] to be a sufficient basis for imposing securities-fraud liability. First Derivative Traders v. Janus Capital Group Inc. (In re Mutual Funds Inv. Litig.), 566 F.3d 111, 121 (4th Cir. 2009). The Supreme Court disagreed, holding for the first time that [t]he statements in the [mutual-fund] prospectuses were made by the mutual funds, not by the adviser. 131 S. Ct. at 2305. Although Janus arose in the context of a private lawsuit for securities fraud, its interpretation of the critical word make in Rule 10b-5 applies equally to criminal cases and announced a sharp departure from previous interpretations of the 14
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 19 of 32 provision. Critically, the decision establishes that Mr. Prousalis, a service provider to Busybox, did not make any of the statements contained in Busybox s registration materials filed with the SEC. A. The Janus Decision Constituted A Sweeping Change In the Substantive Law Governing Liability Under Rule 10b-5. The principal defendant in the Janus litigation was Janus Capital Management LLC, an investment adviser registered under the Investment Advisers Act of 1940 that, among other things, advises the Janus family of mutual funds. See 131 S. Ct. at 2299. The Janus Funds are registered as investment companies under the Investment Company Act of 1940 and offer securities to the public pursuant to offering documents. See id. at 2299 300. First Derivative Traders was proposed representative of a class of plaintiffs who alleged that the Janus Funds prospectuses were misleading and that the investment adviser to the Funds could be held liable for those statements because it had purportedly assisted in drafting them. See id. at 2300 01. The district court dismissed the complaint, but this Court reversed. It concluded that the complaint s allegations were sufficient to state a claim under Rule 10b-5(b), which makes it unlawful [t]o make any untrue statement of a material fact, 17 C.F.R. 240.10b-5(b), because the clear essence of plaintiffs complaint is that the investment adviser helped draft the misleading prospectuses, First Derivative, 566 F.3d at 121. According to this Court, First Derivative had 15
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 20 of 32 sufficiently alleged that the adviser, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents. Ibid. (first emphasis added). 1. The Supreme Court granted review and reversed this Court s judgment. The Court focused its opinion on the relevant language of Rule 10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange... [t]o make any untrue statement of a material fact... in connection with the purchase or sale of any security. 17 C.F.R. 240.10b-5(b) (emphasis added). For purposes of Rule 10b-5, the Court held, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Janus, 131 S. Ct. at 2302. Without control, a person or entity can merely suggest what to say, not make a statement in its own right, and therefore [o]ne who prepares or publishes a statement on behalf of another is not its maker. Id. (quoting 17 C.F.R. 240.10b-5(b)). And in the ordinary case, the Court noted, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by and only by the party to whom it is attributed. Ibid. The Court explained that the dividing line between makers of statements and non-makers might best be exemplified by the relationship between a speechwriter 16
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 21 of 32 and a speaker. Janus, 131 S. Ct. at 2302. Even when a speechwriter drafts a speech, the Court explained, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit or blame for what is ultimately said. Ibid. The Court noted that Rule 10b-5 contains the phrase directly or indirectly. 17 C.F.R. 240.10b-5. But that language merely clarifies that as long as a statement is made, it does not matter whether the statement was communicated directly or indirectly to the recipient. Janus, 131 S. Ct. at 2305 n.11. The Court declined to define precisely what it means to communicate a made statement indirectly because none of the statements in the prospectuses were attributed, explicitly or implicitly, to [the investment adviser]. Ibid. Without attribution, there is no indication that the mutual funds were quoting or otherwise repeating a statement originally made by [the adviser]. Ibid. More may be required to find that a person or entity made a statement indirectly, the Court concluded, but attribution is necessary. Ibid. 2. The Supreme Court emphasized that its holding accords with the narrow scope that we must give the implied private right of action under Rule 10b-5. Janus, 131 S. Ct. at 2303. Indeed, Janus was the third in a series of cases in which the Court declined to extend the private right of action beyond primary actors. In the first case, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 17
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 22 of 32 N.A., the Court held that Section 10(b) of the Exchange Act, under which Rule 10b-5 was promulgated, does not prohibit aiding and abetting, and thus that secondary actors cannot be held liable in such suits unless all of the requirements for primary liability... are met. 511 U.S. 164, 191 (1994). And in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the Court affirmed the dismissal of a lawsuit against defendants that had allegedly agreed to arrangements that allowed [another] company to mislead its auditor and issue a misleading financial statement, because nothing [the defendants] did made it necessary or inevitable for [the company] to record the transactions as it did. 552 U.S. 148, 152 53, 161 (2008). [F]or Central Bank to have any meaning, the Court explained in Janus, there must be some distinction between those who are primarily liable (and thus may be pursued in private suits) and those who are secondarily liable (and thus may not be pursued in private suits). Janus, 131 S. Ct. at 2302. If persons or entities without control over the content of the statement could be considered primary violators who made the statement, however, then aiders and abettors would be almost nonexistent. Id. at 2302. The Court therefore drew a clean line separating primary from secondary liability: [T]he maker is the person or entity with ultimate authority over a statement and others are not. Id. at 2302 n.6. 18
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 23 of 32 The Court noted that this interpretation is further supported by our recent decision in Stoneridge. Janus, 131 S. Ct. at 2303. Without authority over the content of the statement and whether and how to communicate it, it is not necessary or inevitable that any falsehood will be contained in the statement, as the Court had required in Stoneridge. Ibid. (quoting Stoneridge, 552 U.S. at 161). Thus, the Court emphasized, it will not expand liability beyond the person or entity that ultimately has authority over a false statement. Ibid. 3. Applying this test, the Court concluded that the investment adviser did not make any of the statements in the [Janus Funds] prospectuses because its alleged involve[ment] in preparing the prospectuses was subject to the ultimate control of the Janus Funds. Janus, 131 S. Ct. at 2304 05. There is no allegation that [the adviser] in fact filed the prospectuses and falsely attributed them to Janus Investment Fund, the Court noted, [n]or did anything on the face of the prospectuses indicate that any statements therein came from [the adviser] rather than Janus Investment Fund a legally independent entity with its own board of trustees. Id. at 2305. Although [the investment adviser], like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, [the adviser] itself did not make those statements for purposes of Rule 10b-5 because Janus Investment Fund did. Id. at 2304 05 (quoting 17 C.F.R. 240.10b-5(b)). 19
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 24 of 32 The Supreme Court s decision provides a clean line between those defendants whose conduct amounts to making a statement for purposes of Rule 10b-5 liability and those whose conduct falls short of that standard. Janus, 131 S. Ct. at 2302 n.6. Although the lower courts, including this one, had previously understood the scope of liability to sweep more broadly, it is now clear that an entire category of persons and entities who provide services to public companies bankers, lawyers, accountants, financial advisers, and others are not the maker[s] of the statements contained in their clients securities filings. And that is true even if, as was alleged in Janus, the service provider played a role in drafting those statements: The issuer, not the service provider, has ultimate authority over the statement[s] in its offering documents, and it is therefore the only maker of [those] statement[s] under the Supreme Court s reasoning. Janus, 131 S. Ct. at 2302. B. Janus Applies Equally To Criminal Proceedings. The district court did not dispute that the Janus decision announced a change in substantive law governing liability under Rule 10b-5, at least with respect to private lawsuits for securities fraud. Instead, it reasoned that the decision stemmed from a line of decisions limiting judicially created private causes of action and involved no discussion of criminal liability for securities fraud. J.A. 555 (emphasis added). The Supreme Court had no intention of limiting criminal 20
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 25 of 32 liability for securities fraud, the district court concluded, but rather expressed its concern with expanding an implied civil cause of action. Id. at 556. The district court s crabbed reading of Janus cannot, however, be squared with the decision. The Supreme Court squarely held that, [f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Janus, 131 S. Ct. at 2302 (emphasis added). The Court understand that the issue before it was how to interpret the phrase mak[e] any untrue statement of a material fact in Rule 10b-5, and the Court resolved that issue by concluding that as a textual matter the investment adviser did not make the statements in the [Janus Funds ] prospectuses. Id. at 2299 (quoting 17 C.F.R. 240.10b-5). But the text of Rule 10b-5 does not draw any distinction between civil and criminal proceedings, and there is no basis for interpreting the word make to mean one thing in the latter and something else in the former. In a series of decisions issued after Janus, district courts across the country have recognized that Section 10(b) liability can be imposed only on the person or entity that makes a misrepresentation, not on affiliated persons or entities, and have applied this rule even in enforcement proceedings brought by the government. SEC v. Mannion, No. 10-cv-3374, 2013 WL 1291621, at *15 (N.D. Ga. Mar. 25, 2013) (rejecting SEC claims under Rule 10b-5); see also, e.g., SEC v. 21
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 26 of 32 Kelly, 817 F. Supp. 2d 340, 341 42 (S.D.N.Y. 2011) (same); SEC v. Carter, No. 10 C 6145, 2011 WL 5980966, at *2 (N.D. Ill. Nov. 28, 2011) (applying Janus to enforcement action but rejecting motion to dismiss because the defendant had ultimate authority over the statements at issue). Indeed, even the SEC itself has acknowledged that some of the statements [at issue in previous enforcement proceedings] would be considered made by defendants under the Janus standard, and some would not. SEC v. Daifotis, No. C 11-00137, 2011 WL 4714250, at *4 (N.D. Cal. Oct. 7, 2011). As these cases correctly recognize, the holding in Janus involves the proper interpretation of Rule 10b-5, and that interpretation controls in all Rule 10b-5 cases. To be sure, the Janus decision also concluded that the narrow scope of the private right of action, along with the previous decisions in Central Bank and Stoneridge, supported its interpretation of Rule 10b-5. But the Court did not purport to rely on these grounds as independent reasons for rejecting liability; instead, it explained that they supported the interpretation of Rule 10b-5 that the Court had adopted. 131 S. Ct. at 2302. Having concluded as a textual matter that the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it, the Court explained that [t]his rule follows from Central Bank and that [t]his interpretation is further supported by [the] recent decision in Stoneridge. Id. at 2302 03. 22
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 27 of 32 The fact that the Court s holding also accords with the narrow scope that we must give the implied private right of action (Janus, 131 S. Ct. at 2303) does not mean, as the district court assumed, that the holding was justified only on that basis. Rather, the Court s opinion makes clear that [t]he phrase at issue in Rule 10b-5, [t]o make any... statement, is... the approximate equivalent of to state. Id. at 2302. If a particular individual did not make a statement under Rule 10b-5, that is true regardless of whether the issue arises in a civil suit or a prosecution. C. Mr. Prousalis Did Not Make Any Of The Statements At Issue For Purposes of Rule 10b-5. As the Supreme Court has now interpreted the term in Rule 10b-5, Mr. Prousalis did not make any statement in Busybox s registration materials. Janus requires that the maker of the statement have ultimate authority over the statement, including its content and whether and how to communicate it. Janus, 131 S. Ct. at 2302. But each of the statements at issue in the registration materials were made by Busybox. Nowhere in the record is it alleged let alone established that Mr. Prousalis had any ultimate authority over those materials or could decide whether and how they were communicated. The indictment does not allege that Mr. Prousalis himself made any statements to investors, but instead that he well knew that the registration materials supposedly contained false statements. J.A. 238, 243. And while Mr. Prousalis pleaded guilty to not disclos[ing] 23
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 28 of 32 the true terms of [his] retainer agreement in the registration statement filed with the SEC, J.A. 300, the Supreme Court has now made clear that any disclosures or non-disclosures in those materials were made by Busybox the entity required to file the financial documents with the SEC and that is identified in the registration materials as the filer not by Mr. Prousalis. As the Southern District of New York summarized the trial evidence in denying Mr. Prousalis s Section 2255 petition, he worked on the first draft of the registration statement and allegedly misdescribed his retainer agreement in that document before the Busybox CEO corrected it to describe it accurately in the registration statement. Prousalis v. United States, 06 Civ. 12946, 2007 WL 2438422, at *6 (S.D.N.Y. Aug. 24, 2007) (J.A. 458). But Janus holds that drafting SEC filings is not equivalent to making them: [T]his assistance, subject to the ultimate control of [Busybox], does not mean that [Mr. Prousalis] made any statement in the [registration statement]. Janus, 131 S. Ct. at 2305. And that fact that the CEO was able to correc[t] (Prousalis, 2007 WL 2438422) the registration statement demonstrates that Mr. Prousalis did not have ultimate authority over that document. Consistent with this analysis, a number of courts have declined after Janus to impose liability on attorneys who aided in preparing documents but did not actually make the allegedly misleading statements contained in those documents. 24
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 29 of 32 Under Janus, one court reasoned, an attorney who prepares a false statement to be disseminated to investors can be liable for the contents of that statement if the attorney has the ultimate authority over the contents and dissemination of the statement, but not where the attorney is simply preparing the statement at the direction of a client who is controlling the contents of that statement. SEC v. Boyd, No. 95-cv-03174, 2012 WL 1060034, at *7 (D. Colo. Mar. 29, 2012); see also In re DVI Inc. Sec. Litig., No. 03-5336, 2013 WL 56073, at *7 *8 (E.D. Pa. Jan. 4, 2013) (holding that, under Janus, a law firm was not responsible for material misstatements made in its client s public filings even if it participated in the drafting of the documents); Carter, 2011 WL 5980966, at *2 ( The corporate attorney and the director are, in contrast, the speechwriters, who wrote the releases (allegedly at defendant s instigation), but would not be blamed for their contents. ). Because Mr. Prousalis did not make any of the statements in Busybox s registration statement, he cannot be held liable under Rule 10b-5 on that basis. Under a plain application of the Janus decision, this Court should conclude that Mr. Prousalis pleaded guilty based on conduct that is no longer criminal. 25
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 30 of 32 CONCLUSION For the foregoing reasons, this Court should reverse the judgment below and remand with instructions to grant Mr. Prousalis s petition for a writ of habeas corpus pursuant to 28 U.S.C. 2241. Respectfully submitted, August 26, 2013 /s/ Scott P. Martin Scott P. Martin Counsel of Record GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 Telephone: (202) 955-8500 Facsimile: (202) 530-4238 Counsel for Petitioner 26
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 31 of 32 CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS, AND TYPE STYLE REQUIREMENTS 1. This brief complies with the type-volume limitation of Federal Rule of Appellate Procedure 32(a)(7)(B) because it contains 6,115 words, as determined by the word-count function of Microsoft Word 2010, excluding the parts of the brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii). 2. This brief complies with the typeface requirements of Federal Rule of Appellate Procedure 32(a)(5) and the type style requirements of Federal Rule of Appellate Procedure 32(a)(6) because it has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in 14-point Times New Roman font. /s/ Scott P. Martin Scott P. Martin GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 Dated: August 26, 2013
Appeal: 13-6814 Doc: 24 Filed: 08/26/2013 Pg: 32 of 32 CERTIFICATE OF SERVICE I hereby certify that on August 26, 2013, an electronic copy of the foregoing Brief for Appellant was filed with the Clerk of Court for the United States Court of Appeals for the Fourth Circuit using the appellate CM/ECF system. I further certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the appellate CM/ECF system. /s/ Scott P. Martin Scott P. Martin GIBSON, DUNN & CRUTCHER LLP 1050 Connecticut Avenue, N.W. Washington, D.C. 20036