A former racetrack operator charged with fraud by the SEC has asked the Supreme Court to consider whether a misrepresentation that does not affect a security's value can still be a violation of the antifraud provisions. In this case, the petitioner lied to induce a transaction involving the securities, but not about the value of the securities themselves. The petition urges the Court to clarify whether the "in connection with" requirement requires more than that a misrepresentation simply "touches" upon a securities transaction (Hall v. SEC, May 20, 2019).
Lied for loans. In 2015, the Commission charged Christopher J. Hall with fraudulently obtaining millions of dollars in margin loans from a brokerage firm where he and his company maintained accounts. At the time, Hall was the chairman and controlling shareholder of Call Now, Inc., a defunct publicly traded company that operated a horse race track in Texas. Between 1999 and 2008, Hall and Call Now borrowed millions of dollars using margin loans from their brokerage accounts and used the loan proceeds to operate the race track.
By 2009, the collateral in the accounts substantially diminished in value, so, on two occasions, the broker demanded additional collateral. To satisfy the margin calls, Hall offered to pledge Call Now stock to the broker, but claimed that he needed loans to unencumber shares that were pledged to other lenders. The brokerage firm then loaned Hall several million dollars, but he paid only one lender less than $1 million, and used the rest of the funds for his personal use.
Before the district court, Hall argued that the alleged misrepresentations were neither material or made "in connection with" the purchase or sale of a security, but this argument was rejected. In 2017, a jury found Hall, who admitted that he lied to get the loans, liable for securities fraud under both the Securities Act and the Exchange Act. A district court then denied the Commission's request for disgorgement, but ordered a permanent injunction against future violations, a 10-year officer and director bar, and a $225,000 civil monetary penalty; on reconsideration, disgorgement was also ordered. The 11th Circuit affirmed these sanctions.
Chance to clarify "in connection with" standard. In his petition for certiorari, Hall contends that his lies about the Call Now shares being encumbered was a "negotiating tactic." No misrepresentations were made about Call Now itself, or the value of its shares, he says. The Eleventh Circuit, however, "ignored" Hall’s arguments as to whether his conduct implicated the securities laws, stating that it lacked authority to consider Hall’s challenges to the sufficiency of the Commission’s evidence at trial because he had not filed a post-verdict motion for reconsideration or for a new trial in the district court. The first question presented by the petition concerns this issue: whether appellate courts have authority to consider challenges to issues of law raised in a pre-verdict FRCP 50(a) motion for judgment as a matter of law if the same challenges are not subsequently renewed in a post-verdict Rule 50(b) motion in the district court.
Regarding the securities issue, the petition asserts that this case presents the Court with the opportunity to clearly articulate the “in connection with” standard. According to Hall, there is ambiguity over the extent to which misrepresentations must affect the value of a security in order to satisfy the "in connection with" requirement and support a violation of the antifraud provisions. A Second Circuit decision, for example, concluded that where a misrepresentation involves a securities transaction but does not pertain to the security itself, there is no cause of action. The Eleventh Circuit, in contrast, has held prior to this case that the "in connection with" requirement is broad and that a misrepresentation does not need to be explicitly directed at the investing public or occur during the transaction. Indeed, the jury instructions below said that the requirement is met if the fraud "touches" upon the transaction.
The petition maintains that the Court has said (in Chadbourne & Parke LLP v. Troice (2014)) the “in connection with” requirement is not met unless it is material to a decision to buy or sell a security. In this case, Hall says, the misrepresentations had no impact on the brokerage's decision to accept the Call Now shares as collateral. The petition also took note of the Court's decision in 2002 in SEC v. Zandford, in which the Court concluded that the requirement was met when the fraud was directed at the securities themselves and coincided with their sales. The petition urges the Court to take up the case and articulate a standard stating that the fraud or misrepresentation must have a material effect on a party to buy or sell a security.
The petition is No. 18-1471.