Eighth Circuit Applies Negligence Standard To SEC Enforcement Claims For Violations Of Section 14(A) And Rules 14a-9, 13b2-1 And 13b2-2

In SEC v. Das, No. 12-2780, 2013 U.S. App. LEXIS 15327 (8th Cir. July 29, 2013), the United States Court of Appeals for the Eighth Circuit affirmed the district court's delivery of jury instructions applying a negligence standard to alleged violations of Section 14(a) of the Securities Exchange Act of 1934 ("1934 Act") and Securities & Exchange Commission ("SEC") Rules 14a-9, 13b2-1 and 13b2-2. This decision indicates that it is becoming easier for corporate officers to be held liable for violations of Section 14(a), Rule 14a-9, Rule 13b2-1 and Rule 13b2-2.

The SEC brought a civil enforcement action against Stormy Dean ("Dean"), a former chief financial officer of infoUSA, alleging that he had violated certain provisions of the 1934 Act. The SEC investigated Dean in connection with allegations of related-party transactions and misuse of corporate assets. The SEC asserted seven claims including solicitation of false proxy statements in violation of Section 14(a) and Rule 14a-9, falsification of records or accounts in violation of Rule 13b2-1 and deception of auditors in violation of Rule 13b2-2.

Dean's trial was consolidated with the trial of Rajnish Das, another former CFO of infoUSA, and was tried before a jury. The United States District Court for the District of Nebraska instructed the jury that it must find Dean had violated Section 14(a) and Rule 14a-9 if the SEC had proven Dean had "solicited proxies by means of false or misleading proxy statements by negligently approving or signing publicly filed proxy statements." It also instructed the jury that it must find Dean had violated Rules 13b2-1 and 13b2-2 if he had not acted "reasonably" in connection with those allegations. After a few hours of deliberation, the jury found for the SEC on every claim.

Dean appealed, challenging the jury instructions. Dean argued that the SEC was required to prove scienter, or intent, for its Section 14(a) and Rule 14a-9 claims, and that it was required to prove he had "knowingly" violated Rules 13b2-1 and 13b2-2. The Eighth Circuit affirmed the district court's instruction on all four claims.

In affirming the instruction on the Section 14(a) and Rule 14a-9 claims, the Eighth Circuit held that scienter is not a requirement and that negligence is the proper standard to apply. The Court declined to extend its earlier opinion in SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011), which held scienter a requirement for a Rule 14a-9 claim against an outside...