Supreme Court Backs SEC's Interpretation of Securities Fraud


Washington, D.C., June 3, 2002 -- The U.S. Supreme Court today ruled unanimously in favor of the Securities and Exchange Commission's longstanding interpretation of federal securities law, saying that the Commission properly alleged securities fraud in its complaint against a broker who emptied a client's investment account and used the proceeds for his own benefit.

"There is no place in the securities marketplace for brokers who sell their customers' securities in order to steal the proceeds," said SEC Chairman Harvey L. Pitt. "For over 50 years, the SEC has viewed this type of misconduct as securities fraud. In addition to referring such brokers for criminal prosecution, the SEC has imposed the toughest available civil sanctions on them, including kicking them out of the securities industry for good. We are gratified that the Supreme Court, by its unanimous ruling today, endorsed the SEC's longstanding position and enabled the SEC to continue aggressive enforcement action against brokers who abuse their clients' trust in securities transactions."

Broker Charles Zandford of Maryland had opened a joint investment account for an elderly client and his mentally retarded daughter. The client had intended the proceeds of the account to provide for his daughter, but, without the client's knowledge, Zandford sold the securities in the account and converted the proceeds to his personal use.

Based on Zandford's prior criminal conviction for wire fraud, the SEC won a federal civil judgment that Zandford's actions also violated antifraud provisions of federal securities laws. A federal appeals court later reversed the judgment and dismissed the case, reasoning that because Zandford's activities did not involve misrepresenting the value of a particular security, they were not "in connection with the purchase or sale of any security."

The Supreme Court today reversed the appeals court, ruling that the Commission is entitled to deference in its interpretation of the antifraud provisions of the Securities Exchange Act of 1934: "(N)either the SEC nor this Court has ever held that there must be a misrepresentation about the value of a particular security in order to run afoul of the Act." The Supreme Court sent the case back to the U.S. district court for further proceedings.

Last modified: 6/3/2002