VanCook v. SEC: Violating Rule 10b-5 through Inaccurate Time Stamps

In VanCook v. Securities & Exchange Commission, 2011 U.S. App. LEXIS 16355 (2d Cir. August 8, 2011), the Second Circuit Court of Appeals affirmed the Security and Exchange Commission’s (SEC) finding that New York stockbroker John Joseph VanCook willfully violated Section 10(b), Rule 10b-5, Section 17(a)(1), and Rule 17a-3(a)(6) of the Securities Exchange Act of 1934 (“Exchange Act”).

According to the SEC’s allegations, VanCook joined Pritchard Capital Partners (“Pritchard”) in 2001, and he persuaded the firm to use clearing broker Banc of America Securities (“BOA”). Through BOA, VanCook submitted clients’ trades after the 4:00 p.m. deadline, allowing the clients to receive the same day’s net asset value. Additionally, he purportedly disguised these late trades through a false time-stamping procedure and lied to Pritchard’s principal about his actions. Despite several warnings from attorneys and clients, Vancook continued to engage in these practices from 2001 to 2003, resulting in almost five thousand late trades. The SEC sanctioned VanCook by permanently barring him from securities work, issuing a cease-and-desist order, disgorging unjust enrichment of $533,234.01, and imposing a civil penalty of $100,000.

The Exchange Act’s antifraud provisions for securities trading include Section 10(b) and Rule 10b-5. Under these rules, the SEC must “[P]rove that in connection with the purchase or sale of a security the defendant, acting with scienter, made a material misrepresentation (or a material omission if the defendant had a duty to speak) or used a fraudulent device.” SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996). Scienter includes knowingly or willfully engaging in fraudulent or manipulative conduct.

VanCook argued that “timestamping [clients’] proposed trading sheets at the time of receipt, even if final orders came in after 4:00…satisfied any ‘4:00 p.m. rule.’” VanCook also asserted that he did not meet the requirements for liability under Rule 10b-5 because his actions were not deceitful or manipulative. The appellate court disagreed and held that VanCook’s late trading scheme resulted in “numerous deceptive acts” and “implied misrepresentation” which directly violated Section 10(b) and Rule 10b-5.

In addition, the court, in distinguishing other authority, found that VanCook’s behavior involved an “implied” misrepresentation.  As the court noted:

• We agree with the Commission that by submitting orders after that time for execution at the current day's NAV, VanCook made an implied representation that the orders had been received before 4:00 p.m., because such late trading "incorporates an implicit misrepresentation" by "falsely mak[ing] it appear that the orders were received by the intermediary before [4:00 p.m.] when in fact they were received after that time." Other courts have reached similar conclusions. We now join them, and conclude that late trading of the sort committed by VanCook constitutes an implied misrepresentation in violation of Rule 10b-5 and Section 10(b).

Finally, the court also found VanCook violated the reporting procedures in Section 17(a)(1) and Rule 17a-3(a)(6). In upholding VanCook’s personal liability on this claim, the court found that he had knowledge of, and “provided ‘substantial assistance’ to,” the violations committed by Pritchard.

The primary materials for this case may be found on the DU Corporate Governance website.