Ellison v. United States, Case No. 17-712

Amicus Brief

Ellison v. United States, Case No. 17-712

Amicus Brief to the Supreme Court of the United States


This case involves the prosecution and conviction of the petitioners for securities fraud based on alleged misconduct in connection with the sales of certain real-estate-backed securities after the Great Recession of 2008. At that time, the real estate market collapsed and qualified wealthy investors who bought those securities from third-party brokers—who were informed of the financial status of the investment offerings—lost a portion of their investment.

Section 10(b) of the Securities Act forbids using “any manipulative or deceptive device” to sell securities. 15 U.S.C. § 78j(b). SEC Rule 10b-5(a) (17 C.F.R. § 240.10b-5) similarly makes it unlawful to “to employ any device, scheme or artifice to defraud” in selling securities. Yet the petitioners were not convicted of that conduct. Nor were they convicted of violating Rule 10b-5(b) for “making any untrue statement of a material fact or to omit to state a material fact” regarding the selling of securities. Instead, they were found guilty of what is aptly called the “catch-all” provision of the broadly worded Rule 10b-5(c), which makes it unlawful for anyone, “directly or indirectly,” to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

Although securities law only criminally punishes those who “willfully” violate the law or any rule or regulation thereunder, the jury was instructed that “Acting willfully does not require that the defendant know that the conduct was unlawful.” Jury Instr. No. 30 (Pet. Appx 70a). In addition to this watered-down mens rea standard, with respect to the requisite showing of “materiality” of information alleged to be false or deceptive, the court below applied its open-ended test of whether a hypothetical reasonable investor only might consider the information “important” in making an investment decision.

Putting aside the fact that the defendants were not found guilty of “making any untrue statement of a material fact or to omit to state a material fact,” the Ninth Circuit’s general-materiality test conflicts with this Court’s—and most circuits’—stricter “total mix” test. That test is whether within the “total mix” of all the information provided in a case-specific context, the piece of information or conduct at issue was “material” to an actual investor’s investment decision.

This Court should address these important issues, which substantially affect the liberty interests of countless people subject to prosecutorial discretion in regulatory cases where administrative and civil remedies are available.

    1. This court should ensure that lower courts apply the correctmens rea standard for determining “willful” violations of the law
    2. There is a clear circuit split on the materiality issue of a section 10b prosecution
    3. Watering down the mens rea and materiality standards leads to abusive over-criminalization