WASHINGTON (February 11, 2005) – On February 10, an Administrative Law Judge of the Securities and Exchange Commission issued a significant decision, ruling against the SEC's Division of Enforcement, and in favor of two Sutherland Asbill & Brennan clients (IFG Network Securities, Inc. and its former president David Ledbetter) and three registered representatives. This is an important decision for brokerage firms, mutual funds and registered representatives because it affects the sales of mutual fund share classes.
The SEC staff had alleged that the three registered representatives had committed fraud by selling Class B shares of mutual funds and that IFG and Mr. Ledbetter had failed to supervise the representatives. After a twenty-two day hearing held in four cities, the judge ruled against the Commission on all counts. The judge rejected the staff's claim that the registered representatives committed fraud by not disclosing that investments of $250,000 or more in Class A shares of mutual funds would have produced materially higher returns than Class B shares. The judge found that such investments in Class A shares did not outperform Class B share investments in all circumstances. In addition, the judge ruled that the registered representatives did not have to inform customers that each would receive a higher commission for selling Class B rather than Class A shares at the $250,000 level.
Peter J. Anderson, a partner with Sutherland's Atlanta office, noted that this was the first time that an administrative law judge had dismissed an entire case against the Commission staff in more than two years where registered representatives were charged with committing fraud. Brian L. Rubin, a Sutherland partner in the Washington, DC office, who tried the case with Mr. Anderson, stated that the judge agreed with the respondents' argument that the SEC staff was trying to create new rules through an enforcement proceeding.
In addition to Messrs. Anderson and Rubin, IFG and Mr. Ledbetter were represented by Sutherland counsel Rebecca L. Burnaugh and associates Lawrence A. Dany and Olga Greenberg.
Click here to view a copy of the decision.
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