First Circuit Upholds Grant Of Summary Judgment In Market Timing Case
The First Circuit Court of Appeals affirmed a grant of summary judgment in favor of the SEC in a fraud action based on market timing in SEC v. Ficken, Case No. 07-2532 (1st Cir. Oct. 20, 2008). The Commission’s complaint claimed that Justin Ficken, a registered representative in the Boston branch office of Prudential Securities, Inc., intentionally and fraudulently concealed his identity and that of his clients while trading in and out of mutual fund shares in order to mislead the fund companies so they would process trades that they otherwise would not have allowed under their established policies.
The District Court granted summary judgment in favor of the Commission. That ruling was based on the SEC’s evidence which demonstrated that Mr. Ficken sought to circumvent fund policies prohibiting market timing by using multiple financial advisor numbers which identify the broker placing the trade and multiple client numbers so that the funds would not discover his identity and would process the trades.
On appeal, Mr. Ficken did not dispute the fact that the SEC had substantial evidence. Rather, he argued that there was a dispute of material fact which precluded granting summary judgment under Fed. R. Civ. P. 56. The First Circuit rejected this argument and affirmed the district court.
The Court began its opinion by acknowledging that “[a]lthough it is unusual to grant summary judgment on scienter, summary judgment on this issue is sometimes appropriate.” Here, the Commission submitted substantial evidence to support its claim of scienter and deception, as defendant acknowledged. This evidence included e-mails from defendant to his clients which noted that he was trying to evade fund policies on market timing through the use of multiple FA and client numbers.
In considering Mr. Ficken’s evidence, the Court acknowledged that it “might raise a genuine issue as to scienter with respect to the FA numbers …,” but declined to consider it for two reasons. First, the Court rejected Mr. Ficken’s reliance on his testimony before the SEC during its investigation. In that testimony, he stated that multiple FA numbers were used to facilitate splitting commissions with other brokers. The court refused to consider this testimony in evaluating the merits of the summary judgment motion because in the district court it was only offered to explain the reason defendant declined to give a deposition in the district court, not to oppose summary judgment. Since Federal Rule 56(e) and Local Rule 56.1 require a party opposing summary judgment to refer to specific parts of the record to raise a genuine issue of material fact, the Court declined to consider the testimony.
The Court also declined to consider segments from defendant’s testimony before the NASD. In that testimony, Mr. Ficken answered some questions, but not others about blocked accounts, invoking his Fifth Amendment privilege. The Court concluded that this testimony could not be considered because it is inadmissible hearsay. Accordingly, it failed to meet the requirements of Fed. R. Civ. P. 56(a)(1) which requires that supporting affidavits set out facts which would be admissible in evidence. And, in any event, “Ficken’s testimony would not be admissible because his assertion of his Fifth Amendment privilege or his refusal to answer questions prevented development of his testimony on closely related issues.”