SEC v. Zanford

535 U.S. 813 (2002)

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Nature of the Case

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Facts

D was employed as a securities broker. D persuaded William Wood, an elderly man in poor health, to open a joint investment account for himself and his mentally retarded daughter. The objectives for the account were `safety of principal and income.' The Woods granted D discretion to manage their account and a general power of attorney to engage in securities transactions for their benefit without prior approval. The Woods entrusted D with $419,255. Before Mr. Wood's death in 1991, all of that money was gone. On over 25 separate occasions, money had been transferred from the Woods' account to accounts controlled by D. D was indicted on 13 counts of wire fraud in violation of 18 U. S. C. §1343. P filed a civil complaint in the same District Court alleging that respondent violated §10(b) and Rule 10b-5 by engaging in a scheme to defraud the Woods and by misappropriating approximately $343,000 of the Woods' securities without their knowledge or consent. The SEC moved for partial summary judgment after D's criminal conviction, arguing that the judgment in the criminal case estopped respondent from contesting facts that established a violation of §10(b). Summary judgment was entered against D. The Fourth Circuit reversed the summary judgment. The civil complaint did not sufficiently allege the necessary connection because the sales of the Woods' securities were merely incidental to a fraud that 'lay in absconding with the proceeds' of sales that were conducted in 'a routine and customary fashion.' D simply stole the Woods' assets' and did not engage 'in manipulation of a particular security.' The court held that without some 'relationship to market integrity or investor understanding,' there is no violation of §10(b). The Supreme Court granted review.