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Decided: May 7, 2014

The Fourth Circuit held that a change in law to an implied private cause of action under 17 C.F.R. § 240.10b-5 (“Rule 10b-5”) was inapplicable in the context of a criminal cause of action under Rule 10b-5.

Thomas Prousalis was a securities lawyer who failed to accurately disclose his retainer agreement to the Securities and Exchange Commission (SEC) while he represented a company, Busybox, in the process of filing its initial public offering (IPO).  Prousalis admitted that he knew his acts were deceitful, violated the law, and that if he had accurately disclosed his retainer agreement to the SEC Busybox would not have been eligible to be listed on the NASDAQ.  Based on his non-disclosures, Prousalis pled guilty to multiple counts of fraud, but subsequently appealed the Rule 10b-5 criminal charges.  He was denied collateral relief under 28 U.S.C. § 2255(e), and then habeas relief under 28 U.S.C. § 2241.  On appeal, Prousalis seeks § 2241 relief on the basis that the U.S. Supreme Court “changed the substantive law such that the conduct of which” he was convicted was no longer criminal “subsequent to his direct appeal and § 2255(e) motion.”  According to Prousalis, the U.S. Supreme Court case Janus Capital Group v. First Derivative Traders changed the law so that he no longer qualified as a “maker” of false statements.  If Prousalis did not make any false statements, then he could not be guilty of directly violating Rule 10b-5.

The Court denied Prousalis’s § 2241 appeal because Janus only applied to an implied private cause of action brought under Rule 10b-5, and did not affect a criminal conviction under Rule 10b-5.  Therefore, the definition of a “maker” in Janus did not apply to Prousalis.  The Court reasoned that “context” was very important to the Janus decision.  Janus had to be construed narrowly because it dealt with a judicially created private cause of action under Rule 10b-5.  Further, the U.S. Supreme Court did not hold that their decision applied outside of the civil context.  Therefore, “judicial restraint and legislative primacy” supported a narrow reading of Janus.  On the other hand, Prousalis’s criminal charges under Rule 10b-5 did not trigger the same policies of judicial restraint and legislative primacy because Congress clearly acknowledged the judiciary’s power to sanction those who violate Rule 10b-5 with criminal penalties.  Prousalis’s actions clearly fell within the spectrum of conduct that Congress sought to prevent when it passed Rule 10b-5, and so the Court denied his appeal.

Full Opinion

James Bull Sterling