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If an underwriter knows that a prospectus contains a material misrepresentation, may that underwriter use the prospectus to sell securities, or would that expose the underwriter to liability under Rule 10b-5(b)? The United States Court of Appeals for the First Circuit's surprising and rather disconcerting answer was delivered on March 10, 2010, in Securities and Exchange Commission v. Tambone. In Tambone, the First Circuit held that the Securities and Exchange Commission (SEC) could not hold underwriters liable for such misrepresentations if they did not draft the prospectus. Ostensibly, this holding is nothing more than a judicial check on the SEC's enforcement powers under Rule 10b-5(b). However, the practical result of this holding is disturbing. This decision not only provides a perverse incentive for prospectus drafters to be as ignorant as possible, but it also teaches unscrupulous underwriters how to use material misstatements without running afoul of Rule 10b-5(b). The decision sharply constrains the enforcement powers of the SEC and is in direct conflict with both the intent of Rule 10b-5(b) and the current desire to increase regulatory scrutiny of financial markets. Regardless of the outcome, U.S. Supreme Court review of this decision is vital. A reversal of the decision would represent a victory for investors and a blow to dishonest securities sales techniques, and an affirmation of the decision might inspire Congress to reinstate the SEC with the enforcement powers necessary to protect investors.

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43 J. Marshall L. Rev. 931 (2010).