          United States Court of Appeals
                      For the First Circuit

No. 15-1080

                        JOHN P. FLANNERY,

                           Petitioner,

                                v.

                SECURITIES & EXCHANGE COMMISSION,

                           Respondent.


No. 15-1117

                        JAMES D. HOPKINS,

                           Petitioner,

                                v.

                SECURITIES & EXCHANGE COMMISSION,

                           Respondent.


                PETITIONS FOR REVIEW OF AN ORDER OF
              THE SECURITIES AND EXCHANGE COMMISSION


                              Before

                    Lynch, Stahl, and Kayatta,
                          Circuit Judges.


     Mark W. Pearlstein, with whom Laura McLane, Fredric        D.
Firestone, David H. Chen, and McDermott Will & Emery LLP were   on
brief, for petitioner John P. Flannery.
     John F. Sylvia, with whom Andrew N. Nathanson, Jessica     C.
Sergi, and Mintz Levin Cohn Ferris Glovsky & Popeo PC were      on
brief, for petitioner James D. Hopkins.
     Lisa K. Helvin, Senior Counsel, with whom Michael A. Conley,
Deputy General Counsel, John W. Avery, Deputy Solicitor, and
Benjamin L. Schiffrin, Senior Litigation Counsel, Securities and
Exchange Commission, were on brief, for respondent.
     Jonathan G. Cedarbaum, Christopher Davies, Daniel Aguilar,
John Byrnes, Wilmer Cutler Pickering Hale and Dorr LLP, Kate
Comerford Todd, Steven P. Lehotsky, and U.S. Chamber Litigation
Center, Inc., on brief for the Chamber of Commerce of the United
States of America, amicus curiae in support of petitioners.


                        December 8, 2015
            LYNCH,    Circuit   Judge.       In    2010,   the    United      States

Securities and Exchange Commission ("SEC" or "Commission") issued

an Order Instituting Proceedings against two former employees of

State Street Bank and Trust Company ("State Street"): (1) James D.

Hopkins, a former vice president and head of North American Product

Engineering, and (2) John P. Flannery, a former chief investment

officer ("CIO").        The Commission alleged that during the 2007

subprime mortgage crisis, Hopkins and Flannery "engaged in a course

of business and made material misrepresentations and omissions

that misled investors" about two substantially identical State

Street–managed funds collectively known as the Limited Duration

Bond Fund ("LDBF").         Hopkins and Flannery were charged with

violating Section 17(a) of the Securities Act of 1933 (15 U.S.C.

§ 77q(a)), Section 10(b) of the Securities Exchange Act of 1934

(15 U.S.C. § 78j(b)), and Exchange Act Rule 10b-5 (17 C.F.R.

§ 240.10b-5).        After an eleven-day hearing, involving nineteen

witnesses   and    about   five   hundred     exhibits,     the       SEC's   Chief

Administrative Law Judge ("ALJ") dismissed the proceeding, finding

that neither Hopkins nor Flannery was responsible for, or had

ultimate authority over, the documents at issue and that these

documents    did     not   contain    materially       false     or    misleading

statements or omissions.

            The SEC Division of Enforcement ("Division") appealed

the ALJ's decision to the Commission.             In 2014, the Commission, in


                                     - 3 -
a 3-2 decision, reversed the ALJ with regard to a slide that

Hopkins used at a May 10, 2007, presentation to a group of

investors, and two letters, dated August 2 and August 14, 2007,

that Flannery wrote or had seen before they were sent to investors.

See In re John P. Flannery & James D. Hopkins, Securities Act

Release No. 9689, Exchange Act Release No. 73,840, Investment

Company Act Release No. 31,374, 2014 WL 7145625 (Dec. 15, 2014).

The Commission found Hopkins liable under Securities Act Section

17(a)(1) ("Section 17(a)(1)"), Securities Exchange Act Section

10(b) ("Section 10(b)"), and Exchange Act Rule 10b-5 ("Rule 10b-

5"); it found Flannery liable under Securities Act Section 17(a)(3)

("Section 17(a)(3)").      The Commission imposed cease-and-desist

orders on Hopkins and Flannery, suspended Hopkins and Flannery

from association with any investment adviser or company for one

year, imposed a $65,000 civil monetary penalty on Hopkins, and

imposed a $6,500 civil monetary penalty on Flannery.               These

petitions for review followed.

          We   conclude   that   the   Commission's   findings   are   not

supported by substantial evidence.        With regard to Hopkins, we

find that the Division's materiality showing was marginal, and

that there was not substantial evidence supporting scienter in the

form of recklessness.     With regard to Flannery, we conclude that

at least the August 2 letter was not misleading, and therefore, as

we explain, we need not reach the issue of whether the August 14


                                 - 4 -
letter was misleading.               We grant the petitions for review and

vacate the Commission's order.

                                             I.

                  We take the underlying facts from the record before the

Commission.          See Rizek v. SEC, 215 F.3d 157, 159 (1st Cir. 2000).

                  State Street Global Advisors ("SSgA") is the investment

management arm of State Street Corporation.1                       It advises and

manages          State   Street–affiliated        registered    mutual   funds   and

unregistered collective trust funds.2                    On March 1, 2002, SSgA

created the LDBF, a combination of two unregistered fixed-income

funds that were invested in various fixed-income products.                       The

LDBF       was    offered     and   sold   only    to   institutional    investors.

Investments in the LDBF came from three sources: first, other State

Street funds invested directly in the LDBF; second, clients of

internal advisory groups invested in the LDBF based on SSgA's

recommendation           to     those      groups;      and    third,    independent

institutional investors invested directly in the LDBF.

                  The LDBF was heavily invested in asset-backed securities

("ABS"), which included residential mortgage-backed securities

("RMBS").          Until 2007, the LDBF had outperformed its benchmark


       1  State Street is a wholly owned subsidiary of State Street
Corporation.    State Street Corporation is a publicly traded
corporation.

       2  State Street and SSgA were used interchangeably during
the proceeding.


                                           - 5 -
index.      In January and February 2007, it underperformed its

benchmark index because of its investment in certain lower-rated

securities.     April and May 2007, however, were two of the best

months in the LDBF's history. Then, beginning in June 2007, during

the subprime mortgage crisis, the LDBF experienced substantial

underperformance.        The Division's charges against Hopkins and

Flannery involve communications about the LDBF that Hopkins and

Flannery either made or were involved with in 2007.

A.   Vice President Hopkins

             Hopkins worked at State Street from 1998 until 2010,

when he was offered retirement as a result of the SEC proceeding.

From 2006 to 2007, he was a vice president and head of North

American Product Engineering.          During that time, Hopkins was the

senior     product   engineer     responsible    for    fixed-income      funds,

including the LDBF.       He served as a liaison between the portfolio

managers and the client-facing people, which included salespeople

and consultant relations people. Hopkins was one of several people

that would make presentations to potential clients.                 He was also

responsible for correcting inaccuracies in LDBF "fact sheets,"

two-page    quarterly     documents    made    available    to     clients     and

prospective     clients    that     showed     the     LDBF's    strategy      and

performance numbers.       Apart from the SEC charges, Hopkins worked

in   the    securities    industry     for    thirty-five       years   with    an

unblemished record.


                                      - 6 -
           SSgA   used   a   standard   PowerPoint   presentation   when

presenting information about the LDBF.        In 2006 and 2007, this

presentation included a slide titled "Typical Portfolio Exposures

and Characteristics -- Limited Duration Bond Strategy" ("Typical

Portfolio Slide").     We describe the slide:

           Under the slide title, it read:

               Exposure to non-correlated fixed income
           asset classes
               High quality
               No interest rate risk

Below, it had a box containing the following table:

                                            Limited Duration
                                            Bond Fund
           Average quality                  AA
           Modified adjusted duration       0.09 years
           Yield over One Month LIBOR       50 bps
           Average life                     2.5 years

It then had a heading "Breakdown by market value" and contained

two bar graphs.   The graph on the left was titled "By sector" and

contained the following information:

     ABS: 55%
     CMBS: 25%
     MBS: 10%
     Agency: 5%
     Corporates: 0%
     Cash: 5%

The graph on the right was titled "By quality" and contained the

following information:

     AAA: 45%
     AA: 40%



                                  - 7 -
       A: 10%
       BBB: 5%

             Importantly,          the   Typical    Portfolio      Slide     portrayed

percentages       for    both       sector     allocations      and     quality      of

investments.            It    is     the     sector   allocations           (going   to

diversification)        which      disturb    the   SEC.     The    typical     sector

allocation graph showed that the LDBF was 55% invested in ABS, 25%

invested in commercial mortgage-backed securities ("CMBS"), and

10% invested in mortgage-backed securities ("MBS").                     In 2006 and

2007, the LDBF's actual investment in ABS reached 80% to nearly

100%.    One expert testified that along with "Conditional Value at

Risk," credit ratings are used to determine the risk of a portfolio

like the LDBF.

             Hopkins did not update the Typical Portfolio Slide's

sector breakdown from at least December 2006 through the summer of

2007.     He would, however, bring notes on the actual investments

when he made presentations, but he did not necessarily discuss the

information in his notes if it did not come up in a question.

Hopkins used the Typical Portfolio Slide at several presentations.

He did not recall ever being asked a question about the LDBF's

actual     portfolio         composition,      including      at      the     specific

presentation next described.

             On May 10, 2007, Hopkins made a presentation to the

National Jewish Medical and Research Center ("NJC"), which was a



                                           - 8 -
client of Yanni Partners, an institutional investment consulting

firm.    David Hammerstein, Yanni Partners' chief strategist, who

was at the meeting, testified that Hopkins presented the Typical

Portfolio Slide.      According to Hammerstein, Hopkins used the slide

to    demonstrate    that     the    LDBF    was     of   very    high    quality     and

diversified.      It is true the Typical Portfolio Slide labeled the

LDBF as "high quality."

            The     Division    alleged       that      Hopkins    violated     Section

17(a), Section 10(b), and Rule 10b-5 in several ways, including by

being responsible for and using fact sheets that contained false

and   misleading     information;       by    misleading        investors      with   the

Typical Portfolio Slide; by failing to update a slide that stated

the LDBF had reduced its exposure to the index of lower-rated

securities that had contributed to the January and February 2007

underperformance;       and     by     making      or     acting    negligently        in

connection with materially misleading statements in two different

letters.    The ALJ found that Hopkins was not responsible for the

documents    at    issue    and      that    he    did    not    make    any   material

misrepresentations or omissions.

            After     the      Division       appealed      the     ALJ's      decision

dismissing the proceeding, the Commission found that the Typical

Portfolio Slide included material misrepresentations that Hopkins

knew were misleading and that he "made" the misrepresentations in

the slide, at least with regard to the May 10, 2007, presentation


                                        - 9 -
to   the   NJC.         The   Commission    held   Hopkins   liable      for   this

presentation under Section 17(a)(1), Section 10(b), and Rule 10b-

5.   See 15 U.S.C. § 77q(a)(1); 15 U.S.C. § 78j(b); 17 C.F.R.

§ 240.10b-5.

B.      CIO Flannery

               Flannery joined SSgA in 1996 as a product engineer.               In

2005, he became SSgA's Fixed Income CIO for the Americas.                 As CIO,

Flannery had general supervisory oversight for SSgA's operations.

However, he was not involved in the LDBF's investment decisions or

its daily management.           Flannery worked at SSgA until his position

was eliminated in 2007.          Before joining SSgA, Flannery had worked

in the fixed-income area for about sixteen years, first in bond

sales, then in managing fixed-income investments.                     He had an

unblemished record in the industry and a reputation for being very

honest and having a great deal of integrity.

               In May 2006, Flannery expressed that he was concerned

about mortgage risk in the real estate market and requested SSgA's

fixed-income team to provide him with an analysis on the subject.

After    the    LDBF    began    underperforming    in    June   2007,   Flannery

requested on June 25, 2007, that members of SSgA's management team

and a member of its risk team re-examine the subprime market. That

day, the head of Global Structured Projects gave Flannery a

memorandum       that    stated,    "[w]e    remain      constructive     on    the

fundamentals" and that foreclosures were lower than the 10-year


                                      - 10 -
average except in California and the Rust Belt states.                    The

memorandum    indicated   that   "we   think    there    will   be   continued

weakness in certain parts of the country . . . but we don't believe

there is an imminent 'melt down' scenario.               Subprime borrowers

need loans, lenders are making loans, the street continues to fund

these loans via the securitization market, and we expect this to

continue going forward."

             By the end of July 2007, as the subprime crisis worsened,

Flannery became personally involved with managing the LDBF and had

daily contact with the SSgA risk team during the summer and fall

of 2007.    He filled in as chair at a July 25, 2007, SSgA Investment

Committee     meeting.    According     to     meeting   minutes,     Flannery

discussed two ways to provide liquidity if clients wanted to leave

the LDBF: (1) by selling the LDBF's top-rated (AAA) bonds; or (2)

by selling a pro-rata share of assets across the portfolio.

Flannery noted that although AAA-rated bonds were liquid, if the

liquidity gained from the sales were siphoned off, then they would

be left with a lower quality portfolio.            After discussion among

the meeting's participants, the Investment Committee decided on an

approach incorporating both options, where they would increase

liquidity in the fund and sell a pro-rata share of assets to cover

any withdrawals from the fund. The committee also agreed to reduce

the LDBF's exposure to AA-rated assets.          In the two days following

the July 25 meeting, the portfolio management team sold about $1.6


                                  - 11 -
billion in AAA-rated bonds and $200 million in AA-rated bonds,

which paid for investor redemptions and repurchase commitments.

These transactions caused the LDBF's portfolio composition to

change from approximately 48% investment in AAA-rated securities

to less than 5%, and from 46% investment in AA-rated securities to

more than 80%.

          1.     August 2, 2007, Letter (Not From Flannery)

          On August 2, 2007, Relationship Management sent a letter

to clients in at least twenty-two fixed-income funds, signed by

the individual Relationship Managers and including fund specific

performance information.   A draft of this letter had been sent to

the legal department as well as several people to review. Flannery

had also received a draft, and he made a number of edits, some of

which stayed in the final version.   However, Flannery had not been

included on several e-mail exchanges related to edits on the letter

prior to its distribution.      The final version of the letter

included the following paragraph:

          We believe that what has occurred in the
          subprime mortgage market to date this year has
          been more driven by liquidity and leverage
          issues    than   long    term    fundamentals.
          Additionally, the downdraft in valuations has
          had a significant impact on the risk profile
          of our portfolios, prompting us to take steps
          to seek to reduce risk across the affected
          portfolios. To date, in the Limited Duration
          Bond Strategy, we have reduced a significant
          portion of our BBB-rated securities and we
          have sold a significant amount of our AAA-
          rated cash positions. Additionally, AAA-rated


                               - 12 -
          exposure has been reduced as some total return
          swaps rolled off at month end.      Throughout
          this period, the Strategy has maintained and
          continues to be AA in average credit quality
          according   to   SSgA's   internal   portfolio
          analytics. The actions we have taken to date
          in   the  Limited   Duration   Bond   Strategy
          simultaneously reduced risk in other SSgA
          active fixed income and active derivative-
          based strategies.

          2.   August 14, 2007, Letter (From Flannery)

          On August 14, 2007, Flannery sent a letter to LDBF

investors, in an attempt to explain what was taking place in the

housing-related securities market.      Flannery was normally not

responsible for client communications, and the Chief Executive

Officer ("CEO") of SSgA said it would not be a good idea, asking

why Flannery would want to "raise [his] head up."          Flannery

understood the CEO to be saying that "this [was] kind of an ugly

situation . . . why stand up and take a bullet," but Flannery wrote

the letter because he thought it was "the right thing to do."

Flannery said that "up to the limits that [he] was given by legal,

[he] wanted to take responsibility for this disaster . . . and . . .

to tell something of the arc of the story to put it in context."

He said he "wanted to be as just completely straightforward as

[he] could be." The draft of the letter Flannery prepared included

the following paragraph:

          The situation is extreme and difficult to
          manage.   While we believe that the subprime
          markets clearly convey far greater risk than
          they have historically[,] we feel that forced


                              - 13 -
             selling in this chaotic and illiquid market is
             unwise. Even if mortgage delinquencies soar
             beyond our expectations we would expect
             significantly higher values for our sub-prime
             holdings.    While recent events may have
             repriced the risk of these assets for the
             foreseeable future and it is unlikely that
             they will retrace to values at the turn of the
             year we believe that liquidity will slowly re-
             enter the market and the segment will regain
             its footing.     While we will continue to
             liquidate assets for our clients when they
             demand it, our advice is to hold the positions
             for now.

The last sentence was then edited to read, "While we will continue

to liquidate assets for our clients when they demand it, our advice

is to hold the positions in anticipation of greater liquidity in

the months to come."         Deputy General Counsel Mark Duggan revised

that sentence to read, "While we will continue to liquidate assets

for our clients when they demand it, we believe that many judicious

investors will hold the positions in anticipation of greater

liquidity in the months to come."             Flannery kept Duggan's change

because Flannery believed both his original language and the

revised language were accurate.         In addition to Duggan, a number

of   people       reviewed   the   letter,    including   the   co-heads    of

Relationship Management, SSgA's president and CEO, and outside

legal counsel.

             3.     SEC Proceeding

             In the Division's appeal of the ALJ's decision, the

Commission     held    Flannery    liable     under   Section   17(a)(3)   for



                                     - 14 -
misleading statements in both the August 2 and August 14 letters.

With regard to the August 2 letter, the Commission found the

statement     that   SSgA   reduced     its    risk   in    part    by   selling    "a

significant      amount"    of   its     "AAA-rated        cash    positions"      was

"misleading because LDBF's sale of the AAA-rated securities did

not reduce risk in the fund. Rather, the sale ultimately increased

both the fund's credit risk and its liquidity risk because the

securities that remained in the fund had a lower credit rating and

were less liquid than those that were sold."                The Commission found

that "even if [Flannery] did suggest minor edits to the letter

that were never incorporated, and even if others were 'heavily

involved' in its drafting . . . those facts . . . do not excuse

his decision to approve misleading language."

              With regard to the August 14 letter, the Commission found

the   "many    judicious    investors"        language     Duggan    inserted      was

misleading "because it suggested that SSgA viewed holding onto the

LDBF investment as a 'judicious' decision when, in fact, officials

at SSgA had taken a contrary view, redeeming SSgA's own shares in

LDBF and advising SSgA advisory group clients to redeem their

interests,      as    well."       The        Commission      found      that      the

misrepresentations in both letters were material and that Flannery

acted negligently in both cases.              The SEC went on to hold, as a

matter of law, that two misstatements were sufficient to find a

violation of Section 17(a)(3)'s prohibition on "engag[ing] in any


                                       - 15 -
. . . course of business which operates or would operate as a fraud

or deceit upon the purchaser."         We need not reach that issue of

law.

                                      II.

           "The SEC's factual findings control if supported by

substantial evidence, . . . and its orders and conclusions must

not be 'arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law.'"       Cody v. SEC, 693 F.3d 251, 257 (1st

Cir. 2012) (citations omitted) (quoting 5 U.S.C. § 706(2)(A)

(2006)).   "Substantial evidence is 'such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion.'"

Penobscot Air Servs., Ltd. v. FAA, 164 F.3d 713, 718 (1st Cir.

1999) (quoting Universal Camera Corp. v. NLRB, 340 U.S. 474, 477

(1951)).   We consider the whole record, and "[t]he substantiality

of evidence must take into account whatever in the record fairly

detracts from its weight."     Universal Camera, 340 U.S. at 488.

           When    the   Commission    and   the   ALJ   "reach   different

conclusions, . . . the [ALJ]'s findings and written decision are

simply part of the record that the reviewing court must consider

in   determining   whether   the   [SEC]'s   decision    is   supported   by

substantial evidence."       NLRB v. Int'l Bhd. of Teamsters, Local

251, 691 F.3d 49, 55 (1st Cir. 2012) (citing Universal Camera, 340

U.S. at 493).      Because "evidence supporting a conclusion may be

less substantial when an impartial, experienced examiner who has


                                   - 16 -
observed   the   witnesses   and    lived     with   the    case    has   drawn

conclusions different from the [Commission]'s than when [the ALJ]

has reached the same conclusion," id. at 55 (quoting Universal

Camera, 340 U.S. at 496), "where the [Commission] has reached a

conclusion opposite of that of the ALJ, our review is slightly

less deferential than it would be otherwise," id. (quoting Haas

Elec., Inc. v. NLRB, 299 F.3d 23, 28–29 (1st Cir. 2002)).

A.    Hopkins

           Liability under Section 17(a)(1), Section 10(b), and

Rule 10b-5 requires materiality and scienter.          See SEC v. Ficken,

546 F.3d 45, 47 (1st Cir. 2008); see also Matrixx Initiatives,

Inc. v. Siracusano, 131 S. Ct. 1309, 1318 (2011).                "[T]o fulfill

the   materiality   requirement      'there     must   be    a     substantial

likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered

the "total mix" of information made available.'"              Basic Inc. v.

Levinson, 485 U.S. 224, 231–32 (1988) (quoting TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976)).                  "Scienter is an

intention 'to deceive, manipulate, or defraud.'"            Ficken, 546 F.3d

at 47 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12

(1976)); see also Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980).

Hopkins concedes that scienter can be established by proving "a

high degree of recklessness," but denies that he was reckless.

Compare Ficken, 546 F.3d at 47 ("In this circuit, proving scienter


                                   - 17 -
requires 'a showing of either conscious intent to defraud or "a

high degree of recklessness."'" (quoting ACA Fin. Guar. Corp. v.

Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008))), with Matrixx

Initiatives, 131 S. Ct. at 1323 ("We have not decided whether

recklessness suffices to fulfill the scienter requirement.").

           Questions of materiality and scienter are connected.

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters

Corp., 632 F.3d 751, 757 (1st Cir. 2011).        "If it is questionable

whether a fact is material or its materiality is marginal, that

tends to undercut the argument that defendants acted with the

requisite intent or extreme recklessness in not disclosing the

fact."   Id.

           Here,   assuming   the      Typical   Portfolio   Slide     was

misleading,3   evidence   supporting    the   Commission's   finding   of

materiality was marginal.     The Commission's opinion states that


     3    While the actual investment in ABS exceeded that which
was on the slide, the slide was clearly labeled "Typical Portfolio
Exposures and Characteristics -- Limited Duration Bond Strategy"
and did not purport to show the actual exposures to each sector at
any given time. The Commission contends that the allocation the
slide represented was still not typical during the 2006–2007 time
period. In response to the ALJ's question of whether the sector
breakdown "was, in fact, what existed at that time," Hopkins
responded, "I think it probably was -- in terms of the sector
breakdown on this page, it was not . . . what was typical." We
assume this was an admission that the slide was misleading as to
its "typicality."
          We also assume that the Commission did not err in its
finding that Hopkins in fact presented the Typical Portfolio Slide
in his presentation to the NJC on May 10, 2007.



                                - 18 -
"reasonable investors would have viewed disclosure of the fact

that, during the relevant period, LDBF's exposure to ABS was

substantially higher than was stated in the slide as having

significantly altered the total mix of information available to

them."   Yet the Commission identifies only one witness other than

Hopkins relevant to this conclusion.         Hammerstein, Yanni Partners'

chief strategist,4 testified that at the May 10 meeting, Hopkins

spoke for about thirty minutes,5 presented the Typical Portfolio

Slide,   and   said   that   the   fund     was    of   very   high   quality.

Hammerstein said that the information on the Typical Portfolio

Slide was important to him because "[i]t led to the impression

that the fund was well diversified, and therefore that State Street

took steps to reduce the risks or control the risks."            Hammerstein

testified that when he later learned that the LDBF's ABS exposure

actually approached 100 percent, he was surprised in light of the

May 10 meeting.   This led Yanni Partners to advise its clients to

liquidate their positions in the LDBF.            Hammerstein said they came

to this conclusion because they "felt that State Street did not

adequately inform [them] of the risks in the portfolio, and [they]


     4    Hammerstein himself was not actually an investor. He
was the chief strategist at Yanni Partners, which is an investment
consulting firm that works with investors. The Commission points
to no actual investors to support a finding of materiality.

     5    Amanda Williams, who co-presented with Hopkins, wrote in
a note the day after the meeting that they had only about fifteen
minutes for their presentation.


                                   - 19 -
cited the example of the presentation that State Street made to

National Jewish on May 10 when State Street stated that . . . the

typical allocation was 55 percent to the ABS sector, but as

recently as March 31 of 2007, the actual ABS allocation was 100

percent."       The Division presented a letter Yanni Partners sent to

every client invested in the LDBF, signed by the field consultant

responsible         for    the   specific      client,   recommending       that   they

liquidate their holdings and citing the May 10 meeting where "[t]he

LD Bond Fund Portfolio Manager . . . did not disclose the actual

sector       exposure      at    the    time,     instead     presenting    'typical'

portfolio characteristics . . . ."

               On    the    other      hand,    the   slide    was   clearly   labeled

"Typical."          As far as Hammerstein was aware, through May 2007,

Yanni Partners never asked SSgA for a breakdown of the LDBF's

actual investment by sector nor was he aware of any request from

Yanni       Partners      for    the   LDBF's    audited      financial    statements.

Further, the Commission has not identified any evidence in the

record that the credit risks posed by ABS, CMBS, or MBS were

materially different from each other,6 arguing instead that the




        6 We also note that the LDBF's composition in terms of
credit quality of holdings remained relatively constant, and, if
anything, improved. The Typical Portfolio Slide represented that
85% of the LDBF's investment was in AAA- and AA-rated bonds (45%
and 40% respectively), while the March 31, 2007, fact sheet
disclosed that 94.46% of its investment was in AAA- and AA-rated
bonds (62.2% and 32.26% respectively).


                                          - 20 -
percent of investment in ABS and diversification as such are

important to investors.

                 Context makes a difference.           According to a report

Hammerstein authored the day after the meeting, the meeting's

purpose was to explain why the LDBF had underperformed in the first

quarter of 2007 and to discuss its investment in a specific index

that       had    contributed   to   the   underperformance.            The   Typical

Portfolio Slide was one slide of a presentation of at least twenty.

Perhaps          unsurprisingly,     the   slide     was   not     mentioned          in

Hammerstein's report.

                 Hopkins presented expert testimony from John W. Peavy

III    ("Peavy")      that   "[p]re-prepared       documents     such    as   .   .    .

presentations . . . are not intended to present a complete picture

of the fund," but rather serve as "starting points," after which

due diligence is performed.                Peavy explained that "a typical

investor in an unregistered fund would understand that it could

specifically request additional information regarding the fund."7

And not only were clients given specific information upon request,

information about the LDBF's actual percent of sector investment

was available through the fact sheets and annual audited financial


       7  Peavy also opined that "in the hundreds of . . . meetings
and presentations [he has] attended, [he did] not recall a single
instance in which the discussion was based solely on the content
of material prepared beforehand or a rote reading of a PowerPoint
presentation slide deck."



                                       - 21 -
statements.8   The March 31, 2007, fact sheet, available six weeks

prior to the May 10, 2007, presentation, included that the LDBF

was 100% invested in ABS.   The June 30, 2007, fact sheet included

that the LDBF was 81.3% invested in ABS. These facts weigh against

any conclusion that the Typical Portfolio Slide had "significantly

altered the 'total mix' of information made available."     Basic,

485 U.S. at 232 (quoting TSC Indus., Inc., 426 U.S. at 449)

(internal quotation mark omitted).

          This thin materiality showing cannot support a finding

of scienter here.9   See Geffon v. Micrion Corp., 249 F.3d 29, 35

(1st Cir. 2001).     Hopkins testified that in his experience,


     8    Information was also provided on SSgA's website through
the password protected "Client's Corner" and "Consultant's Corner"
sections. However, the information available on these parts of
the website varied by fund and client. Hopkins presented evidence
that during 2007, the Client's Corner section was logged into
28,969 times by 465 unique users. Hopkins also presented evidence
that Hammerstein was copied on an e-mail about the Client's Corner
section of the website, but Hammerstein had no recollection of
seeing the e-mail.
          We do not suggest that the mere availability of accurate
information negates an inaccurate statement. Rather, when a slide
is labeled "typical," and where a reasonable investor would not
rely on one slide but instead would conduct due diligence when
making an investment decision, the availability of actual and
accurate information is relevant.

     9    Our determination is based on how a reasonable investor
would react. Given our conclusion that the Commission abused its
discretion in holding Hopkins liable under Section 17(a)(1),
Section 10(b), and Rule 10b-5, we need not decide whether the level
of sophistication of the LDBF investors would have made any
misrepresentation immaterial. Cf. SEC v. Happ, 392 F.3d 12, 21–
23 (1st Cir. 2004).



                              - 22 -
investors did not focus on sector breakdown when making their

investment decisions and that LDBF investors did not focus on how

much of the LDBF investment was in ABS versus MBS.10              In fact,

Hopkins did not recall ever discussing the Typical Portfolio Slide

or being asked a question about the actual sector breakdown when

presenting the slide.11      He did not update the Typical Portfolio

Slide's sector breakdowns because he did not think the typical

sector breakdowns were important to investors.          To the extent that

an investor would want to know the actual sector breakdowns,

Hopkins would bring notes with "the accurate information" so that

he could answer any questions that arose. We cannot say that these

handwritten notes provide substantial evidence of recklessness,

much less intentionality to mislead -- particularly in light of

Hopkins's    belief   that   this   information   was   not   important   to

investors.    Cf. City of Dearborn Heights, 632 F.3d at 757 ("[T]he

question of whether Defendants recklessly failed to disclose [a

fact] is . . . intimately bound up with whether Defendants either

actually knew or recklessly ignored that the [fact] was material


     10   Hopkins was not alone in his belief.        Lawrence J.
Carlson, the co-head of Relationship Management at SSgA in 2007,
testified that at least prior to the summer of 2007, he did not
recall clients ever asking for a sector breakdown of the LDBF, and
expert witness Peavy testified that it was common for clients "not
to ask for holdings."

     11   Outside of the presentations, prior to the May 10
meeting, there were at least occasional inquiries about the LDBF's
holdings, to which Hopkins provided answers.


                                    - 23 -
and nevertheless failed to disclose it." (alterations in original)

(quoting City of Phila. v. Fleming Cos., 264 F.3d 1245, 1265 (10th

Cir. 2001))).   Given the evidence weighing against the materiality

of the portion of the slide to which the SEC objects, we cannot

say there is substantial evidence that Hopkins's presentation of

a slide containing sector breakdowns labeled "typical," with notes

of the actual sector breakdown ready at hand, constitutes "a highly

unreasonable    [action],   involving      not   merely   simple,    or    even

inexcusable[]    negligence,    but   an   extreme   departure      from   the

standards of ordinary care . . . that is either known to [Hopkins]

or is so obvious [Hopkins] must have been aware of it."              Ficken,

546 F.3d at 47–48 (second alteration in original) (quoting SEC v.

Fife, 311 F.3d 1, 9–10 (1st Cir. 2002)).             We conclude that the

Commission abused its discretion in holding Hopkins liable under

Section 17(a)(1), Section 10(b), and Rule 10b-5.

B.   Flannery

          Section 17(a)(3) deems it unlawful "for any person in

the offer or sale of any securities . . . to engage in any

transaction, practice, or course of business which operates or

would operate as a fraud or deceit upon the purchaser."             15 U.S.C.

§ 77q(a)(3).    "[N]egligence is sufficient to establish liability

under . . . § 17(a)(3)."       Ficken, 546 F.3d at 47.

          The Commission concluded "that the August 2 and August

14 letters were materially misleading, particularly when their


                                  - 24 -
cumulative effect is taken into account."         It found that "[w]hen

considered together -- and as part of a larger effort to convince

investors to remain in the poorly performing LDBF -- the letters

misleadingly downplayed LDBF's risk and encouraged investors to

hold onto their shares, even though SSgA's own funds and internal

advisory group clients were fleeing the fund."           We disagree.   At

the very least, the August 2 letter was not misleading -- even

when considered with the August 14 letter -- and so there was not

substantial evidence to support the Commission's finding that

Flannery was "liable for having engaged in a 'course of business'

that operated as a fraud on LDBF investors."12

            The Commission's primary reason for finding the August

2 letter misleading was its view that the "LDBF's sale of the AAA-

rated securities did not reduce risk in the fund.            Rather, the

sale ultimately increased both the fund's credit risk and its

liquidity risk because the securities that remained in the fund

had a lower credit rating and were less liquid than those that

were    sold."   At   the   outset,   we   note   that   neither   of   the

Commission's assertions -- that the sale increased the fund's

credit risk and increased its liquidity risk -- are supported by

substantial evidence.




       12 In light of this conclusion, we do not reach Flannery's
argument that the Commission's interpretation of Section 17(a)(3)
as applying to misstatements is incorrect.


                                - 25 -
           First, although credit rating alone does not necessarily

measure a portfolio's risk, the Commission does not dispute the

truth of the letter's statement that the LDBF maintained an average

AA-credit quality.        Second, expert testimony presented at the

proceeding explained that the July 26 AAA-rated bond sale reduced

risk because these bonds "entailed credit and market risk that

were substantially greater than those of cash positions.                     In

addition, a portion of the sale proceeds was used to pay down

[repurchase agreement] loans and reduce the portfolio leverage."

Further, testimony throughout the proceeding indicated that the

LDBF's bond sales in July and August reduced risk by decreasing

exposure to the subprime residential market, by reducing leverage,

and by increasing liquidity, part of which was used to repay loans.

           To be sure, the Commission maintained that the bond

sale's potentially beneficial effects on the fund's liquidity risk

were immediately undermined by the "massive outflows of the sale

proceeds . . . to early redeemers."          But this reasoning falters

for two reasons.       First, the Commission acknowledged that between

$175 and $195 million of the cash proceeds remained in the LDBF as

of the time the letter was sent; it offered no reason, however,

why this level of cash holdings provided an insufficient liquidity

cushion.   Second and more fundamentally, even if the Commission

was   correct   that    the   liquidity   risk   in   the   LDBF   was   higher

following the sale than it was prior to the sale, it does not


                                   - 26 -
follow that the sale failed to reduce risk.            Rather, to treat as

misleading the statement in the August 2 letter that State Street

had "reduced risk," the Commission would need to demonstrate that

the liquidity risk in the LDBF following the sale was higher than

it would have been in the counterfactual world in which the

financial crisis had continued to roil -- and in which large

numbers of investors likely would have sought redemption -- and

the LDBF had not sold its AAA holdings.           But the Commission has

not done this.

            Independently, the Commission has misread the letter.

The August 2 letter did not claim to have reduced risk in the LDBF.

The letter states that "the downdraft in valuations has had a

significant impact on the risk profile of our portfolios, prompting

us to take steps to seek to reduce risk across the affected

portfolios" (emphasis added).           Indeed, at oral argument, the

Commission acknowledged that there was no particular sentence in

the letter that was inaccurate.         It contends that the statement,

"[t]he actions we have taken to date in the [LDBF] simultaneously

reduced    risk   in   other   SSgA   active   fixed   income   and   active

derivative-based strategies," misled investors into thinking SSgA

reduced the LDBF's risk profile.         This argument ignores the word

"other."    The letter was sent to clients in at least twenty-one

other funds, and, if anything, speaks to having reduced risk in

funds other than the LDBF.


                                  - 27 -
            Even beyond that, there is not substantial evidence that

SSgA did not "seek to reduce risk across the affected portfolios."

As   one   expert   testified,   there   are    different    types   of   risk

associated with a fund like the LDBF, including market risk,

liquidity risk, and credit or default risk.           The LDBF was facing

a liquidity problem, and at the July 25 meeting, Michael Wands,

the Director of Active North American Fixed Income, explained that

"[i]t's hard to predict if the market will hold on or if there

will be a large number of withdrawals by clients.            We need to have

liquidity should the clients decide to withdraw."            Flannery noted

that "if [they didn't] raise liquidity [they] face[d] a greater

unknown." Robert Pickett, the LDBF's lead portfolio manager, noted

that selling only AAA-rated bonds would affect the LDBF's risk

profile.      After   discussion    of   both   of   these   concerns,     the

Investment Committee ultimately decided to increase liquidity,

sell a pro-rata share to warrant withdrawals, and reduce AA

exposure.     And that is what it did.          On July 26 and 27, 2007,

LDBF's portfolio management team sold approximately $1.6 billion

in AAA-rated bonds and about $200 million in AA-rated bonds;

between approximately July 31 and August 24, 2007, it sold about

$1.2 billion of AA-rated bonds; and on August 7 and 8, 2007, it

sold about $100 million of A-rated bonds.            The August 2 letter

does not try to hide the sale of the AAA-rated bonds; it candidly

acknowledges it.       At the proceeding, Flannery testified that


                                   - 28 -
selling     AAA-rated    bonds   itself    reduces    risk,    and   here,    in

combination with the pro-rata sale, was intended to maintain a

consistent risk profile for the LDBF.          Pickett testified that the

goal of the pro-rata sale was to treat all shareholders -- both

those who exited the fund and those who remained -- as equally as

possible and maintain the risk-characteristics of the portfolio to

the extent possible.        These actions are not inconsistent with

trying to reduce the risk profile across the portfolios.

             Finally, we note that the Commission has failed to

identify a single witness that supports a finding of materiality.

Cf. SEC v. Phan, 500 F.3d 895, 910 (9th Cir. 2007) ("The SEC, which

both bears the burden of proof and is the party moving for summary

judgment,     submitted     no    evidence     to     the     district   court

demonstrating     the   materiality   of     the    misstatement     about   the

payment terms.").       We do not think the letter was misleading, and

we find no substantial evidence supporting a conclusion otherwise.

             We need not reach the August 14 letter.13 In its opinion,

the Commission stated that while Section 17(a)(1) and Rule 10b-

5(a) & (c) "would proscribe even a single act of making or drafting

a material misstatement to investors, Section 17(a)(3) is not




     13   We also do not reach the defense of whether the last
sentence of the relevant paragraph was no more than a non-
actionable "opinion," protected under Omnicare, Inc. v. Laborers
Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1327
(2015).


                                   - 29 -
susceptible to a similar reading.               Of course, one who repeatedly

makes or drafts such misstatements over a period of time may well

have engaged in a fraudulent 'practice' or 'course of business,'

but not every isolated act will qualify."                See also In re Anthony

Fields, CPA, Securities Act Release No. 9727, Exchange Act Release

No. 74,344, Investment Company Act Release No. 31,461, 2015 WL

728005,   at    *10   (Feb.    20,    2015)    ("[A]n    isolated       misstatement

unaccompanied by other conduct does not give rise to liability

under [Section 17(a)(3)].").             Even were we to assume that the

August    14    letter   was    misleading,        in    light     of    the   SEC's

interpretation of Section 17(a)(3) and our conclusion about the

August 2 letter, we find there is not substantial evidence to

support   the    Commission's        finding    that    Flannery    engaged    in   a

fraudulent "practice" or "course of business."

                                        III.

           For the reasons above, we grant the petitions for review

and vacate the Commission's order.




                                       - 30 -
