## Facts

- The SEC brought a civil enforcement action against Eldon Miller, a dealer in government securities active in the repurchase agreement (repo) market, seeking a permanent injunction.
- The challenged transactions were repos (also described as buy/buy backs): an immediate sale of specified securities with an agreement to repurchase the same securities later for the original price plus interest; economically, the transactions functioned as short-term collateralized loans.
- Miller’s repo agreements with institutional customers commonly included a right of substitution, permitting replacement of the originally delivered securities with different securities of the same type and equivalent value during the repo term.
- The SEC alleged Miller’s use of customer securities and substitution practices, together with related funding techniques (including reverse repos), exposed customers to undisclosed risks and constituted deceptive conduct in connection with securities transactions.
- The case was tried to the court in a bench trial, after which the court issued findings of fact and conclusions of law.

## Issues

1. Whether Miller’s repo practices—particularly exercising a right of substitution and using customer securities—constituted deceptive conduct in connection with the purchase or sale of securities in violation of Exchange Act § 10(b) and Rule 10b-5.
2. Whether the SEC proved grounds for a permanent injunction under 15 U.S.C. § 77t(b), including a reasonable likelihood of future violations.

## Decision

- The court entered judgment for Miller and denied the SEC’s request for a permanent injunction.
- The court found the SEC failed to prove that Miller engaged in materially deceptive conduct under Rule 10b-5 in the context of the institutional repo market.
- The court also found the SEC failed to establish the showing required for injunctive relief, including a reasonable likelihood of future violations.

## Legal Principles

- Rule 10b-5 “deception” analysis is informed by market context, including the nature of the product, customary practices, and the sophistication and expectations of the counterparties.
- In repo transactions, a contractual right of substitution generally permits a dealer to substitute different securities of the same type and equivalent value; when such a feature is customary and understood in the trade, its use is not, by itself, fraudulent.
- Rule 10b-5 liability requires proof of materially misleading statements or omissions and scienter (at least recklessness); failure to prove these elements defeats the fraud claim.
- To obtain a permanent injunction under 15 U.S.C. § 77t(b), the SEC must show more than alleged past misconduct; it must demonstrate a reasonable likelihood of future violations warranting equitable relief.

## Conclusion

The court denied injunctive relief because the SEC did not prove that Miller’s repo substitution and related practices were materially deceptive or undertaken with the required state of mind in a market of sophisticated institutional participants, and it also failed to show a reasonable likelihood of future securities-law violations.


Sec. & Exch. Comm'n v. Miller, 495 F. Supp. 465 (S.D.N.Y. 1980)