## Facts

- The SEC brought a civil enforcement action alleging a scheme to manipulate upward the price of U.S. Environmental, Inc. (USE) stock, in violation of Exchange Act § 10(b) and Rule 10b-5.
- The alleged scheme involved trading USE shares among participants and nominees to create the false appearance of an active market and to support an artificial price.
- John Romano was a trader and registered representative at Castle Securities Corp., a broker-dealer alleged to have participated in the scheme.
- The SEC alleged Romano knowingly or recklessly furthered the manipulation by effecting offers, purchases, and sales lacking legitimate economic purpose and intended to create the appearance of active trading.
- The SEC alleged Romano executed trades at a promoter’s direction that he knew, or was reckless in not knowing, were manipulative and contributed to misleading market activity and artificial pricing.
- Romano moved to dismiss under Rule 12(b)(6), arguing he could not be primarily liable absent a shared overall manipulative purpose with the promoter.
- The district court dismissed the § 10(b)/Rule 10b-5 claim against Romano for failure to adequately allege the manipulative intent required for primary liability.

## Issues

1. Whether a trader can be primarily liable under § 10(b) and Rule 10b-5 for executing trades he knows (or is reckless in not knowing) are manipulative, even if he does not share the promoter’s overarching purpose to manipulate the market.

## Decision

- The Second Circuit reversed the Rule 12(b)(6) dismissal.
- The court held the SEC stated a claim for primary liability by alleging Romano personally executed manipulative trades with knowledge or recklessness as to their manipulative nature.
- The court vacated the dismissal order and remanded for further proceedings.

## Legal Principles

- “Manipulation” under § 10(b) and Rule 10b-5 includes trading practices that artificially affect market activity or price by creating a false appearance of supply, demand, or trading volume.
- Primary liability may be based on a defendant’s own manipulative trading activity performed with scienter (knowledge or recklessness), even if the defendant acted at another person’s direction.
- The SEC need not plead that the defendant conceived the scheme or shared the orchestrator’s overall objectives where the defendant is alleged to have directly carried out manipulative acts with the required mental state.
- At the Rule 12(b)(6) stage, the complaint is read in the plaintiff’s favor; allegations that the defendant executed sham trades lacking legitimate economic purpose and contributing to artificial pricing are sufficient to state a manipulation claim.

## Conclusion

The Second Circuit held that executing sham trades with knowledge or reckless disregard of their manipulative character can constitute primary market-manipulation liability under § 10(b) and Rule 10b-5, regardless of whether the trader shared the promoter’s broader plan, and it reinstated the SEC’s claim for further proceedings.


SEC v. U.S. Env’t, Inc., 155 F.3d 107 (2d Cir. 1998)