(February 19) – “In a slap to the Securities and Exchange Commission, a federal appeals court has ruled that theft by a broker doesn’t constitute securities fraud,” writes Judith Burns in today’s Wall Street Journal.

“The Fourth Circuit U.S. Court of Appeals, in a Jan. 26 ruling, reversed a lower court and dismissed an SEC lawsuit against Charles Zandford, a former broker who allegedly defrauded two clients by selling assets in their brokerage account and keeping the proceeds for himself.”

“Mr. Zandford’s theft, from an elderly man in poor health and his mentally retarded daughter, while ‘reprehensible,’ doesn’t amount to securities fraud, the Richmond, Va., appellate court decreed. It rejected the SEC’s case and ruled in favor of Mr. Zandford’s court-appointed attorney, Erin Roth, a third-year Georgetown University law student.”

“Ms. Roth, 25, had never litigated a case before, but convinced the court that the SEC was stretching its authority beyond the bounds intended by Congress. While she had help from other students and faculty members, none of them had ever handled a securities case, said Steven Goldblatt, a law professor and director of the appellate litigation program at Georgetown University.”

” ‘We’re just generalist appellate lawyers,’ said Mr. Goldblatt, who praised the students for “a great job” bringing the case against more experienced SEC attorneys.”

“As a matter of common sense, ‘you might think stealing money from a brokerage account is securities fraud,’ said Robert Jacobson, a former Georgetown law student, now an associate at the Minneapolis law firm of Dorsey & Whitney, who worked on Mr. Zandford’s brief. But, he said U.S. securities laws are meant to prevent brokers from misleading clients, not to be ‘a catch-all for theft.’ “

“The SEC claimed that since Mr. Zandford had been criminally convicted of wire fraud involving securities, he could be sued and found liable in civil court for securities fraud.”

” ‘We have always taken the position that brokers who steal from their customers are committing securities fraud,’ commented Richard Walker, director of the SEC’s enforcement division. ‘This may be a theft, but in our view, it’s also securities fraud.’ “