The First Circuit, in a closely watched securities case, reversed a $93 million summary judgment ruling for the Securities and Exchange Commission this April. The SEC's case against Commonwealth began back in 2019, when it alleged in the United States District Court for the District of Massachusetts that the company, an investment advisor, failed to disclose material conflicts of interest concerning its revenue-sharing payments, in violation of the Investment Advisers Act of 1940. In April 2024, the district court granted summary judgment to the SEC and awarded the SEC a $93 million judgment.
Nearly a year later, on April 1, 2025, the First Circuit in SEC v. Commonwealth, No. 24-1427, reversed, finding two problems with the district court's summary judgment order. First, the First Circuit found that the trial court erred when it in essence held that all potential conflicts of interest are material as a matter of law. Applying what the First Circuit described as the "correct test of materiality," a reasonable jury could have found that these additional disclosures would not have so "significantly altered the 'total mix' of information made available."
Second, the First Circuit rejected the large disgorgement order, in light of what it called "concerning, fundamental legal errors" as to how the district court calculated disgorgement. In particular, the First Circuit took issue with the SEC's evidence of causation. The First Circuit concluded that, if the SEC cannot show that a given amount is a reasonable approximation of a company's ill-gotten gains or that there is a causal connection between the amount requested and the company's illicit profit, then the SEC's requested disgorgement cannot survive. The SEC sought a disgorgement award it called representative of Commonwealth's profits because "at least some" of Commonwealth's clients would have moved money to other lower-cost funds had the omissions been disclosed. The First Circuit declined to accept this as the relevant standard because it encompassed "too wide a range of possibilities." Instead, the standard "requires more analysis and connection to move from a 'few' investors to 'every' investor."
Overall, the Commonwealth opinion reaffirms that materiality is typically determined by the jury, and, in order to prove disgorgement, the SEC must prove a causal connection as to how the allegedly ill-gotten gains are actually connected to the wrongdoing. The First Circuit remanded for further proceedings, and the ultimate findings in this matter remain to be seen.