Section 10(b) of the Exchange Act: enabling statute, giving SEC power to prohibit fraud related to securities transaction.
Rule 10b-5(b) of the Exchange Act
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading
Elements
Jurisdiction
use of any means or instrumentality of interstate commerce
this is a very broad concept: mail, driving on the highway, phone call count as instrumentality of interstate commerce.
Must be commenced in federal court
Standing (SEC doesn’t need to prove standing)
Only a person who purchased or sold stock has standing to bring a private action under Rule 10b-5. Blue Chip Stamps
Scienter (Ernst & Ernst)
Intent
Knowledge
Reckless
Omission or misstatement
Conduct must be deceptive or manipulative to give rise to a 10(b) violation (Santa Fe)
Omissions: must also prove duty. Duty includes:
SEC directives
Duty to correct: must correct after making a statement which, though believed when made, turns out to be false
Duty to update: must update after making a statement which, truthful when made, becomes inaccurate
Half-truth: if what is omitted from a statement renders the statement itself misleading, the omission becomes culpable
Materiality
TSC test: material = substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote
For things that are not certain to happen - Probability/magnitude test: Balance both the indicated probability that the event will occur and the anticipated magnitude of the event
Mosaic information (Texas Gulf Sulphur)
Primary participant
The person with final authority over the dissemination of the misleading statement is the primary participant. (Janus)
Causation (SEC doesn’t need to prove causation)
Transaction causation
Reliance: the misrepresentation cause you to buy/sell
Fraud on the market: presumption that efficient markets will represent the fair price of the relevant stock, therefore P can prove causation by showing that it relies on the efficiency of the market.
Loss causation
Defendant’s wrongful act not only must have caused the plaintiff to buy or sell a security (transaction causation), it must also have been the cause of the plaintiff’s economic loss on the security
Lead plaintiff PSLRA:
Court appoints P who suffered the most loss (usually institutions)
Lead P will choose whether the action goes forward and the lawyer.
This is because the lead plaintiff has substantial skin in the issues.
PSLRA pushed class actions to the state courts
In response, Congress passed SLUSA to allow class action with more than 50 Ps involving listed shares to be removed and litigated...