Securities Fraud

 Fraud in Connection with the Purchase or Sale of Securities

The principal tool for promoting the informational integrity of securities transactions is Rule 10b-5.


Scienter
The Supreme Court held in Ernst & Ernst v. Hochfelder, that private actions under Rule 10b-5 must show that the defendant acted with scienter in order to succeed.



Fraud elements of private 10b-5 actions

Although neither §10(b) nor Rule 10b-5 specifies the elements a plaintiff must show to be entitled to relief, the Supreme Court has understood a 10b-5 action to bear a strong resemblance to its forbearer—old-fashioned common law deceit.

The plaintiff has the burden of showing the following elements

Material misinformation
The defendant affirmatively misrepresented a material fact, or omitted a material fact that made his statement misleading, or remained silent on the face of a fiduciary duty to disclosure a material fact.

Scienter
The defendant knew (or was reckless in not knowing) the true state of affairs and recognised that the plaintiff might rely on the misinformation.

Reliance
The plaintiff relied on the misrepresentation. In 10b-5 cases involving a duty to speak, courts dispense with reliance if the undisclosed information was material.  In 10b-5 cases involving transactions on impersonal trading markets, courts infer reliance from the dissemination of misinformation in the trading market. 

Causation
The plaintiff suffered actual losses proximately caused by the misrepresentation.

Damages
The plaintiff suffered damages. Courts use a variety of theories to measure damages under Rule 10b-5. Punitive damages are not available under Rule 10b-5.


Defenses on private 10b-5 actions

Limitations and repose periods
The Sarbanes-Oxley Act adopts a statute of limitations for private 10b-5 actions.

In Pari Delicto Defense
According to the Supreme Court, a 10b-5 defendant can raise an in pari delicto defense when the plaintiff bears “substantially equal responsibility”for the violations he seeks to redress.

Contribution and Indemnification




The Affirmative Duty to Disclosure


Listing Standard


Fiduciary Duties


SEC Enforcement