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18. SECURITIES EXCHANGE ACT

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Introductory Comment

The instructions in this chapter apply only to actions brought under the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), for false or misleading representations in connection with the purchase or sale of securities ("Rule 10b-5 actions"). As stated in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341 (2005): 

Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the "use or employ[ment] . . . of any . . . deceptive device," (2) "in connection with the purchase or sale of any security," and (3) "in contravention of" Securities and Exchange Commission "rules and regulations." 15 U.S.C. § 78j(b). Commission Rule 10b-5 forbids, among other things, the making of any "untrue statement of material fact" or the omission of any material fact "necessary in order to make the statements made . . . not misleading." 17 C.F.R. § 240.10b-5 (2004).

The courts have implied from these statutes and Rule a private damages action, which resembles, but is not identical to, common-law tort actions for deceit and misrepresentation. . . . And Congress has imposed statutory requirements on that private action . . . (citations omitted).

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737–40 (1975), the Supreme Court, relying chiefly on "policy considerations," limited the Rule 10b-5 private right of action to plaintiffs who themselves were purchasers or sellers. As stated in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 80-81 (2006), the policy the Court sought to promote in Blue Chip Stamps was that "[c]abining the private cause of action by means of the purchaser-seller limitation" minimizes the ill effects of vexatious private litigation brought to compel a substantial settlement. This limitation does not apply to government enforcement actions brought pursuant to Rule 10b-5. Id. at 81. The Supreme Court also limited the scope of liability under Section 10(b) of the 1934 Act to "primary violators," holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 176-78 (1994), that Section 10(b) does not allow recovery for aiding and abetting because the text of the Act "does not . . . reach those who aid and abet a § 10(b) violation. . . .The proscription does not include giving aid to a person who commits a manipulative or deceptive act." Id. at 177–78.

Rule 10b-5 forbids not only a defendant’s material misrepresentations or omissions but also "any device, scheme, or artifice to defraud," as well as "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person." 17 C.F.R. § 240.10b-5(a), (c). Most private lawsuits under Rule 10b-5, however, involve "disclosure" claims, which Rule 10b-5(b) defines as "any untrue statement of a material fact or . . . omi[ssion] 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." These instructions, therefore, focus on Rule 10b-5 disclosure claims.

Prior editions of these instructions interspersed Rule 10b-5 instructions with instructions concerning Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k (the "1933 Act"), as well as instructions applicable to a claim by a customer of a brokerage firm that the customer’s broker engaged in excessive trading ("churning") in order to run up commissions. The Committee has not included 1933 Act instructions or churning instructions in this edition, nor instructions for claims arising out of insider trading or other federal securities statutes such as the Sarbanes–Oxley Act of 2002 (Pub. L. 107-204), because such claims are rarely tried to a jury.