Fraud on the Market and the Substantive Theory of Class Actions (original) (raw)
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Defining Recklessness: a Doctrinal Approach to Deterrence of Secondary Market Securities Fraud
Social Science Research Network, 2010
Little has been written about recklessness as a level of intent sufficient to impose civil liability, even less in the context of the federally implied cause of action for securities fraud. This article engages the concept of recklessness in the setting of class action, fraud-on-the-market lawsuits against securities issuers and their executives. Extending prior work, the author demonstrates the utility of contextual factors in an assessment of an individual corporate actor's recklessness at the crucial pleading stage. The proposed rubric-based on magnitude, atypicality, and timing of the information misrepresented-is informed by recent Supreme Court pronouncements on scienter, by established 10(b) case law attempting to define recklessness as a level of intent producing fraud, and by the Third Restatement's recent adoption of a fundamentally objective approach to recklessness in tort law more generally. By providing an intellectually grounded prescription for the evaluation of inferences of recklessness in 10(b) cases, this work both harmonizes the federal common law of securities fraud and reinforces its normative power. At the same time, the author's conception of recklessness revives largely moribund legislative efforts to increase executive accountability and to improve the quality of corporate disclosure for the benefit of shareholders. Thus, it adds meaningfully to the literature seeking to establish and put into service an optimal level of securities fraud deterrence.
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See 3 Loss, supra at 1426. Rule 10b-5 contains language almost identical to that used in § 17(a): 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, (a) To employ any device, scheme, or artifice to defraud, (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 light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5 (1977). Rule 10b-5, 17 C.F.R. § 240.10b-5 (1977), quoted in note 2 supra. Section 21(d) of the Securities Exchange Act of 1934 empowers the SEC to seek injunctions against violations of § 10(b).
A Development in Insider Trading Law in the United States: A Case Note on Chiarella v. United States
University of Pennsylvania Journal of International Law, 1981
In Chiarella P. United States [1], the United States Supreme Court reversed the criminal conviction under Section 10(b) of the Securities Exchange Act of 1934 and Rule lOb-5 of the Securities and Exchange Commission (SEC) of a financial printer employee who had deduced the names of target companies from documents he was working on for the bidder, purchased stocks in the target companies before the bids were announced, and sold at higher prices immediately after the bids were made public. The narrow holding of the Court was that the trial court's instruction to the jury, that Chiarella could be convicted merely on the basis that he knew of the forthcoming bid and willfully failed to inform the sellers, was improper. The Court stated: "We hold that a duty to disclose under § 10(b) does not arise from the mere possession of non-public market information". While Chiarella's conviction was reversed, he did not avoid the consequences of his acts. The SEC had previously sued him in a civil injunctive proceeding to which he consented and in which he agreed to return his $ 30,000 profit to the sellers. He also lost his job. Before describing the interesting discussion in the majority, concurring and dissenting opinions, it is important to emphasize that the holding in the case is very narrow and that it is unclear what the Supreme Court would hold in cases where a different theory of culpability is presented. Section 10(b) of the 1934 Act [2] prohibits the use "in connection with the purchase or sale of any security ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe". Pursuant to this section, the SEC in 1942 Promulgated Rule lOb-5 [31 which provides: 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, (1) to employ any device, scheme, or artifice to defraud. (2) 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, or • Member of the Board of Advisory Editors of the Journal of Comparative Corporate Law and Securities Regulation.
J. Comp. Corp. L. & Sec. Reg., 1981
In Chiarella P. United States [1], the United States Supreme Court reversed the criminal conviction under Section 10(b) of the Securities Exchange Act of 1934 and Rule lOb-5 of the Securities and Exchange Commission (SEC) of a financial printer employee who had deduced the names of target companies from documents he was working on for the bidder, purchased stocks in the target companies before the bids were announced, and sold at higher prices immediately after the bids were made public. The narrow holding of the Court was that the trial court's instruction to the jury, that Chiarella could be convicted merely on the basis that he knew of the forthcoming bid and willfully failed to inform the sellers, was improper. The Court stated: "We hold that a duty to disclose under § 10(b) does not arise from the mere possession of non-public market information". While Chiarella's conviction was reversed, he did not avoid the consequences of his acts. The SEC had previously sued him in a civil injunctive proceeding to which he consented and in which he agreed to return his $ 30,000 profit to the sellers. He also lost his job. Before describing the interesting discussion in the majority, concurring and dissenting opinions, it is important to emphasize that the holding in the case is very narrow and that it is unclear what the Supreme Court would hold in cases where a different theory of culpability is presented. Section 10(b) of the 1934 Act [2] prohibits the use "in connection with the purchase or sale of any security ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe". Pursuant to this section, the SEC in 1942 Promulgated Rule lOb-5 [31 which provides: 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, (1) to employ any device, scheme, or artifice to defraud. (2) 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, or • Member of the Board of Advisory Editors of the Journal of Comparative Corporate Law and Securities Regulation.