See also Private Securities Litigation Reform Act. The SEC rule that prohibits deceptive or manipulative practices in the buying or selling of securities.
Section 10(b) of the Securities Exchange Act makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements this provision by making it unlawful to, among other things, “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.” 17 CFR § 240.10b-5(b). Courts have implied a private cause of action from the text and purpose of § 10(b). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007).
To prevail on a private claim plaintiffs must prove “(1) a material misrepresentation or omission by D; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S. Ct. 761, 169 L. Ed. 2d 627 (2008).
Two elements for establishing a violation of § 10(b) and Rule 10b-5 by corporate insiders are the existence of a relationship affording access to inside information intended to be available only for a corporate purpose, and the unfairness of allowing a corporate insider to take advantage of that information by trading without disclosure. A duty to disclose or abstain does not arise from the mere possession of nonpublic market information. Such a duty arises rather from the existence of a fiduciary relationship. Chiarella v. United States, 445 U.S. 222. There must also be 'manipulation or deception' to bring a breach of fiduciary duty in connection with a securities transaction within the ambit of Rule 10b-5. Thus, an insider is liable under the Rule for inside trading only where he fails to disclose material nonpublic information before trading on it and thus makes secret profits.
Rule 10b-5 was promulgated pursuant to the grant of authority given the SEC by Congress in Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b). By that Act Congress purposed to prevent inequitable and unfair practices and to insure fairness in securities transactions generally, whether conducted face-to-face, over the counter, or on exchanges, see 3 Loss, Securities Regulation 1455-56 (2d ed. 1961). The Act and the Rule apply to the transactions here, all of which were consummated on exchanges. See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir.), cert. denied, 382 U.S. 811, 86 S. Ct. 23, 15 L. Ed. 2d 60 (1965); Cochran v. Channing Corp., 211 F. Supp. 239, 243 (SDNY 1962). Whether predicated on traditional fiduciary concepts, see, e.g., Hotchkiss v. Fischer, 136 Kan. 530, 16 P.2d 531 (Kan.1932), or on the 'special facts' doctrine, see, e.g., Strong v. Repide, 213 U.S. 419, 29 S. Ct. 521, 53 L. Ed. 853 (1909), the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information, see Cary, Insider Trading in Stocks, 21 Bus.Law. 1009, 1010 (1966), Fleischer, Securities Trading and Corporation Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. 1271, 1278-80 (1965).
The essence of the Rule is that anyone who, trading for his own account in the securities of a corporation has 'access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone' may not take 'advantage of such information knowing it is unavailable to those with whom he is dealing,' i.e., the investing public. Matter of Cady, Roberts & Co., 40 SEC 907, 912 (1961). Insiders, as directors or management officers are, of course, by this Rule, precluded from so unfairly dealing, but the Rule is also applicable to one possessing the information who may not be strictly termed an 'insider' within the meaning of Sec. 16(b) of the Act. Cady, Roberts, supra. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. Cady, Roberts, supra at 911. Congress intended by the Exchange Act to eliminate the idea that the use of inside information for personal advantage was a normal emolument of corporate office. See Sections 2 and 16 of the Act; H.R.Rep.No. 1383, 73rd Cong., 2d Sess. 13 (1934); S.Rep.No. 792, 73rd Cong., 2d Sess. 9 (1934); S.E.C., Tenth Annual Report 50 (1944). See Cady, Roberts, supra at 912.
Private federal securities fraud actions are based upon federal securities statutes and their implementing regulations. 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 CFR §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. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 730, 744 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185, 196 (1976). And Congress has imposed statutory requirements on that private action. E.g., 15 U. S. C. §78u-4(b)(4). In cases involving publicly traded securities and purchases or sales in public securities markets, the action's basic elements include: (1) a material misrepresentation (or omission), see Basic Inc. v. Levinson, 485 U. S. 224, 231-232 (1988); (2) scienter, i.e., a wrongful state of mind, see Ernst & Ernst, supra, at 197, 199; (3) a connection with the purchase or sale of a security, see Blue Chip Stamps, supra, at 730-731; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as 'transaction causation,' see Basic, supra, at 248-249 (nonconclusively presuming that the price of a publicly traded share reflects a material misrepresentation and that plaintiffs have relied upon that misrepresentation as long as they would not have bought the share in its absence); (5)economic loss, 15 U. S. C. §78u-4(b)(4); and (6)'loss causation,' i.e., a causal connection between the material misrepresentation and the loss, ibid.; cf. T. Hazen, Law of Securities Regulation, §§12.11,  (5th ed. 2002).
Judicially implied private securities-fraud actions resemble in many (but not all) respects common-law deceit and misrepresentation actions. See Blue Chip Stamps, supra, at 744; see also L. Loss & J. Seligman, Fundamentals of Securities Regulation, 910-918 (5th ed. 2004) (describing relationship to common-law deceit). The common law of deceit subjects a person who 'fraudulently' makes a 'misrepresentation' to liability 'for pecuniary loss caused' to one who justifiably relies upon that misrepresentation. Restatement (Second) of Torts §525, p. 55 (1977) (hereinafter Restatement of Torts); see also Southern Development Co. v. Silva, 125 U. S. 247, 250 (1888) (setting forth elements of fraudulent misrepresentation).
And the common law has long insisted that a plaintiff in such a case show not only that had he known the truth he would not have acted but also that he suffered actual economic loss. See, e.g., Pasley v. Freeman, 3 T. R. 5:1, 100 Eng. Rep. 450, 457 (1789) (if 'no injury is occasioned by the lie, it is not actionable: but if it be attended with a damage, it then becomes the subject of an action'); Freeman v. Venner, 120 Mass. 424, 426 (1876) (a mortgagee cannot bring a tort action for damages stemming from a fraudulent note that a misrepresentation led him to execute unless and until the note has to be paid); see also M. Bigelow, Law of Torts 101 (8th ed. 1907) (damage 'must already have been suffered before the bringing of the suit'); 2 T. Cooley, Law of Torts §348, p. 551 (4th ed. 1932) (plaintiff must show that he 'suffered damage' and that the 'damage followed proximately the deception'); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §110, p. 765 (5th ed. 1984) (hereinafter Prosser and Keeton) (plaintiff 'must have suffered substantial damage,' not simply nominal damages, before 'the cause of action can arise').
In order to establish a claim under Rule 10b-5, a plaintiff must prove fraud in connection with the purchase of securities. See 17 C.F.R. § 240.10b-5; Gasner v. Board of Supervisors of the County of Dinwiddie, 103 F.3d 351, 356 (4th Cir. 1996).
Section 10(b) of the Securities Exchange Act makes it 'unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.' 15 U. S. C. §78j. Pursuant to this provision, the SEC has promulgated Rule 10b-5. That Rule forbids the use, 'in connection with the purchase or sale of any security,' of (1) 'any device, scheme, or artifice to defraud'; (2) 'any untrue statement of a material fact'; (3) the omission of 'a material fact necessary in order to make the statements made . . . not misleading'; or (4) any other 'act, practice, or course of business' that 'operates . . . as a fraud or deceit.' 17 CFR §§240.10b-5 (2000).
The scope of Rule 10b-5 is coextensive with the coverage of §10(b), see United States v. O'Hagan, 521 U. S. 642, 651 (1997); Ernst & Ernst v. Hochfelder, 425 U. S. 185, 214 (1976)
To succeed in a Rule 10b-5 suit, a private plaintiff must show that the defendant used, in connection with the purchase or sale of a security, one of the four kinds of manipulative or deceptive devices to which the Rule refers, and must also satisfy certain other requirements not at issue here. See, e.g., 15 U. S. C. §78j (requiring the 'use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange'); Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193 (1976) (requiring scienter, meaning 'intent to deceive, manipulate, or defraud'); Basic Inc. v. Levinson, 485 U. S. 224, 231-232 (1988) (requiring that any misrepresentation be material); id., at 243 (requiring that the plaintiff sustain damages through reliance on the misrepresentation).
Rule 10b-5 makes it unlawful to use the mails or any means of interstate commerce in connection with the sale or purchase of stock to defraud, make an untrue statement of material fact, to omit a material fact, or to engage in any practice that operates as fraud or deceit upon any person. Rule 10b-5 is not applicable only to insider trading. Rule 10b-5 applies to any person who makes a misrepresentation in connection with the purchase or sale of stock. Rule 10b-5 applies to the sale of any security. Jurisdictional limitations: A violation of rule 10b-5 must involve the use of some instrumentality of interstate commerce. The use of a telephone, telegraph, or mail satisfies the interstate instrumentality requirement. A fact is material if there is a substantial likelihood that a shareholder would consider it important in deciding whether to buy or sell.