What are the Elements of a Federal Securities Law Claim for a Violation of Rule 10b-5?

Section 10(b) of the Securities Exchange Act of 1934 [15 USC § 78j(b)] provides that:

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… [to] use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement… 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.

SEC Manipulative and Deceptive Devices and Contrivances Rule, 17 C.F.R. § 240.10b-5 (2004), 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,

  • To employ any device, scheme, or artifice to defraud,

  • 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

  • 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.

“To succeed on a Rule 10b-5 fraud claim [based on an untrue statement or omission of a material fact], a plaintiff must establish (1) a false statement or omission of material fact; (2) made with scienter; (3) upon which the plaintiff justifiably relied; (4) that proximately caused the plaintiff’s injury.” Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997) (citing Bruschi v. Brown, 876 F.2d 1526, 1528 (11th Cir. 1989)).

“Scienter” is defined as “a mental state embracing intent to deceive, manipulate, or defraud.” Aaron v. SEC, 446 U.S 680, 686 n.5, 100 S. Ct. 1945, 1950 n.5, 64 L. Ed. 2d 611 (1980). In the Eleventh Circuit, “scienter” may also consist of “severe recklessness” by the defendant, see, e.g., Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 790 (11th Cir. 2010); however, the Supreme Court has left open the question whether recklessness may satisfy the scienter requirement. See Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1323, 179 L. Ed. 2d 398 (2011) (“We have not decided whether recklessness suffices to fulfill the scienter requirement.”); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 n.3, 127 S. Ct. 2499, 2507 n.3, 168 L. Ed. 2d 179 (2007) (declining to decide issue because “whether and when recklessness satisfies the scienter requirement is not presented in this case”).

With respect to the causation element, “a plaintiff must prove both ‘transaction causation’ and ‘loss causation.’” Robbins, 116 F.3d at 1447. The former is merely “another way of describing reliance,” while the latter concerns “the link between the defendant’s misconduct and the plaintiff’s economic loss.” Id. Although some courts have held that, under a “fraud-on-the-market” theory, plaintiffs may establish loss causation if they show that the price of their security on the date of purchase was inflated due to the misrepresentation, see id. at 1448, the Eleventh Circuit has rejected such a view. Rather, “the fraud on the market theory, as articulated by the Supreme Court, is used to support a rebuttable presumption of reliance, not a presumption of causation.” Id. at 1448 (citing Basic v. Levinson, 485 U.S. 224, 241-42, 108 S. Ct. 978, 992, 99 L. Ed. 2d 194 (1988)).

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