Violation of Federal Statutes

West Palm Beach, Florida — Commercial Litigation Attorney, Russell L. Forkey, Esq.

There are a number of federal statutes that provide private causes of action for their violation. Because this website is generally limited to securities, commodities and precious metals matters, the below discussion relates to one such statute.

Federal Securities Litigation

There are a number of United States federal statutes relating to securities regulation, including Securities Exchange Act of 1934. There are also fairly extensive regulations under the Exchange Act, promulgated by the Securities and Exchange Commission (SEC). In this post, we are limiting the discussion to Section 10b of the Exchange Act and Rule 10b-5 promulgated by the SEC. 10b-5 sets forth specific standards relative to federal civil liability between parties in the purchase or sale of securities.

There exists many interpretative releases and case law relating to Rule 10b-5. So many, in fact, that it would be impossible to summarize the same. Consequently, this post is limited to a general discussion of Rule 10b-5. This discussion is not meant to be complete in all material aspects. There may be other statutory or common law claims that could be instituted for a particular securities matter. Please keep in mind that the below information is being provided for general educational purposes only and should not be relied upon as legal advice. This is especially true where, as in 10b-5 cases, such matters are usually very fact specific. If you have any questions relative to your particular situation, you should contact experienced legal counsel.

Section 10b and Rule 10b-5

In order to begin this discussion, it is necessary to quote the material provisions of the statute, which can be found at 15 USC Sec. 78j. It states as follows:

Manipulative and Deceptive Devices

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 affect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security registered on a national securities exchange, 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.
2. 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, 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.

Pursuant to the authority granted to it by this statute, the Securities and Exchange Commission adopted Rule 10b-5 (SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5), which states:

1. 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
2. To employ any device, scheme, or artifice to defraud
3. 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
4. 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.

In order to state a state a claim against a defendant for violation of Section 10 of the Act and Rule 10b-5, a plaintiff must allege, in connection with the purchase or sale of securities, (1) a misstatement or an omission (2) of material fact (3) made with scienter (4) on which the plaintiffs relied (5) that proximately caused the plaintiff injury. Additionally, in 1995, Congress amended the Act through the passage of the Private Securities Litigation Reform Act (PSLRA). In relevant part, the PSLRA provides that:

In any private action arising under this chapter in which the plaintiff alleges that the defendant: (A) made an untrue statement of a material fact or (B) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed.

Additionally, Rue 9(b) of the Federal Rules of Civil Procedure, which has been interpreted to apply to securities fraud claims, requires that in all averments of fraud or mistake shall be stated with particularity.

To summarize, a plaintiff pleading a false or misleading statement or omission as the basis for a section 10(b) and Rule 10b-5 securities fraud claim must, to avoid dismissal:

1. specify each statement alleged to have been misleading, i.e. contended to be fraudulent
2. identify the speaker
3. state when the statement was made
4. plead with particularity the contents of the false representation
5. plead with particularity what the person making the misrepresentation obtained thereby
6. explain the reason or reasons why the statement is misleading, i.e. why the statement is fraudulent

As the reader can see from the above discussion, the filing of a 10b-5 action or for that matter any federal action requires experience not only within the federal court system but also an understanding of the Federal Rules of Civil Procedure and the area in which a litigant desires to file an action. Consequently, a plaintiff’s chance of success is enhanced by retaining qualified legal counsel.