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Corporations • Federal Securities Laws
CORP#065
Legal Definition
Rule 10b-5 seeks to prevent fraud in connection with the purchase or sale of a security. The elements of a 10b-5 claim are: (1) scienter, (2) a materially false or misleading statement or omission, *(3)* in connection with a purchase or sale of securities, *(4)* reliance, *(5)* damages, and *(6)* use of interstate commerce, the mail, or a national securities exchange.
Plain English Explanation
Rule 10b-5 is the most iconic, powerful securities related rule you will encounter. In 1975, SCOTUS Justice Rehnquist described 10b-5 as the "judicial oak which has grown from little more than a legislative acorn," meaning that what is now a massive, powerful rule first began as a much less important law. At its core, 10b-5 is a broad attempt to enforce a level of honesty when it comes to selling and purchasing stocks. In order to prove someone committed securities fraud under 10b-5, you'll need to establish the following elements:
(1) Scienter. What a stupid word, right? This is an old-timey Latin word that means "knowingly." In other words, to establish scienter, you must show that the person was deliberately aware of their actions. Scienter shows that a person didn't make an honest mistake, or misspeak.
(2) There must be a materially false or misleading statement or omission. In other words, you're looking for a person who has either said something or failed to say something they had an obligation to say that resulted in communicating false or misleading information to a reasonable investor who would likely think such information is important to know when making an investment decision.
(3) The false or misleading information must have something to do with someone either buying or selling stocks.
(4) The person who heard the false or misleading information must have actually relied on it. In other words, the person didn't hear the information and then disregard it only to later make the same investment recommendation for other reasons.
(5) There must be damages. Hurt feelings aren't enough. The buyer or seller must have experienced some sort of financial harm from the fraudulent information. Usually this means the stock is worth less than what was paid due to the deception.
(6) Finally, the last element is to show that there was some use of either interstate commerce (business between people living in different states), the mail, or a national stock market.
(1) Scienter. What a stupid word, right? This is an old-timey Latin word that means "knowingly." In other words, to establish scienter, you must show that the person was deliberately aware of their actions. Scienter shows that a person didn't make an honest mistake, or misspeak.
(2) There must be a materially false or misleading statement or omission. In other words, you're looking for a person who has either said something or failed to say something they had an obligation to say that resulted in communicating false or misleading information to a reasonable investor who would likely think such information is important to know when making an investment decision.
(3) The false or misleading information must have something to do with someone either buying or selling stocks.
(4) The person who heard the false or misleading information must have actually relied on it. In other words, the person didn't hear the information and then disregard it only to later make the same investment recommendation for other reasons.
(5) There must be damages. Hurt feelings aren't enough. The buyer or seller must have experienced some sort of financial harm from the fraudulent information. Usually this means the stock is worth less than what was paid due to the deception.
(6) Finally, the last element is to show that there was some use of either interstate commerce (business between people living in different states), the mail, or a national stock market.
