(last updated 21 Mar 13)

Section 10 -- 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 --
(b) 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.

Rule 10b-5
• Transaction (“in connection with purchase or sale of securities”)
• Plaintiff (“purchasers or sellers” / except SEC)
• Defendant (“primary violator” / including company)
• Elements
– Material misrepresentation or omission
– Scienter
– Reliance
– Causation
– Damages
• Procedure
– Jurisdictional nexus (federal court)
– Statute of limitations / repose
– Special rules for class actions

“In 1987 [Zandford] persuaded William
Wood, an elderly man in poor health, to open a joint investment account for himself and his mentally retarded daughter. … [T]he stated investment objective … were “safety of principal and income.” … The Woods entrusted him with $419,255. Before Mr.
Wood’s death in 1991, all of that money was gone.”
SEC v. Zandford (US 2002) (Stevens, J)
• Why is Court so generous? Why not treat this as case of theft?
• Is brokerage firm liable?

Rule 10b-5
• Transaction (“in connection with purchase or sale of securities”)
• Plaintiff (“purchasers or sellers” / except SEC)
• Defendant (“primary violator” / including company)
• Elements
– Material misrepresentation or omission
– Scienter
– Reliance
– Causation
– Damages
• Procedure
– Jurisdictional nexus (federal court)
– Statute of limitations / repose
– Special rules for class actions

“Netflix ended the third quarter of 2003 with approximately
1,291,000 total subscribers, up
144,000 or 13% sequentially. restatement corrects improper
“During the quarter Netflix acquired 383,000 new trial subscribers, a 38% year-overthese changes detract from a new trial subscribers acquired in
…

• Material misrepresentation or omission?
How know whether material? Info?
• Add state claims to the complaint -state fiduciary duties? Why?
• Plaintiffs? Class period? Holders?
Which plaintiff?
• Defendants? Corporate liability? Other defendants? Drafting lawyer?
Scheming outside agency?
• Where file? Venue?
• When file? Who pays for class notice?

The longstanding acceptance of the
rule by the courts, coupled with Congress’ failure to reject
favor … of the reasonable interpretation of the wording of §
10(b), wording which is directed toward injury suffered “in connection with the purchase or sale” of securities, argues significantly in
rule.
Blue Chip Stamps v. Manor Drug Stores (US
1975) (Rehnquist, J)
• Why is “The Chief” so upset about SFCA?
• Why is the Court so stingy?

– Presumption: “largest financial interest”
– Rebut: “Not adequately represent class”
– By most adequate plaintiff
– Subject to approval of court
Elliott Weiss
Univ of Arizona

PSLRA
Appointment of “lead plaintiff”
Not later than 90 days after the date on which a notice [of class action] the court shall consider any motion made by a purported class member in response to the notice, … and shall appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members (hereafter in this paragraph referred to as the "most adequate plaintiff")
Who is “lead plaintiff”?
…the court shall adopt a presumption that the most adequate plaintiff in any private action arising under this title is the person or group of persons that--
–
–
– has either filed the complaint or made a motion in response to a notice under subparagraph (A)(i); in the determination of the court, has the largest financial interest in the relief sought by the class; and otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil
Procedure.
The presumption described in subclause (I) may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff--
–
– will not fairly and adequately protect the interests of the class; or is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
Selection of lead counsel
The most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.
Restrictions on professional plaintiffs
Except as the court may otherwise permit, consistent with the purposes of this section, a person may be a lead plaintiff, or an officer, director, or fiduciary of a lead plaintiff, in no more than 5 securities class actions brought as plaintiff class actions pursuant to the Federal Rules of Civil
Procedure during any 3-year period.

“Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public -- eg, by means of the financial media, if such assertions are false and or misleading are so incomplete so as to mislead.”
SEC v. Texas Gulf Sulphur
(2d Cir 1968) (Friendly, J)

• What must complaint allege?
• How show corporate scienter? Is insider trading relevant?
• How show class members relied on misrepresentation/omission?
• How show misinformation caused stock price fall?
• What damages will the complaint allege? Need expert?
• When begin discovery?

• With whom will class counsel enter into settlement negotiations?
• What will pay class counsel fee?
How will this be set?
• What will judge look at in deciding to approve the settlement?
• Who will administer settlement funds? Firm a "private” agency?
• Adverse decisions by the trial court likely? Appeals likely?

“The SEC has filed an amicus brief espousing that [the
limitation on the plaintiff class in a Rule 10b-5 action for damages is an arbitrary restriction which unreasonably prevents some deserving plaintiffs from recovering damages …”
Blue Chip Stamps (US 1975)
* * *
“The SEC has consistently adopted a broad reading of “in connection with the purchase or sale of any security” [broker who accepts $, but not intending to deliver or sells intending to misappropriate]”
SEC v. Zandford (US 2002)
Section 10(b) says the SEC can promulgate rules. Can
SEC interpret statute?
See Rule 10b-18