Securities Law Commons^™

What Were They Thinking? State Of Mind Puzzles In Insider Trading, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

Insider trading law is famously incoherent, the well-recognized product of its piecemeal creation by the judiciary rather than Congress or (with exceptions) SEC rulemaking. Asking what the insider or tippee was thinking is both a doctrinal inquiry and an expression of exasperation aimed at those whose trading doesn’t seem worth the risk. This essay seeks to situate state of mind questions as they address both reasons for asking, and to show that the case law on the subject is even more puzzling than generally thought.

Top Ten Issues In De-Spac Securities Litigation, Wendy Gerwick Couture

University of Arkansas at Little Rock Law Review

I am delighted to contribute to this symposium on special purpose acquisition companies (SPACs). The securities litigation associated with the de-SPAC transaction is at an early stage, but courts are already wrestling with a number of unsettled issues that cast a mirror on SPACs and the securities laws more broadly. As these issues are resolved, they will affect the future of de-SPAC transactions as well as the regulatory environment in which they operate. In this essay, I identify ten such issues, drawing from the pleadings, briefings, and hearings in pending de-SPAC securities cases, with the goal of highlighting the key …

Out On A Limb: Support For A Limited Version Of Collective Scienter, Matt Mccabe

St. John's Law Review

(Excerpt)

This Note argues that the correct approach to imputing scienter to a corporation by means of the collective scienter theory is through the absurdity analysis taken by the United States Court of Appeals for the Seventh Circuit.

Sec V. Bauer: If The Glove Fits, It's Insider Trading, Kramer Ortman

Catholic University Law Review

Until SEC v. Bauer, insider trading has never been applied within the context of an open-ended mutual fund. In alleging insider trading against Jilaine Bauer, an account executive of a mutual fund, the SEC originally won summary judgment; however, the case on appeal saw the SEC drop its original theory, the classical theory of insider trading, in favor of the alternative misappropriation theory. This Note argues that the misappropriation theory applies in the context of open-ended mutual funds by recognizing that the policy reasons underlying the prohibitions against insider trading are centered on the principles of fairness, market integrity, …

Janus Capital Group, Inc. V. First Derivative Traders: The Culmination Of The Supreme Court’S Evolution From Liberal To Reactionary In Rule 10b-5 Actions, Charles W. Murdock

Charles W. Murdock

“Political” decisions such as Citizens United and National Federation of Independent Business (“Obamacare”) reflect the reactionary bent of several Supreme Court justices. But this reactionary trend is discernible in other areas as well. With regard to Rule 10b-5, the Court has handed down a series of decisions that could be grouped into four trilogies. The article examines the trend over the past 40 years which has become increasingly conservative and finally reactionary.

The first trilogy was a liberal one, arguably overextending the scope of Rule 10b-5. This was followed by a conservative trilogy which put a brake on such extension, …

Determining The Proper Pleading Standard Under The Private Securities Litigation Reform Act Of 1995 After In Re Silicon Graphics , Erin Brady

Pepperdine Law Review

No abstract provided.

What Were They Thinking? Insider Trading And The Scienter Requirement, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

On its face, the connection between insider trading regulation and the state of mind of the trader or tipper seems intuitive. Insider trading is a form of market abuse: taking advantage of a secret to which one is not entitled, generally in breach of some kind of fiduciary-like duty. This chapter examines both the legal doctrine and the psychology associated with this pursuit. There is much conceptual confusion in how we define unlawful insider trading—the quixotic effort to build a coherent theory of insider trading by reference to the law of fraud, rather than a more expansive market abuse standard—which …

An Inquiry Into The Perception Of Materiality As An Element Of Scienter Under Sec Rule 10b-5, Allan Horwich

Faculty Working Papers

In any private action or enforcement proceeding based on SEC Rule 10b-5 the plaintiff, including the Securities and Exchange Commission, must prove that the defendant engaged in deception or manipulation with scienter, that is, an intent to deceive (which lower courts have held encompasses reckless conduct). Where the gravamen of the claim is deception, the deception must have been material. A fact, including forward-looking information, is material if there is a substantial likelihood that a reasonable shareholder would consider the fact important in making his investment decision. This Article demonstrates that in an appropriate case an assessment of whether the …

Securities Law In The Roberts Court: Agenda Or Indifference?, Adam C. Pritchard

Articles

To outsiders, securities law is not all that interesting. The body of the law consists of an interconnecting web of statutes and regulations that fit together in ways that are decidedly counter-intuitive. Securities law rivals tax law in its reputation for complexity and dreariness. Worse yet, the subject regulated-capital markets-can be mystifying to those uninitiated in modem finance. Moreover, those markets rapidly evolve, continually increasing their complexity. If you do not understand how the financial markets work, it is hard to understand how securities law affects those markets.

Revitalizing Motive And Opportunity Pleading After Tellabs, Marvin Lowenthal

Michigan Law Review

Congress passed the Private Securities Litigation Reform Act of 1995 ("PSLRA") to prevent frivolous lawsuits that had been draining resources from businesses. This legislation included provisions for heightening the pleading requirements for the scienter, or state of mind, requirement for securities law violations. Many circuit courts debated whether the motive and opportunity test for scienter, applied initially by the Second and Third Circuits, survived the passage of the PSLRA. This Note argues that while the motive and opportunity test has been discounted by numerous circuits, it not only remains viable for pleading scienter under the PSLRA, but it accomplishes the …

(Mis)Judging Intent: The Fundamental Attribution Error In Federal Securities Law, Victor D. Quintanilla

Victor D. Quintanilla

This article examines the element of scienter (fraudulent intent) in claims of federal securities fraud under Section 10(b) of the Exchange Act and, more specifically, the U.S. Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) from a social-psychological perspective. The field of social psychology has documented a pervasive phenomena—the Fundamental Attribution Error—the failure of decision-makers to consider situational explanations, including the force of environments and social and situational norms on human conduct. In light of robust social-psychological research on the Fundamental Attribution Error, legal concepts such as intent, intentionality, mens rea, and …

The Case For Semi-Strong-Form Corporate Scienter In Securities Fraud Actions, Paul B. Maslo

Michigan Law Review First Impressions

The mental state of scienter - intent to defraud - is a required element of a securities fraud claim. The scienter inquiry is fairly straightforward when the defendant is an individual. It is more complex when a corporate entity is involved because a corporation can only act through its agents; it has no mind of its own. This article compares the three approaches courts have used to impute scienter to corporate defendants in the securities fraud context and concludes by recommending the approach which strikes an appropriate balance between several dueling public policy concerns.

The End Of The Securities Fraud Class Action As We Know It, Richard A. Booth

ExpressO

In this article, I argue that securities fraud class actions (SFCAs) should not be treated as class actions but rather should be treated as derivative actions. In addition, I argue that such actions should be dismissed unless it appears that insiders (including the company itself) have enjoyed gains from trading during the fraud period. Both of these conclusions are based on the fundamental argument that (1) securities law seeks to protect the interests of reasonable investors, (2) reasonable investors diversify, and (3) diversified investors are effectively protected against the supposed financial harms of securities fraud by virtue of being diversified, …

A Case-By-Case Approach To Pleading Scienter Under The Private Securities Litigation Reform Act Of 1995, Matthew Roskoski

Michigan Law Review

Securities fraud litigation under Rule lOb-5 threatens all publicly traded companies: according to the Stanford Securities Class Action Clearinghouse, in 1998 a securities fraud lawsuit was filed for nearly every day that the stock markets were open. Some of these lawsuits appear to be frivolous, triggered by inevitable fluctuations in stock prices (so-called "fraud by hindsight" complaints), while others represent legitimate efforts at private enforcement of the securities laws. Disposition on the pleadings is a critical defense strategy for all securities lawsuits. Securities fraud lawsuits that withstand a 12(b)(6) motion almost always settle, regardless of the actual merits of the …

Section 14(E) Of The Williams Act And The Rule 10b-5 Comparisons, Mark J. Loewenstein

Publications

The passage of the Williams Act in 1968 added a set of provisions to the Securities Exchange Act of 1934 to govern tender offers. In this article, Professor Loewenstein examines the antifraud provision of the Williams Act, codified as section 14(e) of the Securities Exchange Act of 1934, and the development of decisional law under it. After discussing the propriety of inferring a private cause of action from section 14(e), Professor Loewenstein argues that the judiciary's reliance on rule 10b-5 precedents to set the bounds of the 14(e) cause of action is unwarranted. He concludes: 1) that scienter should not …

Implied Contribution Under The Federal Securities Laws: A Reassessment, Mark J. Loewenstein

Publications

No abstract provided.

Elements Of Recovery Under Rule 10b 5: Scienter, Reliance, And Plaintiff's Reasonable Conduct Requirement, Rutheford B. Campbell Jr.

Law Faculty Scholarly Articles

A comparison of the commentaries on rule 10b-5 indicates that uncertainty is widespread in this area of securities law. One area that is needlessly confused is the proper selection and definition of those elements necessary for recovery in a 10b-5 action. The purpose of this article is to consider four distinct elements that continue to be the source of constant litigation and comment and to suggest an approach that clarifies their meaning and use. The four elements are: (1) scienter (the defendant's state of mind), (2) reliance, (3) justifiable reliance, and (4) materiality. This article will analyze the use of …

Scienter And Rule 10b-5: Development Of A New Standard..., Alan J. Ross, James F. Sealler

Cleveland State Law Review

The Securities and Exchange Act of 1934 has had extensive impact on public awareness of corporate information, and has unquestionably provided substantial protection to the investing public. The anti-fraud provisions of this act, and the regulations promulgated thereunder, engendered a number of issues material to the determination of the standards for violations. Perhaps the most difficult and confusing of these issues has been the concept of scienter.

Proof Of Scienter Necessary In A Private Suit Under Sec Anti-Fraud Rule 10b-5, Michigan Law Review

Michigan Law Review

Of the vast amounts of statutory and quasi-statutory material governing the securities business, the Securities and Exchange Commission's rule 10b-51 has potentially the greatest direct importance to the largest number of people. While several provisions in the government's regulatory scheme set more or less specific standards of conduct for securities issuers, broker-dealers, or corporate insiders, the anti-fraud provisions of rule 10b-5 apply to all persons directly or indirectly connected with any sale or purchase of securities transacted through a facility of interstate commerce, the mails, or on a national exchange. In its three clauses, rule 10b-5 forbids any person (1) …