West Virginia Law Review

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The federal securities acts of 1933 and 1934 sought to protect the investing public against fraud and manipulation by replacing the doctrine of caveat emptor with a system of full disclosure. Section 10(b) of the Securities Exchange Act of 1934 gives the Securities and Exchange Commission the power to promulgate rules in order to prohibit "any manipulative or deceptive device or contrivance." In 1942 the Commission adopted rule 10b-5 to implement the "catch-all" provision of section 10(b) which can be viewed as a grant of wide-ranging discretion to the SEC. Although all of the elements necessary for recovery in a 10b-5 action are not yet settled, the general requirements have been identified by the courts: that the defendant come within the jurisdiction of the rule; that the proscribed activities be "in connection with the purchase or sale of any security; that the defendant possess the necessary scienter; that there exist an "untrue statement of a material fact;" that there exist a causation-in-fact; and finally, that a security be involved. The cause of action impliedly granted by rule 10b-5 has often given plaintiffs a better chance of recovery than have traditional state remedies. Other advantages of a 10b-5 action soon became apparent to investors. The statute of limitations under rule 10b-5 is more favorable than other federal securities provisions since it is subject to the generous time periods of state statutes; the tolling of the statute, however, is a matter of federal law rather than state law. Rule 10b-5 is a broad antifraud provision in the federal securities laws: it prohibits fraud, misrepresentation, half-truths, concealment of after-acquired information and omissions. It applies to conduct in many areas, including insider trading, exchange and tender offers, mismanagement, market manipulation, broker-dealer activities, and fiduciary activities. Although there is no language in either section 10(b) or rule 10b-5 which expressly provides for a private cause of action for damages, ever since the seminal case of Kardon v. National Gypsum Company twenty federal courts have recognized a private cause of action, which right is now firmly established. Judge Kirkpatrick set forth in the Kardon case two theories upon which an implied right of action is based. The first theory posited that "disregard of the command of a statute is a wrongful act and a tort," the second that violation of "a statutory enactment that a contract of a certain kind shall be void almost necessarily implies a remedy in respect of it." Because there are so many advantages to using the rule, "10b-5 is generating almost as much litigation as all the other general antifraud provisions together, and several times as much as the express liabilities. Increasingly, however, courts have placed limitations on the reach of rule 10b-5.2 In addition to establishing purchaser-seller standing rules, scienter standards, and materiality requirements, courts have set standards of conduct for plaintiffs. Suits have in a few cases been barred by application of the in pari delicto defense, and in at least one case an action was not allowed under 10b-5 when a state remedy was available.



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