To establish a claim under Rule 10b-5, plaintiffs (including the SEC) must show (i) Manipulation or Deception (through misrepresentation and/or omission); (ii) Materiality; (iii) "In Connection With" the purchase or sale of securities, and (iv)
Scienter. Private plaintiffs have the additional burden of establishing (v) Standing - Purchaser/Seller Requirement; (vi) Reliance (presumed if there was an omission); (vii) Loss Causation; and (viii) Damages. These are roughly comparable to the elements of common law fraud, which are i) Deception; ii) Materiality; iii) with Intent to Cause Reliance; that iv) causes Actual Reliance; and v) Harm. In a case for
insider trading, anyone who uses insider information can be held liable. A tippee can be liable if the tipper breached a fiduciary duty and the tippee knew or had reason to know that the tipper was breaching the duty.
Deceit and reliance Deceit can be in the form of an affirmative misrepresentation or of an omission of fact which, in context, makes other facts misleading. Furthermore, for a private party to recover damages, they must be able to show that they were injured because they relied on the fraudulent claim. Alternately, fraud can occur through omission of a material fact, where the injured party does not have to prove reliance, because it is assumed to have occurred. If the defendant had publicly made a fraudulent statement,
every investor could sue if it could be shown that the statement affected the market as a whole. This is the "fraud on the market" theory the Supreme Court enunciated in
Basic Inc. v. Levinson. This "fraud on the market" presumption of the plaintiff's reliance upon the deceit is only available in situations (like in
Basic) where the security is traded on a well organized and presumably efficient market. The same can be said for an omission of
material information.
Forward-looking statements Both the "bespeaks caution" doctrine and the safe harbor provisions of the
Private Securities Litigation Reform Act offer protection for forward-looking statements if they are accompanied by cautionary language identifying specific factors that could cause actual results to differ materially from those in the forward-looking statement and may be sufficient to absolve a defendant of liability. However, in ''Iowa Public Employees' Retirement System v. MF Global Ltd.,'' the US
Second Circuit Court of Appeals overturned a decision by the District Court for the Southern District of New York, ruling that the "bespeaks caution" defense to securities disclosure claims applies exclusively to forward-looking statements and not to characterizations that communicate present or historical fact.
Materiality In the case of
TSC Industries, Inc. v. Northway, Inc., the word "
material" was defined by the
U.S. Supreme Court - "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." There are four elements of materiality laid out in TSC: a fact must assume "actual significance" in the deliberations of a "reasonable shareholder" because the fact would have "significantly altered" the "total mix" of information available to that shareholder in making its decisions. Each of those elements is itself the subject of extensive litigation.
Scienter Negligence is not sufficient for a claim under 10b-5; plaintiffs or prosecutors must show at least recklessness, purpose, or knowledge.
Standing The purchaser/seller requirement is the requirement that, to bring an action under 10b-5, a private plaintiff must be either a buyer or a seller of the company's stock. Potential buyers who were defrauded into not buying stock may not bring a claim under 10b-5.
Loss causation and damages To recover, plaintiffs must be able to show that the fraud proximately caused their losses. Standard damages in fraud cases are
expectation or benefit of bargain damages. ==Insider trading==