§ 5.1.7.2

• Jurisdiction: Arizona

§ 5.1.7.2 The U.S. Supreme Court's Narrowing of Rule 10b-5 Liability

Until the 1970s, the U.S. Supreme Court interpreted the federal securities laws as remedial legislation that was liberally construed to protect investors.⁷⁸⁴ But in the 1970s, the Supreme Court's approach to statutory interpretation shifted.⁷⁸⁵ While sometimes reciting the remedial nature of the securities statutes,⁷⁸⁶ the Supreme Court more often adopted strict-interpretive approaches that narrowed Rule 10b-5 civil liability.⁷⁸⁷

The most significant change in statutory interpretation occurred when Justices Lewis Powell and William Rehnquist were appointed to the Court.⁷⁸⁸ Powell's background as a corporate lawyer left him with firm views on how the securities laws should be interpreted.⁷⁸⁹ His views were profoundly conservative and favored curbing the SEC and the plaintiff's bar.⁷⁹⁰ Because of his superior knowledge and carefully prepared positions in conferences on securities cases, he was influential in persuading other justices to adopt his views.⁷⁹¹

Among Powell's views was the opinion that policy considerations are relevant to the scope of Rule 10b-5 liability.⁷⁹² Powell interpreted the judicially implied action under Rule 10b-5 as a form of federal common law.⁷⁹³ So viewed, he considered it proper for federal judges to use policy to limit Rule 10b-5 liability.⁷⁹⁴ He adhered to this view even though his clerk's research failed to find empirical support for the policy theory.⁷⁹⁵

The significance of policy came to the forefront in the Court's 1975 Blue Chip Stamps case.⁷⁹⁶ In Blue Chip, the Court (Rehnquist, J.) used non-statutory policy considerations to limit Rule 10b-5 liability.⁷⁹⁷ Expressing Powell's views, Rehnquist justified using judicially defined policy on the basis that private actions under Rule 10b-5 were judicially created and could therefore be judicially restricted.⁷⁹⁸ In describing these policy considerations, the Rehnquist majority took a dark view of Rule 10b-5 claims, especially when filed as class actions. The Court mentioned discovery abuse; groundless claims filed for their "in terrorem increment of the settlement value;"⁷⁹⁹ and the need to avoid interpretations that allow plaintiffs to create fact issues that turn on hazy oral testimony.⁸⁰⁰ The Court therefore concluded, as a matter of judicial policy, that Rule 10b-5 standing should be limited to plaintiffs who purchase or sell stock by reason of a defendant's Rule 10b-5 violation.⁸⁰¹

No opinion before Blue Chip had been written in such hostile language.⁸⁰² And none has been written since. But judicially identified policy considerations along with rules of strict-statutory construction have continued to be used to narrow Rule 10b-5 civil liability.⁸⁰³

Moreover, the Supreme Court's interpretations of the federal securities laws do not always involve normal statutory interpretation. The Court does not consider itself bound by the language of § 10(b) or Rule 10b-5.⁸⁰⁴ Instead, the Court sometimes interprets the private action under § 10(b) and Rule 10b-5 more narrowly than what would result from the plain or fair meaning of the statute's words.⁸⁰⁵ This approach has resulted in the Court reading requirements into Rule 10b-5 like reliance that the Rule's text does not require.⁸⁰⁶ It has also led to interpretations that are contrary to ordinary English: for example, that the only persons who make Rule 10b-5 statements are those with the "ultimate authority" to speak.⁸⁰⁷ Similarly, although prospectuses are statutorily defined to include all written offers,⁸⁰⁸ the Supreme Court has held that the only prospectuses under § 12(a)(2) of the 1933 Act are those used in public offerings.⁸⁰⁹ These decisions have been widely criticized.⁸¹⁰ If applied to Arizona's securities statutes, this interpretative approach would undermine the plain-meaning rule at the forefront of Arizona statutory interpretation.⁸¹¹ The approach is also contrary to the Supreme Court's own practice of normally looking to a statute's words and giving those words their ordinary meaning.⁸¹²

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Notes:

^[784] See Freeman, supra note 774 (discussing the Warren Court's remedial philosophy in interpreting the federal securities laws).

^[785] See Alfred F. Conard, Securities Regulation in the Burger Court, 56 U. Colo. L. Rev. 193 (1985) (discussing the Court's shift to narrower interpretations); E. Thomas Sullivan & Robert B. Thompson, The Supreme Court and Private Law: The Vanishing Importance of Securities and Antitrust, 53 Emory L.J. 1571, 1581-82, 1586-87, 1592-96 (2004) (describing the restrictive interpretations that occurred between 1973 and 1987 and attributing this in large part to Justice Powell's conservative views on securities law and his ability to influence other members of the Court on securities law issues).

^[786] See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 386-87 (1983); see also Steinberg, supra note 776, at 491-96 (discussing the lack of a...