When Will It Finally End: The Effectiveness of the Rule 10b-5 Private Action as a Fraud-Deterrence Mechanism Post-Janus

AuthorJustin Marocco
When Will It Finally End: The Effectiveness of the
Rule 10b-5 Private Action as a Fraud-Deterrence
Mechanism Post-Janus
I wasted no time; I got some people in, we drafted a rule, we
presented it to the Commission, and, without any hesitation, the
Commission tossed the paper on the table saying they were in
favor of it. One Commission member said, “Well, we’re against
fraud, aren’t we?” So, before the sun was down, we had the rule
that is now Rule 10b-5.1
The above is Milton Freeman’s succinct description of the
process behind the passage of Rule 10b-5. Known as the “father of
Rule 10b-5,” Freeman guided the effort that culminated in the
rule’s birth.2 Passed pursuant to Section 10(b) of the Securities
Exchange Act, Rule 10b-5 is a broad antifraud provision that
essentially prohibits all fraud in connection with the purchase or
sale of securities.3 At its birth, not even the “father of Rule 10b-5”
could predict what his child would one day become.4 No one
anticipated that Rule 10b-5 would give rise to a private right of
action that would eventually become the subject of thousands of
opinions attempting to define it.5 Neither Section 10(b) nor Rule
10b-5 contains language providing for a private cause of action
under the rule.6 Instead, federal courts have implied it.7 Hence,
when courts look at the 10b-5 private action, they are dealing with
Copyright 2013, by JUSTIN MAROCCO.
1. Milton V. Freeman, Colloquium Foreword, 61 FORDHAM L. REV. S1,
S1–S2 (1993) (emphasis added). This occurred prior to the passage of the
Administrative Procedure Act of 1946, so the procedure to pass a new rule was
much more informal than in the present day. See id. at S2.
2. See id. at S1, S3.
3. Rule 10b-5 prohibits: (1) employing “any device, scheme, or artifice to
defraud”; (2) making “any untrue statement of a material fact or [failing] to state
a material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading”; and (3)
engaging “in any act, practice, or course of business which ope rates or would
operate as a fraud or deceit upon any person, in connection with the purchase or
sale of any security.” 17 C.F.R. § 240.10b-5 (2011).
4. See Freeman, supra note 1, at S2.
5. See W. Taylor Marshall, Note, Securities Law––The Securities
Exchange Act of 1934––‘Round and ‘Round We Go: The Supreme Court Again
Limits the Circumstances in Which Federal Courts May H old Secondary Actors
Liable Under Section 10(b) and SEC Rule 10b-5, Stoneridge Investment
Partners, LLC v. Scie ntific-Atlanta, Inc ., 128 S. Ct. 761 (2008), 31 U. ARK.
LITTLE ROCK L. REV. 197, 204 (2008); see also Freeman, supra note 1, at S2
(evincing that the future of Rule 10b-5 was unexpected at its inception).
6. See discussion infra Part I.A.
7. See discussion infra Part I.A.
“a judicial oak which has grown from little more than a legislative
acorn.”8 The Securities Exchange Commission (SEC) passed Rule
10b-5 to prevent fraud in connection with the purchase and sale of
securities, and, despite a lack of express language providing for it,
the private right of action is the method used to implement this
deterrence purpose.9
The Supreme Court’s recent holding in Janus Capital Group,
Inc. v. First Derivative Traders puts the usefulness of the 10b-5
private action as a fraud-deterrence mechanism in serious doubt.10
In Janus, the Supreme Court clarified who “makes” a statement
under Rule 10b-5.11 The Court determined that “the maker of a
statement is the person or entity with ultimate authority over the
statement, including its content and whether and how to
communicate it.”12 Additionally, in a footnote, the majority
provided that attribution of a statement is key evidence regarding
who “makes” the statement.13 Consequently, Janus’s holding
opens the door for lower federal courts to absolve corporate
officers of liability for statements attributed solely to the
corporation, even if those statements were prepared and distributed
by the officer on the corporation’s behalf.14 This Note argues that
Janus has severely limited the 10b-5 private action’s effectiveness
as a fraud-deterrence mechanism and, in so doing, has removed
much of the disincentive for corporate officers to commit fraud.
Therefore, the SEC or Congress must step forward and take action
to reestablish the 10b-5 private action as a fraud-deterrence
Part I of this Note provides a brief background regarding
Section 10(b) and Rule 10b-5, as well as a discussion on how
8. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).
Justice Rehnquist’s oft-repeated analogy refers to the inability to decipher
Congress’s intent r egarding the “co ntours of a private cause of action und er rule
10b-5” based solely on the language of Section 10(b). Id.
9. See Freeman, supra note 1, at S1–S2; S. Michael Sirkin, The Deterrence
Paradox: How Making Securities Fraud Class Actions More Difficult for
Plaintiffs Will More Strongly Deter Corporate Fraud, 82 TEMP. L. REV. 307,
311 (2009) (quoting Secs. & Exch. Comm’n v. Capital Gains Res. Bureau, Inc.,
375 U.S. 180, 186 (1963)). Freeman recognizes that the primary impetus behind
the passage of Rule 10b-5 was to prevent a company president from benefitting
from his dishonest co nduct. See Freeman, supra note 1, at S1.
10. 131 S. Ct. 2296 (2011).
11. See id. at 2301.
12. Id. at 2302.
13. See id. at 2302 n.6.
14. Federal courts have exclusive jurisdiction over the private 10b-5 right of
action. See 15 U.S.C. § 78aa (Supp. V 2011); see also Will v. Calvert Fire Ins.
Co., 437 U.S. 655, 659 (1978).
2013] COMMENT 635
federal courts have implied the 10b-5 private cause of action. The
discussion then shifts to the Supreme Court’s decision in Central
Bank of Denver v. First Interstate Bank of Denver and its rejection
of aiding-and-abetting liability for the 10b-5 private action. Part I
ends with an examination of the Court’s holding in Stoneridge
Investment Partners, LLC v. Scientific-Atlanta, Inc., in which the
Court rejected “scheme liability.” Part II provides an in-depth
discussion of Janus, including the case’s intricate facts, the
majority’s holding, and the dissent’s counterargument. Part II
concludes with a discussion of the primary problem that Janus
created: the potential for corporate officers to escape liability for
their unattributed misstatements. Part III analyzes how the private
action should primarily be used for fraud deterrence and how
Janus eliminates much of this usefulness. Part III also argues that
Janus potentially affects the SEC’s ability to impose aiding-and-
abetting liability through an enforcement action. Furthermore, even
if Janus does not affect the SEC enforcement action, relying on the
enforcement action as the primary means to prosecute fraud and
deter conduct is a recipe for disaster. Finally, Part III recognizes
that Janus could signal a revival for Section 20(b) as an instrument
to impose liability on corporate officers who use their company as
the vehicle to carry out their fraudulent schemes. In Part IV, this
Note concludes by proposing a solution in the form of either a
federal statute or SEC rule addressing the problems that Janus
created, specifically the potential for corporate officers to escape
liability for their fraudulent misstatements.
A. Statutory and Regulatory Background
Congress enacted the Securities Exchange Act of 1934 to deal
with the weaknesses in the national securities markets that were
thought to have contributed to the market crash of 1929 and the
ensuing Great Depression.15 The Act regulates the post-distribution
trading of securities16 and seeks to institute a full-disclosure
15. See Robert J. Grubb, II, Attorneys, Accountants, and Bankers, Oh My!
Primary Liability for Secondary Actors in the Wake of Stoneridge, 62 VAND. L.
REV. 275, 281 (2009); Diana L. Hegarty, Rule 10b-5 and the Evolution of
Common-Law Fraud—The Need for an Effective Statutory Proscription of
Insider Tradition by Outsiders, 22 SUFFOLK U. L. REV. 813, 819 (1988).
16. Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164,
171 (1994) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752
(1975)). The Securities Act of 1933 regulates the initial distribution of securities
to investors, whereas the Securities Exchange Act of 1934 regulates securities

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