Section 9 A Connection With the Purchase or Sale of a Security

• Library: Commercial Law 2007

Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, prohibit fraudulent conduct “in connection with the purchase or sale of any security.” Therefore, a plaintiff must show that the defendant’s fraudulent conduct “touches” the purchase or sale of the securities. Superintendent of Ins. of State of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 (1971).

Different circuits have developed different understandings of how fraudulent conduct can “touch” a securities transaction. See Police Ret. Sys. of St. Louis v. Midwest Inv. Advisory Servs., Inc., 706 F. Supp. 708, 715 (E.D. Mo. 1989), aff’d, 940 F.2d 351 (8^th Cir. 1991) (describing differences in approaches). Despite these other interpretations, the Eighth Circuit has repeated the Supreme Court’s test of fraud “touching” the offer or sale of a security. See Harris v. Union Elec. Co., 787 F.2d 355, 368 (8^th Cir. 1986), cert. denied, 479 U.S. 823 (1986). Moreover, what constitutes fraudulent conduct touching a securities transaction will “be fleshed out by a cautious...