The Scope of the Anti-Fraud Provision

1. Section 10(b) of the Exchange Act: enabling statute, giving SEC power to prohibit fraud related to securities transaction.

2. Rule 10b-5(b) of the Exchange Act

   1. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (b) To make any untrue statement of a material fact or to omit 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

3. Elements

   1. Jurisdiction

      1. use of any means or instrumentality of interstate commerce

      2. this is a very broad concept: mail, driving on the highway, phone call count as instrumentality of interstate commerce.

      3. Must be commenced in federal court

   2. Standing (SEC doesn’t need to prove standing)

      1. Only a person who purchased or sold stock has standing to bring a private action under Rule 10b-5. Blue Chip Stamps

   3. Scienter (Ernst & Ernst)

      1. Intent

      2. Knowledge

      3. Reckless

   4. Omission or misstatement

      1. Conduct must be deceptive or manipulative to give rise to a 10(b) violation (Santa Fe)

      2. Omissions: must also prove duty. Duty includes:

         1. SEC directives

         2. Duty to correct: must correct after making a statement which, though believed when made, turns out to be false

         3. Duty to update: must update after making a statement which, truthful when made, becomes inaccurate

         4. Half-truth: if what is omitted from a statement renders the statement itself misleading, the omission becomes culpable

   5. Materiality

      1. TSC test: material = substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote

      2. For things that are not certain to happen - Probability/magnitude test: Balance both the indicated probability that the event will occur and the anticipated magnitude of the event

      3. Mosaic information (Texas Gulf Sulphur)

   6. Primary participant

      1. The person with final authority over the dissemination of...

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