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SEC Rule 10b-5

John W. Sellers
Attorney John W. Sellers
SEC Rule 10b-5 Team Lead
Former DOJ Trial Attorney
envelope iconContact John

SEC Rule 10b-5 is widely regarded as the broadest and most important regulation pertaining to the use of fraud or deceit in the sale of securities in the United States. While other SEC Rules regulate very narrow and specific courses of conduct in explicitly limited circumstances, Rule 10b-5 has extremely broad language that has been interpreted by federal courts is an even more expansive manner than one would have anticipated.

Complying with SEC Rule 10b-5 is one of the most difficult aspects of being a regulated securities professional in the U.S. However, the penalties for noncompliance can be criminal in nature, carrying substantial prison time for certain white collar offenses that are based on the Rule.

The securities litigation, SEC compliance, and white collar defense lawyers at Oberheiden P.C. have represented numerous securities professionals at various stages of 10b-5 enforcement actions, from bringing them into compliance with the Rule to defending against criminal charges of insider trading.

An Overview of SEC Rule 10b-5

SEC Rule 10b-5 is a regulation that was promulgated by the United States Securities and Exchange Commission (SEC) under the powers delegated to it by Congress in the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.). Section 10(b) of that Act (15 U.S.C. § 78j(b)) forbids the use of any “manipulative or deceptive device or contrivance” that violates the SEC’s rules when buying or selling securities.

SEC Rule 10b-5 (17 C.F.R. § 240.10b-5), which was created in 1942, expands upon that already broad and vague prohibition in the Act to include the following actions in connection with securities trading:

  • Conduct that is intended to defraud
  • Making untrue statements of material fact
  • Omitting a material fact to create a misleading statement
  • Engaging in any act, practice, or course of conduct that would operate to defraud or deceive anyone

In the 80 years since it was promulgated by the SEC, courts have expanded the reach and the severity of SEC Rule 10b-5 even further, using it to define certain white collar crimes and opening the floodgate to civil litigation in private causes of action brought by investors.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd
Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester
Brian J. Kuester

Former U.S. Attorney

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara
Linda Julin McNamara

Federal Appeals Attorney

Aaron L. Wiley
Aaron L. Wiley

Former DOJ attorney

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (DOJ)

Chris Quick
Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow
Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Criminal Liability for Deceptive or Fraudulent Conduct

Over that time, courts have routinely turned to SEC Rule 10b-5 to justify creating criminal causes of action in relation to securities trading. Chief among these is insider trading.

Insider trading is the criminal offense of using nonpublic but material information to trade securities in a company.

There is no federal statute prohibiting insider trading. Instead, courts have used the broad language of SEC Rule 10b-5’s prohibition against “fraud or deceit” to fashion a common law criminal offense. In the case Chiarella v. United States, the Supreme Court of the United States imposed a legal duty on corporate insiders to disclose all material information before trading securities of their own company or otherwise using that information to their benefit. Violating this legal duty amounted to the criminal offense of insider trading.

But the Court has subsequently gone even further, extending this duty, in United States v. O’Hagan, out to people who are independent of the company but who have obtained and misappropriated confidential and material information from company insiders.

Convictions for these offenses are severe. They carry up to 20 years in prison as well as a fine of up to $5 million for individual defendants and $25 million for corporate defendants.

A Private Right of Action

Courts have also decided that Rule 10b-5 created an implied private right of action. This meant that it was not just the SEC and prosecutors who could enforce the terms of the Rule against fraudulent actors: Aggrieved investors could also act by taking matters into their own hands and filing civil lawsuits against securities professionals for allegedly fraudulent behavior.

While the recent trend has been towards limiting these private causes of action, investors can still file civil claims for securities fraud if they:

  • Either sold or purchased the securities at issue,
  • The defendant acted with a culpable mind, rather than mere negligence, and
  • The defendant’s conduct was deceptive.

These claims can succeed if the following elements of a securities fraud claim can be proven. These are:

  1. The conduct was deceptive – often involving a misrepresentation, omission, or other disclosure issue that hid or misportrayed a material fact – rather than some other form of fraud,
  2. The defendant’s intent was to deceive or he or she acted with recklessness that led to deception, also known as the “scienter” requirement of a 10b-5 claim,
  3. That conduct was performed by any person in connection to the securities transaction, whether that person was the buyer, seller, or someone else,
  4. There was actually a purchase or sale,
  5. That purchase or sale was of any type of security, even those exempt from registration,
  6. The plaintiff relied on the misrepresentation, and
  7. The plaintiff suffered a loss.

SEC Civil Enforcement Actions are Possible As Well

In addition to criminal charges for insider trading and a civil securities fraud lawsuit by aggrieved investors, SEC Rule 10b-5 and other securities laws also give the SEC itself the authority to bring non-criminal actions against regulated securities professionals.

Perhaps most importantly, Section 17(a)(2) of the Securities and Exchange Act (15 U.S.C. § 77q) gives the SEC the ability to pursue civil enforcement actions against securities professionals, similar to those that can be brought by investors under the implied cause of action that the Rule created. A crucial difference between the private cause of action under Rule 10b-5 and the one that the SEC can pursue under Section 17(a)(2) is that the SEC does not have to prove the scienter requirement – defendants can be held liable by the SEC even if they only acted negligently.

Some FAQs About Oberheiden P.C. and SEC Rule 10b-5

Does the SEC Have the Authority to Enforce Rule 10b-5?

 

A common line of defense that gets raised against private claims and law enforcement actions brought under SEC Rule 10b-5 is that the SEC has exceeded its authority in enacting the Rule.

Particularly when it comes to Rule 10b-5, this argument has weight to it. The SEC’s provision is extremely broad and so wide-reaching that it has spawned criminal offenses that were never contemplated by Congress when it gave the SEC the power to act. There is a strong point to be made that this violates the separation of powers that make up the federal government: The SEC has essentially stepped into the role of the legislature and created new law, rather than sticking to its proper role in enforcing laws that Congress has handed down.

Nevertheless, this argument has gotten struck down by federal district courts for years. Many judges seem unwilling to overturn a tool of law enforcement that has long since become a staple of securities enforcement.

What are Some Defenses to an Allegation of Insider Trading?

 

Out of all of the enforcement actions that are possible under SEC Rule 10b-5, a criminal charge for insider trading is the most severe. It is one of the only allegations that can carry multiple decades in prison. Raising a strong legal defense against the charge is essential.

A few of the legal defenses that the lawyers at Oberheiden P.C. have used in the past have been:

  • You made the trade without relying on the insider information
  • You had been able to infer insider information by using public information
  • The information had actually been made public before you acted on it
  • You did not have access to the information at the time you made the trade
  • You made the trade according to the terms of a valid Rule 10(b)-5-1 Plan

Why Should I Count on Oberheiden P.C.?

 

Clients have been turning to the legal team at Oberheiden P.C. for help with regard to Rule 10b-5 for years, in large part due to the firm’s extensive experience in this important area.

Oberheiden P.C. is unique among defense firms in that we only employ senior-level attorneys who have decades of experience in securities law. Many of our lawyers came to our firm following long and successful careers investigating and prosecuting securities case within the SEC, the Federal Bureau of Investigation (FBI), or the U.S. Department of Justice (DOJ).

You can count on Oberheiden P.C. because our experienced attorneys have likely handled cases just like yours in the past.

Why Doesn’t Oberheiden P.C. Call Itself the Best Securities Defense Firm?

 

Because we let our prior clients say that about our firm, instead.


Oberheiden P.C.: National Securities Compliance and Defense Lawyers

SEC Rule 10b-5 is a crucially important aspect of federal securities enforcement – perhaps the centerpiece of the entire law enforcement apparatus when it comes to securities. It serves as a catch-all for conduct that seems wrongful or potentially deceptive but that does not explicitly fall under one of the other Rules created by the SEC. Unfortunately, this means that innocent securities professionals and brokerage firms can get caught up in the SEC’s crosshairs or get accused of fraud by vengeful investors.

The penalties that can come with these cases can be substantial.

The securities defense lawyers at Oberheiden P.C. have guided securities professionals and companies through every aspect of a Rule 10b-5 case, from improving the company’s compliance in order to forestall a claim of fraud, all the way to raising effective legal defenses against allegations of insider trading.

Call our law office at (888) 680-1745 or contact us online to get started on your case today.

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