We are reviewing some of the positions taken by the various amici in the briefs in Stoneridge. An interesting one was submitted by the Business Roundtable. A copy is posted on the DU Corporate Governance web site. The brief was written by Wilmer Cutler.
The interesting thing about the brief was the position that the Court never should have agreed to a private right of action under Section 10(b) in the first instance and if it could approach the matter ab initio would not do so again. "If the question whether to imply a private right of action under Sec. 10(b) were to arise from scratch today, it is clear that the Court's answer would be 'no,'"
Perhaps, but one should be suspicious anytime a matter is described as "clear." The notion that the Court today would not find a private right of action under Section 10(b) would have to presume that a considerable amount of disclosure fraud and insider trading (both essentially actions under Rule 10b-5) would leave the Court unmoved.
In any event, this earlier error ought to dictate the Supreme Court's interpretation of Section 10(b) and Rule 10b-5. According to the Business Roundtable, this has already been occuring. "In fact, the Court has repeatedly cabined the implied private right of action under Sec. 10(b) since first recognizing it."
True enough, although the four cases cited for the conclusion (Blue Chip, Ernst & Ernst, Sandberg, and Central Bank) hardly reflect a consistent approach. The brief did not include Basic (adopting the probability magnitude test for materiality and the fraud on the market theory of reliance) and O'Hagan (extending insider trading to those who violated an employer's duty of trust and confidence), not to mention the portion of Sandberg that extended the antifraud provisions to opinions. Basic probably did more to extend the reach of Rule 10b-5 than the limitations of the four cases mentioned by Business Roundtable.
The brief cites a number of other liability provisions in the securities laws to show that Congress "did not intend to give investors wide open private rights of action against indirect participants in an alleged fraud." The mentioned Sections 11 and 12 of the Securities Act and Section 18 of the Exchange Act as examples. Specifically with respect to Section 18, the brief notes that it "reaches only persons 'who shall make or cause to be made' a false or misleading statement in an SEC filing." But this cuts against their position. It shows that when Congress wanted to limit the persons subject to a cause of action, it knew how to do so. In Section 10(b), Congress merely prohibited manipulative and deceptive practices, without specifying the categories of persons subject to an action. In other words, Congress could have limited Section 10(b), which presumably it knew would be enforced by the Commission even had there been no implied right of action, to those who made a false statement or caused it to be made but did not. This suggests that the notion of deception was intended to reach other categories of actors.
We shall see whether a chastised Supreme Court agrees to cut back on Rule 10b-5 not because it is dictated by the language of the rule or the statute but because it is necessary as a form of penance for prior mistakes.