Cornell Law Review, Vol. 71, No. 1 (November 1985), pp. 96-142

Abstract

Private litigation under section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 is at present riddled with tort law doctrines. Familiar tort concepts such as aiding and abetting, respondeat superior, plaintiff's duty of care, in pari delicto, and contribution have been imported into the rule 10b-5 private action by a number of lower federal courts. The United States Supreme Court had not addressed the relevance of any of these doctrines until its decision this year in Bateman Eichler, Hill Richards, Inc., v. Berner. By disallowing a defense of in pari delicto on statutory enforcement grounds, Bateman plainly signals the now precarious status of tort law doctrines in rule 10b-5 private actions.

Bateman is the most recent of a series of decisions over the past decade in which the Court has indicated that the intent of Congress governs the elements of the rule 10b-5 action. The Supreme Court has enumerated several factors that must be considered in determining congressional intent: the language and history of section 10(b) and rule 10b-5; the structure of the 1934 Act and the Securities Act of 1933; the policies underlying both the 1933 and 1934 Acts; and the elements of deceit under the common law.

This Article has two objectives: first, to examine the Court's jurisprudence for the rule 10b-5 action; second, to apply the Court's jurisprudence to the duty of care, a rule 10b-5 doctrine of common law origin. The duty of care requires that the court dismiss a rule 10b-5 private action when the plaintiff has carelessly ignored information, relied upon suspicious information, or failed to seek warranted additional information. Every circuit that has considered the duty of care has upheld it, albeit under a variety of names and burden of proof allocations. This Article concludes, however, that the duty of care is not appropriate to rule 10b-5 litigation and should be rejected.

Part I of this Article traces the development of the duty of care under rule 10b-5. The duty of care was first used to restrict the scope of rule 10b-5 and originally was applied in only two types of cases in which the need for limits was especially compelling: claims premised on the defendant's negligence and claims brought by insiders, corporations, and securities professionals. Although the Supreme Court's decisions in Affiliated Ute Citizens v. United States and Ernst & Ernst v. Hochfelder did not address the duty of care directly, the decisions facilitated expanded application of the doctrine. Part I examines this broader reach and potentially harsher impact of the present duty of care.

Parts II, III, and IV examine the Supreme Court's rule 10b-5 jurisprudence. Part II begins with the language and history of section 10(b) and rule 10b-5, including an exploration of the difficulties in utilizing these factors to determine congressional intent. The analysis of statutory structure in Part II prompts the conclusion that the duty of care cannot be reconciled with section 29(a) of the 1934 Act.

Part III addresses the underlying policies of the 1933 and 1934 Acts and demonstrates their inconsistency with the policies that lower courts have advanced to justify the duty of care. Part III shows that the duty of care is inconsistent with the congressional policy of statutory enforcement and thereby contravenes the Supreme Court's decision in Bateman Eichler, Hill Richards, Inc. v. Berner.

Part IV examines common law deceit. In accordance with congressional intent, the relevant deceit standards are those of the most liberal jurisdictions in 1934. In those jurisdictions, a plaintiff's carelessness did not bar recovery. Thus, Rule 10b-5's duty of care is inconsistent with the common law as well as with statutory structure and policy. As such it is contrary to the intent of Congress and should be abandoned.

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