Opinion ID: 391276
Heading Depth: 2
Heading Rank: 1

Heading: The existence of a violation.

Text: 16 Merrill Lynch and Richie contend there was no violation of the securities laws on the facts of this case. They correctly point out that section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 of the Securities and Exchange Commission proscribe the use of any deceptive or manipulative device only in connection with the purchase or sales of any security. 15 U.S.C. § 78j(b); 17 C.F.R. 240.10b-5. See also Mason v. Unkeless, 618 F.2d 597 (9th Cir. 1980). They assert that the fraud here was in connection with the method of financing the purchase of securities, not with the purchase itself. 17 The Supreme Court has said that section 10(b) is to be read flexibly. When there is a sale of a security and fraud touches the sale, there is redress under section 10(b). Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). It does not matter that the fraud is not of the garden variety associated with securities sales. Id. 18 Misrepresentation of the risks of buying securities on margin in a declining market is fraud in connection with the purchase of the securities. Furthermore, the trial court found that Richie misrepresented not only the risks of financing stock investment through a margin account, but also the recommendations of Merrill Lynch analysts as to the four stocks involved. Misrepresentations of these recommendations is directly connected with the sale of the securities. Both misrepresentations made up a scheme to induce Arrington to borrow money from Merrill Lynch to engage in commission-producing securities purchases through Merrill Lynch. The trial court therefore properly found fraud in connection with the sale of securities. 19