Opinion ID: 329946
Heading Depth: 2
Heading Rank: 2

Heading: General 10b-5 elements

Text: 20 Assuming, then, that Mrs. Woodward's note might be a security, we turn to the components of a claim based on Rule 10b-5. 19 By now, the existence of an implied private right of action can hardly be gainsaid. E. g., Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872; Reed v. Riddle Airlines, 5 Cir. 1959, 266 F.2d 314. In Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750, this Court stated that 21 there are three basic elements to be pled and proved in 10b-5 actions: (1) conduct by the defendants proscribed by the rule; (2) a purchase or sale of securities by the plaintiffs in connection with such proscribed conduct; and (3) resultant damages to the plaintiffs. 22 492 F.2d at 759. Only the first two need command our attention, for under our resolution of the case we do not reach the damage issue. 23 1. Proscribed conduct. Subsumed within the first element are several factors of independent significance. First, some sort of fraud, in the special 10b-5 sense of the word, must have been committed. See Herpich v. Wallace, 5 Cir. 1970, 430 F.2d 792, 802; 20 Accord, Dupuy v. Dupuy, 5 Cir. 1975,511 F.2d 641, 643. Second, this Circuit recognizes some continuing vitality of the scienter requirement, at least to the extent that something more than ordinary negligence is required for 10b-5 liability. Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750, 761; Smallwood v. Pearl Brewing Co., 5 Cir. 1974, 489 F.2d 579, 606, Cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113. The third component inherent in the first element of proscribed conduct is that of materiality. In Affiliated Ute Citizens v. United States, 1972, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741, the Supreme Court held that 24 Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision. 25 406 U.S. at 153, 92 S.Ct. at 1472, 31 L.Ed.2d at 761. 21 This Court has construed this passage to mean that a reasonably prudent person Would attach importance to the information. Smallwood v. Pearl Brewing Co., supra, 489 F.2d at 603-04. Cf. Lehigh Valley Trust Co. v. Central Nat'l Bank, 5 Cir. 1969, 409 F.2d 989, 993. 26 2. Purchase or Sale. The second basic element set out in Sargent rests on the in connection with language of the Rule. In Birnbaum v. Newport Steel Corp., 2 Cir. 1952, 193 F.2d 461, Cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356, the Second Circuit announced the rule that plaintiffs must be purchasers or sellers in order to invoke Rule 10b-5. The Birnbaum rule was construed liberally in Superintendent of Ins. v. Bankers Life & Cas. Co., 1971, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128; nevertheless, as this Court has asserted, (b)loody but unbowed, Birnbaum still stands. Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872; Lutgert v. Vanderbilt Bank, 5 Cir. 1975, 508 F.2d 1035; see the extensive discussion of Birnbaum in Smallwood v. Pearl Brewing Co., supra, 489 F.2d at 589-95. Finally, the in connection with requirement encompasses the notion of privity, which seems to be to defendants what Birnbaum is to plaintiffs. Like most other legal concepts in the cocoon of Rule 10b-5, the common law variety of privity has undergone a metamorphosis, its definition assuming utterly new contours. See Sargent v. Genesco, Inc., 5 Cir. 1974, 492 F.2d 750; Rekant v. Desser, 5 Cir. 1970, 425 F.2d 872; Hooper v. Mountain States Securities Corp., supra,282 F.2d 195; Cf. Iroquois Indus., Inc. v. Syracuse China Corp., 2 Cir. 1969, 417 F.2d 963, Cert. denied, 1970, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561. Groping for words to express the formula that justifies isolating the defendant and holding him responsible for a plaintiff's alleged injury, courts have spoken of a nexus between the two parties, Sargent v. Genesco, Inc., supra, 492 F.2d at 761, and of some legally cognizable relationship between plaintiffs and defendants, Lewis v. Marine Midland Grace Trust Co., S.D.N.Y.1973, 63 F.R.D. 39. From the central point of privity, whirling outward with a strong centrifugal force, the Rule has brought within its galaxy more and more parties: from partners, tippees, and professional consultants, to conspirators and aiders and abettors. Our task, as we must accept it, is to ascertain in the case before us whether Metro Bank's acts and omissions possessed enough centripetal momentum to impel it into the sphere of 10b-5's reach.