Opinion ID: 731037
Heading Depth: 2
Heading Rank: 2

Heading: the traditional view: texas gulf

Text: 8 The Securities Exchange Act of 1934 regulates the post-distribution trading of securities. See 15 U.S.C. § 78a et seq. The  'fundamental purpose'  of the Act was  'to substitute a philosophy of full disclosure for the philosophy of caveat emptor.'  Central Bank, 511 U.S. at ----, 114 S.Ct. at 1445 (quoting Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972)). Section 10(b) of the Act prohibits fraudulent activities in connection with the purchase or sale of securities, 3 as does SEC Rule 10b-5. 4 9 In Texas Gulf, the Second Circuit held that false and misleading assertions are made in connection with securities trading whenever [such] assertions are made ... in a manner reasonably calculated to influence the investing public.... 401 F.2d at 862. Specifically, the court held that company officers violated Rule 10b-5 by issuing a misleading press release regarding the company's successful oil exploration activities. The court further held that the prohibition of Rule 10b-5 applies whether or not the makers of a misleading statement also participated in pertinent securities transactions in connection therewith.... Id. at 860. See also Heit v. Weitzen, 402 F.2d 909 (2nd Cir.1968) (applying Texas Gulf to fraudulent annual reports, as well as documents filed by the individual defendants with the SEC), cert. denied, 395 U.S. 903, 89 S.Ct. 1740, 23 L.Ed.2d 217 (1969). 10 The Ninth Circuit adopted the Second Circuit's formulation. In Wessel, the Ninth Circuit held that  'Rule 10b-5 is violated whenever assertions are made ... in a manner reasonably calculated to influence the investing public....'  437 F.2d at 282 (quoting Texas Gulf, 401 F.2d at 862). The court then held that an outside accountant does not violate this standard by preparing documents that were never publicly disseminated. Id. In SEC v. Rana Research, Inc., 8 F.3d 1358 (9th Cir.1993), the Ninth Circuit again relied on the Texas Gulf formulation, holding that a financial consultant violated Rule 10b-5 by issuing a misleading press release regarding the stock value of a publicly traded company. Id. at 1362. 11 Several other circuits have also adopted Texas Gulf 's interpretation of the in connection with language of § 10(b). Gottlieb v. Sandia American Corp., 452 F.2d 510, 516 (3rd Cir.), cert. denied sub nom. Wechsler v. Gottlieb, 404 U.S. 938, 92 S.Ct. 274, 30 L.Ed.2d 250 (1971); Akin v. Q-L Investments, Inc., 959 F.2d 521, 528 (5th Cir.1992); Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90, 100-01 (10th Cir.), cert. denied, 404 U.S. 1004, 92 S.Ct. 564, 30 L.Ed.2d 558 (1971); SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1171 (D.C.Cir.1978), cert. denied sub nom. Zimmerman v. SEC, 440 U.S. 913, 99 S.Ct. 1227, 59 L.Ed.2d 462 (1979). 12 The Supreme Court has never squarely addressed the validity of the Texas Gulf test. See Superintendent of Ins. of the State of New York v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13, 92 S.Ct. 165, 168-70, 30 L.Ed.2d 128 (1971) (describing the issue as whether deceptive practices touch[ ] the sale of securities). However, in a discussion of the materiality of merger discussions for the purposes of § 10(b), the Court favorably quoted Texas Gulf 's interpretation of the in connection with language. Basic Inc. v. Levinson, 485 U.S. 224, 235 n. 13, 108 S.Ct. 978, 985 n. 13, 99 L.Ed.2d 194 (1988).