Opinion ID: 212733
Heading Depth: 3
Heading Rank: 1

Heading: Securities Exchange Act

Text: The substantive standards applicable to the present action by a putative class of NeuroMetrix shareholders are found in the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78pp. The protections against securities fraud are located in sections 10(b) and 20(a) of the Act, 15 U.S.C. §§ 78j(b) and 78t(a), and in Rule 10b-5, 17 C.F.R. § 240.10b-5. Section 10 of the Act provides, in relevant part: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). The implementing regulation for this section, Securities and Exchange Commission (SEC) Rule 10b-5, declares it unlawful: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. Although the statute does not provide for a private right of action, the Supreme Court has implied such a right, which resembles, but is not identical to, common-law tort actions for deceit and misrepresentation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). The elements of a 10b-5 claim, in the context of publicly traded securities, are: (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as transaction causation; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and the loss. Id. at 341-42, 125 S.Ct. 1627 (citations omitted) (emphasis in original). Claims brought under section 20(a) of the Act, 15 U.S.C. § 78t(a), are derivative of 10b-5 claims. Specifically, once any person is found liable for violating the Act's substantive provisions, [e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. Id. Importantly, the statutes make the[] ... actions available, not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause. Dura Pharm., 544 U.S. at 345, 125 S.Ct. 1627. The courts have long acknowledged that litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Even weak cases brought under the Rule may have substantial settlement value, ... because [t]he very pendency of the lawsuit may frustrate or delay normal business activity. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 80, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (final modification in original) (internal quotation marks omitted). As a result, the Supreme Court cabined the private right of action consonant with the policies of preserving the private enforcement function, but minimizing potential ill effects, in part by limiting the universe of potential plaintiffs to buyers and sellers of the securities. Id. at 80-81, 126 S.Ct. 1503.