Opinion ID: 318563
Heading Depth: 2
Heading Rank: 3

Heading: Rejection of Compartmentalization

Text: 30 The Second Circuit's attempt in Chris-Craft and Lanza to limit the scope of rule 10b-5 duty by reference to common law fraud principles demonstrates the difficulties courts have had in trying to fit a wide varity of complex fact situations and relationships within a single standard of scienter. As Professor Bromberg writes: 31 A comprehensive scienter standard would have to fit the enormous variability of 10b-5 private suits, including 32 (1) Whether the violation is misrepresentation, nondisclosure or some more complex scheme or manipulation; 33 (2) Whether there is privity, a lesser relationship (such as aiding-abetting or conspiracy) or no privity at all (as in insider trading cases); in the parlance of this taxt, whether the transactions are direct or indirect, personal or impersonal; 34 (3) Whether there is one plaintiff or thousands; 35 (4) Whether there is some special relationship between the parties, such as fiduciary-beneficiary or broker-customer; 36 (5) Whether the relief sought is damages, rescission, injunction or something else. 37 There is a real question whether a single standard can do the job adequately. 38 2 A. Bromberg, Securities Law: Fraud 8.4(513), at 204.115 (1971). 39 Other commentators have also recognized the necessity of departing from the rigid standards of common law fraud if the goals of the securities laws are to be accomplished. After discussing the confusion and varied standards for state of mind that are being applied among and within the different circuits, one commentator writes: 40 Instead of perpetuating the practice of discussing scienter and negligence as absolutes which are capable of being objectively applied, more is gained by recognizing that there is a sliding scale which determines what constitutes sufficiently diligent conduct to avoid 10b-5 liability, and that 10b-5 liability is determinable only within the context of the vagaries of the specific facts presented. 41 Mann, Rule 10b-5: Evolution of a Continuum of Conduct to Replace the Catch Phrases of Negligence and Scienter, 45 N.Y.U.L.Rev. 1206, 1209 (1970). The commentator then continues by demonstrating that the courts, in dealing with the variety of suits that arise under rule 10b-5, have in actuality been applying a sliding scale, under the guise of a state of mind (scienter) standard, that balances a number of factors in deciding the appropriate duty that should be imposed. 13