Opinion ID: 731037
Heading Depth: 2
Heading Rank: 3

Heading: the continued vitality of texas gulf

Text: 13 The district court held and the defendant argues on appeal that Central Bank fatally undermined Texas Gulf and its progeny. Specifically, it is claimed that while the former requires an analysis of the text and structure of § 10(b), the latter improperly rest exclusively on policy considerations. The defendants further argue that under a proper reading of in connection with, only those who actually trade securities are subject to primary liability under § 10(b). Accountants who simply make misrepresentations that they know will be included in Forms 10-K would not be included. 14 These reports of Texas Gulf 's demise are greatly exaggerated. There is no tension between the holding of Central Bank and the holding of Texas Gulf: the former forbids § 10(b) actions against aiders and abettors, 511 U.S. at ----, 114 S.Ct. at 1455, while the latter allows § 10(b) actions against primary violators  'whenever assertions are made ... in a manner reasonably calculated to influence the investing public....'  Wessel, 437 F.2d at 282 (quoting Texas Gulf, 401 F.2d at 862). Indeed, while Texas Gulf turned on the meaning of in connection with, Central Bank turned instead on the fact that the text of the 1934 Act does not itself reach those who aid and abet a § 10(b) violation. 511 U.S. at ----, 114 S.Ct. at 1448. 15 Nor does the analytic approach of Central Bank undermine Texas Gulf 's interpretation of the in connection with language of § 10(b).
16 The Central Bank Court began with an analysis of the text of § 10(b). 511 U.S. at ---- - ----, 114 S.Ct. at 1445-48. See Federal Trade Comm'n v. Bunte Bros., Inc., 312 U.S. 349, 350, 61 S.Ct. 580, 581, 85 L.Ed. 881 (1941) (While one may not end with the words of a disputed statute, one certainly begins there.). 17 The relevant text of § 10(b) provides: It shall be unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance.... 15 U.S.C. § 78j(b) (emphasis added). On its face, this language does not limit liability to those who actually trade securities. If Congress had meant to accomplish such a limitation, § 10(b) would provide: It shall be unlawful for any person to purchase or sell any security by means of any manipulative or deceptive device or contrivance. Instead, § 10(b) extends liability to all those who use a fraudulent device in connection with the trading of securities. 18 It is equally clear that there must at least be some connection between the fraudulent acts and the trading of securities. Cf. 15 U.S.C. § 80b-6 (prohibiting fraud by investment advisors, regardless of whether or not related to securities trading). Thus, while § 10(b) defendants need not actually buy or sell securities, their fraudulent acts must have a connection to securities transactions. Texas Gulf strikes a reasonable balance, applying liability under § 10(b) to those who make public statements reasonably calculated to influence those who trade securities, whether or not such persons actually trade securities. 401 F.2d at 862. 19 E&Y makes two text-based counterarguments. First, E&Y argues that the use or employ language of § 10(b) limits liability to those who actually trade securities. 5 It is true that the words use and employ require some positive action. However, defendants take positive action when they make false statements that they know will reach potential investors, whether or not they also trade securities. See Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th Cir.1996) (Reading the language of § 10(b) and 10b-5 through the lens of Central Bank of Denver, we conclude that in order for accountants to 'use or employ' a 'deception' actionable under antifraud law, they must themselves make a false or misleading statement (or omission) that they know or should know will reach potential investors.). 20 Second, E&Y argues that the use of the as opposed to a or any in the phrase the purchase or sale of any security also limits liability to those who participate in a particular securities transaction. 6 It is true that the word the implies a particularity lacking in the words a or any. However, it does not follow that the defendant's fraud must be connected to a particular securities transaction engaged in by the defendant. This is especially true in light of Congress's insertion of the in connection with language.
21 The Central Bank Court explained that while the text of the statute resolved the case, a structural analysis would lead to the same result. 511 U.S. at ----, 114 S.Ct. at 1448. See United States Nat'l Bank of Oregon v. Independent Ins. Agents of America, Inc., 508 U.S. 439, 455, 113 S.Ct. 2173, 2182, 124 L.Ed.2d 402 (1993) (Statutory construction 'is a holistic endeavor,' United Savings Ass'n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 630, 98 L.Ed.2d 740 (1988), and, at a minimum, must account for a statute's full text, language as well as punctuation, structure, and subject matter.). 22 Here, a structural analysis indicates that securities trading by the defendant is not a prerequisite to liability under § 10(b). At least three securities laws impose liability only where the fraud is part of a securities transaction: § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2) (imposing liability on any person who offers or sells a security by the use of fraud); § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a) (making it unlawful for any person in the offer or sale of any securities to use fraud); and the amended version of § 15 of the 1934 Act, 15 U.S.C. § 78o(c)(1)(A) (No broker or dealer shall ... effect any transaction in, or ... induce or attempt to induce the purchase or sale of, any security by the use of fraud). In the words of Texas Gulf, these laws demonstrate that when Congress intended that there be a participation in a securities transaction as a prerequisite of a violation, it knew how to make that intention clear. 401 F.2d at 860. Thus, it would ignore the structure of the federal securities laws to read an implied trading requirement into the text of § 10(b). 23 E&Y makes three structure-based counterarguments. First, E&Y argues that the trading requirement of § 10(a) ought to be read into § 10(b). Section 10(a) prohibits unlawful short sales and stop-loss orders made in connection with securities trading. 7 Obviously, only a defendant who trades securities can be held liable under § 10(a). This, however, is the result of the specific short sale and stop-loss order requirements of § 10(a), and has nothing to do with the in connection with language. 24 Second, E&Y argues that § 10(b) is a catch-all for §§ 9 and 10(a), and that § 10(b) should therefore by limited by the trading requirement of §§ 9 and 10(a). 8 Both steps of this argument lack merit. The legislative history does indicate that § 10(b) is a catch-all clause. For example, Thomas G. Corcoran, a spokesperson for the Roosevelt Administration, described § 10(b) as a catch-all that was necessary to deal with new manipulative devices. Texas Gulf, 401 F.2d at 859 (quoting Stock Exchange Regulation, Hearings before the House Committee on Interstate and Foreign Commerce, 73rd Cong., 2d Sess. 115 (1934)). However, it is not clear that § 10(b) is a catch-all for §§ 9 and 10(a) only. Moreover, the fact that §§ 9 and 10(a) both have a trading requirement, 15 U.S.C. §§ 78i, 78j(a), does not necessarily mean that § 10(b) is also so limited. Indeed, the fact that Congress specifically limited §§ 9 and 10(a) to defendants who engaged in securities transactions, but did not so limit § 10(b), is further evidence that reading an implied trading requirement into § 10(b) would be improper. 25 Third, E&Y argues that Texas Gulf 's interpretation of § 10(b) improperly turns § 18 into surplusage. Section 18 makes any party filing false or misleading statements with the SEC liable to any party damaged by reliance on such statements. 9 It is true that under Texas Gulf, many who damage securities traders by filing false statements with the SEC are liable under both § 10(b) and § 18. However, even under Texas Gulf 's interpretation of § 10(b), each of these two sections fills a unique niche: on the one hand, § 18 requires proof of reliance while § 10(b) presumes it; on the other hand, § 10(b) requires proof of scienter while § 18 does not. See Wachovia Bank & Trust Co., N.A. v. National Student Marketing Corp., 650 F.2d 342, 357 (D.C.Cir.1980) (discussing the differences between § 10(b) and § 18), cert. denied sub nom. White & Case v. Wachovia Bank & Trust Co., N.A., 452 U.S. 954, 101 S.Ct. 3098, 69 L.Ed.2d 965 (1981); Ross v. A.H. Robins Co., 607 F.2d 545, 555-56 (2nd Cir.1979) (same), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980). A defendant has available to it an affirmative defense that it acted in good faith and had no knowledge that its statement was false or misleading. Musick, Peeler and Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 296, 113 S.Ct. 2085, 2090, 124 L.Ed.2d 194 (1993), (noting § 18 involves defendants who violated securities law with scienter, citing to Ernst & Ernst v. Hochfelder, 425 U.S. 185, 209, n. 28, 96 S.Ct. 1375, 1388, n. 28, 47 L.Ed.2d 668 (1975)). Thus, there is no surplusage problem in extending liability under § 10(b) beyond those who actually trade securities to include those who know their fraudulent activities will affect the market.
26 The Central Bank Court concluded by rejecting various policy-based arguments raised by the plaintiffs as inconsistent with the Court's textual and structural analysis. 511 U.S. at ---- - ----, 114 S.Ct. at 1450-55. The Court noted the traditional rule that policy considerations override the text and structure of a statute only where necessary to prevent bizarre results that Congress obviously did not intend. Id. at ---- - ----, 114 S.Ct. at 1453-54 (citations omitted). This reasoning is fully consistent with the general rule that  'it is proper for a court to consider ... policy considerations in construing terms in [the federal securities] Acts.'  Pinter v. Dahl, 486 U.S. 622, 653, 108 S.Ct. 2063, 2081, 100 L.Ed.2d 658 (1988) (quoting Landreth Timber Co. v. Landreth, 471 U.S. 681, 695 n. 7, 105 S.Ct. 2297, 2306 n. 7, 85 L.Ed.2d 692 (1985)) (bracket added in Pinter ). See also Independent Insurance, 508 U.S. at 455, 113 S.Ct. at 2182 ( '[I]n expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy.' ) (quoting United States v. Heirs of Boisdore, 49 U.S. (8 How.) 113, 122, 12 L.Ed. 1009 (1849)) (emphasis added). 27 Congress had broad remedial goals when it enacted the depression-era securities laws. Pinter, 486 U.S. at 653, 108 S.Ct. at 2081 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 200, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976)). The Supreme Court has described these goals as follows: 28 The 1934 Act was designed to protect investors against manipulation of stock prices. See S.Rep. No. 792, 73d Cong., 2d Sess., 1-5 (1934). Underlying the adoption of extensive disclosure requirements was a legislative philosophy: There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy. H.R.Rep. No. 1383, 73d Cong., 2d Sess., 11 (1934). This Court repeatedly has described the 'fundamental purpose' of the Act as implementing a 'philosophy of full disclosure.'  Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78, 97 S.Ct. 1292 [1303], 51 L.Ed.2d 480 (1977), quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275 , 11 L.Ed.2d 237 (1963). 29 Basic, 485 U.S. at 230, 108 S.Ct. at 982-83. The traders-only rule proposed by E&Y is inconsistent with these goals. It would exempt from the remedial breadth of § 10(b) a broad range of misinformation and market manipulation, so long as the perpetrators did not buy or sell securities in connection therewith. Yet a party that introduces fraudulent information into the securities market does no less damage to the public because that party did not trade stocks. Congress's goals are better served by giving the in connection with language of § 10(b) its natural meaning and imposing liability on all whose false assertions are reasonably calculated to influence the investing public.
30 The holding of Texas Gulf rests soundly upon a textual analysis of § 10(b), a structural analysis of the surrounding securities laws, and a policy analysis of Congress's remedial goals. Accordingly, the methodology of Central Bank does not undermine the holding of Texas Gulf. See Adam v. Silicon Valley Bancshares, 884 F.Supp. 1398, 1402 (N.D.Cal.1995) (The court is not persuaded that an abandonment of the Wessel/Rana Research construction of the 'in connection with' requirement is justified by the holding of Central Bank.); In re Leslie Fay Companies, Inc., 871 F.Supp. 686, 694-97 (S.D.N.Y.1995) (holding that Central Bank did not overturn the traditional interpretation of in connection with); Spear v. Ernst & Young, Fed. Sec. L. Rep. (CCH) p 98,399 at p. 90,744, 1994 WL 585815 (D.S.C.1994) ([T]he court rejects defendants' argument that Central Bank represents a radical departure from established precedent regarding the exposure of auditors under Section 10(b).), rev'd on other grounds sub nom. In re Policy Management Systems Corp., 1995 WL 541623 (4th Cir. Sept. 13, 1995). See also Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 123 (2nd Cir.1995) (following Texas Gulf in the post-Central Bank era), cert. denied sub nom. Berkley v. Itoba Ltd., --- U.S. ----, 116 S.Ct. 702, 133 L.Ed.2d 659 (1996). 31