Court Opinion

ID: 9454673
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:54:10.165173+00
Date Added: 2024-06-11T17:34:13.882163
License: Public Domain

GODBOLD, Circuit Judge
(dissenting) :
Neither the statute nor the SEC Rules provide for the doctrines of in pari delicto and unclean hands in private 10b-5 litigation. It seems to me inadvisable to import the doctrines into the field.
In pari delicto has lost such limited vitality as it had in the antitrust area. In rejecting in pari delicto in that field, the Supreme Court said:
We have often indicated the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes. * * * Both Simpson [v. Union Oil Co., 377 U.S. 13, 84 S.Ct. 1051, 12 L.Ed.2d 98 (1962)] and Kiefer-Steward [Co. v. Seagram & Sons, 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed. 219 (1951)] were premised on a recognition that the purposes of the antitrust laws are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating business behavior in violation of the antitrust laws. The plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant, but the law encourages his suit to further the overriding public policy in favor of competition. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement. And permitting the plaintiff to recover a windfall gain does not encourage continued violations by those in his position since they remain fully subject to civil and criminal penalties for their own illegal conduct.
Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138-*70639, 88 S.Ct. 1981, 1984, 20 L.Ed.2d 982, 990 (1968).
A major premise of the majority in imposing on this vital and developing area of the law a restraint moribund in antitrust law is that the degree of public interest in private SEC actions does not compare to that in antitrust actions. In discussing proxy requirements under the securities laws the Supreme Court has held otherwise:
Private enforcement of the proxy rules provides a necessary supplement to Commission action. As in anti-trust treble damage litigation, the possibility of civil damages or injunctive relief serves as a most effective weapon in the enforcement of the proxy requirements.
J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423, 427-428 (1964).
The massive increase in filings of 10b-5 cases, the publication of textbooks on 10b-5, and the conduct of symposiums for interested attorneys1 indicate that the private suit will be a major weapon— and may be the most important weapon— in attainment of the policies exemplified by the Act and the Rule.2
The majority suggest that the court in its discretion should apply the defenses because this will better promote the objectives of the securities law by deterring tippees. The best way to stop the misuse of confidential information is to discourage the insider-tipster from making the initial disclosure which is the first step in the chain of dissemination. Insiders are relatively a smaller group, and by their positions more likely to know or to be advised by counsel of the allowable limits on their conduct.
The relatively larger class of tippees are persons less likely to know of the prohibitions on insider information. The tippee may be no more than the unsophisticated odd-lot purchaser who is told by his broker over the telephone of “confidential” data on the company and buys a few shares of listed stock relying thereon. The tippee is subject to liability to those with whom he deals without revealing what he knows. I recognize that he may be difficult to trace so that his potential liability is not the best of restraints. But to strengthen the restraint against him by insulating from responsibility the insider-tipster seems to me precisely the wrong way effectually to restrain tips from circulating.
In pari delicto, with its “complex scope, contents, and effects,” has proved a hindrance to the enforcement of federal statutory regulations through the medium of “private attorneys general.” See Perma-Life Mufflers v. International Parts Corp., supra.3 Application of it, and the unclean hands doctrine, as judicially-imposed restraints on 10b-5 litigation will hinder in similar fashion the effective weapon of the private suit.

. Practicing Law Institute sessions on 10b-5, held in New York and the West Coast, are reported to have had 1,000 lawyers present at each. Financial World, Jan. 15, 1969, p. 28, col. 1.

. See A. Bromberg, Securities Law: Fraud—SBC Rule 105-5, § 8.1, at 194 (1968) : “By now it should be clear that private suits pursuant to the implied right of action are the biggest part of 10b-5’s development and significance.”

. The majority suggest that in pari delicto may be allowable in antitrust litigation where the parties are “co-conspirators” or otherwise are equally guilty. I would not allow even a restricted application of the doctrine in 10b-5 litigation. First, there are problems of deciding when a party’s “badness” is sufficient to warrant the application of m pari delicto, which make it almost impossible to create an orderly and consistent body of law on the subject. Second, litigation among guilty parties serves to expose their unlawful conduct and render them more easily subject to appropriate civil, administrative, and criminal penalties. For example, litigation among insiders will often expose the guilty parties to derivative suits by stockholders. The present case presents a highly unusual situation where no profits were made and consequently no derivative suits would be filed.