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In a civil lawsuit based on violation of the anti-fraud provisions of the Securities Exchange Act of 1934, a/k/a Rule 10b-5 violation, the following must be found by a preponderance of the evidence:
1. That defendant used an “instrumentality of interstate commerce” in connection with the securities transaction involved in the case
2. That defendant made a false representation of a material fact (or omitted a material fact) in connection with the purchase or sale of a security
3. That defendant acted “knowingly” or with “severe recklessness”
4. That plaintiff “justifiably relied” on defendant’s conduct
5. That plaintiff suffered damages as a proximate result of defendant’s wrongful conduct
6. That plaintiff suffered damages.
1. That defendant used an “instrumentality of interstate commerce” in connection with the securities transaction involved in the case
The Securities Exchange Act is a federal statute that allows [the Securities and Exchange Commission, also known as the SEC] to enact rules and regulations prohibiting certain conduct in the purchase or sale of securities. One of the problems that led to the enactment of the Securities Exchange Act of 1934 was the lack of transparency in the stock market. Before the Act was passed, it was difficult for investors to get accurate information about the companies they were investing in. This made it easy for unscrupulous companies to manipulate the market and defraud investors.
Another problem that led to the enactment of the Act was the lack of regulation of the stock exchanges. Before the Act was passed, the stock exchanges were largely unregulated. This allowed for abuses such as insider trading and market manipulation.
The Securities Exchange Act of 1934 was passed to address these problems. The Act created the Securities and Exchange Commission, which is responsible for regulating the stock market. The Act also requires companies to register their securities with the SEC and to provide investors with accurate information about their financial condition.
Section 10(b) of the Securities Exchange Act of 1934 [15 USC § 78j(b)] provides that:
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… 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…, 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.
Thus, Rule 10b-5(b) makes it unlawful for a person to commit a fraud in connection with the purchase or sale of a security.
A person who claims that someone violated Rule 10b-5(b) may bring a civil action for damages that he/she/it/they suffered because of the violation. The first of the six elements plaintiff has to prove a claim under Rule 10b-5(b) by a preponderance of the evidence is that defendant used an “instrumentality of interstate commerce” in connection with the “securities” transaction.
What Can We Call a Security?
Many cases raise and fall on whether or not a security is involved. A “security” is an investment in a commercial, financial, or other business enterprise with the expectation that profits or other gain will be produced by others. Some common types of securities are stocks, bonds, debentures, warrants, and investment contracts. With respect to the definition of “security,” see SEC v. Edwards, 540 U.S. 389 (2004) and Exchange Act Section 3(a)(10), 15 U.S.C. § 78c(a)(10). The issue of whether a particular investment is a “security” is frequently a question of law for the court. Robinson v. Glynn, 349 F.3d 166, 170 (4th Cir. 2003); Ahrens v. American-Canadian Beaver Co., 428 F.2d 926, 928 (10th Cir. 1970).
Internet Much?
“Instrumentality of interstate commerce” means the use of the mails, telephone, Internet, or some other form of electronic communication, or an interstate delivery system such as Federal Express or UPS or a facility of a national securities exchange such as the New York Stock Exchange or NASDAQ, or an inter-dealer electronic-quotation-and-trading system in the over-the-counter securities market. It’s not necessary that the misrepresentation or omission of material fact was transmitted using an instrumentality of interstate-commerce. It is enough if the interstate-commerce instrumentality was used in some phase of the transaction.