Saturday, July 9, 2011
As Rule 10b-5 approaches the age of 70, deep familiarity with this supremely potent and consequential provision of American administrative law obscures its lack of clear conceptual content. The rule, as written, interpreted, and enforced, is missing a straightforward connection to, of all things, fraud. Fraud is difficult to define. Several approaches are plausible. But the law of securities fraud, and much of the commentary about that body of law, have neither attempted such a definition nor acknowledged its necessity to the coherence and effectiveness of doctrine.
Securities fraud’s lack of mooring in the concept of fraud produces at least three costs: public and private actions are not brought on behalf of clearly specified regulatory objectives; the line between civil and criminal liability is not acceptably sharp; and the law provides an at best weak means of resolving vital public questions about wrongdoing in financial markets. The agenda of this article is to illuminate and clarify the relationship between securities fraud and fraud, and to structure a law reform discussion that promises to make more explicit the connection between securities fraud remedies and the purposes of a regime of securities regulation; brighten the line between civil and criminal liability; and produce better understanding of what is being asked when, as so often these days, we wonder whether to label an important matter of market failure, “fraud.”