The conditions that led to the adoption of section 10(b) of the Securities Exchange Act of 1934 are eerily evocative of the atmosphere currently plaguing the national economy. Since 2008 the United States has suffered through a stock market crash, an economic downturn, and a loss of investor confidence–all market conditions that starkly mirror the events originally driving the enactment of section 10(b), a statute designed “to insure honest securities markets and thereby promote investor confidence.” As the current economy limps out of the “Great Recession,” the need for fair and honest securities markets will be of paramount importance. Consequently the need will also be great for regulatory agencies, specifically the Securities and Exchange Commission (SEC), to have a clear and straightforward standard under which to pursue actors who engage in fraudulent behavior in securities markets–particularly as technology changes the very landscape of those markets.
However, the principal antifraud statute, section 10(b), has become anything but straightforward, enduring a tortured existence as courts struggled to force different behaviors to fit into its mold. Most notably, section 10(b) has been used to combat insider trading–traditionally defined as “[t]he use of material, nonpublic information in trading the shares of a company by a corporate insider or other person who owes a fiduciary duty.” The United States Court of Appeals for the Second Circuit therefore struck a progressive and potentially expansive victory for section 10(b)’s fundamental antifraud purpose in SEC v. Dorozhko. The court held that liability under section 10(b) could be found upon a showing of an affirmative misrepresentation, regardless of whether a fiduciary duty existed. The appellate court’s decision directly overturned the lower court’s determination that section 10(b) could not be violated without a breach of fiduciary duty. Indeed, the significance of the Second Circuit’s holding in Dorozhko is most aptly underscored by the district court’s declaration that “[t]o eliminate the fiduciary requirement now would be to undo decades of Supreme Court precedent, and rewrite the law as it has developed.” Specifically, the Second Circuit’s decision was contrary to Regents of the University of California v. Credit Suisse First Boston (USA), Inc., an earlier decision by the Fifth Circuit holding that “[a]n act cannot be deceptive within the meaning of § 10(b) where the actor has no duty to disclose.” By eliminating the need to show the existence of a fiduciary duty, the SEC is free to focus on all fraudulent behavior, regardless of the actor’s particular relationships, thereby simplifying its burden and potentially broadening the scope of prohibited behavior.