SEC Rule 10b-5 is adopted under Section 10(b) of the Securities Exchange Act of 1934 and is the primary anti-fraud provision in federal securities law.
Text of Rule 10b-5 (paraphrased): It is unlawful for any person, in connection with the purchase or sale of any security, to: 1. Employ any device, scheme, or artifice to defraud. 2. Make any untrue statement of a material fact or omit a material fact that makes a statement misleading. 3. Engage in any act, practice, or course of business that operates as a fraud or deceit upon any person.
Key elements for private liability: 1. A material misrepresentation or omission. 2. Scienter (intent to deceive or defraud, or recklessness). 3. Connection with the purchase or sale of a security. 4. Reliance by the plaintiff. 5. Economic loss. 6. Loss causation.
Applications: - Insider trading: Trading on MNPI is a fraudulent device. - Market manipulation: Wash sales, matched orders, and pump-and-dump schemes. - Misrepresentation: False statements in prospectuses, SEC filings, or recommendations.
Who can bring actions: - The SEC (civil enforcement). - The DOJ (criminal prosecution). - Private plaintiffs (civil suits).
> Exam tip: Rule 10b-5 is the broadest anti-fraud rule in securities law — it applies to any securities transaction, not just registered offerings. "In connection with the purchase or sale" is a key phrase. Scienter (intent) is required for criminal liability.