A comparison of the commentaries on rule 10b-5 indicates that uncertainty is widespread in this area of securities law. One area that is needlessly confused is the proper selection and definition of those elements necessary for recovery in a 10b-5 action. The purpose of this article is to consider four distinct elements that continue to be the source of constant litigation and comment and to suggest an approach that clarifies their meaning and use. The four elements are: (1) scienter (the defendant's state of mind), (2) reliance, (3) justifiable reliance, and (4) materiality. This article will analyze the use of these elements in determining liability for violations of rule 10b-5 in the context of four recurring factual patterns: (1) face-to-face misstatement situations, (2) face-to-face nondisclosure situations, (3) non-privity misstatement situations, and (4) non-privity nondisclosure situations.

The thesis of this article is that the configuration of elements required to establish liability under 10b-5 need not be the same in each factual situation. Rather, the elements of recovery should be selected and defined in a manner that will further such sound policies as the integrity of the securities market and fairness among the parties. Fairness dictates that the loss resulting from a securities transaction should be borne by the more blameworthy party. If the parties are equally blameworthy, the law should not reapportion the loss. The promotion of integrity in the securities market requires that the elements be defined in such a way as both to encourage the disclosure of material information needed for an informed investment decision and to discourage the use of misstatements and manipulative devices in stock transactions. The furtherance of these policies may be thwarted if rigidity of definition is demanded by the courts.

Document Type


Publication Date



Notes/Citation Information

South Carolina Law Review, Vol. 26, No. 5 (March 1975), pp. 653-703


To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.