Judicial creation of a private cause of action under rule l0b-5, which was promulgated pursuant to section 10(b)3 of the Securities Exchange Act of 1934, gave rise to a number of perplexing issues. One of the most formidable was whether proof of scienter was a necessary element for recovery. Lacking congressional direction, courts were free to fashion the state of mind standard flexibly, by pursuing what is recognized as the broad policy of section 10(b)—the prevention of fraud on the public by persons connected with the purchase or sale of securities. Predictably, the standards adopted within the United States courts of appeals varied, depending upon such considerations as the type of relationship between the parties, the forseeability of injury to the plaintiff by the defendant, the ease with which such injury could have been avoided, the degree of culpability attending the defendant's act, and most important, the court's perception of congressional intent behind the language of section 10(b). The Supreme Court's recent decision in Ernst & Ernst v. Hochfelder resolved the conflict by mandating that scienter be proved prior to any recovery for a private right of action under section 10(b). Although the Court's decision in Hochfelder brought some welcome structure to an otherwise amorphous state of law, some questions regarding the scope of the decision deserve further attention. This note examines the development of the law with respect to the state of mind element in rule 10b-5 cases prior to Hochfelder and will present some observations concerning the possible impact of this recent case.
Larry V. Albers,
Rule 10b-5: Scienter Displaces the Flexible Duty Standard: Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976),
56 Neb. L. Rev. 382
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