Neither Congress in the Securities Exchange Act of 1934 nor the SEC in Rule 10b-5 explicitly provided a private cause of action for investors or others defrauded by the purchase or sale of securities. Nevertheless, courts recognize an implied private cause of action premised on the theory that Section 10(b) and Rule 10b-5 impose a duty on those in possession of material inside information to either disclose it to the investing public or abstain from trading or recommending the securities at issue while the information remains non-public.1
Congress eventually passed the Insider Trading and Securities Fraud Enforcement Act of 1988, which first established a statutory right of action based on that theory under Section 20A of the Exchange Act. The new provision afforded buyers or sellers of securities a private cause of action against the insider trader and the entity that controlled the insider trader, if the investors contemporaneously traded with the insider.2
Much of the private insider trading litigation brought today is in the form of class action suits relying on a fraud-on-the-market theory. Under this theory, Rule 10b-5 permits suits by secondary market purchasers or sellers against non-transacting corporate defendants for misstatements made by the corporation’s agent, assuming that the plaintiff actually relied upon those misstatements in entering into the secondary market transaction.3 Securities fraud class actions brought on behalf of all investors that traded close in time with the insider often follow corporate insider trading enforcement matters.
The right to private action in respect of insider dealing is less clear in the UK as neither MAR or the CJA contemplate this. Contact us for more information.
In France, subject to certain conditions, parties that have suffered loss can file a complaint to the Investigating Judge for a criminal investigation and may participate in it and the subsequent trial as civil parties (parties civiles) (Art. 85 of the Criminal Procedure Code).
If administrative proceedings are launched, parties that have suffered loss can only seek compensation before civil courts and not before the AMF’s Enforcement Committee.
1 See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 238 (2d Cir. 1974).
2 15 USC § 78t-1.
3 See Basic Inc. v. Levinson, 485 U.S. 224, 246 (1988).