Textualist Statutory Interpretation Kills Section 10(b) "Aiding and Abetting" Liability

Article excerpt

IN First Central Bank of Denver v. First Interstate Bank of Denver,(1) the U.S. Supreme Court held that there is no private aiding and abetting liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule lob-5 of the Securities and Exchange Commission. The decision eliminated the judicially implied private right of action by which allegedly defrauded investors could sue securities and accounting professionals--typically accounting firms, brokerages, law firms and banks--who aided and abetted a primary violator--typically a securities issuer or underwriter. A five-justice majority strictly interpreted Section 10(b), focusing on its text and rejecting the dissent's admonition to adhere to the 1934 act's general purpose of investor protection and the principle of stare decisis.

Central Bank has weighty ramifications for securities litigation under Section 10(b) and other provisions of the securities laws, but the decision is also an interesting illustration of the relationship between the textualist and purposivist factions of the Supreme Court when engaged in statutory interpretation. The majority opinion by Justice Kennedy is a vivid example of how the Court has utilized the textualist approach, which began in the 1970s, to narrow the scope of Section 10(b). The dissent by Justice Stevens is notable for its employment of both purposivist and dynamic theories of statutory interpretation when the precedents for strict interpretation were numerous.

Central Bank is a legally provocative decision, not only for the field of securities law but also for students and critics of the modem Supreme Court and the relationship between its conservative and more liberal factions.

SECURITIES ACTS

A. Section 10(b) Implied Private Rights of Action

The primary purposes of the Securities Act of 1933 and the 1934 act were to protect investors and promote market stability and efficiency.(2) The statutes attempt to ensure full disclosure in securities transactions, to empower the SEC to bring civil and criminal actions against violators of the acts, and to provide investors with private remedies when defrauded in the securities markets.(3) However, Section 10(b) of the 1934 act, 15 U.S.C. [sections] 78j(b), does not expressly provide for a private remedy against primary violators or against aiders and abettors, and the legislative history does not indicate that Congress contemplated a private remedy. Section 10(b) is an enabling statute that grants the SEC authority to promulgate rules.

Labeled "Manipulative and Deceptive Devices," it provides:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or instrumentality

of interstate commerce or of the mails, or of

any facility of any national securities exchange--...

(b) To use or employ, in connection with the

purchase or sale of any security registered on a

national securities exchange or any security not so

registered, any manipulative or deceptive device

or contrivance in contravention of such rules and

regulations as the [Securities Exchange] Commission

may prescribe as necessary or appropriate in

the public interest or for the protection of investors.

Based on that authority, in 1942 the SEC promulgated Rule 10b-5, its "catch-all" anti-fraud provision:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or instrumentality

of interstate commerce, or of the mails

or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice

to defraud,

(b) To make any untrue statement of a material

fact or to omit to state a material fact necessary in

order to make the statements made, in the light of

the circumstances under which they were made,

not misleading, or

(c) To engage in any act, practice, or course of

business which operates or would operate as fraud

or deceit upon any person,

in connection with the purchase or sale of any

security. …