Acorns and Oaks: Implied Rights of Action under the Securities Acts
Gordon, James D., III, Stanford Journal of Law, Business & Finance
It began, as they say, innocently enough. In 1946 a federal district court1 recognized an implied private right of action under section 10(b)3 of the securities Exchange Act of 1934 and Rule 10b-5.4 Since then, the federal courts have issued thousands of decisions defining the scope of that private right of action, which the Supreme Court has described as "a judicial oak which has grown from little more than a legislative acorn."5 In addition, federal courts have found implied rights of action in other sections of the federal securities acts, and have issued decisions defining the scope of those rights of action as well. What began as a legislative acorn is now a grove of oaks, with the courts nurturing, pruning, and occasionally uprooting individual trees. Since the mid-1970s the growth has slowed,6 but the grove remains.
This Article will argue that implied rights of action under the federal securities acts7 are based on erroneous statutory interpretation and are unconstitutional.8 Congress created private remedies in some sections, and did not intend to do so in other sections. By creating implied rights of action, federal courts have in effect amended the securities acts, thus violating the separation of powers. The judicially created remedies have upset the balance that Congress struck between investor protection and costs imposed on the securities markets. In addition, Rule 10b-5 actions eclipse or almost nullify express rights of action that Congress provided in the 1934 Act. While Congress has not overturned what the courts have done, congressional acquiescence does not legitimate this process of judicial lawmaking. Moreover, the inconsistent recognition of implied remedies and the gradual judicial development of the elements of those rights of action cause uncertainty and unnecessary litigation. Much of the expense is ultimately borne by investors-both plaintiffs and other shareholders of corporations.
In light of these concerns, this Article will propose that Congress adopt express private remedies mirroring the two most well established implied rights of action, those under Rule 10b-5 and Rule 14a-9,9 and address the major unresolved questions about those remedies. The Article will also propose that Congress expressly disallow implied rights of action under the securities acts. This proposal would convert the two most venerable implied rights of action under the securities acts into express remedies, and would end the litigation which seeks to create other implied rights of action and to determine their elements.
I. ERRONEOUS STATUTORY INTERPRETATION AND UNCONSTITUTIONALITY
The securities markets are essential to America's economy and financial health. securities such as stocks and bonds are a primary means through which businesses raise capital. Many Americans invest in securities to save money and earn a return in order to prepare for retirement or meet other financial objectives. Before the 1930s, securities were governed only by state law. However, in the wake of the stock market crash of 1929, Congress passed comprehensive legislation regulating securities. The two most important acts are the Securities Act of 1933(10) and the Securities and Exchange Act of 1934.11 These acts apply to most purchases and sales of securities in the United States.
A. Erroneous Statutory Interpretation
When Congress enacted the securities acts, it was painfully aware of the Great Depression and believed that it was largely precipitated by abuses in the securities markets. The securities acts represent Congress's imperfect judgment about the level of federal regulation necessary to protect investors and the economy without unduly burdening the raising of capital and the functioning of the securities markets.
Congress provided express private rights of action in eight sections of the 1933 and 1934 Acts.12 However, Congress did not originally intend to create a private remedy under Section 10(b) of the 1934 Act or Rule 10b-5. …