TITLE

Duty to Disclose Under Rule 10b-5 In Face-to-Face Transactions

AUTHOR(S)
Fishman, Steven A.
PUB. DATE
January 1987
SOURCE
Journal of Corporation Law;Winter87, Vol. 12 Issue 2, p251
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
One particularly important issue that arises in this context is whether rule 10b-5 creates an affirmative obligation to disclose information other than that information which either has been requested in the course of negotiating the transaction or that has been embodied in the contract. This issue raises both theoretical questions about the extent of the protection provided by the federal securities laws and practical questions about the extent to which affirmative disclosures must be made in order to avoid liability in arm's-length transactions. In addition, other elements of a rule 10b-5 cause of action, such as materiality, reliance, and due diligence, may be affected by the nature of face-to-face transactions. Recent Supreme Court decisions have emphasized the importance of the consideration of these questions. In Landreth Timber Co. v. Landreth and Gould v. Ruefenacht the Supreme Court rejected the application of the sale of business doctrine, under which a number of circuit courts had held that the securities laws did not apply to the sale of all the stock, or in some cases, a controlling interest in the stock, of a corporation. Landreth and Gould made clear that the securities laws apply to face-to-face transactions and, therefore, an increase in the number of rule 10b-5 actions relating to these face-to-face transactions is likely to result. However, they did not address the question of the extent of the obligation imposed by rule 10b-5 or other provisions of the securities laws. In addition, the Supreme Court in Chiarella v. United States and Dirks v. SEC emphasized that liability for a failure to disclose under rule 10b-5 is founded on the existence of a fiduciary duty owed by one party to the other. Although these decisions dealt with insider trading, the Court's reasoning should apply equally to face-to-face transactions. Because some of the lower court decisions preceding Chiarella and Dirks which applied rule 10b-5 in face-to-face transactions...
ACCESSION #
6030986

 

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