ual reliance in these cases by showing that the misrepresentation was material, testifying that he relied upon it, and showing that he traded soon after misrepresentation.
7.WHEN NONDISCLOSURE CONSTITUTES a VIOLATION
a) Mere Possession of Material Information - generally, nondisclosure of material, nonpublic information violates rule 10b-5 only when there is a duty to disclose independent of rule 10b-5
b) Insider Trading - insiders (dirs, officers, controlling shs and corporate employees) violate rule 10b-5 by trading on the basis of material, nonpublic info obtained through their positions. They have a duty to disclose before trading.
c) Misappropriation - the liability of noninsiders who wrongfully acquire (misappropriate) material nonpublic info has not been ruled upon by the US Supreme Court, although some lower level federal courts have imposed criminal liability.
1) Duty to Employer - using the misappropriation theory, criminal liability under rule 10b-5 has been imposed where an employee trades on info used in violation of the employee's fiduciary duty to his employer. An employee's duty to "abstain or disclose" with respect to his ER does NOT extend to the general public. However, the Insider Trading and Securities Fraud Enforcement Act of 1988 makes any person who violates rule 10b-5 by trading while in possession of material, nonpublic info liable to any person who, contemporaneously to the transaction, purchased or sold securities of the same class. Liability is limited to the defendant's profit or avoided loss.
2) Mail and wire fraud - the application of the federal mail and wire fraud statute to this situation lessens the importance of the misappropriation theory in imposing criminal liability under rule 10b-5.
3) Special rule for tender offers - once substantial steps toward making a tender offer have begun, it is a fraudulent, deceptive, or manipulative act for a person possessing material information about the tender offer to purchase or sell any of the target's stock, if that person knows that the info is nonpublic and has been acquired from the bidder, the target, or someone acting on the bidder's or the target's behalf.
d) "Disclose or Abstain" - nondisclosure by a person with a duty to disclose violates rule 10b-5 only if he trades (Cady rule)
8.LIABILITY OF NONTRADING PERSONS FOR MISREPRESENTATION - a nontrading corp or person who makes a misrepresentation that could cause reasonable investors to rely thereon in the purchase or sale of securities is liable under rule 10b-5, provided the scienter requirement is satisfied.
9.LIABILITY OF NONTRADING CORPORATION FOR NONDISCLOSURE - the basic principle is "disclose or abstain." Thus, a nontrading corp is generally not liable under rule 10b-5 for nondisclosure of material facts.
a) Exceptions - a corp has a duty to:
1) Correct misleading statements...
