Rule 10b-5 under the Securities Exchange Act of 1934 prohibits fraud only when it is “in connection with” a securities transaction. The limit is simple in concept, but difficult in application. Courts long have struggled to determine when the requisite connection exists.
In 2009, the Fourth Circuit in SEC v. Pirate Investor LLC proposed a multi-factor framework for analyzing whether a particular fraud meets the “in connection with” requirement. The Fourth Circuit’s factors, however, represent neither mandatory requirements nor an exhaustive list of relevant considerations, and absent from the framework is a general principle for determining when to apply the factors, how to weigh them, and when other factors should be considered. Unfortunately, the Supreme Court likewise has failed to articulate a general principle for the “in connection with” requirement.
This Article attempts to fill the void left by the Supreme Court. Drawing on the Court’s few “in connection with” cases, the Article proposes a general principle to serve as a guide for applying the “in connection with” requirement. It also critically examines the Fourth Circuit’s multi-factor framework and suggests modifications so that the framework informs the application of the general principle and can be applied logically and efficiently.
Available at: http://works.bepress.com/thomas_molony/1/