Standing Under Section 10(b) and Rule 10b-5: The Continued Validity of the Forced Seller Exception to the Purchaser-Seller Requirement

University of Pennsylvania Journal of Business Law, 2009

67 Pages Posted: 2 May 2009 Last revised: 17 Sep 2009

See all articles by Eric C. Chaffee

Eric C. Chaffee

Case Western Reserve University School of Law

Date Written: May 1, 2009

Abstract

Congress drafted section 10(b) of the Securities and Exchange Act of 1934 as a "catchall" antifraud provision to combat a wide variety of manipulative and deceptive activities that can occur in connection with the purchase or sale of a security. Based upon the power granted under section 10(b), the Security and Exchange Commission ("SEC") enacted Rule 10b-5, and these provisions have become powerful tools in fighting securities fraud. Although Congress explicitly charged the SEC with enforcement of section 10(b) and Rule 10b-5, the Supreme Court of the United States has held that a private right of action exists based upon these provisions. This private right has become an essential supplement to the federal government's criminal prosecutions and civil enforcement actions to combat securities fraud.

In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975), the Supreme Court of the United States held that standing to bring a private right of action under section 10(b) and Rule 10b-5 is limited to plaintiffs who have purchased or sold securities in connection with manipulative or deceptive conduct. This Article explores the validity of a forced seller exception to the purchaser-seller requirement for standing. The forced seller exception has been adopted by numerous lower courts and provides that a plaintiff has standing to sue under section 10(b) and Rule 10b-5 without the actual purchase or sale of a security when an interest in a security has been transformed from an interest in an existing business entity into a claim for cash or when a security has been forcibly exchanged for a fundamentally different security. This exception has been used by dozens of courts to remedy fraudulent short form mergers and fraudulent business liquidations. However, no law review articles have been published focusing on the validity of this exception.

Although strong policy arguments justify the existence of a forced seller exception to the purchaser-seller requirement, the Supreme Court is unlikely to hold that such an exception exists because of the Court's current hostility to expanding the implied private right of action under section 10(b) and Rule 10b-5. The circuit courts have already split over the existence of a forced seller exception to the purchaser-seller requirement. Ultimately, Congress should codify the private right of action under section 10(b) and Rule 10b-5 and provide standing to forced sellers who have been victims of securities fraud.

Keywords: 1933 Act, 1934 Act, Blue Chip Stamps, Rule 10b-5, forced sale, forced sale, section 10(b), Securities Act of 1933, SEC, Securities and Exchange Commission, Securities Exchange Act, securities fraud, securities litigation, securities regulation, standing

Suggested Citation

Chaffee, Eric C., Standing Under Section 10(b) and Rule 10b-5: The Continued Validity of the Forced Seller Exception to the Purchaser-Seller Requirement (May 1, 2009). University of Pennsylvania Journal of Business Law, 2009, Available at SSRN: https://ssrn.com/abstract=1397566

Eric C. Chaffee (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States

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