Is an SEC Rule 10b-5 violation a civil or criminal crime?

SEC Rule 10b-5 violations can result in civil or criminal penalties, or both. SEC Rule 10b-5 governs the selling and buying of shares and securities across the US public market. Here’s a quick guide.

What is SEC Rule 10b-5?

Rule 10b-5 is a regulation from the US Securities and Exchange Commission (SEC) that makes it unlawful to pass an untrue statement of a material fact or omit crucial information related to the purchase or sale of any security.

The rule is named after its place in the Code of Federal Regulations: 17 CFR 240.10b-5 (codified under 15 USC 78j(b)). 

It was created by Section 10(b) of the Securities Exchange Act of 1934, prohibiting fraud and other deceptive practices in the securities markets. And Rule 10b-5, which makes violations of Section 10(b) actionable by private parties.

While most people think of the SEC Rule 10b-5 primarily as a tool for investors who have been defrauded, the rule has two versions applying to both buyers and sellers. So the rule doesn’t only cater to investors but also other parties.

Who Can Sue Under SEC Rule 10b-5?

Investors and companies can sue under SEC Rule 10b-5. There are two 10b-5 versions for their protection. 

The first version of the SEC Rule 10b-5 is found at 17 CFR 240.10b-5(a)(1). This section (along with Section (2)) prohibits any person from making any material misrepresentation or omission in connection with the purchase or sale of a security.

The second version of the rule advocates for a trade’s plan by insiders, when buying stocks. It helps prevent losses while giving time for decision-making.

What Are the Elements of an SEC Rule 10b-5 Claim?

The elements of an SEC Rule 10b-5 claim are fraudulent misrepresentation, material misrepresentation and omission, scienter, and reliance. For the lawsuit to be filed, there must be proof of violating the federal security laws. And this is where elements of the offense in the 10b-5 charges come in handy. Let’s explore

Fraudulent Misrepresentation

A misrepresentation can be a statement that is untrue or misleading. For example, a statement by a company claiming that their earnings are “up 15%” could mislead investors. Simply because the information is not well detailed enough. At the same time, it is controversial, and each investor may interpret it differently, leading to misrepresentation, 

Once it turns up against them, they may file a claim under Rule 10b-5 against the company for fraudulent misrepresentation.

However, the victim must have suffered financial losses due to the misrepresentation to claim fraud under the rule. 

The victim must also prove that the defendant had knowledge of or acted with reckless disregard for the truth or falsity of the information.

Material Misrepresentation and Omission

A material misrepresentation would significantly affect a reasonable investor’s decision on buying or selling stock. In other words, if they knew the facts, would they still have purchased or sold the shares? 

Of course, it can be hard to know what an investor would do in situations like this. So most courts usually apply an objective standard and consider what a reasonable investor would have done under the circumstances.

When crucial information has not been disclosed to investors at all with omission, it occurs. This often happens when companies fail to make required disclosures under federal securities laws, such as financial statements, insider trading, and corporate takeovers. 

In case of losses attributed to misrepresentation and omission, an investor has the right to action and can file a lawsuit for the same.


There must be proof that the defendant acted with intent to defraud (scienter) or had a conscious disregard for the truth (recklessness). A mere negligent mistake is not enough.

Also, your conduct must have been reasonable and should not look like it contributed to the loss whatsoever.


Reliance means that the plaintiff relied on the fraudulent statement. So considering most fraud claims are filed by investors who bought or sold securities based on false information, reliance is usually established in those cases. 

However, it is not necessary that the plaintiff intended to rely on the fraudulent statement. A plaintiff can also allege that he relied upon omissions of material fact in violation of Rule 10b-5(b).

Is 10b-5 Securities Fraud a Civil or Criminal Crime?

10b-5 is a regulatory provision that allows the SEC to pursue civil charges against an entity or individual who engages in securities fraud. It is distinct from federal crimes, like mail and wire fraud.

If you’re convicted of 10b-5 securities fraud, you could face fines, restitution, and prison time. The SEC also has the power to ban your company from doing business with investors.

But, the SEC must prove that your conduct violated federal securities laws — in other words, that you had a duty to act in good faith and you breached it. These federal security laws are the elements of a 10b-5 charge. 

Does a 10b-5 Action Require Intent?

To establish the element of scienter in a 10b-5 action, the plaintiff must prove that the defendant made statements knowing they were false or while not believing they were true. The requirement of scienter, or a mental state embracing intent to deceive, manipulate or defraud is a threshold requirement for all securities fraud claims. 

The purpose of the requirement is to separate those individuals who have genuinely acted with fraudulent intent from those who have made innocent misstatements.


The plaintiffs in a 10b-5 action must prove that they relied on the false statements made by the defendant and that there was an economic loss attributed to this reliance. However, the plaintiffs cannot be de facto purchasers of the security since they bought it from someone injured by the defendant’s misstatement. In this way, a 10b-5 claim is different from other charges. It does not let you sue for damage resulting from the tort, without regard to whether the person suffered harm.

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