- Securities fraud under Rule 10b-5 prohibits using "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of any security. Under this rule, one cannot deliberately try to deceive another when selling or purchasing securities.
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There are two ways to commit fraud under 10b-5:
(1) Make an untrue statement (a lie);
(2) Fail to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading (a half-truth, or not telling the whole story). - In order to commit securities fraud, the lie or half-truth must have been made in connection with the purchase or sale of securities. In other words, the lie or half-truth was made to induce someone to buy or sell securities. If someone is selling securities and he lied about his preference of sports teams, that is not securities fraud because it is immaterial to the purchase and sale of securities.
- The person who lied or told a half-truth in connection with the purchase or sale of securities must have intended to defraud.
- Lastly, the lie or half-truth must have caused the transaction (caused the victim to buy or sell stocks), and the victim must have suffered a loss as a result of this transaction.
