The Path to Culpability Under Section 14(e) of the Securities Exchange Act of 1934

I. Introduction

In 1911 Kansas became the first state to regulate securities sold by out-of-state corporations.^[1] Soon, other states followed suit, enacting what became known as “blue sky laws.”^[2] These laws discouraged fraudulent securities practices but lacked nationwide uniformity.^[3] Changing state license laws and restrictions upon interstate investment operations were two ways this lack of uniformity negatively impacted investors and investment operations.^[4] These negative effects procured support for federal regulation, but were insufficient to necessitate immediate action.^[5]

As the nation moved into the 1930s it became more evident that federal regulation of securities was needed.^[6] The market crash of 1929, the circumvention of blue sky laws, and the unreliability of corporate disclosures all aided in the push towards federal regulation.^[7] President Roosevelt, shortly after being inaugurated, prompted Congress to enact legislation regulating investment securities in interstate commerce.^[8] In his March 29, 1933 message to Congress, he impressed upon Congress that there is “an obligation upon [the government] to insist that every issue of new securities to be sold in interstate commerce . . . be accompanied by full publicity and information, and that no essentially important element . . . be concealed from the buying public.”^[9] Congress heeded this message and passed the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (Exchange Act).^[10] The 1933 Act regulated the distribution of securities, protecting purchasers, and the Exchange Act regulated the aftermarket trading once securities had been issued.^[11] The Exchange Act also amended the 1933 Act, creating the Securities and Exchange Commission (SEC) and broadening the scope of federal securities regulation.^[12]

In 1968 subsections 13(d)–(e) and 14(d)–(f) were added to the Exchange Act.^[13] These amendments, collectively known as the Williams Act, addressed the Exchange Act’s lack of a disclosure requirement applicable to tender offers.^[14] A tender offer, although undefined by the Williams Act, is “typically an active and widespread solicitation by a company or third party (often called the “bidder” or “offeror”) to purchase a substantial percentage of the company’s securities.”^[15]

Prior to the Williams Act, a company seeking to take control of another company—respectively the “tender offeror” and “target corporation”—could circumvent disclosure requirements by using a cash tender offer.^[16] Nondisclosure and the ability to effectively gain control of another company without the approval of shareholders or management made cash tender offers an effective tool in corporate takeovers.^[17] In addition, the use of tender offers to facilitate corporate takeovers created a war-like environment involving offensive and defensive tactics employed by the offeror and target company, with little protection for investors.^[18] The disclosure requirements under the Williams Act filled this void, providing companies and investors with information to make informed decisions regarding tender offers.^[19]

Although the 1933 Act, Exchange Act, and Williams Act brought federal uniformity to securities regulation, there were still gaps in the legislation. Specifically, Congress did not specify the requisite culpability for multiple antifraud provisions.^[20] Some of these gaps have been filled by caselaw,^[21] but the Court has yet to determine the culpability required under Section 14(e) of the Exchange Act.^[22] Part II of this Comment analyzes the methods used by the Court to interpret securities law over the years; Section III.A analyzes current circuit law on Section 14(e); and Section III.B applies those findings to Section 14(e) and shows why a negligence standard should be applied to Section 14(e).

II. The Court’s Changing Approach to Securities Statute Interpretation

Over the years the Court has changed its approach to interpreting securities laws. Statutory text, congressional intent, and policy considerations have consistently been employed, but the weight given to each category has varied. The 1960s can be seen as the decade where the Court expanded the reach of securities laws.^[23] During this time, the Court interpreted securities statutes with an emphasis on the broad remedial purposes of the legislation and its overarching purpose of investor protection.^[24] SEC v. Capital Gains Research Bureau, Inc., J.I. Case Co. v. Borak, and SEC v. National Securities, Inc. are good examples of the Court’s use of the overarching purpose of investor protection. In Capital Gains, the Court was required to determine whether “fraud” and “deceit” under the Investment Advisors Act of 1940 required proof of intent to injure and actual injury.^[25] In answering this question, the Court began with the purpose of the Investment Act.^[26] The Court stated, “A fundamental purpose, common to [the Investment Act, 1933 Act, and Exchange Act], was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.”^[27] Expanding from this legislative grouping, the Court added that the congressional intent of the Investment Act required it to be construed “not technically and restrictively, but flexibly to effectuate its remedial purposes.”^[28] The Court concluded, through the use of purpose, congressional intent, and legislative history, that “fraud” in the Investment Act reached a broader class of actions and did not “impose . . . the burden of showing deliberate dishonesty.”^[29]

One year later, in Borak, the Court was tasked with interpreting Section 14(a) of the Exchange Act.^[30] Specifically, the issue was whether private parties had a right to bring suit under Section 14(a).^[31] Though the language in Section 14(a) did not expressly permit a private right of action, the Court used Section 14(a)'s broad remedial purpose of investor protection as evidenced from its language, to imply one.^[32] Further supporting this private right, the Court looked to public policy stating that a private right of action is a “necessary supplement to Commission action” and an “effective weapon in the enforcement of [Section 14(a)].”^[33] By implying this private right of action, the Court was using the purpose of the statute to remedy a wrong when the statutory text was insufficient.^[34]

Four years later, in National Securities,^[35] purpose would again be utilized to interpret Section 10(b) of the Exchange Act^[36] and Rule 10b–5.^[37] Specifically, it was used in determining the meaning of “in connection with the purchase or sale of any security.”^[38] According to the SEC’s complaint, National Securities, Inc. (National Securities) and various other persons manufactured a fraudulent scheme surrounding a merger between National Life & Casualty Insurance Co. (National Life) and Producers Life Insurance Co. (Producers) in violation of Section 10(b) and Rule 10b–5.^[39] National Securities, after acquiring a controlling interest in Producers, sent communications to Producers’ shareholders that allegedly omitted material information when seeking approval of the merger between National Life and Producers.^[40] National Securities argued that the complaint failed to “allege any misstatements ‘in connection with the purchase or sale of any security,’ as required by” Section 10(b) and Rule 10b-5.^[41] The Court began its analysis by stating that the interdependence of the 1933 Act and Exchange Act is a factor in interpreting their language, but “ordinary rules of statutory construction still apply.”^[42] By reducing the weight of the similar language in the 1933 Act and construing the wording “purchase and sale” only in the context of Section 10(b) and Rule 10b–5, the Court provided itself with a channel to expand the reach of Section 10(b) and Rule 10b–5.^[43] Looking to the Exchange Act, the Court found the definition of “purchase” and “sale” unhelpful but did not stop there.^[44] The Court then analyzed whether the behavior in this suit was “meant to be forbidden by the statute and the rule.”^[45] Analyzing the misstatements by National Securities, the Court stated: “Whatever the terms ‘purchase’ and ‘sale’ may mean in other contexts, here an alleged deception has affected individual shareholders’ decisions in a way not at all unlike that involved in a typical cash sale or share exchange.”^[46] In concluding that Producers’ shareholders had “purchased” shares in the new company, the Court reiterated the broad antifraud purposes of Section 10(b) and Rule 10b⁠–⁠5.^[47]

The 1960s Court stood by its approach of applying purpose as the main guide when interpreting securities laws.^[48] Using this method of interpretation to interpret Section 14(e) of the Exchange Act might prove fruitful for a plaintiff arguing for a higher level of culpability. However, the Court began to change as it entered the 1970s, and the resounding theme of “investor protection” would slowly fade.^[49]

A. The 1970s and the Restrictive Court

The 1970s saw the Court’s departure from the once broad approach to securities law interpretation. Although the Court did not fully adhere to one method of statutory interpretation, the Court began placing less weight on the broad remedial purpose of the securities acts and focused more on the statutory text.^[50] This can be seen in Reliance Electric Co. v. Emerson Electric Co.^[51] There, the Court determined whether Section 16(b) of the Exchange Act^[52] applied to Emerson Electric’s sale of its 9.96% holding in Dodge Manufacturing.^[53] Emerson Electric—after a failed tender-offer takeover—possessed 13.2% of Dodge’s outstanding common stock.^[54] Wanting to dispose of this stock, and clearly aware of the 10% ownership threshold required for Section 16(b) liability, Emerson Electric reduced its Dodge share total using two sales: the first sale reduced its ownership from 13.2% to 9.96%, and the second sold the remainder.^[55] Both sales were made within six months of purchase.^[56] While the first sale was clearly subject to Section 16(b), the Court was called to decide if the second sale was also subject to Section 16(b).^[57] The Court noted the strict liability imposed by Section 16(b) and further stated that “[l]iability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under [Section] 16(b).”^[58] In light of Section 16(b)'s “objective standards” and the literal language of the statute, the Court held that Emerson Electric’s actions were not a Section 16(b) violation.^[59] Although this statute imposed strict liability, the Court did not attempt to use the purpose of the acts to rein in Emerson Electric’s actions.^[60]

In 1973 the Court would take another look at Section 16(b).^[61] This time, the question was whether an option granted by the holder of more than 10% stock—who acquired this stock as a result of a failed tender-offer takeover—was subject to Section 16(b).^[62] In Kern County, Occidental Petroleum Corp. (Occidental) failed in its attempted tender-offer takeover of Kern County Land Co. (Old Kern).^[63] After purchasing more than 10% of Old Kern stock, Occidental was prevented from taking over Old Kern after Old Kern merged with Tenneco, Inc.^[64] As a result of the merger, all stockholders would receive Tenneco preferred stock in exchange for the Old Kern stock.^[65] Not wanting to receive Tenneco stock, Occidental granted an option to Tenneco Corp. (a Tenneco, Inc. subsidiary) that could not be exercised until six months and one day after the expiration of Occidental’s tender offer.^[66] After the consummation of the merger, Tenneco Corp. exercised the option, resulting in a $19 million gain for Occidental.^[67] New Kern brought suit requiring the Court to determine whether Occidental was required to return the profits from the sale under Section 16(b).^[68]

Under Section 16(b), “a statutory insider must surrender to the issuing corporation ‘any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer . . . within any period of less than six months.’”^[69] Because the option granted was not a typical cash-for-stock transaction that would have clearly been under the scope of Section 16(b), the Court had to determine whether the option constituted a “sale” under Section 16(b).^[70] The Court weighed the purpose of the statute—“curbing short-swing speculation by corporate insiders”—and Occidental’s actions to determine if the option was in fact a “sale.”^[71] Holding that the option was not a sale, the Court took a seemingly ad hoc approach to the interpretation of sale and departed from the “objective” standard held closely in Reliance Electric.^[72] Kern County and Reliance Electric demonstrate the 1970s Court’s willingness to take slightly different interpretive approaches if given enough room in the statutory text.

The 1975 case Blue Chip Stamps v. Manor Drug Stores was a turning point in the Court’s approach to securities law interpretation that affected the weight given to certain interpretation tactics.^[73] In Blue Chip Stamps, the Court answered whether offerees in a stock offering have a private right of action under Section 10(b) of the Exchange Act and Rule 10b–5, when they neither purchased nor sold any shares.^[74] In a plan of reorganization, Blue Chip Stamps Co. (Old Blue Chip), a stamp service, was to merge with Blue Chip Stamps (New Blue Chip).^[75] The plan required New Blue Chip to offer common stock to nonshareholder retailers who had used the stamp service in the past.^[76] Respondent, an offeree but not a purchaser of the stock, alleged that Old Blue Chip and New Blue Chip (collectively, Blue Chip) distributed an offering prospectus that was materially misleading because of its “overly pessimistic appraisal of Blue Chip’s status and future prospects.”^[77]

In resolving the dispute, the Court began its analysis by looking to the statutory language of Section 10(b) and Rule 10b–5.^[78] Recognizing that nothing in the text expressly provided for a private cause of action, the Court agreed with the Second Circuit and various other courts that a private right of action under Section 10(b) and Rule 10b–5 was limited to purchasers and sellers of securities.^[79] The Court stepped away from the possibility of using the purpose of investor protection and instead narrowed the class of plaintiffs that would have standing to bring suit under Section 10(b) and Rule 10b–5.^[80] However, the Court’s analysis did not stop with the language of the statute and compared Section 10(b) with Section 17(a) of the 1933 Act,^[81] looked to legislative history,^[82] and weighed policy considerations.^[83] The Court, in addressing policy considerations, recognized that not all potential plaintiffs would be able to bring suit under the Birnbaum Rule.^[84] The Court also recognized the dangers of vexatious litigation that could result if the class of plaintiffs were expanded.^[85] Expounding on the dangers of vexatious litigation, the Court addressed how “strike” suits could lead to extensive discovery because of the difficulty of disposing of the matter by summary judgment.^[86] But the Court noted that nothing in the language of the provisions conflicted with its interpretation that a private right of action exists only for purchasers and sellers of securities.^[87]

In his Blue Chip Stamps concurrence, Justice Powell stated that “[t]he starting point in every case involving construction of a statute is the language itself.”^[88] Looking to the words of Section 10(b), Justice Powell noted that ruling in favor of a private right of action for offerees would insert “an offer to sell” into Section 10(b).^[89] Justice Powell recognized that there was an absence of support for this interpretation in the statutory language, legislative history, and structure of the legislation.^[90] Blue Chip Stamps kept the Court on its trend of narrowing the scope of securities laws.^[91]

In 1976, the Court continued its focus on the statutory text with Ernst & Ernst v. Hochfelder—a case with analysis that is now pivotal in determining culpability standards under securities laws. In Ernst & Ernst, the Court decided whether an action for civil damages under Section 10(b) and Rule 10b–5 was permitted in the absence of any intent by the defendant to deceive, manipulate, or defraud the plaintiff.^[92] The respondents filed a complaint against Ernst & Ernst (Ernst) stating that Ernst violated Section 10(b) and Rule 10b–5 by failing to conduct a proper audit of First Securities.^[93] The respondents’ cause of action rested on Ernst’s failure to discover internal practices that hindered a proper audit.^[94] In sum, the respondents premised their cause of action on Ernst’s negligence.^[95] Unlike prior cases of the 1960s Court, where the intent of Congress was at the forefront of statutory interpretation,^[96] the Court again turned to the language of Section 10(b), stating, “The starting point in every case involving construction of a statute is the language itself.”^[97] Looking at Section 10(b), the Court noted that “Section 10(b) makes unlawful the use or employment of ‘any manipulative or deceptive device or contrivance.’”^[98] The connection of “manipulative or deceptive” with “device or contrivance” suggested a requirement of knowing or intentional misconduct.^[99] The Commission, seeking an interpretation based on the purpose of securities laws, argued that Section 10(b) “must be construed ‘not technically and restrictively, but flexibly to effectuate its remedial purposes.’”^[100] This argument was rejected.^[101] Using other sections in the 1933 Act and the Exchange Act, the Court showed that Congress did not adopt negligence as the uniform standard.^[102] Although the Court considered the statutory text sufficient to show that scienter was necessary for culpability under Section 10(b), it nonetheless analyzed Section 10(b)'s legislative history.^[103] Nothing in the legislative history indicated a Congressional intent to “proscribe conduct not involving scienter.”^[104] The legislative history only supported the Court’s view that scienter was a requisite part of Section 10(b).^[105]

Two important arguments were addressed by the Ernst & Ernst Court. In the first, the Commission contrasted Section 10(b) with other sections of the 1933 Act and the Exchange Act to show that only negligence was required under Section 10(b).^[106] The Court acknowledged that the interrelation of the 1933 Act and the Exchange Act was a relevant factor in interpreting statutory text, but rejected the Commission’s argument.^[107] In the second, the Commission argued that Rule 10b–5 subsections (b) and (c), standing alone, could be read to include both negligent and intentional behavior.^[108] The Court agreed, stating that “[v]iewed in isolation the language of subsection (b), and arguably that of subsection (c) could be read as proscribing, respectively, any type of material misstatement or omission, and any course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or not.”^[109] Even with this concession, the Court defended its view by stating that Rule 10b–5 was promulgated by an administrative agency pursuant to Section 10(b).^[110] Section 10(b) unambiguously spoke of manipulation and deception and the Court was unwilling to extend the scope of Section 10(b) to include negligent conduct.^[111]

The Court would hold to its statement that it was unnecessary to further analyze a statute when the clear statutory text was sufficient, wiping out any possible policy argument.^[112] However, when the statutory language contained gaps, the purpose of the 1933 Act and Exchange Act would be considered.^[113] One of these gaps was whether an unsuccessful tender offeror had an implied cause of action under Section 14(e) of the Exchange Act.^[114] Piper v. Chris-Craft Industries, Inc. addressed this issue.^[115] Looking first to the language of the statute, the Court noted that the statute did not expressly provide a private right of action.^[116] Nevertheless, the Court looked to Borak and Blue Chip Stamps, stating that a private cause of action could be implied because the statute’s chief purpose was “investor protection.”^[117] With “investor protection” in hand, the Court analyzed the legislative history.^[118] Quoting Justice Frankfurter’s warning that “[w]e must be wary against interpolating our notions of policy in the interstices of legislative provisions,” the Court reiterated that caution must be taken when reviewing legislative history to discern congressional intent.^[119] Nothing in the legislative history indicated that Section 14(e) was designed to provide a private cause of action for contending offerors.^[120] One of Chris-Craft’s final arguments was that, unlike Section 10(b), Section 14(e) does not contain the limiting language “in connection with the purchase or sale,” but instead simply contains “in connection with any tender offer,” thereby establishing a private cause of action.^[121] The Court rejected this argument by stating, “[T]he elimination of the purchaser-seller restriction can scarcely be interpreted as giving protection to the entirely separate and unrelated class of persons whose conduct the statute is designed to regulate.”^[122] Thus, the Court held that no implied private cause of action existed under Section 14(e) for tender offerors.^[123]

The Chris-Craft Court’s approach to the interpretation shows the Court’s reluctance to broaden securities laws through the use of the broad and remedial purpose of the 1933 Act and Exchange Act. While the 1970s Court’s interpretation sometimes required a more holistic approach because of the gaps left by Congress, Chris Craft and other decisions show the Court’s unwillingness to expand securities laws simply using the purpose of securities laws.^[124] This shift would be one that would stay with the Court and its approach to interpreting securities statutes.

B. The 1980s and Beyond: The Full Shift in Statutory Interpretation

The 1980s solidified the shift of the Court’s approach to interpreting securities laws. The Court would seldom look to the “broad remedial purpose” approach that had once been at the forefront of interpretation. Instead, the Court would focus its attention on the statutory language, with policy considerations only an afterthought. Aaron v. SEC provides a good example of this shift and also provides a window into how the Court might take on an interpretation of Section 14(e)'s culpability standard.^[125] There, the Court determined whether the SEC was required to establish scienter as an element to enjoin violations of Section 17(a) of the 1933 Act, Section 10(b) of the Exchange Act, and Rule 10b–5.^[126] Analyzing the text of Section 17(a), the Court noted that Section 17(a) only applies to sellers of securities.^[127] In its comparison between Section 17(a), Section 10(b), and Rule 10b-5, the Court noted that all three sections allow the Commission to bring suit for injunctive relief, with Section 10(b) and Rule 10b–5 containing an additional implied private cause of action.^[128] Beginning its analysis with Section 10(b) and Rule 10b-5, the Court recognized that it was not writing on a “clean slate.”^[129] Ernst & Ernst had already decided that scienter was a requisite element of a Section 10(b) and Rule 10b–5 private cause of action.^[130] Reiterating the Court’s reasoning in Ernst & Ernst, the Court in Aaron concluded that “the rationale of [Ernst & Ernst] ineluctably leads to the conclusion that scienter is an element of a violation of [Section] 10(b) and Rule 10b–5, regardless of the identity of the plaintiff or the nature of the relief sought.”^[131] Considering the significance the Court in Ernst & Ernst placed upon the statutory language and legislative history when holding that Section 10(b) and Rule 10b–5 required scienter, the Court in Aaron stated that it would be anomalous to attach a scienter requirement to an implied remedy and not attach the same to an express remedy.^[132]

Turning to Section 17(a), the Court acknowledged that securities legislation regarding fraudulent activities should be interpreted “not technically and restrictively, but flexibly to effectuate its remedial purposes,”^[133] but noted this approach would not justify reading securities legislation broader than its text and statutory scheme reasonably permit.^[134] Echoing Ernst & Ernst, the Court stated that when the statutory text is “sufficiently clear in its context and not at odds with the legislative history,” it is unnecessary to consider policy considerations.^[135]

The Court started its analysis with the text of Section 17(a).^[136] Beginning with Section 17(a)(1), the Court noted that the use of “any device, scheme, or artifice to defraud” strongly suggested a scienter requirement.^[137] However, the Court recognized that Sections 17(a)(2) and 17(a)(3) did not contain the same strong suggestion.^[138] Referring back to its statement in Ernst & Ernst, the Court compared the language in Section 17(a)(2) with Rule 10b–5 and stated that the similar language in Rule 10b–5 “could be read as proscribing . . . any type of material misstatement or omission . . . that has the effect of defrauding investors, whether the wrongdoing was intentional or not.”^[139] Last, the Court addressed Section 17(a)(3) and the fact that it protects the purchaser from conduct that “operates or would operate as a fraud or deceit.”^[140] This language was seen as importing with it an interpretation that Congress focused on the effect of conduct and not on the intent of the responsible party.^[141] With nothing in the legislative history to suggest a contrary interpretation, the Court held that the Commission is required to prove scienter under Section 17(a)(1), Section 10(b), and Rule 10b–5, but only negligence under Sections 17(a)(2) and 17(a)(3).^[142] The Court’s differentiation between culpability requirements in Section 17(a) and Rule 10b–5 showed that the Court will not read in the same culpability requirement based simply on similar statutory language. Additionally, Aaron solidified the Court’s approach to interpret securities laws strictly when there was no ambiguity or textual gap in the statutory language.^[143]

Herman & MacLean v. Huddleston was an instance where there was a slight gap. There, the Court addressed whether a party could bring suit under Section 10(b) of the Exchange Act notwithstanding an express remedy provided under Section 11 of the 1933 Act.^[144] In its analysis, the Court reiterated that the 1933 Act and Exchange Act “constitute interrelated components of the federal regulatory scheme governing transactions in securities.”^[145] However, the Court noted that both sections were intended to proscribe different conduct, with Section 10(b) being a “catchall” provision.^[146] The Court found no legitimate reason to carve out an exception to Section 10(b) and further strengthened its analysis by looking to prior caselaw and the recent congressional revision of securities laws.^[147] Referring back to Ernst & Ernst, the Court expounded on the fact that scienter was required under a Section 10(b) cause of action.^[148] If negligent conduct was allowed under Section 10(b), parties could circumvent the “carefully drawn procedural restrictions” placed on the express civil remedies in the 1933 Act, which allowed recovery for negligent action.^[149] The Court explained that, in considering the circumvention of the express remedies, it was necessarily assuming that express remedies in the 1933 Act and remedies under Section 10(b) were not exclusive.^[150] The Court further supported this interpretation by looking to the then-recent Congressional revision of securities laws in 1975.^[151] Noting that Congress did not alter Section 10(b), the Court reasoned that this suggested congressional ratification of Section 10(b)'s well-established judicial interpretation.^[152] In holding that the availability of an express remedy under Section 11 did not preclude action under Section 10(b), the Court noted its repeated recognition that “securities laws combating fraud should be construed ‘not technically and restrictively, but flexibly to effectuate [their] remedial purposes.’”^[153] While Huddleston showed that the Court would not completely disregard the purpose of the statute, it also provided the Court with reason to believe that its interpretation of Section 10(b) was in line with congressional intent. This observation regarding congressional approval and its interpretation of Section 10(b) is likely to play a role when the Court determines the culpability standard under Section 14(e) of the Exchange Act.

During the 1980s and beyond, gaps in securities laws provided the Court with avenues to interpret the statute using purpose, but the Court would not depart from its strict adherence to the statutory text of securities laws that were unambiguous.^[154] In Central Bank of Denver, the Court answered whether private civil liability would extend to those who only aided and abetted a violation of Section 10(b) and did not engage in any manipulative or deceptive device.^[155] In addressing the scope of Section 10(b), the Court stated that the text of the statute controls.^[156] Citing Ernst & Ernst, Santa Fe Industries, and Chiarella, the Court held tight to its previous emphasis that the “language of [Section] 10(b) gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception.”^[157] Additionally, in holding that aiding and abetting was not covered by the statutory language in Section 10(b), the Court stated, “The issue . . . is not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by the statute.”^[158] The Court’s strict adherence to unambiguous statutory text makes it difficult for a party to argue for broader interpretations of the text. This might not have been the case in the 1960s, but as shown, the Court’s interpretation of securities laws saw a major shift from the 1960s to the 1980s. The 1960s broadened the scope of the 1933 Act and the Exchange Act, adhering to the resounding theme of “investor protection.”^[159] But the broad remedial purpose of securities legislation lost power in the 1970s and 1980s with an adherence to the statutory text of the legislation.^[160] The Court has not yet departed from its 1980s way of interpreting securities statutes, and the question remains whether it will do so in an interpretation of Section 14(e) of the Exchange Act.

III. Circuit Court Interpretation of Section 14(e) of the Exchange Act

Until 2018, the circuit courts were in agreement that proof of scienter was required under Section 14(e) of the Exchange Act.^[161] In 1973, the Second Circuit was the first circuit court to hold that scienter was required.^[162] Comparing Rule 10b–5 with Section 14(e), the Second Circuit noted that the “major contribution provided by [Section] 14(e) would appear to be a broader standing to sue—accorded both to the offeror and to the opposition—based on fraudulent securities transactions.”^[163] The court, acknowledging that Section 14(e) was recent legislation, stated that Section 14(e) was “virtually identical” to Rule 10b–5 and held that the principles developed under Rule 10b–5 will be followed when applying Section 14(e).^[164] The court further stated that scienter was required and “that mere negligent conduct is not sufficient ‘to permit plaintiffs to recover damages in a private action under [Section] 17(a) or [Section] 10(b).’”^[165]

The Third, Fifth, Sixth, and Eleventh Circuits followed the Second Circuit’s reasoning. However, these circuit courts did not provide in-depth analyses to determine that proof of scienter was required under Section 14(e).^[166] The Fifth Circuit, in Smallwood v. Pearl Brewing Co., agreed with the Second Circuit that Section 14(e) required proof of scienter, elaborating on the scope of Section 14(e) by stating, “To charge violations of Section 14(e) in federal court a private plaintiff need not be a purchaser or a seller of any securities, as he must be to sue under Rule 10b–5.”^[167] Six years later, the Sixth Circuit, while analogizing Section 14(a) to Section 14(e), simply stated that Section 14(e) required scienter.^[168] It based its reasoning on the statute’s use of “fraudulent,” “deceptive,” and “manipulative.”^[169] And lastly, twenty-four years after the Sixth Circuit’s decision, the Third and Eleventh Circuits joined. The Third Circuit, in In re Digital Island Securities Litigation simply agreed with Chris-Craft and Smallwood that scienter is an element of a Section 14(e) claim.^[170] And the Eleventh Circuit also agreed with prior circuit decisions that “[i]n order to establish liability under [Section] 10(b) and [Section] 14(e) of the Securities and Exchange Act and accompanying Rules 10b–5 and 14e–3, the SEC must prove that [the defendant] acted with scienter.”^[171]

In 2018, the Ninth Circuit departed from the other circuits holding Section 14(e) did not require proof of scienter.^[172] In Varjabedian v. Emulex Corporation, the Ninth Circuit based its analysis on the Supreme Court’s interpretation of securities laws in Ernst & Ernst and Aaron.^[173] The Emulex court saw the similarities between Section 14(e) and Rule 10b–5, but also noted their differences.^[174] Taking an interpretative approach consistent with today’s Supreme Court, the court classified Section 14(e) in a group with Section 17(a) rather than Rule 10b–5.^[175] With this newly created circuit split, it has yet to be determined whether the Ninth Circuit properly decided Emulex.

A. Applying the Court’s Approach to Interpret Section 14(e)

The Court’s shift from the “broad remedial” approach to a strict construction of the statutory language has implications on the canons of statutory interpretation the Court can utilize when interpreting Section 14(e).^[176] But first, as Justice Powell stated, “The starting point in every case involving construction of a statute is the language itself.”^[177] Section 14(e) states:

It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer . . . .^[178]

This section contains two different congressional proscriptions. First, it is unlawful “to make any untrue statement of a material fact or omit to state any material fact . . . in connection with any tender offer.”^[179] Second, it is unlawful “to engage in any fraudulent, deceptive, or manipulative acts or practices in connection with any tender offer.”^[180]

Starting with the second clause, it is similar to Section 10(b) because both statutes proscribe any manipulative or deceptive acts.^[181] But there is a slight difference. Section 14(e) contains the addition of “fraudulent.”^[182] While this additional word could be seen to proscribe more than intentional conduct, reading in a negligence standard “presumes too much regarding congressional intent.”^[183] Therefore, the similarities between Section 10(b) and the second clause of Section 14(e) give support for a scienter requirement.^[184]

Although the second clause can be read as requiring scienter, the same cannot be said for the first. There is no requirement of deception, manipulation, or any intent to defraud.^[185] The circuit courts that found Section 14(e) requires proof of scienter did so by comparing Section 14(e) to Rule 10b–5.^[186] However, those circuits that did so after Ernst & Ernst did not consider the Court’s entire analysis of Section 10(b) and Rule 10b–5.^[187] A critical point in Ernst & Ernst was the Court’s recognition that Section 10(b) was the rulemaking power delegated to the Commission.^[188] The Court stated that: “The rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law. Rather, it is ‘the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.’”^[189] Because of this limitation and the recognition that the language of Section 10(b) only provided the Commission with the power to promulgate rules requiring scienter, the Court could not expand the scope of Section 10(b) and hold that Rule 10b–5 required negligence.^[190] The same cannot be said for Section 14(e).

Section 14(e) is part of the Williams Act promulgated by Congress.^[191] It is a statute that provides the Commission with power to write rules that prevent fraudulent, deceptive, or manipulative acts in connection with tender offers.^[192] It is not a rule created by the Commission. Because of this difference, the language of the statute must be independently interpreted. Taking the Supreme Court’s approach to statutory interpretation, the starting point is the language of Section 14(e).^[193] In Ernst & Ernst, the Court provided insight on how Section 14(e) could be interpreted with its comment on the identical language of Rule 10b–5(b).^[194] The Court stated that “[v]iewed in isolation the language of [Rule 10b–5(b)] . . . could be read as proscribing . . . any type of material misstatement or omission, and any course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or not.”^[195] Because Section 14(e) does not have the same restrictions as Rule 10b–5, there is nothing that provides for a scienter requirement when interpreting the text of the first clause of Section 14(e).

Looking to other rules that have been interpreted by the Court, Section 17(a) contains language similar to Section 14(e).^[196] In addition, Section 14(e) is more comparable to Section 17(a) than Rule 10b–5 because Section 17(a) was promulgated by Congress.^[197] Section 17(a)(2) states that it is unlawful “to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact.”^[198] The Court, in Aaron, noted that the language of Section 17(a)(2) was unambiguous and interpreted Section 17(a)(2) as only requiring proof of negligence.^[199] Similarly, a reading of Section 14(e) does not present any ambiguities regarding its culpability requirement. As stated, Section 14(e) reads with a requirement of negligence; Section 14(e) only becomes ambiguous when compared with Rule 10b–5.

While both statutes are antifraud statutes, this comparison is insufficient to read in a scienter requirement. The Court’s approach to interpretation of securities statutes requires an adherence to the language of the statute when there are no ambiguities or gaps.^[200] Section 14(e)'s lack of ambiguity will not provide the Court with any opportunity to interpret into Section 14(e) a requirement of scienter.

B. Other Arguments

Although the Court has stated that there is no need to consider other arguments when the language of the statute is unambiguous and not contrary to legislative history,^[201] these arguments can provide support for the Court’s interpretation. Although the Court has strayed away from simply interpreting the text of securities legislation based on the overarching purpose of “investor protection,” any argument based on purpose supports a negligence requirement rather than a requirement of scienter.^[202]

Turning, for a moment, back to Aaron, the Court foreclosed any argument that the culpability requirement could be different depending on whether the plaintiff was seeking injunctive relief or damages.^[203] Additionally, any argument that subsections of securities statutes must require the same culpability is precluded by Aaron. The Aaron Court divided the culpability requirement in Section 17(a) stating that Section 17(a)(1) required scienter while Sections 17(a)(2) and 17(a)(3) only required negligence.^[204]

A party seeking to persuade the Court to interpret Section 14(e) as requiring scienter will have great difficulty because of the Court’s current stance on securities law interpretation.^[205] Looking back to Blue Chip Stamps, vexatious litigation will be at the forefront of any battle to interpret Section 14(e) as requiring scienter. While there will likely be more litigation if Section 14(e) is held to only require negligence, it is the duty of Congress to address the matter if it does not like the outcome.^[206]

As a last resort, a scienter-seeking party can argue that the requirement of scienter under Section 14(e) has been utilized by some circuit courts for forty-five years.^[207] While this argument may have superficial merit, it is not likely to persuade the Court.

IV. Conclusion

From the 1960s to the 1980s the Court changed its approach to the interpretation of securities law. The '60s saw implied private rights of action based on the purpose of the 1933 and Exchange Acts, while the '80s saw a strict adherence to the statutory text. This shift in the Court’s approach to interpreting securities laws provides no room for Section 14(e) to be interpreted as requiring anything other than negligence. While arguments can be made for a scienter requirement, they are not supported by the statutory language nor the Court’s current stance on securities law interpretation. Therefore, apart from any implications the interpretation may have on litigation, the first clause of Section 14(e) can only be read as requiring proof of negligence.

Camilo Godoy