Also known as: acts or practices that operate as a fraud or deceit · Rule 10b-5 · fraud · deceptive practice
Written by attorneys · grounded in primary & secondary sources — see below
A category of conduct prohibited by SEC Rule 10b-5 that encompasses deceptive actions or schemes in connection with the purchase or sale of securities. The prohibition reaches practices that mislead investors through trickery or concealment without requiring an affirmative misstatement or omission of a material fact.
Austin Abbott, an officer of a public company, tells investors he is conducting a routine safety audit of corporate books. Once given access, Abbott routes customer payments through an offshore account to conceal declining revenue. The scheme satisfies Rule 10b-5 because it constitutes an act or practice that would operate as a fraud or deceit.
Anthony Arnold, CEO of a public homebuilder, sells shares to Amber Alonzo and accepts payment at closing. Arnold had secretly repaired water damage with cheap materials that later fail and hid the repairs from SEC filings. Because the conduct amounts to an act or practice that would operate as a fraud or deceit, Rule 10b-5 liability is not barred.
Select any source to read its text and confirm it supports the definition.
Apollo Energy's officers direct subordinates to route customer payments through an offshore account to hide declining revenue. Investors who bought shares during this period sue under Rule 10b-5. The complaint must describe with particularity the circumstances of the act or practice that would operate as a fraud or deceit.
Anchor Bank asks its lawyer to draft loan documents that falsely state the bank holds adequate reserves. The lawyer learns the statements are false yet continues drafting while the bank sells securities to investors. The client's request constitutes an act or practice that would operate as a fraud or deceit, requiring the lawyer to withdraw.
Amelia Amari forms Aether Technologies with minimal capital and commingles its funds with her personal accounts. She uses the entity to issue securities to suppliers she never intends to pay. The arrangement is an act or practice that would operate as a fraud or deceit, allowing investors to sue under Rule 10b-5.
Andre Antoine, an officer of a public company, tells investors that a rival has already received its share of corporate assets. The investors then purchase additional shares favoring Antoine's scheme. The false statement is an act or practice that would operate as a fraud or deceit under Rule 10b-5.
Clause (c) reaches any deceptive practice or scheme that operates as a fraud or deceit, even without an affirmative misstatement or omission required by clause (b) or a device to defraud under clause (a).
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Yes. Courts interpret all three clauses of Rule 10b-5 to require scienter, meaning the defendant must have acted with intent to deceive or with recklessness.
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Yes, when the defendant has a duty to disclose and remains silent to further a fraudulent scheme, the nondisclosure can constitute an act or practice that would operate as a fraud or deceit.
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…Act of 1934 (1934 Act), 48 Stat. 881, as amended, 15 U. S. C. § 78a et seq., and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.10b-5 (1987), promulgated thereunder, in the context of preliminary corporate merger discussions. We must also determine whether a person who traded a corporation's shares on…