With Respect To Scienter, The Ninth Circuit Walks By Its Wild Lone

Although the United States Supreme Court has never directly addressed the issue, many lower courts have inferred that a private right action exists under Section 14(e) of the Exchange Act.  That may not come of much a surprise since it was modeled on the anti-fraud provisions of Section 10(b) and Rule 10b-5 for which a private right of action exists.  Congress added Section 14(e) to the Exchange Act in 1968 as part of the Williams Act amendments to address fraudulent acts in tender offers.

If Section 14(e) as an anti-fraud is a near relation to Section 10(b) and Rule 10b-5 it would stand to reason that scienter, not negligence, is a required.  Indeed, courts in five other circuits have held that scienter is required.  See, e.g., Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir. 2009); In re Digital Island Sec. Litig.,357 F.3d 322, 328 (3d Cir. 2004); SEC v. Ginsburg, 362 F.3d 1292, 1297 (11th Cir. 2004); Conn. Nat'l Bank v.Fluor Corp., 808 F.2d 957, 961 (2d Cir. 1987); Adams v. Standard Knitting Mills, Inc., 623 F.2d 422, 431 (6th Cir. 1980).  

Sola Negligentia?

Earlier this year, however, the Ninth Circuit decided that these other courts got it wrong and that negligence alone will suffice.  Varjabedian v. Emulex Corp., 888 F.3d 399, 408 (2018).  To be precise, the Ninth Circuit held that negligence would suffice under the first clause of Section 14(e) that declares it 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”.

On October 11, 2018, a petition was filed with the United States Supreme Court presenting the following question: “Whether the Ninth Circuit correctly held, in express disagreement with five other courts of appeals, that Section 14(e) of the Securities Exchange Act of 1934 supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer.”  Stay tuned.