Is There an Express Section 10(b) Private Right of Action? A Response to Professor Prentice

Abstract:     
In Scheme Liability: A Reply to Grundfest, Professor Robert A. Prentice asserts that the United States Supreme Court was simply and abysmally wrong in Central Bank v. First Interstate Bank. He also claims that the majority of lower courts have been dead wrong in interpreting Central Bank. He further states that the Section 10(b) private right of action is express and not implied, that Congress in 1934 intended to create that private right of action, and that the Securities and Exchange Commission also intended to create a private right when it adopted Rule 10b-5 in 1942. From these premises, Professor Prentice urges that Section 10(b) and Rule 10b-5 be interpreted to sustain a private right of action for scheme liability.

Professor Prentice's analysis rests on revisionist history. The record is clear that the private right of action under Section 10(b) is implied: it is not and has never been express. Congress in 1934 did not intend to create a private right of action under Section 10(b), much less one that would encompass scheme liability. Nor did the Commission intend to create a private right of action in 1942 when it adopted Rule 10b-5. Professor Prentice's conclusions based on these false premises fail of their own weight.

Professor Prentice's analysis is also strategically selective. He ignores 1934-era common law rejecting scheme liability. He nowhere discusses the Court's admonitions that implied rights be narrowly construed. He also fails to appreciate the implications of his historically revisionist analysis. If Professor Prentice is correct that the Section 10(b) private right is express, and intended by Congress and the Commission, then the entire corpus of federal securities law must be rewritten. Central Bank is then far from the only decision in which the Supreme Court is simply and abysmally wrong.

Keywords: aiding and abetting, scheme liability, implied private right, 10b-5, legislative intent

JEL Classifications: K22, K41, K42

Working Paper Series