An Inquiry into the Perception of Materiality as an Element of Scienter under SEC Rule 10b-5

40 Pages Posted: 27 Apr 2011 Last revised: 24 Jan 2012

Date Written: April 27, 2011


In any private action or enforcement proceeding based on SEC Rule 10b-5 the plaintiff, including the Securities and Exchange Commission, must prove that the defendant engaged in deception or manipulation with scienter, that is, an intent to deceive (which lower courts have held encompasses reckless conduct). Where the gravamen of the claim is deception, the deception must have been material. A fact, including forward-looking information, is material if there is a substantial likelihood that a reasonable shareholder would consider the fact important in making his investment decision. This Article demonstrates that in an appropriate case an assessment of whether the defendant acted with scienter should consider whether the defendant appreciated the materiality of an omitted or misrepresented fact. As one example, an insider who traded in the securities of his employer while he was aware of nonpublic information should not be found to have acted with scienter, if, before trading, he made a good faith evaluation of that information, including (but not necessarily) consulting with counsel, and concluded that the information was not material, even though a trier of fact later found that the information was material when the trade occurred.

Keywords: 10b-5, materiality, scienter, recklessness

JEL Classification: K22, K29

Suggested Citation

Horwich, Allan, An Inquiry into the Perception of Materiality as an Element of Scienter under SEC Rule 10b-5 (April 27, 2011). Business Lawyer, Vol. 67, No. 1, 2011, Northwestern Law & Economic Research Paper No. 11-11, Northwestern Public Law Research Paper No. 11-44, Available at SSRN:

Allan Horwich (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

ArentFox Schiff ( email )

233 S. Wacker Drive
Suite 7100
Chicago, IL 60606-6473
United States

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