On January 4, 2019, the U.S. Supreme Court agreed to hear an appeal of the Ninth Circuit Court of Appeal’s controversial decision in Varjabedian v. Emulex Corp., 888 F.3d 399, 401 (9th Cir. 2018), cert granted, 19-459, 2019 WL 98542 (U.S. Jan. 4, 2019). The outcome of the appeal turns on the Court’s interpretation of Section 14(e) of the Securities Exchange Act. The relevant language reads:
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.15 U.S.C. § 78n(e). The Second, Third, Fifth, Six, and Eleventh Circuits have all determined that Section 14(e) requires proof of scienter—the defendant must be shown to have intended to omit or make an untrue statement of material fact to be held liable. The Ninth Circuit decision is the first to break with this trend.
Contrary to its sister courts, the Ninth Circuit determined that Section 14(e) differs from, and therefore should not be read together with, Exchange Act Rule 10b-5. The Ninth Circuit relied on the Supreme Court’s holding in Ernst & Ernst v. Hochfelder to reason that, despite identical language, Section 14(e) and Rule 10b-5 were promulgated at different times and for distinct purposes and therefore require differing proofs of mental culpability. Unlike Section 14(e)—enacted by statute—the Ninth Circuit recognized that Rule 10b-5 is an SEC Rule derived from the Commission’s powers under § 10(b), powers purposed to control “manipulative or deceptive device[s].” 15 U.S.C. § 78j(b). The court found Section 14(e) governing a “broader array of conduct” and therefore requiring less mental culpability. The Ninth Circuit reasoned that in order to interpret “statutes dealing with similar subjects . . . harmoniously,” Section 14(e) of the Exchange Act ought not require proof of scienter, just as the Supreme Court determined to be the case for the nearly identically worded Section 17(a)(2) of the Securities Act of 1933 in Aaron v. SEC. Finally, the Ninth Circuit concluded that Section 14(e) was never purposed to include a scienter requirement because it was passed as part of the Williams Act of 1968 and was accompanied by a Senate Report stating the purpose of the Williams Act was “to insure that public shareholders . . . will not be required to respond without adequate information,” suggesting “[an] emphasis on the quality of information . . . [not] on the state of mind harbored.” All eyes now turn to the Supreme Court to resolve the Circuit Court split.