The United States District Court for the Eastern District of Pennsylvania recently declined to recognize an implied private right of action against short sellers of securities under Section 10(a) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10a-1 thereunder.
Hemispherx Biopharma, Inc. ("HBI") instituted suit against Asensio & Company and other defendants alleging, inter alia, claims under Section 10(a) of the 1934 Act arising out of a purported scheme to depress the price of HBI's stock that began in mid-September 1998. According to HBI, Asensio & Company had at that time disseminated an inaccurate report on HBI that included a "strong sell" recommendation and contained numerous material misrepresentations, omissions of fact, and "blatant lies." HBI asserted that as a result of that report, the price of its stock plummeted from 13 3/8 to 4 7/8 "in a span of days." HBI further alleged that in anticipation of the decline in its stock prices, the defendants engaged in heavy, illegal "short selling" of HBI's common stock by selling it on the "down-tick," and selling short "naked" at a time when the defendants neither owned, nor had any reason to believe they could borrow, sufficient shares to make delivery on their short sales, all to defendants' substantial profit.
On consolidated motions to dismiss, the Court held that no implied private right of action exists under Section 10(a) and dismissed HBI's claims thereunder. As a preliminary matter, the Court noted that whether an implied cause of action exists under Section 10(a) was an issue of statutory construction and Congressional intent. The Court stated that the presence of express private remedies within the 1934 Act, as in Sections 6, 16(b) and 18, "strongly suggests" that Congress did not intend a private right of action under Section 10(a). As the Court stated, "[w]hen Congress wished to provide a private damages remedy, it knew how to do so and did so expressly."
Next, the Court declined to recognize an implied private cause of action under Section 10(a) simply because such action has been implied under Section 10(b). The Court explained that the Supreme Court's recognition of an implied private right of action under Section 10(b) in 1971 was simply in "acquiesc[ence]" to a 25-year history of cases in which lower federal courts had recognized an implied private remedy thereunder. In contrast, the Court noted that Section 10(a) has no such history. Indeed, the Court observed that the only other court to address the issue -- the United States District Court for the Southern District of New York -- declined to find a private right of action under Section 10(a). The Court further stated in dicta that even if a private action were implied under 10(a), such action would be for the benefit of investors, as under Section 10(b), not issuers like HBI whose stock was sold short.
Finally, the Court declined to recognize an implied private right of action under Section 10(a) based on the four-part test set forth in Cort v. Ash, 422 U.S. 66 (1979). First, the Court found that the plaintiff was not "one of a class for whose especial benefit the statute was enacted." As the Court explained, Section 10(a) names no beneficiaries and confers no substantive rights on specific persons. Second, the Court determined that there is nothing in the statute or its legislative history to indicate that Congress intended a private right of action under Section 10(a). Third, the Court reasoned that although private enforcement of Section 10(a) might aid in effectuating Congress' goals, this could also be said of many other sections of the 1934 Act for which there is no private right of action. Fourth, while conceding that a private right of action under Section 10(a) would not be an intrusion into the province of state law, the Court concluded that the balance of the factors weighed against finding an implied private right of action. *
Hemispherx Biopharma v. Asensio, No. Civ. A. 98-5204, 1999 WL 144109 (E.D. Pa. Mar. 15, 1999).