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A damage action under Rule 10b-5, 17 C.F.R. § 240.10b-5 will not lie in the absence of proof of scienter, which is defined as a mental state embracing intent to deceive, manipulate or defraud and as knowing or intentional misconduct. Fraudulent intent is not necessary where injunctive relief is sought by the Securities Exchange Commission.
Plaintiff alleged violations of §§ 10(b), 13(d), 14(d), and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C.S. §§ 78j(b), 78m(d), 78n(d), and 78n(e), and filed a motion for a preliminary injunction barring defendant from acquiring any further of shares in plaintiff or voting plaintiff's stock. Plaintiff also sought an order directing defendant to divest itself of all of plaintiff's stock purchased on April 30 and May 1, 1979. Plaintiff contended that defendant issued confusing and misleading public statements with the result that the April 30 and May 1 acquisitions on the American Stock Exchange violated of Rule 10b-5, 17 C.F.R. § 240.10b-5.
Was there a sufficient basis for the court to grant plaintiff’s motion for a preliminary injunction to bar defendant from acquiring ant further shares in plaintiff?
The court found no basis for the charge with respect to defendant's conduct prior to May 1. Defendant's releases in early April correctly stated its position with respect to plaintiff and were not false, misleading or otherwise within the scope of Rule 10b-5. An April 30 statement became "misleading" on May 1 when defendant's intentions changed and a further statement was necessary in order to make the statements made not misleading. Defendant's omission occurred with knowledge, but not with any intention to defraud or deceive. Defendant was required to set the record straight regarding the April 30 statement. There was no basis for injunctive relief, as such, the preliminary injunction was denied. Moreover, a temporary restraining order of May 1 was dissolved, with exception of the provision forbidding further purchases, which would be dissolved on defendant's demonstration that it made a public statement correcting any misleading impression remaining from the April 30 statement.