<em>Texas Gulf Sulphur</em> and the Genesis of Corporate Liability Under Rule 10b-5

This Essay explores the seminal role played by SEC v. Texas Gulf Sulphur Co. in establishing Rule 10b-5’s use to create a remedy against corporations for misstatements made by their officers. The question of the corporation’s liability for private damages loomed large for the Second Circuit judges in Texas Gulf Sulphur, even though that question was not directly at issue in an SEC action for injunctive relief. The judges considered both, construing narrowly “in connection with the purchase or sale of any security,” and the requisite state of mind required for violating Rule 10b-5. We explore the choices of the Second Circuit judges by analyzing not only material available in the published opinions, but also the internal memos that the judges circulated among themselves prior to issuing the decision.

Ultimately, the Second Circuit majority construed “in connection with” broadly, a choice ultimately validated by the Supreme Court. The Second Circuit’s choice of negligence for SEC injunctive actions, however, was rejected by the Supreme Court in subsequent cases for both private plaintiffs and the SEC.