The neglected relationship of materiality and recklessness in actions under rule 10b-5

The concept of "materiality" under the federal securities laws has received much attention from the courts and the Securities and Exchange Commission, yet it has become increasingly murky. Judgments about what is and what Is not material for purposes of the disclosure requirements under SEC rules and the antifraud provisions of the federal securities laws are often very difficult. At the same time, errors in making those judgments can result in civil liability. Litigants seldom contend that, and courts seldom address whether, a defendant's judgment about whether a fact was material is germane in assessing liability particularly under Rule 10b-5. This Article suggests that the determination of liability under Rule 10b-5, particularly where the defendant is alleged to have acted recklessly (rather than with a specific intent to defraud), should take into account whether the defendant was reckless in failing to appreciate the materiality of the fact that was omitted or misrepresented. In other words, a determination of whether a defendant acted with scienter encompasses an evaluation of whether the defendant was reckless in not recognizing that the fact that was omitted or misrepresented was material.