Securities Litigation

Grabar Law Office represents shareholders in securities fraud class actions and shareholder derivative litigation arising from corporate misconduct.

We investigate:
• Material misstatements and omissions
• Breaches of fiduciary duty
• Insider misconduct and governance failures

Shareholders impacted by securities fraud may be eligible to seek recovery and corporate reforms.

Private Securities Litigation Reform Act of 1995- Title I: Reduction of Abusive Litigation - Amends the Securities Act of 1933 (SA) and the Securities Exchange Act of 1934 (SEA) (together, the Acts) with respect to private securities class action law suits to mandate that each plaintiff seeking to serve as a representative party file a sworn certification: (1) that the plaintiff did not purchase the subject matter securities at the direction of counsel or in order to participate in a private action; (2) that identifies any other action filed during the preceding three-year period in which the plaintiff sought to serve as a representative party on behalf of a class; and (3) that the plaintiff will not accept payment for serving as a representative party on behalf of a class beyond the plaintiff's pro rata share of any recovery, except as approved by the court.

The PSLRA further prescribes guidelines for early notice to class members of the appointment of the lead plaintiff. The PSLRA requires the court to adopt a rebuttable presumption that the most adequate plaintiff is the person with the largest financial interest in the relief sought by the class and declares that a person may be a lead plaintiff (or an officer, director, or fiduciary of a lead plaintiff) in no more than five securities class actions brought as plaintiff class actions during any three-year period.

The PSLRA prohibits settlements under seal except in limited circumstances. It mandates disclosure of settlement terms to class members. It further requires the court to determine whether an interest on the part of plaintiff's counsel in the securities that are the subject of the litigation constitutes a conflict of interest sufficient to disqualify the attorney from representing the party; provides for: (1) a stay of discovery during the pendency of any motion to dismiss; and (2) preservation of the evidence during the pendency of any stay of discovery; mandates court review, upon final adjudication of an action, of the parties' compliance with certain Rules of Civil Procedure and sets forth a rebuttable presumption in favor of award of attorney's fees and costs to opposing counsel by the party in violation of such Rules; establishes each defendant's right to written interrogatories to the jury on the issue of the defendant's particular state of mind with respect to specified alleged violations; and amends the SEA to authorize the court to require security for payment of class action costs.

The PSLRA also limits damages, where the plaintiff seeks to establish them by reference to the market price of a security, to the difference between the purchase or sale price paid or received by the plaintiff, as appropriate, and the mean trading price of the security during the 90-day period beginning on the date on which the information correcting the misstatement or omission that is the basis for the action is disseminated to the market.

Securities Act of 1933 - Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:

First to require that investors receive financial and other significant information concerning securities being offered for public sale; and

Second to prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.

Purpose of Registration

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

The Registration Process

In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:

a description of the company's properties and business;

a description of the security to be offered for sale;

information about the management of the company; and

financial statements certified by independent accountants.

Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements.

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include: private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.

Securities Exchange Act of 1934- With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various securities exchanges, such as the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options are SROs. The Financial Industry Regulatory Authority (FINRA) is also an SRO.

The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.

The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

The full text of this Act can be read at: http://www.sec.gov/about/laws/sea34.pdf.

Corporate Reporting

Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database and often on the websites of the reporting companies as well.

Proxy Solicitations

The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.

Tender Offers

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.

Insider Trading

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

Registration of Exchanges, Associations, and Others

The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.

The exchanges and the Financial Industry Regulatory Authority (FINRA) are identified as self-regulatory organizations (SRO). SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are subject to SEC review and published to solicit public comment. While many SRO proposed rules are effective upon filing, some are subject to SEC approval before they can go into effect.

Trust Indenture Act of 1939

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.

The full text of this Act is available at: http://www.sec.gov/about/laws/tia39.pdf.

Investment Company Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. The full text of this Act is available at: http://www.sec.gov/about/laws/ica40.pdf.

Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission. The full text of this Act is available at: http://www.sec.gov/about/laws/iaa40.pdf.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. Being characterized as one of "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt," Sarbanes-Oxley mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at:http://www.sec.gov/about/laws/soa2002.pdf. (Please check the Classification Tables maintained by the US House of Representatives Office of the Law Revision Counsel for updates to any of the laws.) You can find links to all Commission rule-making and reports issued under the Sarbanes-Oxley Act at: http://www.sec.gov/spotlight/sarbanes-oxley.htm.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 by President Barack Obama. The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.

Dodd-Frank also strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley Act. Dodd-Frank established an incentive program under which whistleblowers can receive from 10% to 30% of the proceeds from the settlement of litigation, broadened the scope of a covered employee by including employees of a company's subsidiaries and affiliates and extended the statute of limitations under which whistleblowers can bring forward a claim against their employer from 90 to 180 days after a violation is discovered.

The full text of the Act is available at: http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. You can find links to all Commission rule-making and reports issued under the Dodd Frank Act at: http://www.sec.gov/spotlight/dodd-frank.shtml.

To learn more about our securities litigation practice, contact us today!

What Is Securities Law

What Is Securities Law?

What is a securities class action?

A securities class action is a case brought pursuant to Federal Rule of Civil Procedure 23 on behalf of a group of persons who purchased the securities of a particular company during a specified period of time (the class period). The complaint generally contains allegations that the company and/or certain of its officers and directors violated one or more of the federal or state securities laws. A suit is filed as a class action because the members of the class are so numerous that joinder of all members is impracticable. For a case to proceed as a class action, there should be a well-defined commonality of interest in the questions of law and fact involved in the case. Further, the plaintiffs must establish that a class action is superior to other available methods for the fair and efficient adjudication of the controversy and that the prosecution of separate actions by individual class members would create a risk of inconsistent and varying adjudications.

What laws protect individual investors against fraud by company management?

The Securities Act of 1933 and the Securities Exchange Act of 1934 are the main federal laws which prohibit such conduct. In addition, the states have securities laws, known as blue sky laws, which are also designed to protect individual investors.

What is a shareholder derivative action?

Unlike a class action, brought on behalf of investors, a shareholder derivative action is a lawsuit brought by a shareholder of a public company on behalf of and for the benefit of the company itself against the directors and/or officers of that company. In a derivative action, shareholders “step into the shoes” of the directors and officers of a company and bring litigation that the board would be unwilling to pursue on its own. Such unwillingness typically relates to the fact that the board members themselves are alleged to have participated in the misconduct and thus would be unlikely to “sue themselves.”

Shareholder derivative litigation can recover money damages back to the company for financial or reputational harm caused by the conduct of its insiders, and also can be used to improve the governance of public companies in order to guard against such harms in the future. The objectives of these actions are primarily: (i) to recover monetary damages from responsible corporate actors and their director and officer liability policies for the benefit of company; and (ii) to force the company to implement corporate governance improvements and reforms. Should these objectives be met, the company and its shareholders both benefit: the company benefits via return of funds to its coffers and/or better corporate governance; the shareholders benefit because of the company’s improved corporate governance, which can result in corporate goodwill and in an increase in share price.

Any shareholder of a company can serve as a plaintiff in a shareholder derivative action provided that the shareholder has held stock in the company continuously at least from the period in which the wrongful conduct began and through the present, generally provided that they continue to hold at least one share through the conclusion of the litigation. While courts frequently give deference to shareholders with larger holdings when selecting a Lead Plaintiff in shareholder derivative actions, courts will consider other factors as well, including which plaintiff was the first to file a complaint, the quality of the pleadings filed, and the experience of plaintiff ’s counsel.

What laws provide shareholder derivative standing?

Shareholder derivative actions generally arise out of violations of state corporation laws, and as such, they are traditionally brought in state courts. However, shareholder derivative actions can be brought in federal court under certain circumstances. Under Delaware state law, which governs a majority of U.S. companies that are incorporated there, and also serves as a model for other state laws, directors and officers of publicly traded companies owe fiduciary duties to the companies that they serve. These duties include the duties of:

Loyalty, which requires directors and officers to not use their positions of trust and confidence to further their private interests;
Care, which requires that directors use that amount of care which ordinarily careful and prudent people would use in similar circumstances; and
Good Faith, which requires corporate fiduciaries to act with a genuine attempt to advance corporate welfare — to not act in a manner unrelated to a pursuit of the corporation’s best interests.Breaches of the three (3) duties form the foundation of the claims underlying shareholder derivative actions.

What Harm Is Required To Bring A Shareholder Derivative Action

The harm alleged by the plaintiff must be to the company itself, and not to the shareholder personally. directly. Moreover, because company officers and directors are traditionally charged with preserving the interests of the company, a shareholder in a derivative action must be able to demonstrate that a litigation demand on the board to pursue the action was either wrongfully refused, or that making a litigation demand prior to filing suit would have been futile due to the self-interest of the members of the board.

To learn more about the firm’s securities litigation practice, contact us today!

Shareholder Class Actions

Securities Class Actions are brought under Section 10(b) of the Exchange Act which prohibits acts or practices that constitute a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” Per the SEC’s Rule 10b-5, “it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”

In the private class action context, courts require plaintiffs to plead the following six elements in order to state a claim under Section 10(b) and Rule 10b-5:

A material misrepresentation (or omission) — A statement or omission of fact is material “if a reasonable investor would consider it important in determining whether to buy or sell stock.”
Scienter — Plaintiffs must allege that defendants acted with a wrongful state of mind. This is more than mere negligence or poor business decisions.
In connection with the purchase or sale of a security —A plaintiff must have engaged in some type of transaction involving a security during the class period. Allegations of being induced to hold onto a security due to fraudulent statements are not actionable. In order to meet the “in connection with” element, a plaintiff must have purchased or sold a security in reliance upon a misleading statement or material omission.
Reliance — Generally, in an open and efficient market reliance is presumed. And plaintiffs are not required to plead that they read and relied on defendants’ material misrepresentations. The market’s incorporation of publicly available information into the price of a security will satisfy the reliance element.
Economic loss — Plaintiffs must allege that they sustained a loss from their investments.
Loss causation — Plaintiffs are required to plead a causal connection between the material misrepresentation and the loss.

Violations of the Securities Act and/or the Exchange Act can be enforced by the federal
government or by investors through private litigation.

Specifically, the Securities Act provides investors an expressed private right of action allowing any person acquiring a security based on materially false offering documents to file suit under the Act.

To learn more about our shareholder class action litigation practice, contact us today!