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:

  1. 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.” 
  2. Scienter — Plaintiffs must allege that defendants acted with a wrongful state of mind. This is more than mere negligence or poor business decisions. 
  3. 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. 
  4. 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. 
  5. Economic loss — Plaintiffs must allege that they sustained a loss from their investments. 
  6. 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!