A securities class action is a lawsuit filed by investors who bought or sold a company’s publicly traded securities within a specific period of time. Investors then suffered an economic loss as a violation of securities laws.

Instead of each shareholder bringing an individual action, one or more shareholders may bring an action on behalf of the entire class of shareholders against those companies and/or individuals who have allegedly violated securities law.

Broadly, securities fraud is the spreading of false or misleading information or the concealment of material information regarding a business. Such misrepresentations had inflated a company’s stock price and investors that had purchased the shares at an inflated price may later be injured when the truth is revealed.

Claims usually arise under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Claims under the Exchange Act arise under Sections 10(b) and 20(a) as well as under SEC Rule 10b-5. Section 10(b) and SEC Rule 10b-5 prohibit fraud in connection with the purchase or sale of a security. Under the Exchange Act, the fraud occurred in purchases made on a stock exchange.

The scenario is usually the following. Senior executives of a public company made statements on investors calls, in press releases and/or in SEC filings, they knew or should have known were false or misleading. These misrepresentations artificially inflated the stock price, the executives cashed by selling stock at the inflated price and when investors finally learned the truth, the artificial inflation of the stock price disappeared harming the class-period investors who held their stock through the class period.

The essence of a Section 10(b) claim is that it is based on fraud or other deceptive or manipulative conduct. In order to state a claim for violations of Section 10(b) of the Exchange Act and Rule 10b-5 a plaintiff must allege facts to support each of the following elements: 1) a misstatements or omission; 2) of material facts; 3) made with scienter; 4) on which the plaintiff relied; 5) that proximately cause the plaintiff’s injury. Scienter means the intent to deceive manipulate or defraud.

Under Section 10(b), the plaintiff is not required to have transacted directly or indirectly with the defendant. Investors need to prove that they bought the securities in an “efficient market”, the misrepresentation inflated the market price and the market price declined as a result of the truth emerging. 

Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 have a statute of limitations of two years after the fraud has been discovered and not more than five years after the fraud has occurred.

Claims under the Securities Act arise under Section 11. Section 11 of the Securities Act provide a right of action to investors for misrepresentations made in securities registration statements and offering prospectuses. Section 11 of the Securities Act is available to investors who purchased securities offered pursuant to a false or misleading registration statement. Plaintiffs must prove they purchased in the offering or be able to trace the securities they purchased back to the offering.

Under Section 11of the Securities Act, plaintiffs don’t need to prove fraud, the pleading standards may be less stringent, the burden of proof on the issue of causation rests with the defendants rather than the plaintiffs and damages may be, in some circumstances, easier to prove.

In securities class actions that allege violation of Section 11 of the Securities Act, officers and directors are liable together with the corporation for material misrepresentations in the registration statement.

Actions under Section 11 of the Securities Act must be brought within one year after the misstatement or omission was discovered or should have been discovered.

The class action complaint will include a class period which are dates during which the fraud allegedly occurred. To be eligible to participate in a securities class action, a plaintiff must have made a purchase of the security during the class period. The term “security” typically includes stocks, bonds, derivatives and almost any other investment vehicle where the investor gives money to another person or company for the purposes of receiving income or capital gains. It is not necessary for the participant to retain ownership of the stock after the class period has expired to participate in the lawsuit.

Since the adoption of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), securities class actions brought in federal court require court appointment of one or more Lead Plaintiffs. They represent the entire class of investors who suffered financial losses from purchasing a company’s fraudulently inflated stocks during the class period. To appoint a Lead Plaintiff, a court must determine that the proposed Lead Plaintiff will adequately represent the class members. Applications for Lead Plaintiff must be filed within 60 days of the first filing of a class action complaint in a federal securities fraud case.

As a general rule, the court will appoint as Lead Plaintiff the applicant with the largest financial interest in the litigation.

Class members in a securities class action have the right to opt out of the class action, and to pursue a direct action against the company, separate from the class action. By choosing to opt out, the investor will not be bound by the court’s decision in the class action and will not get a share in the recovery obtained in the class action.

In a securities class action, plaintiffs may recover the difference between the inflated price they paid and the corrected price or deflated price after the fraudulent statements are revealed.

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