A security class action is a lawsuit brought on behalf of a group of investors who have suffered a financial loss in a particular security, such as a stock, bond, or investment fund. Typically, the loss occurs because of fraudulent conduct or materially false statements made to investors in SEC filings, prospectuses, or earnings announcements. Once the truth emerges about the misconduct, the company’s artificially inflated stock or other security loses value, and the investors suffer losses. Securities class actions typically arise under the Securities Act of 1933 (“the Securities Act”), the Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 promulgated thereunder.
Securities laws and regulations aim to protect investors from fraudulent conduct or misleading information and to create transparency for investors to make informed decisions. The Securities Act was the first major federal regulation of securities enacted by Congress in 1929 and had two basic objectives: (i) to require that investors receive financial and other significant information concerning securities being offered for public sale; and (ii) to prohibit deceit, misrepresentations, and other fraud in the sale of securities. The Securities Act accomplishes its objectives by mandating that before an offering of securities occurs, an issuer must disclose all material facts about the company and the proposed security in a registration statement and a prospectus.[1]
While the Securities Act governs the public offering of securities, the Exchange Act governs aftermarket trading including the purchases and sales of securities on securities exchanges. The principal goal of the Exchange Act is to ensure investors have access to truthful information concerning the security being traded, including any material facts about the issuer which could impact the security’s value. The enforcement mechanism of the Exchange Act is found in Section 10(b), 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.”[2] Under the rulemaking authority of Section 10(b), the SEC promulgated Rule 10b-5, which states, “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 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 fraud or deceit upon any person.”[3]
As securities caselaw developed over time, courts require plaintiffs to plead the following six elements to state a claim under Section 10(b) and Rule 10b-5: (i) a material misrepresentation; (ii) scienter; (iii) in connection with the purchase or sale of a security; (iv) reliance; (v) economic loss; and (vi) loss causation.[4]
These bodies of Securities Laws and Rule 10b-5 provide the groundwork to bring powerful securities class actions in which shareholders, who form the body of the corporation, seek to remedy corporate injustices by suing the corporation itself, either through securities fraud class actions (10b-5 actions) or shareholder derivative class actions, where a shareholder seeks to compel a company to sue its officers and directors for breach of fiduciary duties and/or other misconduct.[5]
Securities class actions cover a wide range of conduct. Lowey Dannenberg has extensive experience in representing clients in several different industries, including cases involving: financial fraud, auction rate securities, options backdating, failed corporate governance, stockholder agreement disputes and customer/brokerage firm arbitration proceedings. For instance, in Said-Ibrahim et al v. FuboTV Inc. et al, No. 1:21-CV-01412 (S.D.N.Y.), Lowey serves as court-appointed lead counsel in a securities lawsuit which alleges FuboTV’s false and misleading statements concerning their business operations and performance metrics.[6] Lowey has also filed a class action lawsuit against Waste Management Inc., alleging that the company and its executives made false and misleading statements to investors regarding its anticipated merger with Advanced Disposal Services.[7] In June 2022, Lowey filed its most recent class action lawsuit against Energy Transfer LP, alleging that Energy Transfer made materially false and misleading statements relating to an investigation by the Federal Energy Regulatory Commission into a drilling incident that caused an environmental disaster near in Ohio.[8]
Lowey Dannenberg is committed to recovering damages for shareholders victimized by securities fraud and directors’ and officers’ breaches of fiduciary duty. Lowey securities litigation practice has recovered billions of dollars on behalf of defrauded investors. The firm has also achieved landmark, long term corporate governance changes at public companies, including reversing results of elections and returning corporate control to the companies’ rightful owners, its stockholders.
If you have any questions concerning securities law or would like to speak to a securities attorney, please contact us using the form below or email Christian Levis (clevis@lowey.com) or Andrea Farah (afarah@lowey.com).
[1] 15 U.S.C.A. § 77k (West 2022).
[2] 15 U.S.C.A. § 78j (West 2022).
[3] Id.; 17 C.F.R. § 240.10b-5 (2022).
[4] Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005).
[5] Kessler Topaz Meltzer Check LLP, A Primer on Shareholder Litigation, (accessed on Jul. 28, 2022), https://www.ktmc.com/files/522_Primer.pdf.
[6] Said-Ibrahim et al v. FuboTV Inc. et al, 1:21-CV-01412 (S.D.N.Y. Feb. 17, 2021).
[7] United Industrial Workers Pension Plan, et al. v. Waste Management, Inc., et al., No. 22-CV-04838 (S.D.N.Y. June 9, 2022).
[8] Vega v. Energy Transfer LP, 22-CV-04614 (S.D.N.Y. June 3, 2022).