When do you need a securities attorney? The short answer is when you have suffered financial loss on the securities of a company due to the company’s misconduct. Certainly, there are more nuances to it depending on the types of securities lawsuits. Two most commonly known types of securities class actions are securities fraud class action and shareholder derivative action.
Securities Fraud Action
“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” This elegant metaphor by Justice Brandeis can serve as an accurate characterization of securities laws’ rationale – adequate disclosure of financial information can reduce securities fraud. The idea is that if the government requires a company to disclose comprehensive information about its business to the investors and punishes non-disclosure and misstatements, then the investors would have all the information they need to make a calculated investment decision, leaving no room for fraud. For example, Section 11 of the Securities Exchange Act of 1934 (the “Exchange Act”) prohibits untrue statements or omission of material facts within registration statements, which are the necessary disclosure documents for an Initial Public Offering (“IPO”). Section 10(b) of the Exchange Act delegates power to Securities and Exchange Commission (“SEC”) to promulgate rules that prohibit use of “manipulative or deceptive device” in connection with the purchase or sale of any security, and SEC accordingly implemented Rule 10b-5 which makes it unlawful for any person to make untrue statements or omit material facts in connection with purchase or sale of any security.
Therefore, for a securities fraud action, the most important thing you as an investor should look out for is non-disclosure of misconduct or misstatements of business. When news breaks out about how a company had committed misconduct and concealed it from its investors with lies, that is when an investor of that company could potentially bring a securities fraud action with the help of a securities attorney. As another example, when there is a revelation that a public company has been hyping the value of its stock with misstatements in press releases, financials, or SEC filings, that could also be a great opportunity to bring a securities fraud action.
Several other factors are also at play for a securities fraud action. First, you must own securities as defined by securities laws and court precedents. Securities include conventional instruments such as stock, note, bond, debenture, evidence, security-based swap, options on securities, investment contracts, and etc. Unconventional instruments like crypto currency, however, often fall within a gray area where courts would apply a fact-intensive case-by-case analysis. The result of such an analysis could be highly uncertain.
Second, you must have transacted the securities during the relevant period. Take the following as an example:
Suppose a company had concealed its misconduct for 10 years and the truth was only revealed to the public on June 1, 2022. If you purchased its stock between June 1, 2012 and June 1, 2022, then you had done so at an artificially inflated price. This means that had the company made the proper disclosure of the misconduct on June 1, 2012, the price of its stock would have already dropped at that time. Thus, the price of its stock at the time of your purchase was “artificially inflated” by the company’s omission of its misconduct.
Third, you must have suffered financial loss on the securities. This is relatively straight-forward: if you did not lose any money on the securities, there is no harm that the securities laws could redress. Additionally, an investor who suffered greater loss would presumably be more vigorous in prosecuting a securities fraud action. In fact, based on such an assumption, courts often select the plaintiff with the greatest financial loss to serve as the lead plaintiff of a securities fraud action.
Shareholder Derivative Action
The idea of a shareholder derivative action is that you as an investor of the company are suing the company’s fiduciaries on behalf of the company based on the claim that these fiduciaries have breached their duties owed to the company.
Fiduciaries of a company often include its directors and officers. Two major fiduciary duties are duty of care and duty of loyalty. Duty of care requires fiduciaries to make business decisions with reasonable diligence and prudence. Courts tend to defer to the business judgment of a company’s officers and directors because courts do not view themselves as experts in business. However, courts would find a breach of duty of care if there is evidence of bad faith or gross negligence. For example, if an employee of a company sexually harassed another employee, but the directors and officers of the company consciously disregarded this problem and failed to address it in any way, then they may have breached their duty of care. In this case, you as an investor of this company could bring a shareholder derivative lawsuit with the help of a securities attorney.
Duty of loyalty, on the other hand, requires the fiduciaries to make business decisions without personal economic conflict. The fiduciaries might breach their duty of loyalty if they have made a self-interested transaction that profits at the company’s expense, or if they have taken a business opportunity away from the company. Common types of breach of duty of loyalty include insider trading of the company’s stock, granting excessive executive compensation, approving a takeover bid by an interested party, and etc.
To serve as a plaintiff of a shareholder derivative lawsuit, you must own the company’s share at time of the misconduct that the lawsuit complains about. You would also have to remain as a shareholder throughout the lawsuit.