Securities Class Action Lawsuits

When investors purchase stock in a company and later discover that the company violated U.S. securities law, such as fraudulent reporting of financial data, there are choices to make. Investors can join or file a securities class action lawsuit.

For example, a shareholder may have purchased $1000 of stock in a pharmaceutical corporation. It's alleged that the company made misleading statements when reporting its financial data. When shareholders discover the misstatements, the value of the company's securities drops to only $500. An investor has lost half their investment because of the company's fraud.

For an individual, this loss can be significant. However, it is often too small to justify one person suing a company. Securities class action litigation allows investors to join together to pursue recovery.

Filing a class action complaint allows individual investors to consolidate their claims into a single legal action when they share the same impact of the alleged wrongdoing. Securities class action cases can result in judgments or settlements worth millions of dollars. 

Read on to learn more about private securities class action lawsuits.

Why Individuals Pursue Class Actions

Companies that violate federal securities laws cause economic harm to many people. Securities fraud class actions are the most common way a group of shareholders seeks to recover damages based upon claims of fraudulent statements connected with the sale or purchase of a security. A class action lawsuit allows a lead plaintiff who has suffered similar harm to a group to pursue claims on behalf of a group in a single court action.

Types of Securities Class Action Claims

Though the specifics of every lawsuit differ, most securities class actions pursue similar legal claims against defendants. Typical defendants include the following:

• The corporation
• Current and former members of the Board of Directors
• Current and former executive officers, such as CEOs and CFOs

The most common violations claimed include the following.

Fraud or Deceit

These claims argue that a defendant engaged in fraud or deceit connected with the purchase or sale of securities. Fraud or deceit can be active. It can occur when a company lies about its earnings or through omission, such as when a company fails to make material disclosures. These claims are referred to as Rule 10b-5 claims. Rule 10b-5 is a Securities and Exchange Commission rule prohibiting fraud and deceit.

False Forward-Looking Statements

False forward-looking statement claims revolve around an issuer's predictions and projections regarding future corporate actions and performance. These documents include the following:

• Earning estimates
• Projected expenditures
• Expected growth
• Future cash flow

False forward-looking statement claims allege intentional misrepresentations in documents.

Other Common Securities Class Action Claims

Other claims revolve around conduct such as the following:

• Insider trading
• Poor corporate governance
• Deficient accounting

Insider trading claims argue that traders acted on relevant, non-public knowledge in buying or selling securities. An insider trading claim may be made when a corporate officer sells all her stock immediately before the company reports corporate fraud.

Poor governance claims allege that the company lacked proper internal controls to protect against fraud or other damaging actions. Claims regarding accounting accuse a corporation of failing to follow accepted accounting procedures.

Securities Class Action Procedure

Securities fraud class action suits based on U.S. securities laws are brought either in state or federal district court that has jurisdiction over the case. Plaintiffs often prefer state courts because they are viewed as more "plaintiff-friendly." However, there are limitations on state court jurisdiction for some private securities litigation.

Private Securities Litigation Reform Act

Congress enacted the Private Securities Litigation Reform Act (PSLRA) in large part to reduce frivolous litigation. The PSLRA codified particular pleading standards to maintain a securities fraud class action suit. For example, the PSLRA created several substantive and procedural requirements, including the following:

• Heightened pleading requirements
• Damages caps
• Mandatory sanctions for frivolous litigation

The PSLRA sought to provide protections to curb perceived abuses in class actions involving nationally traded securities. Requirements seek to ensure that class action benefits shareholders rather than class action lawyers. Certain PSLRA protections only apply in federal court, though. Plaintiffs often make claims under Section 10(b) of the Securities Exchange Act of 1934.

A state or federal securities class action lawsuit allows a lead plaintiff who has suffered similar harm to a group to pursue claims on behalf of a group in a single court action.

Due to the PSLRA protections, private litigants sought to bring securities claims in state court. To curb litigants from flocking to state court, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA made federal court the exclusive forum for all fraud-based securities class actions.

Forum for Section 11 Claims

SLUSA made federal court the forum for all fraud-based class action securities claims. However, the same was not true for claims made under Section 11 of the Securities Act of 1933.

A 2018 U.S. Supreme Court ruling held that state courts had jurisdiction for Section 11 class action lawsuits under the Securities Act of 1933. Section 11 claims attract plaintiffs' attorneys because shareholders do not need to prove reliance, causation, or intentional wrongdoing by the defendants. The plaintiff only needs to establish a materially false or misleading statement.

State court may be a legal option for Section 11 claims. However, corporations have successfully included federal forum provisions in their certificates of incorporation and IPO and secondary offering statements.

Federal forum provisions often provide that both class and individual claims made under Section 11 must be filed only in federal court. This places a practical limitation on the availability of state courts as a forum for some class action securities cases. Your securities lawyer will be able to navigate the complexities of determining which court to bring your case.

Class Members

When an investor or investors begin a class action lawsuit, they must identify who qualifies as a class member. The court consolidates the cases if plaintiffs file federal class actions in multiple courts for nearly identical claims. The PSLRA provides a notice and motion procedure for appointing a lead plaintiff. It requires the court to appoint a lead plaintiff who the court determines will represent the interests of the class members.

Class Period

Often, an attorney for the class will begin by determining the class period. This is the time during which the violation occurred. For example, if the class action accuses a corporation of fraud by inflating its stock price over two years, the class period would be the two years during which the fraud occurred.

Anyone who purchased stock during that class period would be eligible to become a class member. Attorneys must take action to notify the public about the lawsuit to find class members.

Class Certification

During the initial stages of the case, defendants can contest whether class certification is appropriate. Defendants can attempt to oppose class certification. They can base opposition claiming any of the following:

• The plaintiff's claims are not typical of other class members
• The plaintiff cannot adequately represent the class
• The plaintiff's counsel cannot represent the class
• Individual questions of fact predominate
• There is no causation between the plaintiff's loss and the defendant's actions

With the class formed, the lawsuit proceeds much like any other. Little is required from most class action members once they have been approved as a member of the class. They are not expected to have any significant involvement in the litigation.

The Defendant's Litigation Choices

Following the designation of a plaintiff, defendants will either file a motion to dismiss or file an answer. The plaintiff has the opportunity to respond, and the defendant can reply. Common bases for a motion to dismiss include lack of personal jurisdiction or failure to state a claim.

While the motion is pending with the court, the PSLRA mandates the stay of all discovery and other proceedings. The court rules on the motion. It can dismiss the case or allow the plaintiffs to amend their complaint.

If the case is not dismissed, the defendants must file a formal answer to the complaint. The defendants can also assert defenses. The parties can begin discovery.

Discovery in Class Action Litigation

Discovery allows both parties to exchange information about the claims and defenses in the case. Available discovery includes the following:

• Interrogatories
• Requests for the production of documents
• Requests for admission
• Depositions
• Subpoenas for non-parties

Discovery can last for more than a year and is very expensive. For this reason, defendants will often seek to settle the class action litigation.

Resolving Class Action Securities Cases

Few class actions make it to trial. Courts dismiss many cases following initial pleadings. Even cases that do not go to trial can cost corporations billions. Parties can explore alternative dispute resolution during any stage of the litigation process.

For example, the parties in a case can choose to meditate. Mediation is a process where parties attempt to reach a mutually beneficial resolution. An independent person trained as a mediator facilitates the process.

Settlement is another alternative litigation process parties may choose. Many companies choose to settle class actions. It's expensive for companies to defend securities fraud class action suits. Parties attempt to reach class action settlements.

Settlements in class action cases can be complicated. Under the PSLRA, class members must be notified before the court approves the settlement fund. Class members can opt out of the settlement.

After settlement (or final judgment), the class members divide the money awarded. Attorneys' fees also come from the settlement or judgment. An independent claims administrator handles the distribution of settlement funds. Class members cannot sue defendants for conduct occurring during the class period.

When To Contact an Attorney

If you believe you have experienced securities fraud that might be shared by others, consider contacting a qualified class action attorney.

An attorney can discuss your situation, help explain the applicable laws, and investigate whether a securities class action may be appropriate. If you believe you qualify as a member of an existing class, the notice of class action lawsuit should provide information on how to join. Contact a securities attorney if you have any questions.