A securities
class action
A class action is a form of lawsuit.
Class Action may also refer to:
* ''Class Action'' (film), 1991, starring Gene Hackman and Mary Elizabeth Mastrantonio
* Class Action (band), a garage house band
* "Class Action" (''Teenage Robot''), a 2002 e ...
(SCA), or
securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.[class action
A class action is a form of lawsuit.
Class Action may also refer to:
* ''Class Action'' (film), 1991, starring Gene Hackman and Mary Elizabeth Mastrantonio
* Class Action (band), a garage house band
* "Class Action" (''Teenage Robot''), a 2002 e ...]
, is a
lawsuit
A lawsuit is a proceeding by one or more parties (the plaintiff or claimant) against one or more parties (the defendant) in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today ...
filed by investors who bought or sold a company's
publicly traded
A public company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock exchange or in over-the-counter (finance), over-the-counter markets. A public (publicly traded) co ...
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
within a specific period of time (known as a “class period”) and suffered economic injury as a result of violations of the
securities law
Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencie ...
s.
In cases involving misleading statements or
omissions, a class period generally starts when a company makes an untrue statement of
material fact about the company or fails to disclose a material fact necessary to render other statements not misleading.
The class period generally ends when the truth is fully disclosed to the investing public. The statement or action that reveals the truth related to a specific alleged misstatement or omission is known as a "corrective disclosure". During the class period there is usually one final corrective disclosure and in some complex cases, several partial corrective disclosures that reveal partial truths related to the alleged misstatements or omissions.
"Cases are brought pursuant to
Federal Rule of Civil Procedure
The Federal Rules of Civil Procedure (officially abbreviated Fed. R. Civ. P.; colloquially FRCP) govern civil procedure in United States district courts. They are the companion to the Federal Rules of Criminal Procedure. Rules promulgated by the ...
23 on behalf of a group of persons who purchased the securities of a particular company during a specified period of time (the class period)."
The Private Securities Litigation Reform Act (PSLRA) (1995); securities class actions
The
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995, , 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C.) ("PSLRA") implemented several substantive changes in the United States that have affected certain cases brought under t ...
(PSLRA) of 1995 encouraged
institutional investor
An institutional investor is an entity that pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...
s to participate as
lead plaintiffs in securities class actions "to shift the balance of power between shareholders and class action lawyers by allowing investors with the most substantial losses to take control over" the case. Approximately forty percent of securities fraud cases have a public pension fund or labor union fund lead plaintiff. Since the passage of the PSLRA, institutional investors rely on
portfolio
Portfolio may refer to:
Objects
* Portfolio (briefcase), a type of briefcase
Collections
* Portfolio (finance), a collection of assets held by an institution or a private individual
* Artist's portfolio, a sample of an artist's work or a ...
monitoring services offered by plaintiff class action law firms to identify "loss recovery opportunities."
In 2018,
Institutional Shareholder Services recorded 136 approved settlements in North America and $6.1 billion in settlement funds for distribution. U.S. public corporations' exposure to securities class actions that allege violations of the federal securities laws under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A land ...
amounts to "approximately one quarter of a percentage point of the aggregate market capitalization of U.S.-based corporations."
In securities class actions that allege violations of
Section 11 of the
Securities Act of 1933
The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and afte ...
, "officers and directors are liable together with the corporation for material misrepresentations in the registration statement."
To have "
standing
Standing, also referred to as orthostasis, is a position in which the body is held in an upright (orthostatic) position and supported only by the feet. Although seemingly static, the body rocks slightly back and forth from the ankle in the ...
" to sue under
Section 11 of the 1933 Act in a class action, a plaintiff must be able to prove that he can "trace" his shares to the registration statement in question, as to which there is alleged a material misstatement or omission.
[''Slack v. Prani''](_blank)
Supreme Court of the United States
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all Federal tribunals in the United States, U.S. federal court cases, and over Stat ...
(2023).[Seven on 11: Seven Avenues to Early Dismissal of Claims Under Section 11 of the Securities Act , Bloomberg Law](_blank)
/ref> In the absence of an ability to actually trace his shares, such as when securities issued at multiple times are held by the Depository Trust Company in a fungible bulk and physical tracing of particular shares may be impossible, the plaintiff may be barred from pursuing his claim for lack of standing.
The Supreme Court's unanimous decision in ''Cyan'' allowed state courts to "retain subject-matter jurisdiction over class actions alleging only 1933 Act claims. Defendants cannot move these actions to federal court." The ruling caused confusion in the securities class action bar because "''Cyan'' permits a class action asserting Section 11 or 12(a)(2) claims under the 1933 Act to proceed in state court while a related Section 10(b) class action is proceeding under the Securities Exchange Act of 1934 in Federal Court." ''Cyan'' also contributed to rising costs in executive liability insurance for directors and officers of publicly traded companies due to soaring exposures.
U.S. corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $135.1 billion during the second quarter of 2019. U.S. Corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $68.4 billion in 3Q 2019. U.S. Corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $321.1 billion in full year 2019.
Global corporate exposure to issuers of common stock that trade on American exchanges amounted to $75.2 billion in 1Q 2020. U.S. Corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $63.5 billion in 1Q of 2020. Exposure to alleged violations of Rule 10b-5 for non-U.S. issuers amounted to $11.68 billion in 1Q 2020. Global corporate exposure to issuers of common stock that trade on American exchanges amounted to $53.1 billion in 2Q 2020. U.S. corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $45 billion in 2Q of 2020. Exposure to alleged violations of Rule 10b-5 for Non-U.S. issuers amounted to $8.1 billion in 2Q 2020. Global corporate exposure to issuers of common stock that trade on American exchanges amounted to $133.2 billion in 3Q 2020. U.S. Corporate exposure to alleged violations of Rule 10b-5 of the Exchange Act amounted to $101.8 billion in 3Q of 2020. Exposure to alleged violations of Rule 10b-5 for Non-U.S. issuers amounted to $31.4 billion in 3Q 2020.
A handful of law firms are specialized in this type of litigation. Class action securities litigation has been a lucrative field due to large settlements, the largest historic settlements having been Enron
Enron Corporation was an American Energy development, energy, Commodity, commodities, and services company based in Houston, Texas. It was led by Kenneth Lay and developed in 1985 via a merger between Houston Natural Gas and InterNorth, both re ...
($7.2 billion), WorldCom
MCI, Inc. (formerly WorldCom and MCI WorldCom) was a telecommunications company. For a time, it was the second-largest long-distance telephone company in the United States, after AT&T. WorldCom grew largely by acquiring other telecommunicatio ...
($6.1 billion), Tyco International
Tyco International was a security systems company incorporated in the Republic of Ireland, with operational headquarters in Princeton, New Jersey, United States (Tyco International (US) Inc.). Tyco International was composed of two major busin ...
($3.2 billion), and VEREIT ($1.1 billion).
Event study analysis is the court-accepted methodology for evaluating the degree of informational efficiency during an alleged Class Period. The ease to prove damages, and thus the ability to garner and drive large settlements, may be tempered by the ''Halliburton'' Supreme Court
In most legal jurisdictions, a supreme court, also known as a court of last resort, apex court, high (or final) court of appeal, and court of final appeal, is the highest court within the hierarchy of courts. Broadly speaking, the decisions of ...
case which allows direct evidence
In law, a body of facts that directly supports the truth of an assertion without intervening inference. It is often exemplified by eyewitness testimony, which consists of a witness's description of their reputed direct sensory experience of an ...
to counter efficient market
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...
or Fraud-on-the-market theory. Because plaintiffs often rely on evidence of the existence of price impact using event studies, defendants may rely on similar statistical analysis prior to class certification to identify an absence of price impact. Evidence that proves that an absence of stock price impact exists may prevent class certification by rebutting Basic's presumption of reliance.
It was announced in 2014 that the European Union
The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...
may "introduce an injunctive and compensatory collective redress mechanism to their national procedural rules by July 26, 2015," thereby replacing the pooling of private securities litigation cases with securities class action litigation.[{{cite web , url=http://www.dlapiper.com/en/us/insights/publications/2013/12/is-usstyle-class-action-litigation-coming-to-the__/ , title=European Commission calls for collective redress mechanisms in EU national laws – 8 points to note , last= , first= , date= , website=DLA Piper , accessdate=5 November 2014]
See also
* List of class-action lawsuits
References
Class action lawsuits
Lawsuits
Securities (finance)
Stock market