Chapter 24 Securities Fraud Class Action • Securities fraud class actions • statutory basis • comparison to fiduciary derivative suit • structure and recent use • Elements • Materiality: Basic v. Levinson • Scienter: PSLRA / Tellabs • Reliance: Basic v. Levinson • Causation: which price event? • Analysis • Lawyers as entrepreneurs? • Cross-subsidization - solutions? Module VIII – Stock Trading Citizen of world Law profess ion Corpora te practic e Bar exam
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Chapter 24Securities Fraud Class Action
• Securities fraud class actions • statutory basis • comparison to fiduciary derivative suit• structure and recent use
• Elements• Materiality: Basic v. Levinson• Scienter: PSLRA / Tellabs• Reliance: Basic v. Levinson• Causation: which price event?
• Analysis• Lawyers as entrepreneurs?• Cross-subsidization - solutions?
Module VIII – Stock Trading
Citizen of world
Citizen of world
Law profession
Law profession
Corporate practice
Corporate practice
Bar examBar
exam
SFCA background …
Source: § 10(b)
Use of SFCA
Securities Exchange Act of 1934
Section 10 -- Manipulative and Deceptive Devices
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 any national securities exchange--
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered … any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Use of SFCA …
“King of Pain”
“Loathed because he's so mean, feared because he's so powerful, Bill Lerach is the lawyer everyone in Silicon Valley hates.”
• Jurisdictional nexus– Federal court– Statute of limitation
Plead “scienter” …
PSLRA [’34 Act § 21D(b)(1)]
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
Required “state of mind”? Compare to Rule 9(b)
How get pre-filing “facts”?
Tellabs v. Makor Issues & Rights (US 2008)
1. FACTS• What were misstatements? • Material – why? • Who are plaintiffs? Kind of suit?
pleading standard”• Must be “cogent and compelling” /
compare inferences: plaintiff wins tie
4. ANALYSIS• Why should plaintiff win tie? Wasn’t
PSLRA anti-plaintiff? • Why not same burden as at trial –
preponderance of inferences?
5. CONCLUSION• After this case, what “facts” will survive
motion to dismiss? • After this case, are internal reports of
company difficulties enough?
Tellabs(Notebaert)
Shareholders(stock market)
Misstatements about product /
“channel stuffing”
Ruth Bader Ginsburg(civil rights lawyer)
… PSLRA strong inference of state of mind (scienter) means … “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference.”
… allegations must also be considered “holistically” [isolated insider sales not enough, must have unusual, broad sales]
… omissions and ambiguities [in the plaintiffs’ allegations] count against inferring scienter” [discount confidential witnesses]
Reliance and causation …
Basic Inc. v. Levinson (US 1988)
1. FACTS• Who are plaintiffs? Kind of suit? • Were individual suits be viable?
2. ISSUES• Reliance in fraud action?
3. HOLDING• Presumption necessary for class actions to
publicly-available information into price• Rebuttable presumption – unless market
knew or did not react OR individual plaintiffs would have traded anyway
4. ANALYSIS• Is ECMH part of law? • Do investors really trust market price – see
White dissent? • Shouldn’t Congress make policy decisions?
5. CONCLUSION• SFCA have life – compare to Delaware?• Presumption rebutted in small companies
with few analysts?
Basic IncCombustionEngineering
Shareholders(stock market)
merger negotiations
Three “white”
lies
“… in open and developed securities market .. Misleading statement defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.”
“… reliance is an element of a Rule 10b-5 cause of action.
“Presumptions typically serve to assist courts in managing circumstances in which direct proof for one reason or another is rendered difficult.”
– identify material corporate misrepresentations– find appropriate shareholders to act as class representatives– file a complaint in a court of class counsel’s choosing
• Take care of legalities– defend the complaint against motion to dismiss (on legal
grounds)– urge the judge to grant class action status to the litigation – send notice to class members, giving them an option to
withdraw from the lawsuit– undertake discovery of information from the company and
other sources• Close the deal
– enter into settlement negotiations with company officials – champion any settlement before the judge– administer settlement funds – appeal any adverse decisions by the trial court judge