securities fraud

Securities Fraud

Reliance (Transaction Causation)Private (silence)

Public markets

Loss CausationProving

Pleading

(last updated 23 Apr 12)

Sup Ct 10(b) jurisprudence 1970s / 1980s 2000s Gr

Transactional No privity Zandford A

Plaintiff Blue Chip Stamps Lead plaintiff* B

Defendant Central Bank Stoneridge / Janus C

Elements

(1) Materiality Basic Bespeaks caution* B

(2) Misrep Va Bankshares Stoneridge B

(3) Scienter Ernst & Ernst Tellabs / reckless* A

(4) Reliance Affiliated Ute / Basic Rebut presumption* A

(5) Causation/$ Circularity* Dura / Halliburton C

Procedural

(1) S/L Gilbertson / Huddleston SOX / Reynolds A

(2) Federal/state Santa Fe Dabit C

(3) Arbitration Shearson/Am Express FINRA / D-F* B

* open questions

Securities Fraud Action

Rule 10b-5• Transaction (“in connection with

purchase or sale of securities”)• Plaintiff (“purchasers or sellers” /

except SEC)• Defendant (“primary violator” /

including company)• Elements

– Material misrepresentation or omission

– Scienter– Reliance– Causation– Damages

• Procedure – Jurisdictional nexus (federal court)– Statute of limitations / repose– Special rules for class actions

Reliance in face-to-face transaction (when silence actionable) …

Ute Development

Corporation

Tribe members

Non-member

First SecurityBank of Utah

Mixed-blood

Transferagent

Affiliated Ute Citizens v United States (US 1976)

“Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material ….

The obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact.

Affiliated Ute Citizens v United States (US 1976)

Justice Harry Blackmun[MN lawyer]

Reliance in public markets …

TimelineThe lies

– 10/21/77: news interview that “no reason for stock activity and no negotiations”

– 9/25/78: response to NYSE inquiry that “management unaware of development”

– 11/6/78: Quarterly report that “unaware of any developments”

The truth

– 12/18/78: announce tender offer by Combustion

Basic Inc v. Levinson (US 1988)

Efficient Capital Market Hypothesis

“… 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.”

How can presumption be overcome?

Basic Inc v. Levinson (US 1988)

Justice Harry Blackmun[MN lawyer]

“… I fear that the Court’s decision may have many adverse, unintended effects as it is applied and interpreted in the years to come.”

“… Court assumes buyers and sellers rely on the “integrity of the market price … which most mystifies me.”

Basic Inc v. Levinson (US 1988)

Justice Byron White[former football player]

Big vs small companies

Big companies• Public disclosure• Many analysts• SEC investigation • Large damages

Small companies• Less publicized• Fewer analysts• No SEC interest• Smaller total damages

Securities Fraud

Loss causationProving

Pleading

PSLRA [Exchange Act 21D(b)(4)]

… In any private action arising under this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover damages.

Plaintiffs’ argument:

PL shows loss by showing that price inflated on day of purchase

Proving Loss Causation

Defendant’s argument:

PL must show that price drop actually related to prior false statements

“… .. At the moment the transaction takes place, the plaintiff has suffered no loss.”

“When the purchaser subsequently resells at a lower price … that price may reflect not the earlier misrepresentation but changes in economic circumstances.

The common law has long insisted that a plaintiff show … he suffered actual economic loss.

Securities laws maintain public confidence … [but] not broad insurance against market losses.

Dura Pharmaceuticals v. Broudo (US 2005)

Justice Stephen Breyer(administrative law professor)

PSLRA [Exchange Act 21D(b)(4)]

… In any private action arising under this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover damages.

Rule 9(b) FRCP

 In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.

Plaintiffs’ argument:

PL alleges that false statements about asbestos liability, construction K revenues, and merger benefits were false and when disclosed resulted in stock price declines

Pleading Loss Causation

Defendant’s argument:

PL has not proved [alleged with specificity] that false statements caused declines in price; must show not result of extraneous circumstances

“We recognized in Basic individualized proof of reliance would prevent SFCA. Plaintiff must prove misrepresentation publicly known, market efficient, and relevant transaction before truth revealed.

“Requiring proof of loss causation is “not justified by Basic. … Compelling plaintiff to prove loss causation [plead with particularity] to invoke rebuttable presumption contravenes Basic’s fundamental premise – investor relies on market price.

Erica P John Fund v. Halliburton (US 2011)

Chief Justice John Roberts(appellate lawyer)

The end

Who pays?

Average settlement: $80 MMAverage attorney fees: 20%

2006 data2004 data2003 data

Atty feesoverview