CHAPTER 19Securities Fraud Class ActionsI.Executive SummarySecurities fraud claims generally turn on an alleged public misrepresentation by asecurities issuer (e.g, a corporation whose stock has fallen in value), adjudication ofwhich can readily lend themselves to class-wide treatment. The plaintiffs’ class actionbar has long made securities fraud a highly active area and 2022 was no exception.The pillars of federal securities law are the Securities Act of 1933 and the SecuritiesExchange Act of 1934, which were enacted after the stock market crash of 1929 to helpregulate the securities markets and promote transparent disclosure to investors. TheSecurities Act generally regulates securities offerings, while the Securities ExchangeAct governs the trading of existing securities and securities markets. The Securities Actallows private litigants to pursue claims against corporate issuers for materialmisrepresentations or omissions made in connection with a securities offering.Individual litigants need not prove reliance or loss causation to sustain a claim underSection 11 and Section 12 of the statute. Although the Securities Act expressly providesa private cause of action for losses related to an offering, a plaintiff must demonstratethat the shares of the security at issue trace back to the offering. Because of thislimitation, plaintiffs tend to look to the broader implied private right of action under theSecurities Exchange Act Section 10(b) and SEC Rule 10b-5, which prohibit fraudulentschemes or fraudulent misrepresentations in connection with any securities transaction.To successfully bring a misrepresentation or claim under the Securities and ExchangeAct, a plaintiff must demonstrate: (i) a material misrepresentation or omission; (ii)scienter; (iii) a connection between the misrepresentation or omission and the purchaseor sale of a security; (iv) reliance on the material misstatement or omission (v) economicloss; and (vi) loss causation. Loss causation is a merits-based element that typically isnot considered at the certification stage of a litigation.Class action plaintiffs commonly seek certification under Rule 23(b)(3), which requiresthat questions of law or fact predominate over those pertinent to individual members ofthe class, and that a class action is superior to all other methods available to adjudicatethe dispute. For a varied and often large group of plaintiffs, proving reliance oftencreates individual fact issues that could overwhelm common ones and present aninsurmountable hurdle to class certification. This challenge was substantially mitigated,however, when the U.S. Supreme Court accepted the “fraud on the market” theory ofreliance in Basic, et al. v. Levinson, 485 U.S. 224 (1988). This theory avoids the need toshow individual reliance by employing the presumption that, when a stock trades in anefficient market, investors “rely on the market as an intermediary for setting the stocksprice in light of all publicly available material information; accordingly, when one buys orsells the stock at the market price, one has, in effect, relied on all publicly availableinformation, regardless of whether the buyer and/or seller was aware of that information302© Duane Morris LLP 2023Duane Morris Class Action Review – 2023
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