Duane Morris Class Action Review - 2023 - Report - Page 303
CHAPTER 19
Securities Fraud Class Actions
I.
Executive Summary
Securities fraud claims generally turn on an alleged public misrepresentation by a
securities issuer (e.g, a corporation whose stock has fallen in value), adjudication of
which can readily lend themselves to class-wide treatment. The plaintiffs’ class action
bar 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 Securities
Exchange Act of 1934, which were enacted after the stock market crash of 1929 to help
regulate the securities markets and promote transparent disclosure to investors. The
Securities Act generally regulates securities offerings, while the Securities Exchange
Act governs the trading of existing securities and securities markets. The Securities Act
allows private litigants to pursue claims against corporate issuers for material
misrepresentations or omissions made in connection with a securities offering.
Individual litigants need not prove reliance or loss causation to sustain a claim under
Section 11 and Section 12 of the statute. Although the Securities Act expressly provides
a private cause of action for losses related to an offering, a plaintiff must demonstrate
that the shares of the security at issue trace back to the offering. Because of this
limitation, plaintiffs tend to look to the broader implied private right of action under the
Securities Exchange Act Section 10(b) and SEC Rule 10b-5, which prohibit fraudulent
schemes or fraudulent misrepresentations in connection with any securities transaction.
To successfully bring a misrepresentation or claim under the Securities and Exchange
Act, a plaintiff must demonstrate: (i) a material misrepresentation or omission; (ii)
scienter; (iii) a connection between the misrepresentation or omission and the purchase
or sale of a security; (iv) reliance on the material misstatement or omission (v) economic
loss; and (vi) loss causation. Loss causation is a merits-based element that typically is
not considered at the certification stage of a litigation.
Class action plaintiffs commonly seek certification under Rule 23(b)(3), which requires
that questions of law or fact predominate over those pertinent to individual members of
the class, and that a class action is superior to all other methods available to adjudicate
the dispute. For a varied and often large group of plaintiffs, proving reliance often
creates individual fact issues that could overwhelm common ones and present an
insurmountable hurdle to class certification. This challenge was substantially mitigated,
however, when the U.S. Supreme Court accepted the “fraud on the market” theory of
reliance in Basic, et al. v. Levinson, 485 U.S. 224 (1988). This theory avoids the need to
show individual reliance by employing the presumption that, when a stock trades in an
efficient market, investors “rely on the market as an intermediary for setting the stocks
price in light of all publicly available material information; accordingly, when one buys or
sells the stock at the market price, one has, in effect, relied on all publicly available
information, regardless of whether the buyer and/or seller was aware of that information
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© Duane Morris LLP 2023
Duane Morris Class Action Review – 2023
