A securities class action is a lawsuit brought on behalf of investors who bought or sold a company’s stock or other securities during a defined class period, alleging that false or misleading statements distorted the price. When a securities class action settles, eligible investors can submit a claim for a share of the settlement fund, generally supported by their brokerage records.
Quick Answer
A securities class action is a private lawsuit filed on behalf of a group of investors, typically everyone who bought a company’s shares during a set period, the class period. Most are brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which prohibit material misstatements and omissions in connection with buying or selling securities, or under Section 11 of the Securities Act of 1933, which covers misstatements in the registration statement for an offering such as an IPO. A typical case alleges that a company’s statements kept its stock price inflated until the truth emerged and the price fell. The Private Securities Litigation Reform Act of 1995 governs how these cases proceed, including how the lead plaintiff is chosen. Few securities class actions go to trial; cases that are not dismissed usually settle, and investors in the class recover by filing a claim with the settlement administrator.
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What a Securities Class Action Is
A securities class action is a lawsuit in which one or more investors sue on behalf of a larger group of investors who traded the same securities, usually a company’s common stock, during the same period. The defendants are typically the company and some of its senior executives, and in offering cases can include directors, underwriters and auditors.The claims center on information the market relied on: earnings reports, guidance, risk disclosures, regulatory updates, statements on earnings calls and the documents a company files with the SEC on EDGAR. The plaintiffs allege that some of those statements were false or misleading and that investors paid too much, or sold for too little, as a result. These are allegations. Many cases are dismissed, and companies that settle commonly do so without admitting wrongdoing.
Like any class action, a securities case must meet the requirements of Federal Rule of Civil Procedure 23 to proceed on behalf of the class, through a ruling on class certification or as part of a settlement.
The Laws Behind Securities Class Actions
Section 10(b) and Rule 10b-5
Most securities class actions are brought under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which make it unlawful, in connection with the purchase or sale of any security, to make an untrue statement of a material fact, to omit a material fact needed to keep statements from being misleading, or to engage in a scheme or practice that operates as a fraud. In Halliburton Co. v. Erica P. John Fund (2014), the Supreme Court restated the six elements a private plaintiff must prove:- a material misrepresentation or omission by the defendant,
- scienter, meaning an intent to deceive or, in most courts, recklessness,
- a connection between the misrepresentation and the purchase or sale of a security,
- reliance on the misrepresentation,
- economic loss, and
- loss causation, meaning the misrepresentation caused the loss.
Section 11 of the Securities Act
Section 11 of the Securities Act of 1933 covers securities bought under a registration statement, such as the prospectus for an initial public offering, that contained an untrue statement of a material fact or left out a required one. It allows suits against the people who signed the registration statement, the company’s directors, the underwriters, and accountants and other experts who certified parts of it. Section 11 does not require proof that anyone intended to mislead. The issuer is liable for a material misstatement, while the other defendants can avoid liability by showing they conducted a reasonable investigation and believed the statements were true. Damages are generally measured from the price paid, capped at the offering price. Many IPO cases, such as the WEBTOON Entertainment IPO settlement, are brought under Section 11.Time limits
Under 28 U.S.C. § 1658(b), a private securities fraud claim generally must be brought by the earlier of two years after discovery of the facts constituting the violation or five years after the violation. Section 11 and Section 12(a)(2) claims are governed by 15 U.S.C. § 77m, generally one year after the misstatement was or should have been discovered and no more than three years after the offering or sale.The Class Period and the Stock Drop
The class period is the window during which, the plaintiffs allege, misleading statements kept the stock price artificially high or low. It usually begins with the first alleged misstatement and ends with a “corrective disclosure,” the date the truth is said to have reached the market, often marked by a sharp price drop. That is why these cases are often called stock-drop lawsuits.Proving that every investor individually read and relied on a statement would make a class action impossible. In Basic Inc. v. Levinson (1988), the Supreme Court accepted the fraud-on-the-market theory, under which the price of a stock traded in an efficient market reflects all public information, including misstatements. Investors who bought at that price are presumed to have relied on it. In Halliburton (2014), the Court held that defendants may rebut the presumption before class certification by showing that an alleged misstatement did not actually affect the stock price.
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How the PSLRA Shapes These Cases
The Private Securities Litigation Reform Act of 1995, codified largely at 15 U.S.C. § 78u-4, sets procedures that apply to every private federal securities class action:- Lead plaintiff. Notice of the case must be published within 20 days, investors have 60 days to seek appointment, and the court presumptively appoints the movant with the largest financial interest. See Lead Plaintiff (PSLRA).
- Heightened pleading. The complaint must identify each allegedly misleading statement and explain why it was misleading, and must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
- Discovery stay. Discovery is generally paused while a motion to dismiss is pending, so many cases are decided on the complaint alone.
- Damages cap. Damages are limited using a 90-day “lookback”: they cannot exceed the difference between the purchase or sale price and the stock’s mean trading price during the 90 days after the corrective disclosure.
- Settlement notices. A settlement notice must state the average recovery per share, the parties’ positions on damages and the attorney fees requested.
How Securities Settlements Pay Investors
A securities settlement creates a fund that, after the court approves attorney fees and expenses and administration costs, is divided among class members who submit valid claims. A court-approved plan of allocation sets the formula. It typically calculates a “recognized loss” for each claimant from the dates, prices and number of shares bought and sold, and the fund is then distributed pro rata according to those recognized losses.Claims are filed with the settlement administrator, and they generally require transaction records, such as brokerage statements or trade confirmations. Many investors hold shares in “street name” through a broker, so settlement notices are often mailed to brokers and other nominees, who forward them to the beneficial owners or provide their names to the administrator. Per-share estimates published in settlement notices are averages before fees, and an individual claimant’s payment depends on the trades and on how many claims are filed.
OpenClassActions.com tracks open investor settlements, with deadlines and estimated per-share recoveries, on its securities class actions page.
Related Cases That Are Not Securities Class Actions
Several kinds of investor cases are often confused with securities class actions:- SEC enforcement actions. The government, not investors, brings these cases. Penalties and disgorgement can be returned to harmed investors through an SEC Fair Fund, such as the Becton Dickinson Fair Fund.
- Merger and stockholder class actions. These typically claim that directors breached their fiduciary duties in a merger or buyout and are usually brought in state court, often the Delaware Court of Chancery, rather than under the federal securities laws.
- Shareholder derivative suits. A shareholder sues on the company’s behalf, usually against its directors and officers. Any recovery generally goes to the company, not to individual investors.
Frequently Asked Questions
What is a class period in a securities class action?
The class period is the span of time during which, the plaintiffs allege, the company’s misleading statements kept its stock price artificially high or low. It usually starts with the first alleged misstatement and ends when the truth is said to have reached the market, often marked by a sharp price drop. Investors who bought or sold during that window are typically the class.
What proof is usually needed to file a securities settlement claim?
Securities settlements generally require records of each purchase and sale during the class period, such as brokerage statements or trade confirmations showing dates, share amounts and prices. The settlement administrator uses those records to calculate each claimant’s recognized loss under the court-approved plan of allocation.
What is the difference between a Rule 10b-5 claim and a Section 11 claim?
A Rule 10b-5 claim under the Securities Exchange Act covers misstatements in connection with any purchase or sale of a security and requires proof that the defendant acted with scienter, an intent to deceive or recklessness. A Section 11 claim under the Securities Act covers material misstatements in a registration statement, such as an IPO prospectus, and does not require proof of intent; the issuer is liable for a material misstatement, while directors, underwriters and others can raise a due diligence defense.
How long do investors have to bring a securities fraud lawsuit?
Federal law generally requires a private securities fraud claim to be brought by the earlier of two years after discovery of the facts constituting the violation or five years after the violation. Claims under Sections 11 and 12(a)(2) of the Securities Act generally must be brought within one year after discovery of the misstatement and no more than three years after the offering or sale.
Is a securities class action the same as an SEC enforcement case?
A securities class action is a private lawsuit brought by investors. An SEC enforcement case is brought by the government and can end with civil penalties and disgorgement, which the SEC may return to harmed investors through a Fair Fund. The two can run in parallel over the same conduct.
Sources
- 17 C.F.R. § 240.10b-5 — SEC Rule 10b-5 (Cornell Legal Information Institute)
- 15 U.S.C. § 77k — Securities Act Section 11 (Cornell Legal Information Institute)
- 15 U.S.C. § 78u-4 — Private Securities Litigation Reform Act provisions (Cornell Legal Information Institute)
- 28 U.S.C. § 1658 and 15 U.S.C. § 77m — limitations periods (Cornell Legal Information Institute)
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) — Cornell Legal Information Institute
- Class Action Lawsuits — Investor.gov, U.S. Securities and Exchange Commission
