A securities class action, or securities fraud class action, is a lawsuit filed by investors who bought or sold a company’s securities within a specific period of time, referred to as a “class period,” and suffered economic injury as a result of violations of the securities law.
Why do investors pursue class actions?When companies violate the securities laws it causes economic harm to many people at once, not just a single individual. A class action lawsuit allows a group of individual investors who have suffered similar harm to pursue their claims in a single action. For example, a small investor may have purchased $500 of stock in a corporation that was fraudulently reporting its financial data. When the fraud was discovered, that $500 in stock dropped in value to only $250. The investor has lost half of her investment because of the company’s fraud. For an individual, this loss can be significant, but is often too small to justify suing a company on one’s own. A class action allows investors to join together in order to pursue recovery.
Types of securities class action claimsWhile every lawsuit is different, most securities class actions pursue similar legal claims. Some of the most common violations claimed are:
Fraud or Deceit:
These claims argue that a defendant engaged in fraud or deceit in connection to the purchase or sale of securities. The fraud or deceit can be active, as when a company lies about its earnings, or it can be through omission, such as when a company fails to report potential liabilities. These claims are referred to as Rule 10b-5 claims, after the Securities and Exchange Commission rule which prohibits such fraud and deceit.
False Forward-Looking Statements:
These type of claims involve an issuer’s predictions and projections regarding future corporate actions and performance. These claims allege intentional misrepresentations in documents such as earning estimates, projected expenditures, expected growth, and future cash flow.
Other Common Securities Class Action Claims:
Other claims involve insider trading when, for example, a corporate officer sells all her stock immediately before corporate fraud is reported. Others involve poor governance claims that allege the company lacked proper internal controls to protect against fraud or other damaging actions. Finally, are accounting claims which accuse a corporation of failing to follow generally accepted accounting procedures.
What is a lead plaintiff in a securities class action?A lead plaintiff is a person, group of persons, or entity that is appointed by the court to represent the interests of all class members. The lead plaintiff generally has the largest financial interest in the outcome of the case. The lead plaintiff works with the court-appointed lead counsel in determining how the litigation should proceed and eventually be resolved.
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