How securities class action litigation works

Securities fraud class actions are legal proceedings where a group of investors collectively sues a company for knowingly making false and misleading statements about publicly traded securities (i.e., common stock and corporate bonds). These cases typically arise when a company makes misrepresentations about its financial health, operations or prospects, causing the prices of such securities to become artificially inflated. When the truth about the company is revealed to the market, its stock price often drops, resulting in significant financial losses for the company’s investors.

In a securities class action, one or more investors are appointed by the court to act as lead plaintiffs, representing the entire class of affected investors. The goal is to recover damages for the group rather than having each investor file individual lawsuits. This collective approach makes it more efficient and cost-effective to pursue legal action against large corporations.

The class action process

Securities class actions generally follow a structured legal process with the help of experienced attorneys who understand the entire process:

1. Filing of a complaint: The complaint outlines the allegations against the company and the basis for the lawsuit.
2. Motions to dismiss the complaint: Unlike smaller individual lawsuits, the defendants in securities fraud class actions will typically file a motion to dismiss the complaint. Such motions argue that, based on the alleged facts, the plaintiff has failed to state a claim for violations of the federal securities laws. In some cases, the court may dismiss the lawsuit if it determines that the plaintiffs have failed to meet the legal requirements for a securities class action.
3. Discovery: Both parties gather evidence, including documents, emails and witness testimonies, to support their claims or defenses. This phase can be lengthy and complex, especially in cases involving large corporations with extensive records.
4. Certifying the class: Once discovery is completed, the plaintiff will file a motion asking the court to certify the class in accordance with the requirements of Federal Rule of Civil Procedure 23. The requirements under Rule 23 include determining (a) whether the class is sufficiently numerous, (b) whether the lead plaintiffs’ claims are typical of the class, (c) whether there are questions of law and fact that are common to the entire class, and (d) whether the proposed class representatives will adequately represent the interests of the class. In addition, the plaintiff must establish that common questions of law or fact predominate over individual issues and that a class action would be superior to individual lawsuits.
5. Summary Judgment: Once a class is certified, the parties will typically file motions for summary judgment. Such motions argue that, based on the evidence in the case, the court must find in favor of the moving party as a matter of law.
6. Trial: Once all pre-trial motions are completed, the case may proceed to trial, where both sides present their arguments and evidence.

Many securities class actions reach settlements before going to trial.

Challenges of securities class actions

Securities class actions face several challenges that can complicate the litigation process:

1. Proving scienter: Investors must establish that the company acted with intent to deceive, manipulate or defraud (scienter), which is critical but challenging.
2. Class certification: Achieving this can be difficult, as plaintiffs must demonstrate that common questions of law or fact predominate over individual issues. It often involves complex legal arguments and extensive documentation.
3. Complex financial issues: Many securities class actions involve complicated issues of causation and damage, which require expert analysis and testimony.
4. Regulatory environment: Navigating the complex web of regulations from agencies such as the SEC and international regulations adds another layer of complexity to securities class actions.

Despite their difficulty, securities class actions are crucial in maintaining the integrity of financial markets and protecting investors from fraud and misconduct.

Possible resolutions

The most common resolution, settlements, involve the defendant agreeing to pay a certain amount of money to the class, which allows both parties to avoid the uncertainty and expense of a trial. If the case goes to trial, the court will issue a verdict based on the evidence presented. If the plaintiffs win, the court will determine the damages awarded.