Private (silence)
Public markets
Proving
Pleading
(last updated 23 Apr 12)

Sup Ct 10(b) jurisprudence
Transactional
Plaintiff
Defendant
1970s / 1980s
No privity
Blue Chip Stamps
Central Bank
Zandford
2000s
Lead plaintiff*
Stoneridge / Janus
Elements
(1) Materiality
(2) Misrep
(3) Scienter
(4) Reliance
Basic
Va Bankshares
Ernst & Ernst
Affiliated Ute / Basic
Bespeaks caution*
Stoneridge
Tellabs / r eckless*
Rebut presumption*
Dura / Halliburton (5) Causation/$ Circularity*
Procedural
(1) S/L Gilbertson / Huddleston SOX / Reynolds
(2) Federal/state Santa Fe Dabit
(3) Arbitration Shearson/Am Express FINRA / D-F*
* open questions
Gr
A
B
C
A
C
B
A
A
C
B
B

Rule 10b-5
• Transaction (“in connection with purchase or sale of securities”)
• Plaintiff (“purchasers or sellers” / except SEC)
• Defendant (“primary violator” / including company)
• Elements
– Material misrepresentation or omission
– Scienter
– Reliance
– Causation
– Damages
• Procedure
– Jurisdictional nexus (federal court)
– Statute of limitations / repose
– Special rules for class actions

Affiliated Ute Citizens v United States (US 1976)
Tribe members
Mixed-blood
Ute Development
Corporation
Transfer agent
Non-member
First Security
Bank of Utah

Affiliated Ute Citizens v United States (US 1976)
“Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material ….
The obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact.
Justice Harry Blackmun
[MN lawyer]

Basic Inc v. Levinson (US 1988)
Timeline
The lies
– 10/21/77: news interview that “no reason for stock activity and no negotiations”
– 9/25/78: response to NYSE inquiry that
“management unaware of development”
– 11/6/78: Quarterly report that “unaware of any developments”
The truth
– 12/18/78: announce tender offer by
Combustion

Efficient Capital Market Hypothesis

Basic Inc v. Levinson (US 1988)
“… in open and developed securities market .. Misleading statement defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.”
“… reliance is an element of a Rule
10b-5 cause of action.
“Presumptions typically serve to assist courts in managing circumstances in which direct proof for one reason or another is rendered difficult.”
Justice Harry Blackmun
[MN lawyer]
How can presumption be overcome?

Basic Inc v. Levinson (US 1988)
“… I fear that the Court’s decision may have many adverse, unintended effects as it is applied and interpreted in the years to come.”
“… Court assumes buyers and sellers rely on the “integrity of the market price … which most mystifies me.”
Justice Byron White
[former football player]

Big companies
• Public disclosure
• Many analysts
• SEC investigation
• Large damages
Small companies
• Less publicized
• Fewer analysts
• No SEC interest
• Smaller total damages

Proving
Pleading

PSLRA [Exchange Act 21D(b)(4)]
… In any private action arising under this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover damages.

Plaintiffs’ argument:
PL shows loss by showing that price inflated on day of purchase
Defendant’s argument:
PL must show that price drop actually related to prior false statements

Dura Pharmaceuticals v. Broudo (US 2005)
“… .. At the moment the transaction takes place, the plaintiff has suffered no loss.”
“When the purchaser subsequently resells at a lower price … that price may reflect not the earlier misrepresentation but changes in economic circumstances.
The common law has long insisted that a plaintiff show … he suffered actual economic loss.
Securities laws maintain public confidence
… [but] not broad insurance against market losses.
Justice Stephen Breyer
(administrative law professor)

PSLRA [Exchange Act
21D(b)(4)]
… In any private action arising under this title, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this title caused the loss for which the plaintiff seeks to recover damages.
Rule 9(b) FRCP
In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.

Plaintiffs’ argument:
PL alleges that false statements about asbestos liability, construction K revenues, and merger benefits were false and when disclosed resulted in stock price declines
Defendant’s argument:
PL has not proved [alleged with specificity] that false statements caused declines in price; must show not result of extraneous circumstances

Erica P John Fund v. Halliburton (US 2011)
“We recognized in Basic individualized proof of reliance would prevent SFCA.
Plaintiff must prove misrepresentation publicly known, market efficient, and relevant transaction before truth revealed.
“Requiring proof of loss causation is “not justified by Basic . … Compelling plaintiff to prove loss causation [plead with particularity] to invoke rebuttable presumption contravenes Basic’s fundamental premise – investor relies on market price.
Chief Justice John Roberts
(appellate lawyer)

Average settlement: $80 MM
Average attorney fees: 20%
2006 data
2004 data
2003 data
Atty fees overview