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What is a Securities or Shareholder Class Action?

A securities class action is a representative lawsuit brought on behalf of a group of investors who have suffered a financial loss in a particular stock, bond or investment fund. In a typical case, the loss may be the result of fraudulent stock manipulation or materially false statements made to investors in prospectuses, private placement memoranda, earnings announcements or SEC filings (10-K, 10-Q, proxy statements, etc.). Many of the most infamous of past securities class actions, such as the WorldCom or Enron frauds, involved the restatement of previously issued financial statements or issuing financial statements that violated Generally Accepted Accounting Principles (“GAAP”). Once the fraud is revealed, the company’s previously artificially inflated stock or other security loses a significant amount of its value, resulting in investor losses. Claims usually arise under the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as what are called state “Blue Sky” laws. The most common of such claims arise under Rule 10b-5, where the fraud occurred in purchases made on a stock exchange, or under Section 11 of the Securities Act of 1933 where the securities purchased are traceable to a materially false and misleading registration statement (prospectus) filed with the SEC.


Since the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), securities class actions brought in federal court require court appointment of one or more “lead plaintiffs,” who represent the entire class of investors who suffered financial losses from purchasing a company’s fraudulently inflated securities during the “class period” (i.e., the time period in which the fraud or other legal violations artificially inflated the value of the stock). A unique aspect of lawsuits under the PSLRA is that the plaintiff must publish a notice of filing that informs all potential members of the plaintiff class that a securities class action has been filed. Besides the nature of the suit, the claimed class period and the security involved, that notice must also inform the potential class members that any member of the class has sixty days from publication of the notice to make an application to the court for appointment as Lead Plaintiff. As a general rule, the court will appoint as Lead Plaintiff the applicant with the largest financial interest in the litigation. Certain cases may require appointment of Co-Lead Plaintiffs. Plaintiffs can recover the difference between the inflated price they paid and the deflated, or corrected, price after the fraudulent statements are revealed. To be eligible to participate in a securities class action, a plaintiff must have made a purchase of the security during the class period. In many PSLRA cases, multiple notices will issued by a number of law firms. While a member of the class can choose to seek appointment as lead plaintiff, a class member is not required to do so to remain a member of the class.

Who Should File a Class Instead of an Individual Action?

The term “security” has a very broad legal definition, and typically includes stocks, bonds, derivatives or almost any other investment vehicle where the investor gives money to another person or company for the purpose of receiving income or capital gains. If the company lied about its business, or neglected to inform investors about an important (or material) aspect of the business, the company could be liable to its investors for the losses suffered when the fraud is revealed. For example, if Company A sold shares of stock to investors based on a financial statement that showed a $10 million profit for the previous year, when in fact the company had lost $10 million, the company, it officers and directors and other professionals deemed to have made the false statement would be liable to investors for the loss in value of the stock once the true facts are revealed.

Class actions are well-suited to investors who lost money on a security, but did not lose so much money that it would warrant retaining and paying a private attorney. For example, if you lost $10,000 on an investment in a company because of fraud, you would likely be better served by joining a class action than by hiring a private attorney since the attorney’s fees could easily exceed your loss. In a securities class action the entire class of investors share the costs and attorneys’ fees and such expenses must be approved by the court if a settlement or judgment is obtained for the class.

Time is important if you believe you are the victim of securities fraud. Statutes of limitations (the time in which a claim must be brought) are complex and can be two years or less depending on the claim. Especially as to claims under the Securities Act of 1933, there are also what are known as statutes of repose, which establish an outside time limit after an offering of securities is first made to investors that a claim must be brought. Finally as noted above, the PSLRA requires that a Lead Plaintiff application must be filed within sixty days of the date the first notice is published.

If you have questions about an existing case or a potential case, or if you believe you have been the victim of securities fraud, please contact Pearson Warshaw, LLP us by e-mail at [email protected] or by telephone at (818) 788-8300.