About Securities Class Actions

Why is a securities class action filed? What conduct constitutes a violation of the federal securities laws? In a securities class action, an institutional or individual investor, or group of investors, bring an action on behalf of a large number of investors (a “class”), all of whom have suffered a substantially similar type of loss (often evidenced by a drop in stock price) stemming from violations of the federal securities laws. The class is usually made up of people who purchased the same investment or group of investments during the same time frame (the “class period”). A securities class action seeks damages on behalf of investors who acquired a company’s stock during a period of time when alleged fraud caused the price of the stock to be artificially inflated, and because of that fraud, the investors overpaid for the stock, or would not have purchased the stock if they had known the truth. Often, the type of information disseminated during the class period that artificially inflates the stock’s price will include false or misleading statements about matters such as a company’s financial condition, business operations or prospects for earnings or growth.

What are the benefits of a securities class action? An investor who is a victim of fraud, or is misled, in connection with his purchase or sale of a stock, and who has suffered damages as a result, may file a suit against persons and entities responsible for the damages under the federal securities laws. Class actions exist to enable the claims of thousands of similarly situated individuals to be prosecuted efficiently in one proceeding. Claims of individual class members are too small to make it feasible for them to pursue their claims on an individual basis, particularly against a large corporate entity which can well afford the expense of vigorously defending a lawsuit for violations of the federal securities laws. Even if an investor suffered damages in the tens of thousands of dollars, it would cost far more than that to pay the legal fees and expenses that would be required to obtain relief. However, by bringing a class action, and by being represented by lawyers who work on a contingent fee basis, many people having relatively small claims may seek redress in a single proceeding for the wrong that has been done to the entire class.

What is a Securities Litigation Policy? As part of its no-cost securities fraud portfolio monitoring services, C&T also provides its institutional clients with a comprehensive Quarterly Report. The Quarterly Report details the status of each class action in which the fund has a financial interest, regardless of whether the client is a lead plaintiff or an absent class member. The Quarterly Report also provides the client with updates on class action settlements in which the client may be entitled to collect on claims.

What is the PSLRA The Private Securities Litigation Reform Act of 1995 (“PSLRA”) is a federal statute which changed the manner in which private securities class actions are brought and litigated. Under the PSLRA, the plaintiffs or persons bringing a securities class action are held to more stringent standards of pleading securities fraud and demonstrating loss causation than under the prior law. In addition, the PSLRA seeks to encourage the selection of institutional investors as lead plaintiffs in securities class action claims. Although the PSLRA discourages a party from serving as the lead plaintiff in more than five securities class actions during any three year period, the PSLRA’s legislative history and several Courts have made it clear that, under most circumstances, this provisional bar was not intended to apply to institutional investors.

How does one become a lead plaintiff? Under the PSLRA, courts must appoint a Lead Plaintiff to represent the class of investors in a securities class action. Any class member may seek to be appointed lead plaintiff to represent the class in the litigation and must file a motion for appointment within sixty (60) days of the publication of the notice of the pending, or filed, securities class action. The court will appoint as lead plaintiff the individual, group of individuals or institutional investor(s) who are deemed to be the “most adequate” plaintiff. The PSLRA creates a presumption that the most adequate plaintiff is the investor who, among those who sought to be appointed, has the largest financial interest in the relief sought by the class, and, who satisfies other requirements. The lead plaintiff also selects and retains counsel, such as Chimicles & Tikellis LLP (“C&T”), to vigorously represent the interests of the class members in obtaining the appropriate financial or other redress. Typically, the court will approve the lead plaintiff’s selection of counsel as Lead Counsel for the action. The lead plaintiff has oversight of, and input into, the litigation far beyond that of other class members.

How has the PSLRA increased the role of institutional investors in securities class actions? As a practical matter, the necessity of appointing the “most adequate plaintiff” under the PSLRA has increased the role of institutional investors serving as lead plaintiff to control and oversee the interests of the plaintiff class. Most often, institutional investors are likely to have the largest financial interest in the case. The benefits to the class of institutional investors serving as lead plaintiffs include: increased settlement amounts, the achievement of meaningful changes in corporate governance, material reduction in attorneys’ fees through negotiation, selection of competent counsel to represent the class, and oversight of the litigation.

What is the cost to the client? Who pays attorneys fees? C&T prosecutes securities class actions on a contingency fee basis. Even a lead plaintiff will not receive a bill for legal fees and expenses. Following a resolution of the case, counsel fees and expenses must be awarded by the court. Counsel is required to provide certain detailed information to the court and ask to be paid fees and expenses out of the settlement fund that has been created. The degree of expertise of the attorneys and their dependence upon highly trained, specialized experts makes prosecution of a class action very labor intensive.

Why file an individual lawsuit? A class action, by its nature, can bring only claims common to class members. It cannot prosecute any issue unique to a class member, such as advice given by a particular broker. Further, if a suit is certified as a class action and, thereafter, is dismissed or settled, such dismissal or settlement is binding on all class members. Thus, if you believe your claim may involve issues not addressed by the class action, you should consult your counsel concerning the feasibility of opting out of the class and pursuing your claim as an individual proceeding. Also, if your individual losses appear to be substantial, that is yet another reason to consider pursuing your claim on an individual basis. Since an individual lawsuit will require significant cost and more of the investor’s time, the decision to pursue this avenue of recovery should be made only after careful consideration in consultation with counsel, such as C&T.

Why is it important to submit your claim with the claims administrator? After a class action is filed, the lead plaintiff seeks to have the court issue an order certifying that the group of investors on whose behalf the lawsuit was initiated, do indeed have certain interests and claims in common. Thereafter, a formal notice is sent to all potential class members advising them about the lawsuit, their rights and interests in connection with the lawsuit and any action they need to take to protect their interests. Often, class counsel will retain a professional claims administration firm to disseminate such notices and, when a verdict or settlement is reached, the forms upon which class members may submit their claims to the proceeds of the settlement or verdict. Be certain to read and follow the procedures. Failure to submit your proof of claim in a timely manner may effectively forfeit your right to settlement proceeds. Over the years, many class members, individual and institutional, have lost the opportunity to share in substantial amounts of recovery to which they would have been entitled – if only they had filed a claim.