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Establishing a Securities Case

The federal securities laws are complex. If you have questions about these laws and the various types of securities abuses, contact an attorney.

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Establishing a Securities Case

There are a number of factual, procedural and legal issues that a plaintiff must consider before deciding whether to file a lawsuit for a violation of federal or state securities laws. Potential plaintiffs and their lawyers should consider issues such as: the applicable statute of limitations, the evidence supporting their claims, potential defenses that the defendant could raise and damages. An experienced securities lawyer at Kaufmann Gildin & Robbins LLP in New York, NY can evaluate your situation and help you determine how to best proceed.

Jurisdiction and Venue

Federal courts have exclusive jurisdiction over actions brought under the Securities Exchange Act of 1934 ("1934 Act"). Federal and state courts have concurrent jurisdiction of claims under the Securities Act of 1933 ("1933 Act"). Section 22 of the 1933 Act and §27 of the 1934 Act provide that venue is proper in any district where the defendant is found, is an inhabitant or transacts business. Process can be served on any defendant in that district or in any other district in which the defendant can be found. If there are multiple private actions involving common questions of law or fact brought in different districts, the Judicial Panel on Multidistrict Litigation can order that the cases be consolidated or coordinated for pretrial proceedings.

Statutes of Limitation

The statute of limitations, which is the time period in which you must file a lawsuit, for securities violations depends on the provision on which you are basing your claims. Claims brought under various sections of the 1933 and 1934 Acts must be filed within the times set forth below:

  • Section 11 or 12(a)(2) of the 1933 Act — within one year after discovery of the falsity or omission and not more than three years after the sale
  • Section 12(a)(1) of the 1933 Act — within one year after the violation
  • Section 16(b) of the 1934 Act — within two years after the insider recognized a profit
  • Section 18 of the 1934 Act — within one year after discovery of the true facts and within three years after the violation
  • Section 20A of the 1934 Act — within five years after the violation

The Sarbanes-Oxley Act of 2002 created another statute of limitations that applies to claims involving a "claim of fraud, deceit, manipulation or contrivance." These claims must be filed within two years from the date of a discovery or five years from the violation.

Gathering Evidence

During the process called discovery, the parties have the opportunity to request documents from the other side, ask the other side written questions (called interrogatories) and take depositions of witnesses, including company employees involved with registering and offering the security, officers, directors, broker-dealers, financial advisors and others. There are certain categories of evidence, including information disclosed by the company about the security and documents and information provided by a broker-dealer, that a plaintiff will need to gather in order to help establish his or her claims. To establish damages, the plaintiff will need documentation about how much he or she paid for the security, its value at the time of the lawsuit and possibly, expert testimony about the security's fair market value had there not been fraudulent activity.

Potential Defenses

In addition to the statutory defenses that may be available to a defendant, there are a number of common law defenses that the defendant could raise which would bar the plaintiff's recovery. These include:

  • Waiver and estoppel
  • In pari delicto — Generally, if a plaintiff also participated in illegal activities, but is still less culpable than the defendant, the suit is not barred. In Pinter v. Dahl, 486 U.S. 622 (1988), the Supreme Court held that this defense was available under §12(a)(1) of the 1933 Act only if the plaintiff's role in the offering was "more as a promoter then as an investor."
  • Contributory negligence — The plaintiff can be barred from initiating a suit based on misleading statements if he or she knew that the statements were false.

Damages

Generally, a securities plaintiff will seek damages for the financial loss sustained because of the defendant's misconduct. Plaintiffs may also seek equitable relief such as rescission or an injunction prohibiting the defendant from engaging in future fraudulent conduct.

Under §11(e) of the 1933 Act, the plaintiff can recover the difference between the price he or she paid for the security and the price at the time of the suit or the price at which plaintiff was able to sell it. If the defendant can prove that the drop in price was caused by something other than the misrepresentation in the registration statement, the plaintiff's recovery may be lessened or barred. Under §12 of the 1933 Act, the plaintiff may sue for a refund of the purchase price or for damages in the amount of the difference between the purchase price and the price for which he or she sold the security. Under §10(b) of the 1934 Act, a seller's damages are generally calculated as the difference between the price he or she was paid and the fair value of the security had there not been a misrepresentation. In cases involving insider trading, the typical way of measuring the plaintiff's damages is to look at the profits the defendant realized.

Punitive damages are damages designed to punish the defendant and deter similar violations in the future. Courts have held that punitive damages are barred by §28(a) of the 1934 Act. This section provides that no person shall recover a total amount in excess of his or her actual damages. Courts have also held that punitive damages are not allowed under §17(a) of the 1933 Act on the basis that policy considerations outweigh any deterrent effect on future violations.

Conclusion

When determining whether to file a securities case, there are a number of issues that an attorney and potential plaintiff will consider. Notably, they will need to consider the statute of limitations, the evidence necessary to prove the claims, potential defenses and an appropriate amount of damages. An experienced securities lawyer at Kaufmann Gildin & Robbins LLP in New York, NY can provide guidance on these issues.

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