1. Securities Fraud Reliance (Transaction Causation) Private (silence) Public markets Loss Causation Proving Pleading (last updated 23 Apr 12)

2. Sup Ct 10(b) jurisprudence 1970s / 1980s2000sGr TransactionalNo privityZandfordA PlaintiffBlue Chip StampsLead plaintiff*B DefendantCentral BankStoneridge / JanusC Elements (1) MaterialityBasicBespeaks caution*B (2) MisrepVa BanksharesStoneridgeB (3) ScienterErnst & ErnstTellabs / reckless*A (4) RelianceAffiliated Ute / BasicRebut presumption*A (5) Causation/$Circularity*Dura / HalliburtonC Procedural (1) S/LGilbertson / HuddlestonSOX / ReynoldsA (2) Federal/stateSanta FeDabitC (3) ArbitrationShearson/Am ExpressFINRA / D-F*B * open questions

3. Securities Fraud Action 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

4. Reliance in face-to-face transaction (when silence actionable) …

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

6. “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. Affiliated Ute Citizens v United States (US 1976) Justice Harry Blackmun [MN lawyer]

7. Reliance in public markets …

8. 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 Basic Inc v. Levinson (US 1988)

9. Efficient Capital Market Hypothesis

10. “… 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.” How can presumption be overcome? Basic Inc v. Levinson (US 1988) Justice Harry Blackmun [MN lawyer]

11. “… 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.” Basic Inc v. Levinson (US 1988) Justice Byron White [former football player]

12. Big vs small companies Big companies Public disclosure Many analysts SEC investigation Large damages Small companies Less publicized Fewer analysts No SEC interest Smaller total damages

13. Securities Fraud Loss causation Proving Pleading

14. 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.

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

16. “….. 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. Dura Pharmaceuticals v. Broudo (US 2005) Justice Stephen Breyer (administrative law professor)

17. 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.

18. 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 Pleading Loss Causation Defendant’s argument: PL has not proved [alleged with specificity] that false statements caused declines in price; must show not result of extraneous circumstances

19. “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. Erica P John Fund v. Halliburton (US 2011) Chief Justice John Roberts (appellate lawyer)

20. The end

21. Who pays? Average settlement: $80 MM Average attorney fees: 20% 2006 data 2004 data 2003 data Atty fees overview