This is Part 1 in a 4 part series on Securities Class Actions by Martin Chitwood.


American capital markets operate under the provisions of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”).  The purpose of those bills was

to protect the investing public and honest business; . . . to prevent further exploitation of the public; . . . to place adequate and true information before the investor; to protect honest enterprise; . . . [and] to restore the confidence of the investor . . . .

  1. Rep. No. 47, 73rd Cong., 1st Sess., at 1 (1933). In particular, Section 10-b of the Exchange Act and its Rule 10b-5 deterred fraudulent conduct by insuring that companies were punished when they misrepresented or exaggerated information to unlawfully affect the price of their stock.

Because the Securities Exchange Commission (“SEC”) does not collect investment losses for defrauded investors, private causes of action under the Securities Act and the Exchange Act have played an important role in supplementing the enforcement powers of the SEC.  As one court observed:

The most effective control and deterrent to over-reaching and wrongful conduct in the capital raising area is the presence of private lawyers who are willing to devote their time, their energy, and their own personal resources to vindicate the rights of individual investors who have been importuned, misled, or who somehow have been fraudulently deprived of their money.

In re Public Service of New Mexico, No. 91-0536M (S.D. Cal. July 28, 1992), at 8.

The United States Supreme Court has also recognized that one of the “essential tool[s]” in achieving the purpose of the Exchange Act (i.e., the promotion of full and fair disclosure by companies issuing securities) is the private right of action implied under Section 10(b) of the Exchange Act and SEC Rule 10b-5.  Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); Herman & MacLean v. Huddleston, 459 U.S. 375, 380 (1983).  As the Eleventh Circuit has noted, class actions in particular serve the “public interests in the private enforcement of various regulatory schemes, particularly those governing the securities markets.” Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718, 727 (11th Cir. 1987).

In a class action lawsuit, a “class representative” sues on behalf of himself and all other persons who were similarly harmed by the same wrongdoer or wrongdoers.  This process enables potential plaintiffs to pool claims for litigation that would be economically inefficient to litigate individually.  Such potential plaintiffs “would have no realistic day in court if a class action were not available.”  Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809 (1985).  Therefore, a class action is the preferred mechanism whenever a large number of persons have been similarly harmed by an alleged wrongdoer or wrongdoers and the individual amount of damages suffered by each potential plaintiff may be too small to justify litigating on an individual basis.

Actions alleging violations of the federal securities laws are often ideal for class action treatment because they involve a large number of shareholders who have suffered damages in amounts that are small enough to make  litigating them individually cost prohibitive, but that when pooled together are quite large.  Thus, courts frequently certify classes in cases involving claims of securities fraud.  E.g., In re T2 Medical, Inc. Shareholder Litig., Civil Action No. 1:92-CV-1564-RLV  (N.D. Ga. Nov. 17, 1993) (order granting class certification); In re Nat’l Data Corp. Sec. Litig., Master File No. 1:90-CV-1037-JEC (N.D. Ga. Mar. 31, 1993) (order granting class certification) (hereinafter Nat’l Data Corp. Order); In re KnowledgeWare, Inc. Shareholder Litig. Master File No. 1:92-CV-1651-JTC  (N.D. Ga. Jan. 31, 1993) (order granting class certification); In re DCA Sec. Litig., Civil Action No. 1:89-CV-2195-RCF (N.D. Ga. December 21, 1990) (order granting class certification); see also 4 H. Newberg & A. Conte, Newberg on Class Actions §18.05 (3d ed. 1992).

Class actions also provide a mechanism to resolve numerous related claims in one forum, establishing a uniform standard for conduct and preserving judicial resources.  Thus, “it is well-recognized that class actions are a particularly appropriate means for resolving securities fraud actions.”  In re Nat’l Data Corp. Sec. Litig., Master File No. 1:90-CV-1037-JEC, at 4 (N.D. Ga. Mar. 31, 1993) (order granting class certification) (citing Kennedy v. Tallant, 710 F.2d 711, 718 (11th Cir. 1983)).  The class action mechanism provides a vehicle for the private enforcement of the federal securities laws because “a large number of individuals may have been injured, although no one person may have been damaged to a degree which would have induced him to institute litigation solely on his own behalf.”  Id. (quoting Green v. Wolf Corp., 406 F.2d 291, 296 (2d Cir. 1968)).

This article outlines the fundamentals of a securities class action from the perspective of the plaintiff class, with an emphasis on the procedures for obtaining “certification” of the action as a class action under the Federal Rules of Civil Procedure.  It also discusses selected provisions of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and its impact on securities class actions.  Although the discussion encompasses all class actions based on violations of the federal securities laws, particular attention is paid to those actions in which the plaintiffs are shareholders asserting claims arising under Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.

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