Securities Fraud (Securities Law Series)

THIS CASEBOOK contains a selection of 227 U. S. court of Appeals of decisions that analyze and discuss issues surrounding allegations of securities fraud. The selection of decisions spans from 2004 to the date of publication.

Federal securities laws are broad enough to regulate "virtually any instrument that might be sold as an investment." Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). SEC v. Zada, (6th Cir. 2015).

The Exchange Act and related regulations ensure that public companies release information that will permit "investors to make informed investment decisions." Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 884 (4th Cir.2014) (citing Taylor v. First Union Corp. of S.C., 857 F.2d 240, 246 (4th Cir.1988)). Under Section 10(b) of the Act, companies are prohibited from using "any manipulative or deceptive device or contrivance" in connection with the sale of a security in violation of SEC rules. See 15 U.S.C. § 78j(b). Pursuant to regulatory proscription in Rule 10b-5, the following conduct is unlawful in connection with the sale of a security:

To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading....
17 C.F.R. § 240.10b-5(b).

Generally, a plaintiff asserting a claim under Section 10(b) must establish: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Yates, 744 F.3d at 884 (citation omitted); see Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 1322, 179 L.Ed.2d 398 (2011). Zak v. Chelsea Therapeutics Intern., Ltd., 780 F. 3d 597 (4th Cir. 2015).

To demonstrate scienter, a plaintiff must show that the defendant acted with "a mental state embracing intent to deceive, manipulate, or defraud." Tellabs, 551 U.S. at 319, 127 S.Ct. 2499 (citation omitted). Allegations of reckless conduct can satisfy the level of scienter necessary to survive a motion to dismiss. See Matrix Capital, 576 F.3d at 181. Reckless conduct sufficient to establish a strong inference of scienter is described as "severe," Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 344 (4th Cir.2003), or conduct that is "so highly unreasonable and such an extreme departure from the standard of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Matrix Capital, 576 F.3d at 181 (citation and internal quotation marks omitted). Zak v. Chelsea Therapeutics Intern., Ltd., ibid.

[T]he required state of mind [for scienter] is an intent to deceive, manipulate, defraud or severe recklessness." Lormand, 565 F.3d at 251. Owens v. Jastrow, (5th Cir. 2015).

"Scienter requires a showing of 'reckless or intentional wrongdoing' . . . ." Elam, 544 F.3d at 928 (quoting Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008)). It "'can be established in three ways: (1) from facts demonstrating a mental state embracing an intent to deceive, manipulate or defraud; (2) from conduct which rises to the level of severe recklessness; or (3) from allegations of motive and opportunity.'" Id. (quoting Cornelia I Crowell GST Trust, 519 F.3d at 782). (Footnote omitted.) Podraza v. Whiting, (8th Cir. 2015).

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