On what grounds can an institutional investor file a securities class action?
The Securities Exchange Act of 1934 gives shareowners the right to bring a private action in federal court to recover damages suffered as a result of securities fraud. The majority of securities fraud claims are brought under Section 10(b) of the Exchange Act and the accompanying Securities and Exchange Commission (SEC) Rule 10b-5. Section 10(b) prohibits fraud in connection with any purchase or sale of a security. Although Section 10(b) is extremely wide in scope, it requires proof that the misleading statements were made with “scienter” (either intentionally or recklessly). Section 11 of the Securities Act of 1933 is another important anti-fraud provision of federal law. This provision applies only to misrepresentations and omissions that are included in prospectuses or registration statements. A Section 11 claim provides important advantages over a Section 10(b) fraud claim. Most notably, Section 11 has no scienter requirement.
