Securities Fraud Litigation

Securities Fraud Litigation
Pictured: Jeffrey Saxon and Marc Fitapelli by Wall Street subway station in New York City ©

SEC Rule 10b-5 is the main mechanize for enforcing securities fraud claims. This rule makes it illegal for anybody to use any method to defraud, make false statements, omit relevant information, or otherwise conduct business operations that would deceive another person, specifically a buyer or a seller of a stock share, in the process of conducting transactions.

Generally, violations to this rule apply when:

  • There is insider trading, which is when someone uses insider information to defraud a buyer or seller of a security; or
  • If an executive makes a false statement or refrain from releasing material information that would lead a reasonable investor to buy or sell a security that they would not otherwise have bought or sold if not due to the fraudulent information stated, or if they knew the material information withheld.

In order to file a valid claim the plaintiff or the SEC must be able to establish the elements of Rule 10(b)5.

The elements to be established in order to have a valid claim under SEC Rule 10b-5 includes the following:


First, the plaintiff must show sufficient evidence that the defendant made an untrue statement of material fact or refrain from disclosing material fact in connection with the purchase or sale of securities.


So how does one determine if a statement or information is material? The standard used under this rule has been established by the case TSC Industries, Inc. v. Northway, Inc., which states that a statement is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

In practical application, there must be a substantial likelihood that the disclosure of the omitted fact would have been considered by a reasonable investor to have significantly altered the “total mix” of information made available to them to make a decision.

Scienter or Intent to Deceive

Second, the untrue statement of a material fact or its omission was done by the defendant in a reckless, intentionally, or knowingly by the defendant. However, it is important to note that it is not sufficient if the defendant has committed fraud in a negligent manner as the intent to deceive the plaintiff must be established. They have to have “scienter” or knowledge that their statements are false.


As with any lawsuit, there are only select people who can file certain actions against defendants. Here, a private plaintiff must be either a buyer or a seller of the actual company’s stock. This means that potential buyers or sellers who were defrauded from actually buying or selling the stock cannot bring a claim under this rule.


If the defendant has made a fraudulent claim, the plaintiff must show that they suffered losses and damages because they relied on the defendant’s fraudulent claim. However, if the defendant has fraudulently omitted a material statement, then there is no need for the plaintiff to prove reliance.

Loss Causation and Damages

In order to recover damages, the plaintiff must successfully show that the fraud committed by the defendants has proximately caused their losses.

It is important to know that proximity does not mean direct results. Rather, proximity merely needs to show that there is some connection between the defendant’s fraud and the losses that the plaintiff incurred. The plaintiff merely has to show that the defendant’s action has led to some other results that ultimately caused their losses.

Generally, claims of securities fraud is not an easy allegation to make more so prove the elements in order to establish a valid claim. Thus, it is valuable to seek the guidance of a sophisticated securities lawyer that can help you navigate the convoluted elements of establishing a claim, and to ultimately seek the justice you deserve.

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