‘Materialization Of Risk’ In Securities Class Actions: Part 1

Private securities fraud lawsuits are designed to recover losses caused by fraud — not as a system of investor insurance. Congress, in 1995, amended the Securities Exchange Act of 1934 to codify the rule that “the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate [Section 10(b)] caused the loss for which the plaintiff seeks to recover damages.”[1] To sue for securities fraud under Section 10(b) and Rule 10b-5, a plaintiff must therefore plead and prove, among other things, that (1) the defendant made a materially false or misleading statement (or omission) and (2) the misrepresentation or omission not only caused the plaintiff to invest, but also caused the economic loss the plaintiff seeks to recover — i.e., loss causation.