‘Materialization Of Risk’ In Securities Class Actions: Part 2

In part one of this two-part series, we discussed how plaintiffs asserting claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, increasingly invoke the “materialization of risk” theory of loss causation. This is particularly the case when plaintiffs cannot plead a clear “corrective disclosure” — i.e., a statement that reveals that some prior disclosure was false or misleading and, as a consequence, negatively affects the value of a security. The materialization of risk theory allows plaintiffs to instead allege that a risk that the defendants fraudulently concealed eventually came to light in a series of revealing events (rather than disclosures), which negatively affected the stock price over time.