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Securities are the financial instruments of corporations offered for sale to the public. Securities litigation refers to lawsuits filed by investors against an issuer of a security, for fraud in connection with its purchase or sale. Most securities litigation cases in the United States are typically filed under either the provisions of the Securities Act of 1933 (33 Act) or the broad anti-fraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934 (34 Act). Since Rule 10b-5 is an omnibus regulation, nearly every securities fraud lawsuit filed contains a request for relief pursuant to its express provisions.
The most important provisions of the 33 Act are the mandatory disclosure requirements it imposes on corporate issuers of securities. Under it, securities offered for sale to the public must either be registered with the Securities and Exchange Commission (SEC), or qualify for one of the available exemptions from the registration requirements. Issuers are required to file a comprehensive registration statement that provides investors with sufficient and detailed information about the company, as well as the attendant risks of the underlying business and the particular securities being offered for sale. Approval of the registration statement by the SEC is not an endorsement of the merits of the offering.
The duty of a securities issuer to disclose material facts concerning its business to the public is a continuing one. Companies whose securities are listed and trade on one of the exchanges must file updated quarterly reports with the SEC. These must include current audited financial statements as well as pertinent disclosure related to any significant changes to the business. The 33 Act provides a private right of action for fraud against an issuer who either fails to disclose material facts in connection with the initial public offering of securities, or fails to disclose adverse material information when the securities trade in the secondary market.
The legal standard for materiality in securities litigation is information that a reasonable person would need in order to make an informed investment decision. Most securities litigation actions arise from allegations that the issuer of new securities failed to adequately disclose material facts about the offering in the registration statement. Issuers can also be held liable for securities fraud if they fail to abide by the continuing duty to disclose publicly adverse information about the business in a timely manner.
The 34 Act regulates the activities of brokers or dealers who sell securities to the public. Based on a 1987 United States Supreme Court ruling, however, public customers whose brokerage account agreements includes a pre-dispute mandatory arbitration clause must resolve disputes with their brokers through arbitration. Thus, although the 34 Act provides remedies for investors defrauded by their brokers, public customers are precluded from filing an action for securities fraud in court.