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Class Actions By Defrauded Shareholders

Occasionally there are numerous shareholders who have been ripped off by corporate insiders in the same way. In such situations, it may be more economical for one or a few shareholders to bring a lawsuit for the benefit of all of the similarly situated shareholders.

The court will first have to determine whether or not to certify the case as a class action and allow it to proceed as a representative lawsuit in behalf of the “class” of plaintiff shareholders.  Class actions by shareholders seeking damages under the federal or state securities laws are often referred to as “securities class actions”.

Class actions can also be brought by shareholders based on wrongful actions and failures to act in breach of common law duties by corporate insiders where the shareholder plaintiffs have been caused to suffer losses as a result of such breaches of duty that are distinct from the proportionate losses all shareholders suffer when the value of the corporation declines due to business setbacks.

A federal law passed in 1998 (the Securities Litigation Uniform Standards Act 1998 – “SLUSA”) significantly limited the circumstances under which large securities class actions alleging fraud in connection with the purchase, sale or holding of a security traded on a national exchange can be brought in reliance on state law, essentially mandating that most such large securities class actions be brought in federal court under the federal securities laws.

An important exception to SLUSA permits such large securities class actions in state court by shareholders against the corporation that issued their shares if the claims are based on the law of the state of incorporation of the issuer.  Another federal law passed in 1995 (the Private Securities Litigation Reform Act of 1995 – “PSLRA”) had already tightened up the rules relating to class actions in federal court under the federal securities laws to curb perceived abuses of such class actions.  Yet another important federal law passed in 2005 (the Class Action Fairness Act of 2005 – “CAFA”) had the effect of making federal court the forum for many interstate class actions where the amount involved is over $5 million.

An important exception to CAFA, known as the “local controversy exception,”permits class actions in state court to proceed where two-thirds of the class plaintiffs are citizens of the forum state and the primary defendants are also citizens of the forum state, among other limited circumstances under which such interstate class actions are allowed to proceed in state court under CAFA.  The net effect of this series of federal laws concerning class actions has been to push many of them into federal court, to mandate that such cases be based on the federal securities laws and to tighten up the circumstances under which a competent lawyer will counsel the bringing of a securities class action.  Yet, there still remain many factual situations in which a securities class action can be brought in state court in California under its plaintiff friendlier Corporate Securities Law of 1968 and in a forum perceived by many as friendlier to plaintiffs and to securities class actions.

Class action law is very complex and a class action should not be considered without the assistance of legal counsel with significant experience in litigation and class actions.

If you are interested in bringing a securities class action suit against corporate insiders in your company, and you live in the state of California, call me for a free consultation to discuss your case.