A Quick Look At The Elements Of Securities Fraud Claim Under SEC Rule 10b-5, Pt.2

On behalf of Wolf Popper LLP

Last time, we began looking at the basic elements of a securities fraud claim under Rule 10b-5 of the Securities Exchange Act of 1934 ("Securities Exchange Act"). As we noted last time, justifiable reliance is one of the elements that must be proven with adequate evidence in order for a plaintiff to succeed in a claim under this measure.

Justifiable reliance requires not only that the plaintiff either purchased or sold securities in reliance on the defendant's materially untrue statements or omissions, but also that the plaintiff's reliance on these communications was reasonable, or justifiable. Exactly what constitutes justifiable reliance is not always easy to determine, though there is an established body of case law that provides some guidance on the matter.

Justifiable reliance ensures a "causal connection" between the misrepresentation and the harm suffered by investors. For example, an investor cannot turn a blind eye to a known risk. If an investor already knows the representation is false, he or she cannot later claim reliance on a false representation. This is an important limitation on recovery for securities fraud "because the securities laws create liability only when there is substantial likelihood that the misrepresentation significantly altered the total mix of information that the investor possesses." Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030 (9th Cir. 1992) (citation and quotation omitted).

Sorting out the proper application of the law in securities fraud and achieving a just outcome which holds responsible parties liable for their misconduct is not necessarily an easy matter. Building a solid case based on the law and effectively navigating the court system in these cases can be challenging, but working with an attorney experienced in the area of securities litigation helps ensure a plaintiff or class has the best chance of achieving a favorable outcome.