Securities Litigation, Class Action & Derivative Defense

The PSLRA (1995) imposed heightened pleading requirements for securities fraud class actions. Plaintiffs must plead with particularity each false statement or omission, explain why it was false or misleading, and plead 'strong inference' of scienter, intent to deceive. These requirements are enforced on motions to dismiss before any discovery occurs. A successful PSLRA motion to dismiss terminates the case in its early stages and is the most important tool in securities class action defense.

A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of the corporation (typically against directors and officers) for breach of fiduciary duty, waste of corporate assets, or other misconduct. The corporation is technically the plaintiff and any recovery goes to the corporation rather than the shareholders directly. Derivative suits often follow internal investigations or government enforcement actions and require a demand on the board (or pleading demand futility) before they can proceed.

Securities class action demand letters come in two varieties requiring different responses. The first is a legitimate threat from a firm that has investigated a securities fraud claim, has a plausible theory, and has a client with standing. The second is a templated letter sent to every company that experiences a stock price drop, seeking a quick settlement before any real investigation. The tell is specificity: a serious demand letter identifies specific statements, specific dates, specific reasons those statements were false, and a loss causation theory tying the decline to a corrective disclosure. A template letter does not. Both require a response, serious ones because you need to prepare for litigation, template ones because failing to address them can create leverage for a settlement demand. The practical response: retain securities litigation counsel to assess the legal merit of the theory, evaluate public statements and exculpatory evidence, identify potential witnesses and documents relevant to any eventual litigation, and assess whether a proactive communication strategy is appropriate. The PSLRA's heightened pleading requirements make weak securities class actions very difficult to sustain through a motion to dismiss, and that is where strong cases should be defended.