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Understanding the burden of proof in shareholder litigation

On Behalf of | Sep 14, 2016 | Uncategorized

Executives of publicly traded companies have a duty to provide transparency and to make every attempt to provide a reasonable rate of return for their shareholders.

In a tumultuous business environment, that can create issues that put executives at odds with each other, the public, regulators, and shareholders.  They are accountable to all those parties while maintaining their effort to produce profits and maintain shareholder value.

When executives skirt the law or cross over the line, that can produce a possible legal situation requiring the services of a shareholder litigation lawyer.

Shareholder litigation issues that can arise include:

  • Fraud
  • Conflict of interest
  • Accounting improprieties
  • False or misleading financial statements
  • Breaches of fiduciary duty
  • Excessive executive compensation issues
  • Department of Justice or Securities and Exchange Commission investigations
  • Violations related to consumer protection or environmental laws
  • Merger and acquisition issues

For a company executive to be found guilty in a shareholder litigation case, plaintiffs must plead six elements to make their claim.

  • A material misrepresentation or omission – A statement is considered material if a reasonable investor would consider it important in determining whether or not to buy or sell a stock.
  • Scienter – Plaintiffs must prove a defendant acted in a wrong state of mind vs. just being negligent or making a poor business decision.
  • Connected to the sale of a security – This requires the plaintiff to engage in some kind of transaction involving a security, not merely just holding it.
  • Reliance – Plaintiffs are not required to prove they relied on the defendant’s misrepresentations. The market’s incorporation of the available information is sufficient instead.
  • Economic loss – Plaintiffs must allege they sustained a loss from their investments.
  • Loss causation – Plaintiffs must show there is a connection between the misrepresentation and the loss.

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