The instructions in this chapter apply only to actions brought under the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), for fraud in the purchase or sale of securities ("Rule 10b-5 actions"). As stated in Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005):
Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the "use or employ[ment] . . . of any . . . deceptive device," (2) "in connection with the purchase or sale of any security," and (3) "in contravention of" Securities and Exchange Commission "rules and regulations." 15 U.S.C. § 78j(b). Commission Rule 10b-5 forbids, among other things, the making of any "untrue statement of material fact" or the omission of any material fact "necessary in order to make the statements made . . . not misleading." 17 CFR § 240.10b-5 (2004).
The courts have implied from these statutes and Rule a private damages action, which resembles, but is not identical to, common-law tort actions for deceit and misrepresentation. . . . And Congress has imposed statutory requirements on that private action . . . (citations omitted).
In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737–40 (1975), the Supreme Court, relying chiefly on "policy considerations," limited the Rule 10b-5 private right of action to plaintiffs who themselves were purchasers or sellers. As stated in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), the policy the Court sought to promote in Blue Chip Stamps was that "[c]abining the private cause of action by means of the purchaser-seller limitation . . ." minimizes the ill effects of vexatious private litigation brought to compel a substantial settlement. Id. at 80-81. (This limitation does not apply to government enforcement actions brought pursuant to Rule 10b-5. Id.)
In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 176–78 (1994), the Supreme Court also limited the scope of liability under Section 10(b) of the Securities Exchange Act to "primary violators," holding that Section 10(b) does not allow recovery for aiding and abetting because the text of the Act "does not reach those who aid and abet § 10(b) violation. . . .The proscription does not include giving aid to a person who commits a manipulative or deceptive act." Id. at 177–78. In Simpson v. AOL Time Warner, Inc., 452 F.3d 1040 (9th Cir.2006), petition for cert. filed, 75 USLW 3236 (Oct. 19, 2006) (No. 06-560), the Ninth Circuit held that to be liable as a primary violator of Section 10(b) for participation in a "scheme to defraud," the defendant "must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. It is not enough that a transaction in which a defendant was involved had a deceptive purpose and effect; the defendant’s own conduct contributing to the transaction or overall scheme must have had a deceptive purpose and effect." Id. at 1047–48 (emphasis in original).
The 2001 edition of these Model Instructions interspersed Rule 10b-5 instructions with a number of other instructions concerning Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k ("the 1933 Act"). The 2001 edition also contained instructions applicable to a claim by a customer of a brokerage firm that the customer’s broker engaged in excessive trading ("churning") in order to run up commissions. The committee has not included 1933 Act instructions or churning instructions in this edition, nor instructions for claims arising out of insider trading or the "Sarbanes-Oxley Act" of 2002 (Pub. L. 107-204), for the following reasons.
First, the 1933 Act basically is concerned with the initial distribution of securities, rather than their subsequent trading. It imposes many regulatory requirements on issuers and underwriters of securities. There have been no reported jury trials in private actions arising out of the Securities Act of 1933 for many years. Section 12(a)(2), the provision in the 1933 Act most like Section 10(b) of the 1934 Act, imposes liability for rescission or damages upon those who offer or sell securities by means of a material misstatement. In the unlikely event of a jury trial under Section 12(a)(2), instructions could easily be adapted from these instructions.
Second, claims for churning also have become virtually absent from federal court trials, undoubtedly because almost all brokerage firms require their customers to sign enforceable customer agreements that require such claims to be submitted to arbitration. See, for example, Shearson/American Express v. McMahon, 482 U.S. 220 (1987).
Third, insider trading claims in civil litigation almost always are brought by the Securities and Exchange Commission (SEC) directly under 15 U.S.C. § 78u, not under Rule 10b-5. Most of the basic elements of such claims, however, are those applicable to the 10b-5 action discussed in this chapter, although there are differences. SEC enforcement actions typically seek injunctive relief and disgorgement. There is no right to a jury trial in such proceedings. SEC v. Rind, 991 F.2d 1486, 1493(9th Cir.1993). Moreover, in enforcement actions the SEC is not required to prove that identifiable investors were injured, Rind at 1490, or that investors relied on the defendant’s misrepresentation or omission. SEC v. Rana Research, Inc., 8 F.3d 1358, 1364 (9th Cir.1993).
Fourth, the Sarbanes-Oxley Act creates only two private causes of action: one that allows for the recovery of profits from insider trading, 15 U.S.C. § 7244, and one that provides protection for whistle blowers, 18 U.S.C. § 1514A. The committee is unaware of any cases that have actually been tried to a jury under the Act.
18.0 SECURITIES—DEFINITION OF RECURRING TERMS
Congress has enacted securities laws designed to protect the integrity of financial markets. The plaintiff claims to have suffered a loss caused by the defendant’s violation of certain of these laws.
There are terms concerning securities laws that have a specific legal meaning. The following definitions apply throughout these instructions, unless noted otherwise.
[A security is an investment of money in a commercial, financial or other business enterprise, with the expectation of profit or other gain produced by the efforts of others. Some common types of securities are [stocks,] [bonds,] [debentures,] [warrants,] [and] [investment contracts].]
The buying and selling of securities is controlled by the Securities Laws. Many of these laws are administered by the United States Securities and Exchange Commission ("SEC").
A "10b-5 Claim" is a claim brought under a federal statute, Section 10(b) of the Securities Exchange Act of 1934, which in essence prohibits acts of deception in connection with the purchase or sale of a security and in violation of rules and regulations that the SEC has the duty and power to issue. A corresponding SEC Rule, Rule 10b-5, prohibits the misrepresentation of material facts and the omission of material facts in connection with the purchase or sale of securities. A person or business entity who violates the securities laws, including Rule 10b-5, may be liable for damages caused by the violation.
[A misrepresentation is a statement of material fact that is false or misleading when it is made. [A statement may be misleading even if it is literally true if the context in which the statement was made caused the listener or reader to remain unaware of the actual state of affairs.]]
[An omission is a failure to disclose a material fact that had to be disclosed to prevent other statements that were made from being misleading.]
[A broker buys and sells securities for clients, usually for a commission. A broker can also be a dealer.]
[A dealer buys securities and resells them to clients. A dealer can also be a broker.]
[A controlling person is [an individual who] [company that] possesses the power to direct the management or policies of a business enterprise or of another person involved in the management or policy-making of the enterprise. A broker or a dealer may be a controlling person.]
[In connection with means that there was some nexus or relationship between the allegedly fraudulent conduct and the [sale] [purchase] of the securities.]
An instrumentality of interstate commerce includes the postal mails, e-mails, telephone, telegraph, telefax, interstate highway system, Internet and similar methods of communication and travel from one state to another within the United States.
Choose the bracketed portion(s) applicable to the claims in the case.
As to "controlling person," see Section 20(a) of the 1934 Act, 15 U.S.C. § 78f(a). See also No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 (9th Cir.2003), for a discussion of controlling person liability.
As to "in connection with," the Ninth Circuit has noted:
To show a Rule 10b-5 violation, a private plaintiff must prove a "causal connection between a defendant’s misrepresentation and the plaintiff’s injury. . . ", a proximate relationship between the plaintiff’s injury and the purchase or sale of a security . . . [and] a connection between the defendant’s alleged misrepresentation and the security at issue . . . .
Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1485–86 (9th Cir.1991) (citations omitted).
As to "instrumentality of interstate commerce," it is not necessary that interstate mailings or telephone calls, etc., be proved; intrastate use of such instrumentalities is sufficient to satisfy the jurisdictional requirements. Spilker v. Shayne Laboratories, Inc., 520 F.2d 523, 524 (9th Cir.1975).
As to "omission," the Ninth Circuit has held that Rule 10b-5 is violated by nondisclosure only when there is a duty to disclose. "‘[T]he parties to an impersonal market transaction owe no duty of disclosure to one another absent a fiduciary or agency relationship, prior dealings or circumstances such that one party has placed trust and confidence in the other.’" Paracor Finance v. General Electric Capital Corp., 96 F.3d 1151, 1157 (9th Cir.1996) (citations omitted). Paracor lists a number of factors used to determine whether a party has a duty to disclose. See id. The typical scenarios of investors bringing 10b-5 actions against issuers, promoters, underwriters or insiders seldom raise an issue as to whether the defendant had such a duty.
18.1 SECURITIES—RULE 10b-5 CLAIM
The plaintiff alleges that the defendant[s] defrauded [him] [her] [it] by [describe the plaintiff’s "10b-5" claim]. This is referred to as "the plaintiff’s 10b-5 claim."
On this claim, the plaintiff has the burden of proving each of the following elements by a preponderance of the evidence:
1. The defendant [[employed a device, scheme or artifice to defraud] [made an untrue statement of a material fact] [omitted a material fact necessary under the circumstances to keep the statements that were made from being misleading] [engaged in an act, practice or course of business that operated as a fraud or deceit]] in connection with the [purchase] [sale] of securities;
2. The defendant acted knowingly;
3. The defendant [used] [caused the use of] an [instrumentality of interstate commerce, such as mail or telephone] [facility of a national securities exchange] in connection with the [purchase] [sale] of securities, regardless whether the [instrumentality] [facility] itself was used to make an untrue statement or a material omission;
4. The plaintiff justifiably relied on [the defendant’s untrue statement of a material fact] [the defendant’s omission to state a necessary material fact] in [buying] [selling] securities; and
5. The defendant’s [conduct] [misrepresentation] [omission] caused the plaintiff to suffer damages.
If you find that the plaintiff has proved each of the above elements, your verdict should be for the plaintiff. If, on the other hand, you find that the plaintiff has failed to prove any of these elements, your verdict should be for the defendant.
See Instruction 18.0 (Securities—Definition of Recurring Terms) for definitions of "security," "misrepresentation," "omission," "in connection with," and "instrumentality of interstate commerce." National security exchanges include the New York Stock Exchange and the NASDAQ Stock Market.
See 15 U.S.C. § 78j(b) (unlawful to use deceptive device in connection with purchase or sale of a security) and 17 C.F.R. § 240.10b-5 (unlawful to use a device to defraud, to make an untrue statement of material fact, or to engage in a fraudulent act in connection with the purchase or sale of a security). Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir.1996), confirms that the elements described in this instruction are required to prove a 10b-5 claim.
A defendant "makes" a statement if the defendant has ultimate authority over the statement, including its content and whether and how to communicate it. Janus Capital Group v. First Derivative Traders, 564 U.S. __, 131 S. Ct. 2296, 2302 (2011). The plaintiff must show that the defendant had control over the statement; a defendant’s significant involvement in the preparation of prospectuses containing untrue or misleading statements is not enough to show that the defendant "made" the statements. Id. at 2302-04.
Previously, these model instructions phrased the fourth element as requiring that "the plaintiff reasonably relied" on the misrepresentation. Several Ninth Circuit cases, however, use the phrase "justifiable reliance." See Gray, 82 F.3d at 884; Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir.1999); Livid Holdings Ltd., v. Salomon Smith Barney, Inc., 416 F.3d 940, 950 (9th Cir.2005) ("If [Plaintiff] justifiably relied on Defendants’ misrepresentation about the stock sale and, in turn, bought [company] stock based on this reliance, it incurred damages from Defendants’ fraud.")
18.2 SECURITIES—MISREPRESENTATIONS OR OMISSIONS—MATERIALITY
The plaintiff must prove by a preponderance of the evidence that the misrepresentation or omission of the defendant was material.
A factual representation concerning a security is material if there is a substantial likelihood a reasonable investor would consider the fact important in deciding whether or not to buy or sell that security.
An omission concerning a security is material if a reasonable investor would have regarded what was not disclosed to [him] [her] as having significantly altered the total mix of information [he] [she] took into account in deciding whether to buy or sell the security.
You must decide whether something was material based on the circumstances as they existed at the time of the statement or omission.
In Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988), the Supreme Court adopted the standard for materiality developed in TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (whether a reasonable shareholder would "consider it important" or whether the fact would have "assumed actual significance") as the standard for actions under 15 U.S.C. § 78j(b).
In discussing materiality, the Ninth Circuit has applied TSC Indus. and Basic Inc. in various formulations. See, for example, Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir.1994) (omission or misrepresentation would have misled a reasonable investor about the nature of his or her investment), cert. denied, 516 U.S. 810 (1995); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 n.2 (9th Cir.1994) (substantial likelihood omitted fact would have been viewed by reasonable investor as having significantly altered the "total mix" of information; reasonable investor would have felt the fact "important" in deciding whether to invest), cert. denied, 516 U.S. 868 (1995); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1408 (9th Cir.1996) (same), cert. denied, 520 U.S. 1103 (1997); McGonigle v. Combs, 968 F.2d 810, 817 (9th Cir.) (substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in deliberations of the reasonable shareholder), cert. dismissed, 506 U.S. 948 (1992); No. 84 Employer-Teamster Joint Council Pension Trust Fund v America West Holding Corp., 320 F.3d 920, 934 (9th Cir.2003) (declining to adopt a bright line rule for materiality which would require an immediate market reaction and instead engaging in a "fact-specific inquiry" under Basic Inc.); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946-48 (9th Cir.2005) (citing Basic and applying to facts of the case).
Many cases deal with "forward-looking data." That term refers, generally, to management projections of future economic performance, such as sales, revenue or earnings per share forecasts. See 15 U.S.C. § 78(u)(5). The materiality of "forward-looking" data depends on the circumstances. United States v. Smith, 155 F.3d 1051, 1066 (9th Cir.1998) (observing that "determining materiality requires a nuanced, case-by-case approach"), cert. denied, 525 U.S. 1071 (1999).
The Private Securities Litigation Reform Act of 1995 affords a conditional "safe harbor" to "forward-looking" statements. See 15 U.S.C. § 78u–5(c). Under that act, "plaintiffs must prove that ‘forward-looking’ statements were made with ‘actual knowledge’ that they were false or misleading." In re Silicon Graphics Inc. Securities Litig., 183 F.3d 970, 993 (1999) (Browning, J., concurring in part and dissenting in part) (quoting 15 U.S.C. §§ 78u-5(c)(1)(B), 77z-2(c)(1)(B)), cited approvingly in In re Daou Systems, Inc. Sec. Litig., 397 F.3d 704, 717 (9th Cir.2005), cert. denied, 126 S. Ct. 1335 (2006). The "safe harbor" provisions are not applicable to statements of historical fact. Livid Holdings Ltd., 416 F.3d at 948.
A defendant acts knowingly when [he] [she] [it] makes an untrue statement [with the knowledge that the statement was false] [or] [with reckless disregard for whether the statement was true]. A defendant acts knowingly if [he] [she] [it] omits necessary information [with the knowledge that the omission would make the statement false or misleading] [or] [with reckless disregard for whether the omission would make the statement false or misleading].
["Reckless" means highly unreasonable conduct that is an extreme departure from ordinary care, presenting a danger of misleading investors, which is either known to the defendant or is so obvious that the defendant must have been aware of it.]
See 15 U.S.C. § 78j(b) (unlawful to use deceptive device in connection with purchase or sale of a security); SEC Rule 10b–5, 17 C.F.R. § 240.10b–5 (2004) (unlawful to use a device to defraud, to make an untrue statement of material fact, or to engage in a fraudulent act in connection with the purchase or sale of a security).
This instruction addresses the element of "scienter," which was developed in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, reh’g denied, 425 U.S. 986 (1976). In Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978), the court found that Congress intended Section 10(b) to reach both knowing and reckless conduct, and it interpreted the Ernst & Ernst decision as merely eliminating negligence as a basis for liability.
The Ninth Circuit defined "recklessness" in the context of Section 10(b) and Rule 10b–5 in Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc), and In re Software Toolworks, Inc., 50 F.3d 615, 626 (9th Cir.1994). Recklessness satisfies the scienter requirement, except as to forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, where actual knowledge that the statement was false or misleading is required. In re Daou Systems, Inc. Sec. Litig.,411 F.3d 1006, 1021 (9th Cir.2005); see 15 U.S.C. § 78u-5(c)(1)(B). See also Sec. Exch. Comm’n v. Todd, 642 F.3d 1207, 1215, 1217-19 (9th Cir.2011). As to a forward-looking statement outside the PSLRA’s safe harbor provisions, see In re Oracle Corp. Sec. Litig., 627 F.3d 376, 388 (9th Cir.2010).
The PSLRA entitles a defendant to require the court to submit an interrogatory to the jury regarding the defendant’s state of mind at the time of the alleged violation of the securities laws. 15 U.S.C. § 78u-4(d).
18.4 SECURITIES—JUSTIFIABLE RELIANCE GENERALLY
The plaintiff must prove by a preponderance of the evidence that [he] [she] [it] justifiably relied on the alleged misrepresentation or omission in deciding to engage in the [purchase] [sale] of the [security] [securities] in question. The plaintiff may not intentionally close [his] [her] [its] eyes and refuse to investigate the circumstances or disregard known or obvious risks.
Use this instruction unless the plaintiff relies on a fraud-on-the-market theory, in which case Instruction 18.5 (Securities—Justifiable Reliance—Fraud-on-Market Case) should be used. Even in a fraud-on-the-market theory case, however, this instruction may become applicable if the jury finds that the defendant rebutted the presumption of reliance on the market.
The element of "reliance [is] often referred to in cases involving public securities markets . . . as transaction causation . . .." Dura Pharmaceuticals Inc. v. Broudo, 544 U.S. 336, 341 (2005).
In Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030 (9th Cir.1992), the court found that an investor cannot claim reliance on a misrepresentation if the investor already possessed information sufficient to call the representation into question.
A rebuttable presumption of reliance is deemed to arise when the fraud involves material omissions. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153–54 (1972). In a "mixed case of misstatements and omissions," the presumption will only apply if the case primarily alleges omissions. Binder v. Gillespie, 184 F.3d 1059, 1063–64 (9th Cir.1999) (case resolved on summary judgment), cert. denied, 528 U.S. 1154 (2000). Accordingly, at trial, the court will have to resolve whether the presumption is applicable in light of the evidence.
To provide guidance to jurors required to determine whether the plaintiff’s reliance was justifiable, the judge may consider adding the following language to this instruction:
In deciding whether a plaintiff justifiably relied on the defendant’s alleged misrepresentation[s] or omission[s,] you may consider evidence of:
(1) whether the plaintiff was sophisticated and experienced in financial and securities matters;
(2) whether the plaintiff and the defendant had a long-standing business or personal relationship, or a relationship in which the defendant owed a duty to the plaintiff to not interfere with or adversely affect the plaintiff’s interests;
(3) whether the plaintiff ignored or refused to investigate the circumstances surrounding the transaction;
(4) whether the plaintiff disregarded risks so obvious that they should have been known or risks so great as to make it highly probable that harm would follow;
(5) whether what the defendant misrepresented or concealed suggests that [he] [she] [it] had knowledge of the fraud;
(6) whether the plaintiff had access to the relevant material information;
(7) how specific was the misrepresentation;
(8) who initiated or expedited the transaction—the plaintiff or the defendant;
(9) whether the defendant prepared or provided to the plaintiff materials that contained adequate warnings about the risks associated with the investment or adequate disclaimers describing limitations on the scope of the defendant’s representations or the defendant’s involvement; and
(10) any other evidence you find helpful in deciding whether the plaintiff justifiably relied on the defendant’s misrepresentation[s] or omission[s]."
Although there is no reported decision reflecting that a court actually instructed a jury to consider the foregoing factors, there is some authority for doing so. See, e.g., In re Rexplore, Inc. Securities Litigation, 671 F.Supp. 679, 684 (N.D. Cal. 1987); Luksch v. Latham, 675 F.Supp. 1198, 1203 (N.D. Cal. 1987) (sophistication of plaintiff relevant to determine when plaintiff knew or should have known of a securities law violation, for purposes of statute of limitations); cf. Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434, 1435–36 (9th Cir.1984) ("The scope of duty owed under Rule 10b-5 is to be determined from a number of factors. Among these are the relationship between the advisor and the client, their relative access to information, the benefit derived from the relationship by defendant, defendant’s awareness of plaintiff’s reliance on him and defendant’s activity in initiating the transactions at issue.").
To establish that a defendant adequately warned the plaintiff of the attendant risks in the transaction, the defendant’s disclosures must have been precise and must have related directly to that which the plaintiff claims was misleading. See In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1414–15 (9th Cir.1994).
18.5 SECURITIES—JUSTIFIABLE RELIANCE—FRAUD-ON-MARKET CASE
The plaintiff does not have to prove that [he] [she] [it] justifiably relied on the alleged misrepresentation or omission in deciding to engage in the [purchase] [sale] of the [security] [securities] in question if [he] [she] [it] proves by a preponderance of the evidence that there was an active open market in the [security] [securities] at the time of the transaction[s] in question. An "active open market" means that there were a large number of traders, a high level of activity, and frequent trades, such that buyers and sellers could rapidly obtain current information about the price of the security.
If you find that the plaintiff has proved by a preponderance of the evidence that (1) an active, open market for the [security] [securities] existed and (2) investors reasonably relied on that market as an accurate reflection of the current market value of the [security] [securities], you may find that the plaintiff has proved that [he] [she] [it] relied on the defendant’s statements.
If, however, the defendant proves by a preponderance of the evidence that (1) the plaintiff did not actually rely on the integrity of the market or (2) the alleged misrepresentation or omission did not affect the market price of the security, then the defendant has rebutted any presumption that the plaintiff relied on the market. In that event, the plaintiff must then prove that [he] [she] [it] justifiably relied directly on the alleged misrepresentation or omission.
Use this instruction when a theory of fraud on the market is involved. See Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1051 (9th Cir.2006) (the fraud-on-the-market theory applies to all three classes of Rule 10b-5: (1) scheme to defraud, (2) misrepresentation or omission, and (3) fraudulent course of business)), petition for cert. filed, 75 USLW 3236 (Oct. 19, 2006) (No. 06-560). That theory is based on the premise that when persons buy or sell publicly-traded shares, they rely on the marketplace to assure the integrity of the price, to the extent that price is a consideration in their decision. Basic, Inc. v. Levinson, 485 U.S. 224, 245–49 (1988). In such circumstances, the law presumes that the market itself has factored in relevant information and the plaintiff need not prove that he or she individually or the class of purchasers whom the plaintiff seeks to represent relied on the statements or omissions on which the action is based. In re Convergent Technologies Sec.Litig., 948 F.2d 507, 512 n.2 (9th Cir.1991) (in a fraud-on-the-market case, the plaintiff need not show actual reliance on any misrepresentation or omission; instead the plaintiff must show reliance on the integrity of the price established by the market, which was in turn influenced by the misleading information or the omission of information). However, the defendant may rebut evidence giving rise to the presumption of reliance. In re Apple Sec. Litig., 886 F.2d 1109, 1115 (9th Cir.1989), cert. denied, 496 U.S. 943 (1990). The defendant may do so in a variety of ways too numerous to list here, and always dependent on the facts of the given case. In general, however, to rebut the presumption of reliance the defendant must show that there was no link between the plaintiff’s decision to trade at a fair market price and the alleged misrepresentation or omission. See Basic, Inc., 485 U.S. at 248. See also Kaplan v. Rose, 49 F.3d 1363, 1376 (9th Cir.1994) (presumption can be rebutted by showing that information tending to refute the misrepresentation had entered market through other channels), cert. denied, 516 U.S. 810 (1995). But even if some information was "out there," corporate insiders "are not relieved of their duty to disclose material information where the information has received only brief mention in a few poorly-circulated, lightly-regarded publications." In re Apple Computer Securities Litig., 886 F.2d at 1116.
If the jury finds in a fraud-on-the-market case that the defendant rebutted the presumption of reliance, use Instruction 18.4 (Securities—Justifiable Reliance—Generally) to instruct the jury on what the plaintiff must prove.
The plaintiff must prove by a preponderance of the evidence that the alleged material misrepresentations or omissions were the cause of [his] [her] [its] economic injury. To establish cause, the plaintiff must prove that the alleged misrepresentation[s] or omission[s] played a substantial part in causing the injury or loss the plaintiff suffered. The plaintiff need not prove that the alleged misrepresentation[s] or omission[s] [was] [were] the sole cause of the economic injuries.
The Private Securities Litigation Reform Act ("PSLRA") of 1995 imposed the requirement that a private plaintiff prove that the defendant’s fraud caused an economic loss. 15 U.S.C. § 78u-4(b)(4). This element of causation has been referred to as "‘loss causation,’ i.e. a causal connection between the material misrepresentation and the loss . . .." Dura Pharmaceuticals, Inc. v. Broudo, 544U.S. 336, 341 (2005). In Dura Pharmaceuticals, the Supreme Court held that the PSLRA "makes clear Congress’ intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss." Id. at346. The Supreme Court reversed the Court of Appeals’ ruling that a plaintiff may establish loss causation if the plaintiff merely shows that the price paid on the date of purchase was inflated because of the defendant’s misrepresentation. In doing so, the court rejected the view that a plaintiff’s injury necessarily will have occurred at the time of the transaction. The Supreme Court held that a plaintiff’s mere purchase of stock at an inflated price is not sufficient to establish loss causation for a number of reasons, such as that at the moment of purchase the plaintiff has suffered no loss because the inflated price paid is offset by the value of the shares he or she acquired, which at that instant possess equivalent market value. Also, the purchaser could later sell those shares at a profit. Conversely, if the price drops, the cause of the decline could be attributable to a host of factors other than that the stock price previously had been inflated as a result of the defendant’s misrepresentation or omission. The Court found that under the plaintiff’s theory of liability, the complaint failed adequately to allege causation because it did not allege that Dura’s share price fell significantly after the truth become known; did not specify the relevant economic loss; and did not describe the causal connection between that loss and the misrepresentation. Id. at 346–48.
If you find for the plaintiff on [his] [her] [its] 10b-5 claim, then you must consider and decide the amount of money damages to be awarded to the plaintiff. You may award only actual damages, in that amount which will reasonably and fairly compensate the plaintiff for the economic loss [he] [she] [it] sustained. Your award must be based on evidence and not upon speculation, guesswork or conjecture. The plaintiff has the burden of proving damages, by a preponderance of the evidence.
"The usual measure of damages for securities fraud claims under Rule 10b-5 is out-of-pocket loss; that is, the difference between the value of what the plaintiff gave up and the value of what the plaintiff received. Consequential damages may also be awarded if proved with sufficient certainty. . . . The district court may apply a rescissory measure of damages in appropriate circumstances." Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1030 (9th Cir.1999) (citing DCD Programs v. Leighton, 90 F.3d 1442, 1449 (9th Cir.1996). The Supreme Court decision in Dura Pharmaceuticals Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627 (2005), highlights the difficulty in framing an instruction premised on a theory that the price on the date of purchase was inflated because of a misrepresentation. See Comment to Instruction 18.6 (Securities—Causation). Comparable difficulties could arise where there are several different transaction dates, multiple plaintiffs or a class action; in such cases, computations based on average prices during the applicable trading period might prove necessary. Disgorgement of profits, typically an equitable remedy sought by the Securities and Exchange Commission, also would be difficult to calculate. Cf. SEC v. Happ, 392 F.3d 12, 31 (1st Cir.2004) (in insider trading action brought by SEC, "the proper amount of disgorgement is generally the difference between the value of the shares when the insider sold them in possession of the material, nonpublic information and their market value ‘a reasonable time after public dissemination of the inside information’ . . .. The amount of disgorgement ‘need only be a reasonable approximation of profits causally connected to the violation.’" (citations omitted). See also SEC v. JT Wallenbrock & Associates, 440 F.3d 1109 (9th Cir.2006).
Because of the above-described complications, often expert testimony is proffered in calculating damages in 10b-5 actions. See In re Imperial Credit Industries, Inc. Securities Litigation, 252 F.Supp 2d 1005, 1014–15 (C.D. Cal. 2003); In re Oracle Securities Litigation, 829 F.Supp 1176, 1181 (N.D. Cal. 1993).
18.8 SECURITIES—CONTROLLING PERSON LIABILITY
Under the Securities Exchange Act of 1934, a defendant may be liable if during the period that someone else defrauded the plaintiff, the defendant had the authority to control that person or company.
The plaintiff claims that the defendant is a controlling person and is therefore liable under the securities laws. On this claim, the plaintiff has the burden of proving by a preponderance of the evidence that the defendant [controlling person] possessed, directly or indirectly, the actual power to direct or cause the direction of the management and policies of [controlled person].
See Instruction 18.0 (Securities—Definition of Recurring Terms) for definition of "controlling person."
Section 20(a) of the Securities Exchange Act of 1934 provides that "controlling persons" can be vicariously liable for 10b-5 violations. See 15 U.S.C. § 78t(a) (liability of controlling persons); 17 C.F.R. § 230.405 (definition of "control"); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578 (9th Cir.1990) (en banc) (broker-dealer is "controlling person" within meaning of the 1934 Act and could be liable for its stockbroker-employee’s conduct, even if the broker-dealer and the stockbroker contractually agreed that the stockbroker would be an independent contractor), cert. denied, 499 U.S. 976 (1991). See also No. 84 Employer-Teamster Joint Council Pension Trust Fund v America West Holding Corp., 320 F.3d 920, 945 (9th Cir.2003) (discussing traditional indicia of control).
See Instruction 18.9 (Securities—Good Faith Defense to Controlling Person Liability).
It may be necessary to supplement this instruction with instructions regarding respondeat superior liability. See Instructions 4.4 (Agent and Principal—Definition); 4.5 (Agent—Scope of Authority Defined); 4.6 (Act of Agent Is Act of Principal—Scope of Authority Not an Issue); 4.7 (Both Principal and Agent Sued—No Issue as to Agency or Authority); 4.8 (Principal Sued but Not Agent—No Issue as to Agency or Authority); 4.9 (Both Principal and Agent Sued—Agency or Authority Denied); and 4.10 (Principal Sued, but Not Agent—Agency or Authority Denied).
18.9 SECURITIES—GOOD FAITH DEFENSE TO CONTROLLING PERSON LIABILITY
The defendant [insert name] contends that [he] [she] [it] is not liable to the plaintiff even if [he] [she] [it] was a controlling person because [he] [she] [it] did not induce the violation that led to the plaintiff’s economic injury and [he] [she] [it] acted in good faith. The defendant has the burden of proving both of the following elements by a preponderance of the evidence:
1. the defendant did not directly or indirectly induce the violation; and
2. the defendant acted in good faith.
If you find that the defendant proved both of these elements, your verdict should be for the defendant. The defendant can prove good faith only by establishing that [he] [she] [it] maintained and enforced a reasonable and proper system of supervision and internal control. If you find that the defendant failed to prove either or both of these elements, your verdict should be for the plaintiff.
See 15 U.S.C. § 78t(a) (Section 20(a) of the 1934 Act (Liability of Controlling Persons)); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575–76 (9th Cir.1990) (en banc) (defendant has the burden of establishing its good faith), cert. denied, 499 U.S. 976 (1991).