Rarely, but sometimes, the Danish delivers something worthwhile. The exchange between LD and LP confirms some points I’ve alluded to before: The spoofing case will be challenging to prosecute. LP recognizes in her owns words that this is a relatively “uncharted area of law,” attempting to apply securities law to high speed trading. It’s perhaps the reason these cases are rare.
LP: Yes, high-frequency trading and algorithms are rapidly evolving and becoming more sophisticated, making manipulation easier, putting investors at greater risk and garnering the attention of law enforcement. Further, unlike most traditional securities class actions involving misstatements and omissions, these claims are brought under 10b-5(a) and (c), a relatively uncharted area of the law.
I suspect there will be three elements that will be difficult to unanimously convince a jury to go along with. The first will be the technical issues around understanding high speed trading and it’s impact on the share price, especially when there are multiple HFT market makers trading against each other, thereby making its look like a level playing field (lots of expert testimony on both sides); showing intent may require a whistleblower; and demonstrating damages will likely be challenging for a variety of reasons.
Although I believe NWBO has a decent chance at a nice settlement, litigation is likely to drag on for a couple of years, at least. It’s also the reason why even a small settlement now has much more utility to shareholders than waiting two or three years for a much larger settlement or verdict.
What is SEC Rule 10b-5 and when does it apply?
Under the Securities and Exchange Act of 1934, the SEC is the governmental agency responsible for establishing, overseeing and enforcing laws pertaining to securities fraud. SEC Rule 10b-5, states that it is illegal for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security. Rule 10b-5 covers instances of insider trading, wherein an insider or executive uses nonpublic information to influence share prices to their benefit:
Employment of Manipulative and Deceptive Practices.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,in connection with the purchase or sale of any security.
In sum, SEC Rule 10b-5 is applicable to any person that commits securities fraud, i.e., the intentional misrepresentation of material information in connection with securities trading, including insider trading. “Person”, however, is not limited to an individual and includes businesses, corporations, and possibly even governmental bodies.
Who can sue under Rule 10b-5? And what is a Rule 10b-5 private right of action?
As stated above, the SEC often serves as plaintiff in securities fraud lawsuits. In addition, private plaintiffs may sue if they have standing – i.e., they were directly harmed by the securities fraud. Private parties that were not directly targeted by the securities fraud may seek recourse by bringing the issue to the attention of the SEC.
Nevertheless, it is possible to file a securities fraud class action known as a “fraud-on-the-market” claim. In this type of situation, the traditional private right of action under 10b-5 is widened so as to allow a class of securities purchasers to sue an issuer for having made a public misrepresentation.
What are some examples of Rule 10b-5 violations?
In addition to the examples of securities fraud discussed in the introduction, Rule 10b-5 violations include but are not limited to:
False or misleading statements made by a corporate executive intended to increase market share price
False or “creative” accounting used to hide losses or insufficient revenue False or misleading statements by a corporate executive intended to decrease market share price, so that they are able to buy up those shares at the lower price
What is the Rule 10b-5 statute of limitations?
There are two time-frames applicable to a Rule 10b-5 claim, both of which the plaintiff must satisfy. First, the plaintiff must file the claim within two years of having discovered the facts that constitute the alleged violation. Second, the plaintiff must file the claim no more than five years after the violation occurred.
