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In a civil lawsuit based on violation of the anti-fraud provisions of the Securities Exchange Act of 1934, a/k/a Rule 10b-5 violation, the following must be found by a preponderance of the evidence:
1. That defendant used an “instrumentality of interstate commerce” in connection with the securities transaction involved in the case
2. That defendant made a false representation of a material fact (or omitted a material fact) in connection with the purchase or sale of a security
3. That defendant acted “knowingly” or with “severe recklessness”
4. That plaintiff “justifiably relied” on defendant’s conduct
5. That plaintiff suffered damages as a proximate result of defendant’s wrongful conduct
6. That plaintiff suffered damages.
2. That defendant made a false representation of a material fact (or omitted a material fact) in connection with the purchase or sale of a security
For the second element, plaintiff must prove that defendant either made an untrue statement of material fact or omitted a material fact, either of which would tend to mislead the prospective buyer or seller of a security.
A “misrepresentation” is a statement that is not true. An “omission” is the failure to state facts that would be necessary to make the statements made by the defendant not misleading to plaintiff.
A misrepresentation or omission of fact is “material” if there is a substantial likelihood that a reasonable investor would attach importance to the misrepresented or omitted fact in determining his course of action. Put another way, there must be a substantial likelihood that a reasonable investor would view the misstated or omitted fact’s disclosure as significantly altering the total mix of available information. A minor or trivial detail is not a “material fact.”
Predictions, opinions, and other projections (if they aren’t expressed as guarantees) aren’t representations of material facts – unless the person or entity communicating them doesn’t believe, or doesn’t have a reasonable basis for believing, they’re true. But if the person or entity making the predictions, opinions, or projections actually believed them at the time or had a reasonable basis for making them, then the statements are not materially misleading statements of fact. The focus is on whether the statements were false or misleading when they were made. Later events proving that the predictions, opinions, or projections were wrong don’t create a violation of Rule 10b-5.
For this second element, plaintiff must first prove that defendant made one or more of the alleged misrepresentations of fact, or omitted facts that would make other statements defendant made not misleading. And second, that the misrepresentation or omission involved “material” facts.
If defendant has previously made false or inaccurate statements regarding material facts, such as statements made in reports [he/she/it] filed with the SEC, information defendant sent to investors, or statements defendant made in press releases, defendant has a duty to correct those statements if it is discovered later that those statements weren’t true when made and they remain material to a shareholder’s investment decision.