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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.
3. That defendant acted “knowingly” or with “severe recklessness”
For the third element, plaintiff must prove that defendant made the alleged misrepresentations or omissions knowingly, or with severe recklessness.
The term “knowingly” means that defendant acted with an intent to deceive, manipulate, or defraud. But defendant didn’t act knowingly if defendant acted inadvertently, carelessly, or by mistake.
To act with “severe recklessness” means to engage in conduct that involves an extreme departure from the standard of ordinary care. A person acts with reckless disregard if it’s obvious that an ordinary person under the circumstances would have realized the danger and taken care to avoid the harm likely to follow.
As an example, defendant acted “knowingly” or with severe recklessness if she stated material facts that she knew were false or stated untrue facts with reckless disregard for their truth or falsity, or didn’t disclose material facts that she knew or was severely reckless in not knowing, and knew or was severely reckless in not knowing that disclosing those facts was necessary to avoid making her other statements misleading.